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.
Securitization of Uneconomic Costs: Whom Does It Secure?
can collect from its current ratepayers. It also instructs the state's utility commission to determine the amount collected and to supervise a collection mechanism.
Mechanics. Typically, the utility will transfer the legislatively created property right to a designated trustee, who then issues a security or bond. The trustee then sells the security in the financial markets and pays the cash proceeds (less transaction costs) to the utility. The cash proceeds the utility receives should equal the discounted present value of the revenue stream.
The Customer Charge. The utility customer pays a "competitive transition charge," or CTC. (That term originated in California, and has since acquired wide usage across the country as a generic term for a charge assessed to ratepayers to recover a utility's uneconomic costs.) The CTC is generally designed as a "non-bypassable" obligation (to the extent such a thing exits) imposed on ratepayers by legislative fiat.
Investor Payout. The utility or distribution company collects the CTC from the customers. The funds are then transferred to the trustee, who then transfers it to the security holders (bondholders).
Collateral. Basically, a pledge by legislators to see that the securities will be paid in full, including principal, interest and financing costs. However, what is being refinanced are three main categories of potential utility uneconomic costs: 1) the portion of the utility's generating assets that exceeds market value; 2) costs incurred in above-market contracts to buy power from non-utility generators, and 3) regulatory assets or deferred debts (e.g., accounts payable to the utility over a long-term amortization period, the receipt of which is threatened by competition).
In other words, the assets refinanced are those assets on the utility's books that hold no real value. These securities only have a value because the legislators have promised to create and sustain the revenue stream from the CTC until the debt is paid.
Examples. California and Pennsylvania have adopted legislation that permits securitization of uneconomic costs. Many more states are considering it.
1The most recent case was Duquesne Light Co. v. Barasch, 483 U.S. 299, 109 S.Ct. 646 (1989). In footnote number 10, the Court stated that a "right requirement of the prudent investment rule would foreclose hybrid systems... [and] would also foreclose a return to some form of the fair value rule just as its practical problems may be diminishing. The emergent market for wholesale electric energy could provide a readily available objective basis for determining the value of utility assets."
2From a presentation by Howard Hiller (Solomon Brothers) at "Nuclear Power in a Competitive Era: Asset or Liability?" sponsored by The Nuclear Waste Program Office of The National Association of Regulatory Utility Commissioners, Fort Myers, Florida (January 1997).
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