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Stranded Costs: Qualified Financing for Intangible Assets

Fortnightly Magazine - October 1 1996

made in connection with regulatory assets.

s Rate Orders. By creating "qualified rate orders" (QROs), to be issued at the discretion of the PSC, the act would enable the commission to provide for the recovery of all or a portion of qualified intangibles expenditures through special irrevocable service rates. The rates thereby become a state law property right (special intangibles property) that can be sold or pledged as a basis for financing. By elevating the utility's recovery expectation to the status of a state property right, the bill creates a credit enhancement that facilitates lower-cost financing by the utility.

s Flexible Financing. Special financing would include a mortgage-type financing (secured by the special intangibles property), or a "true sale" of the special intangibles property to a third party or special-purpose subsidiary.

s Bankruptcy; Bypass. The Act would include provisions dealing with bankruptcy and customer bypass, require successors in interest to collect and remit revenues sufficient to service the financing, and set up assignee rights in special intangibles property under New York law. A concurrent state agreement would preserve the law so as to not to impair outstanding transactions.

Key Policy Aspects

s Ratepayer Savings. A QRO cannot be issued unless the PSC determines that "significant" ratepayer savings would occur.

s PSC Control. Issuance of a QRO is discretionary; the PSC may require appropriate utility or third-party adjustments or concessions as a condition to issuance of a QRO.

s Voluntary Filings. A QRO requires a voluntary filing by the utility; and, before the QRO can be effective, the utility must agree in writing to all terms and conditions.

s Quantification. In requesting a QRO, the utility will be expected to propose its comprehensive plan for the use of this legislation. The proposal must include a quantification of the expected ratepayer savings.

s Cooperation. The Act anticipates that the PSC and the utility will work together to develop the details of the QRO, taking into account (a) the effects on ratepayers; (b) the needs of the financing parties; and (c) the effects on other interested parties, who will have the opportunity to fully participate in the process that results in the final terms of the QRO.

Financial Benefits

Standard & Poor's has indicated that the Act could make a significant and important contribution to the financing capability of New York utilities. The Act requires a sharing of the resulting benefits.

Ratepayers, for example, would enjoy rate savings from (a) financial engineering generated from credit-enhanced financing made possible by the Act, and (b) utility and third-party adjustments or concessions, whatever their form, exchanged for financing benefits.

Utilities presumably would gain from a "balance sheet uplift," since they could acquire greater security for otherwise uncertain recovery of expenditures. This uplift, in turn, would improve the outlook for holders of debt or equity.

For their part, third parties, such as IPPs and their financiers, could benefit from buy-outs or buy-downs of controversial and risky contracts, and stronger utility financial condition on other contracts.

The state itself expects to benefit from (a) lower electric rates for residents and