March 15 , 2002
Mortgaging Your Conservation: A Way Out for Stranded Investment?Andrea L. Kelly and Donald E. Gaines
When an electric utility invests in a resource to serve its customers, it does so with the belief that the asset underlying the investment can be pledged as collateral to secure debt capital. But what happens if the asset is not owned by the company and, therefore, provides no collateral? The following situations illustrate:
Electric utility "A" chooses to build a small generating plant to meet the future needs of its growing customer base. It secures project financing for the new plant. Once the unit becomes operational, utility A pledges the asset as collateral to obtain permanent, lower-cost financing.
Electric utility "B" also enjoys a growing customer base, but chooses to meet part of its future needs by suppressing electric usage through investment in a demand-side management (DSM) energy-conservation program. Unlike utility A, utility B does not own the asset underlying its investment (em its customers do, through grants to install energy-conservation measures in their homes and businesses. Since the utility does not own the asset, there is no collateral to support lower-cost financing.
In the not-so-distant past, situation B would have posed little concern. State regulators would have conducted a prudence review for the conservation investment. Following approval, they would have added costs to the rate base and allowed amortization over the appropriate time period, giving the utility an opportunity to recover its investment. But in today's environment, lack of ownership of a DSM asset raises concerns not present in construction of a generating plant.
With a DSM investment equal to approximately 7 percent of its assets, Puget Sound Power & Light Co. qualified as utility B. How could it finance an asset it did not own? How could it ease the financial community's increasing concern about the ultimate recovery of $240 million in DSM investment? Three years ago, the company began to grapple with these issues. At the time, no attractive solution lay in sight.
Then Puget Power went to the Washington State Legislature with an idea: Since the legislature had consistently supported DSM as a resource solution, would the state now legislate statutory recovery of conservation? With such support, utilities could finance DSM investment in a manner similar to municipal financing, which is supported by statutory taxing authority.
In June 1994, a new statute was signed into law after winning near-unanimous support in the state legislature (see sidebar, From the Legislature). Puget Power then began working with Salomon Brothers, Inc. and Chemical Securities to structure a transaction, and sought the support of the Utilities and Transportation Commission (UTC) staff and the Public Counsel Section of the State Attorney General's Office. On May 1, 1995, the UTC issued an order giving its approval of the transaction (see sidebar, From the Commission).
The statute enacted by the Washington legislature created a new property right, known as "bondable conservation investment." Under the new law,
customer rates must be allowed to recover DSM-related expenditures (em along with the costs of financing (em once they are approved by the UTC. Essentially, the new law allows electric utilities to