Securitization

Securitization allows a utility to collect on a commission-approved regulatory asset that can be pledged as collateral in a bond issuance. For the consumer, securitized debt is a financing tool that lowers 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 market transitions and large one-time event costs such as storm recovery. Securitization methods share common elements, including extended collection timeframes, reduced carrying costs and recognition that alternative financing is beneficial to ratepayers.

Securitization financing, when structured appropriately, to recover non-bypassable incremental costs is a win-win for customers, the state and distribution utilities. For customers, securitized debt will lower the overall carrying costs for repayment of a regulatory asset. This reduces rate shock. Dedicated riders/trackers ensure collection of customer cash is directly applied to the securitization bonds.

Although securitized debt is excluded for revenue requirement 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 irrevocability of the securitization charge can make it difficult to implement other necessary rate increases.

downed transmission lines
The cost of storm recovery could be an ideal condition for the use of securitization.

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 HB 4530 allows the state PSC to approve the use of securitization for recovery of fuel and purchased power costs. The mechanism would permit commissionapproved expanded net energy costs, which are generally recoverable in a utility's rates, to be recovered through the issuance of consumer rate relief bonds. This would be for situations in which such financing should result in cost savings and rate mitigation to customers, when compared to traditional financing or costrecovery methods.