[BETA] Fortnightly

Cynicism is nothing to scoff at. Cartoonist Scott Adams of Dilbert( fame has made a good living at it. But cynicism has an Achilles' heel. It reflects a certain lack of objectivity. It may deflect serious debate.

Consider the securitization of electric utility stranded costs. Last summer, after Ken Rose had thrown down the gauntlet against securitization, %n1%n I heard him speak at the 1997 NASUCA mid-year meeting and was struck that his message might make mischief in state regulatory and legislative arenas. In California a recent court challenge against securitization was short-lived. In Pennsylvania, a court challenge is pending against retail competition issues including securitization. Of course, the Fortnightly later published a rebuttal from former California commissioner Dan Fessler, %n2%n but others, %n3%n like Ken Rose, have failed to consider the matter in an entirely objective manner. In my own view, as a former state consumer counsel and NASUCA committee chair, I feel the issue calls for a more exacting analysis: one that confronts such realities as the ban against any taking or confiscation of property without due process.

I believe that utilities, regulators and customers should consider securitization for working out stranded costs if it is properly included in state enabling legislation.

Credit card users and automobile purchasers have been financing purchases through issuance of asset-backed securities for more than a decade. Such revenue streams have value; they provide collateral for issuing new securities. In fact, last year the Internal Revenue Service issued a private letter ruling affirming this approach. In an opinion issued to Southern California Edison, it determined that the proceeds would constitute debt financing to that utility. %n4%n This IRS ruling likely will pave the way for securing future revenues based upon prudent, used and useful investments. Thus, this case resolved the potential uncertainty over use of competitive transition charges and proceeds from securitization. The ruling also allayed fears of violating the Commerce Clause of the U.S. Constitution.

Critics may argue that high-cost utilities should not benefit from an inflow of cash from securitization. However, this argument ignores or discounts the rate reductions typically built into securitization.

Utilities in states with securitization will remain subject to regulatory sanction for failure to mitigate stranded costs. They will also bear the burden of proof that they have used these funds appropriately during the transition period. Clearly, higher rated bonds, secured this way, will cut capital costs and offer real benefits to shareholders and customers.

Point for Point: Confronting the Critics

Most opponents of stranded cost recovery and securitization argue similar points, each of which can be disputed.

Point: Securitization rigs the competition. Counterpoint: Securitization can be used to promote (em not rig (em competition, since it may finance appropriate transitional costs.

There are at least 10 factors that should be used in this public policy analysis: economic efficiency; economics of scale; monopoly power, including antitrust implications (mitigating market power); ability of regulated utilities to respond to competition; capital intensity; quality of service; equal treatment, including ability to pay and avoid rate shock; transitional costs and benefits; national security; and