The issue
Securitization allows a utility to capture a commission-approved regulatory asset up front through a bond issuance and pass the savings from the lower-cost financing on to the customer. For the consumer, securitized debt will lower the carrying costs of the regulatory assets relative to the costs that would be incurred using conventional utility financing methods.
Securitization has been used to finance transition and stranded costs associated with moving to an open market, environmental control equipment costs, and storm cost recovery. Although their goals are different, securitization methods share common elements, including recognition that alternative financing is beneficial to ratepayers, requirements of a financing order issued by the public service commission proscribing the amount of recoverable costs and allowable financing costs to be securitized, authorization of a non-bypassable rider to be used solely to repay the securitized debt, a mechanism for periodic true-ups, and a pledge from the state not to take or permit any action that would impair the value of the transition property (bonds).
The cost of downed transmission lines, such as these affected by an ice storm, can be financed through securitization.
Source: AEP Corporate Archive
What the industry says
Securitization financing to recover a non-bypassable incremental value/market charge is a win-win for customers and electric distribution utilities. For the consumer, securitized debt will lower the carrying costs of the regulatory assets relative to the costs that would be incurred using conventional utility financing methods. Dedicated riders/trackers ensure that only those costs associated with making the electric distribution utility whole will be included in customer rates. Securitization also supports the financial strength and stability of electric distribution utilities by providing the capital to purchase and make incremental investments in utility infrastructure.
Examples of securitization in use:
- Texas (SB 7) and Pennsylvania (HB 1509) adopted securitization provisions in their utility restructuring bills to finance transition and stranded costs associated with moving to an open market.
- West Virginia statute §24-2-4e authorizes the Public Service Commission to issue Environmental Control Bonds to finance the costs of environmental control equipment.
- Louisiana Act 55, creating the Louisiana Utilities Restoration Corporation to provide an alternate financing mechanism to the Public Service Commission and City of New Orleans. The Corporation’s purpose is to attract low-cost capital to finance utility system restoration through issuance of securitized debt.
Utility company bond ratings are decreasing
What the stakes are
Although securitization debt is excluded for ratemaking purposes, it does consolidate onto the balance sheet of the utility and may be a factor in analysis of credit quality. Investors may take the view that the irrevocability of the securitization charge can make it difficult to implement other necessary rate increases.
