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Fortnightly Magazine - April 15 1997

utility bond.

In a report issued in February, Moody's Investors Service took a stab at evaluating the risks in these new ABS financings. That report, entitled "Stranded Utility Costs: Legislation Jolts the ABS Market," predicts some $50 billion to $75 billion in new ABS issues over the next four years.

Lesley Goldwasser, also a senior manager for

ABS issues at Bear Stearns, projected $7 billion in new ABS issues in 1997 to secure utility stranded costs

(out of $175 billion for the total ABS market). By contrast, reports Goldwasser, credit cards ($46 billion), home equity loans ($35.7 billion), and auto loans ($26.3 billion) drove the ABS market in 1996.

For this new breed of utility investor (em the one who casts his lot of ABS issues (em the risks may likely include a host of new factors specific to the utility's wires franchise area. As Moody's notes, the region's tax climate, jobless rate and index of economic activity and new business formations may affect the revenue stream for ABS debt as much as anything. So too will the area's weather patterns, its energy consumption preferences, its population growth rate and its demographic profile.

This catalog of risks reflects the special nature of ABS bonds. Contrary to the typical utility bond supported by corporate assets such as loans or leases, the securitized asset for a stranded cost bond, says Moody's, is the future revenue stream from fees paid from the utility's customer base (or from customers who sign on after having switched energy providers). New questions arise in evaluating risk. Who are the utility's customers? How old are they? How much energy do they buy? Do they keep their thermostats turned up high during the winter? Do they sleep with the windows open in the summer?

In fact, this revenue stream does not even depend upon the continuing corporate existence of the originating utility, notes Moody's. It explains that state legislation enabling these securitization deals will typically require the successor in interest to satisfy all the obligations of the issuing utility, including collection of fee revenue for the securitization even after bankruptcy.

The True Up

Not everyone loves securitization. In New York state, Assembly Speaker Sheldon Silver has joined with Majority Leader Michael J. Bragman and Energy Committee Chair Paul D. Tondo, to issue a scathing critique on Governor Pataki's bill to allow securitization of utility stranded costs.

Their briefing paper, "Shedding Light on Securitization," raises alarms at the prospect of $15 billion to $25 billion in new ABS debt, which the lawmakers describe as akin to "public debt."

"Under the Governor's securitization bill," say Sheldon Silver, et al., "utilities would be guaranteed the right to charge ratepayers for the full amount of any sum fixed by the PSC [public service commission]. This guaranteed recovery for utilities would replace the balancing of interests normally performed by the commission.

"The bill does not require that there be any relation between the savings achieved and the amount of utility recoveries that are guaranteed."

In California, where the securitization craze began, the Legislature met this objection