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Securitization of Uneconomic Costs: Whom Does It Secure?

Fortnightly Magazine - June 1 1997

For example, should cogenerators pay the CTC? Qualifying facilities under the Public Utility Regulatory Policies Act might switch to a different backup supplier. In that case, a CTC imposed on QFs could violate PURPA's rule against rate discrimination. Similarly, a judge might overturn the "non-bypassable" feature that requires even self-generators to pay the CTC. The courts have yet to rule on these and other matters related to recovery of uneconomic costs. The laws passed so far offer no recourse for bondholders against the state itself (that is, from general tax funds) in case of default. In fact, if there was such a recourse for bondholders, would this raise a whole new set of concerns?

Who Is Secured

Clearly, the biggest beneficiaries of the securitization of uneconomic costs are the companies that use the option. A company using securitization would benefit in two ways. First, the company's above-market costs would be paid for by ratepayers and placed beyond the regulators' or the market's supervision. Second, the company would be placed in a competitive position any firm would like to be in (em that is, with questionable costs removed from the books. Other beneficiaries are of course the underwriters of the bonds, who would receive perhaps millions of dollars in fees, which may explain their enthusiasm for the concept.

But what about ratepayers? They would likely pay a lower annual cost in interest expense than what is currently in rates. (Whether total interest expense would be lower or higher would depend on the comparative length of the debt terms and the debt and equity terms being replaced.) However, allowing the utility a higher debt level could have the same result. Usually this would simply require a change in public utility commission policy. Also, securitization presumes that ratepayers are the ones who should pay. It is in the beneficiaries' interest, utilities with uneconomic costs, their shareholders and potential underwriters, to obscure this point and make it seem like an entitlement and place it beyond the regulators' and the market's control. t

Kenneth Rose is a senior institute economist at The National Regulatory Research Institute, at the Ohio State University, in Columbus. The views and opinions expressed here do not necessarily state or reflect the views, opinions, or policies of NRRI, the National Association of Regulatory Utility Commissioners, or NARUC-member commissions. The author thanks Ken Costello, Robert Burns and Doug Jones for helpful comments on an earlier draft.

And Where is the Collateral?

Definition. A financial security backed by a revenue stream pledged to pay the principal and interest of that security.

Purpose. To allow electric utilities to finance uneconomic costs with an up-front, lump-sum payment from the sale of a security or bond.

Benefits. The replacement or refinancing of the utility's existing capital structure of debt and equity with lower-cost debt. Plans approved so far require a passthrough to retail customers of any savings eventually realized from securitization.

Authorization. Requires legislation to create a transferrable property right to collect the utility's uneconomic cost from ratepayers. Such legislation determines the general guidelines on what the utility