Duff & Phelps Credit Rating Co. has released a report advising that a properly structured plan for securitization of stranded utility investment should address third-party credit risk. That is, the plan should limit the extent to which bondholders are exposed to credit risk that may stem from actions taken by small energy marketing companies that are expected to act as middlemen in aggregating retail customers or services distributed by electric utilities.
According to the report, Stranded-Cost Securitization (em Potential Aggravation With Aggregators, securitization deals for stranded costs may lie exposed to credit risk because aggregators (largely small, start-up companies) may bill utility customers directly and handle receipts, and thus play a role in the revenue stream that supports bonds issued in a securitization.
Billing Cycle. For example, if an aggregator bills and receives payments not only for the electricity consumed, but for the utility's transmission and distribution services (including the transition charge earmarked for a securitization), the aggregator would temporarily possess funds due security holders. Absent any safeguards, investors would be exposed to the credit quality of the aggregator during the period that it held the funds.