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Corporate Unbundling: Are We Ready Yet? A Bondholder's Primer

Fortnightly Magazine - June 1 1996

the GenCo in the example given above. He reports that, as of early April, Oklahoma Gas and Electric Co. was intending to issue FMBs under a new indenture that would convert to unsecured status once the old FMBs were retired. The company would couple the deal with a pledge not to undercut the newly issued senior unsecured debt with any subsequently issued but secured FMBs.

"Today's mortgages allow flexibility," Kinney observes. "Some utilities have exited the gas business, or have transferred generating plants to subsidiaries, and their mortgages permitted that."

"I haven't seen a covenant not to exit a business," notes Dunn. "But covenants usually require the utility to receive fair value for releasing property." If the utility retains generating plant but spins off T&D, the GenCo could sign a five-year contract to sell bulk power back to the spunoff T&D, says Dunn, as a "logical way to ensure that the GenCo will remain a going concern."

The Price Tag

The price tag varies for corporate unbundling, depending on who you talk to.

On March 19, PG&E and Edison both filed comments on the cost, feasibility, and advisability of breaking up into separate subsidiaries. On reviewing those two reports, David Falck (Winthrop, Stimson, NY) came away with the feeling that "PG&E has a friendlier attitude" [than Edison] toward vertical disaggregation.

Edison underscores the financial costs of a breakup (see sidebar this page). By contrast, PG&E notes property rights and market pressures that it believes will develop under the CPUC's new regulatory model, with the Western Power Exchange (WEPEX) and the independent system operator (ISO).

PG&E predicts that the ISO and WEPEX will force functional unbundling of costs, mitigating subsidies and precluding self-dealing and conflicts of interest. But it adds that separate subsidies for distribution and transmission could prove problematic for (em of all things (em the transfer of city and county easements and franchises:

"PG&E currently operates under . . . 46 county franchises, 39 charter city franchises, and 192 general-law city municipal electric franchises. Corporate separation would entail a split transfer of [rights] now covered by a single franchise. . . . Each franchise and any associated ordinances . . . would have to be individually assessed for transferability."

As Falck reads it, Edison believes it can satisfy conditions for releasing property from the lien of indenture but, for various reasons, wants to make the point, as Falck puts it, that "bondholders could argue that their rights were violated."

But Doug Dunn points out that much of the difficulty that Edison cites in its comments stems from the idea of shifting some portion of debt to transmission and/or distribution. Dunn's advice to Edison? "Leave the debt with the largest block of property."

In most cases, the largest block of property means generation. However, as Dunn notes, "With a utility like ConEd, the largest chunk of assets might be T&D because it's all buried under the streets of New York City."

Even so, is it practical to keep the debt with generation? As Dan Scotto points out, a competitive generating company will