California Delivers an Investment Shock

Tennessee held off buying Pacific Gas & Electric Co. bonds during the last year, aware that California's ongoing power crisis could cause a downgrade in the long-term credit rating for that state's utility. But Tennessee continued its historically conservative investments in PG&E's commercial paper, not expecting the company's rating to plunge in just a few short months.

Now PG&E has defaulted on a good chunk of its paper and declared bankruptcy. It owes Tennessee payments on $76 million worth of investments made with money from the state investment pool and retirement system.

Tennessee isn't alone. PG&E and California's other main utility, Southern California Edison, have defaulted on payments to dozens of states, cities, counties, school districts and municipal pension plans that invested in their commercial paper. The companies are making most interest payments, but don't yet have plans to repay the investments in full. The California Public Utility Commission approved a rate hike of up to 46 percent, but the plan doesn't allow the utilities to apply the cash to past debts.

Investors aren't panicking, but they are tiring of the situation. Tom Milne, chief investment officer for the Tennessee Consolidated Retirement System, says the lagging payments haven't affected his state--yet. But if the full investment is lost, the state's investment pool and possibly its 2002 budget may take hits. "It's going to be hard for the banks and the power producers and the creditors to stand by much longer," Milne says.