"This legislation represents a piecemeal approach to a problem which requires deliberate and thoughtful consideration .... [It] could lead to 'cream-skimming,' which would result in increased...
Securitization of Uneconomic Costs: Whom Does It Secure?
Touted as a panacea for stranded costs, securitization would forever shield rates from market scrutiny.
We consumers display an amazing talent to squander the fruits of our labor on the whim of the moment. Examples might include bungee jumping, vanity license plates or pet rocks. Or just about anything you might find in a magazine stuffed in the back of an airline seat.
Now make way for electric utility restructuring, where the latest fashion calls for securitization of uneconomic costs. (I deliberately avoid the industry's euphemism of "stranded" costs.) Will securitization aid consumers, as claimed by its advocates, or will it go down as just another bad idea that was once very popular?
Much of the debate runs rife with doublespeak. It tends to diminish and confuse the subject. Do proponents seek a bailout? Or is this a "win-win" proposition as advertised by proponents? Perhaps the biggest problem with securitization is that it might be seen as a panacea for all projects that become uneconomic.
The truth is at once more simple and profound. Securitization is mostly a refinancing option (em paid for by customers to recover the cost of bad investments. Utilities with uneconomic costs, their shareholders and potential underwriters are the only ones that stand to benefit from securitization. Estimates on the size of the market for these financial assets would make even Carl Icahn sit up and take notice. Salomon Brothers estimates that the market could approach $50 billion. An analyst at Fitch Investors Service stated that it could reach $100 billion.
A Perversion of Process
From a public interest standpoint, a major drawback with securitization is that it effectively bypasses the regulatory process. It converts the utility's opportunity to recover its costs and earn a return into a guarantee protected by legislation. Whether or not securitization is viewed as a problem depends on the interpretation of the so-called Regulatory Compact.
A great deal has been written on the subject of the Regulatory Compact. Some have claimed the compact is a fiction recently invented by the industry. Others have said the compact is an ironclad covenant etched in blood. As often happens, the truth is somewhere between. A tacit agreement of sorts does exist between regulators and utilities. The agreement is more complicated than how it is often portrayed.
Briefly stated, the compact grants the utility an exclusive (but limited) franchise to operate in a service territory free from competition. This was a "special privilege" that could be granted or withheld at the discretion of the state or federal government. In exchange, the utility was required to serve all customers without discrimination. Its profits were regulated to ensure that its prices remained reasonable.
The obligation is not, as it is often characterized, an obligation imposed by regulators that binds ratepayers to the utility. There was never, nor is there now, a concurrent obligation to buy on the part of utility customers. If such an obligation did exist, utilities would have the right to charge industrial customers that installed their own on-site generating plants. Or, utilities would chase down residential