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Mortgaging Your Conservation: A Way Out for Stranded Investment?Andrea L. Kelly and Donald E. Gaines

Fortnightly Magazine - October 15 1995

convert a regulatory promise of cost recovery into a statutory right to recovery. Most important, this secured revenue stream may be sold, pledged, or assigned as the basis for issuing securities.

On June 8 of this year, Puget Power completed the first-of-its-kind transaction under the statute. Specifically, the transaction established the Puget Power Conservation Grantor Trust, involving a true sale and transfer to the trust of $202 million of its $240 million in DSM investment assets, and the sale by the trust of certificates to outside investors. The proceeds from the sale provided an infusion of cash to repay existing securities.

Because of the statutory right to recovery and other protections, the trust certificates were rated AAA by Duff & Phelps, Fitch, and Standard & Poor's. Moody's rated the issue Aa-2. These credit ratings and favorable capital market conditions led to a 6.45-percent certificate rate, taxable to investors. The transaction reduced the cost of conservation by more than $36 million when compared to financing at the utility's authorized overall cost of capital.

Investment bankers and analysts familiar with the financing arrangement think there may be other benefits down the road. Salomon Brothers, the lead manager for the financial transaction, noted in a June 1995 informational release:

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"We believe that this approach is a timely one given the industrywide discussion of stranded assets and accelerated depreciation of selected assets. Puget [Power's] ability to monetize its largest regulatory asset through this transaction has been very favorably received by the rating agencies and by equity analysts."The Groundwork

The history of this unique trust fund began modestly in 1978, with the installation of energy-saving devices on customers' property. After nearly two decades of dramatic customer growth, Puget Power found itself in a resource-deficit position, and residents of the Pacific Northwest widely agreed that energy-conservation measures made plain good sense. Indeed, the Pacific Northwest Electric Power Planning and Conservation Act of 1980 designated cost-effective conservation as the resource of choice for the region.

Puget Power's commitment to energy conservation meant that the building of new generating plants could be deferred. The UTC demonstrated its support by allowing the company to recover and earn a return on its conservation investment under a theory Benjamin Franklin would have approved: A kilowatt-hour saved is a kilowatt-hour earned.

Over time, Puget Power's DSM program became more ambitious and sophisticated. Organizations such as the Northwest Conservation Act Coalition and the Natural Resources Defense Council recognized the company's efforts as exemplary. Energy-conservation grants by Puget Power to its customers expanded well beyond the earlier residential measures of water-heater wraps and insulation. By 1988, Puget Power had shifted its focus to new construction markets, offering technical assistance, training, and financial incentives to builders of new residential structures that incorporated energy-efficiency measures and designs. Puget Power also

targeted commercial and industrial projects, energy-efficient lighting, building insulation, and electrical energy-efficiency improvements, such as HVAC (heating, ventilation, and air conditioning) equipment and energy-management controls upgrades, heat pumps, heat recovery, refrigeration, variable speed motor drives, lighting system modifications, and process efficiency improvements. All combined to benefit the