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Fortnightly Magazine - April 1 1998

for cash. Counterpoint: Securitization does not result in a tax or subsidy; it is a financing. %n8%n

On Sept. 9, 1997, the IRS issued a private letter ruling to Southern California Edison confirming that securitization constitutes a debt financing tool. Last year the utility reportedly sold $2.466 billion in securitization bonds. Demand from investors helped hold down interest rates that the utility will have to pay. %n9%n

Point: Adjustment of the capital structure to provide a heavier debt load will not significantly lower a utility's aggregate interest on dividend payout to debt and equity investors. Counterpoint: Securitization lowers capital costs and thereby provides benefits.

Point: Securitization replaces the annual revenue the utility would have received with a lump-sum, up-front payment of cash. Counterpoint: Up-front recovery of revenue logically carries an obligation of fiscal responsibility. Legislators may wish to spell out that obligation in a new statutory framework. Utilities will otherwise have a burden of demonstrating their fiscal responsibility commitment.

Frankly Speaking

Don't blindly accept the charge by critics that securitization and stranded cost recovery will shift risks from investors to customers. I see no such transfer.

Frankly, any prior regulatory finding on prudence or used-and-useful status will have already set up a sharing mechanism between shareholders and customers. Suggestions that regulators switch back and forth among rate-setting methods invite legislators and regulators to engage in arbitrary practices that could not withstand judicial scrutiny. I, for one, urge rejection of such suggestions.

Legislatures, regulators and courts are dealing with evolving public policy analysis in electricity markets. Given the magnitude of stranded costs at stake, the results of rate-making will prove extensive. Certainly, regulators could limit recovery of stranded costs and securitization. Decision-makers have to ensure the impact of proposals is legal and fair to all stakeholders.

The U.S. Supreme Court has recognized the importance of operating capital (em and the ability to raise capital in the future. It continues to focus on the impact of rate orders, rather than the underlying theory. Critics therefore should eliminate their inappropriate reliance on a cynicism factor in this debate and get over their apparent disagreement with certain prior regulatory rate-making and related court decisions. I have.

The author is an attorney, shareholder, and secretary/treasurer in the law firm of Austin, Lewis & Rogers, P.A. in Columbia, S.C. From 1978 to 1992, he served as a state consumer counsel in South Carolina. During that time he served as a member and chairman of the Electricity Committee for the National Association of State

Utility Consumer Advocates.

1 "Securitization of Uneconomic Costs: Whom Does It Secure?" Public Utilities Fortnightly, June 1, 1997, p 32.

2 "Facts, Fairness and Securitization," Public Utilities Fortnightly, Oct. 1, 1997, p. 16.

3 Hon. F. J. Kelley, "Securitization: A State Attorney General's Perspective," The Electricity Journal, October 1997.

4 "IRS Issues Favorable Ruling On Rate Reduction Bonds," Edison International News,, Sept. 9, 1997.

5 See, generally, Council on Economic Regulation, Competition and Regulation In Electricity Markets, September 1988, at 6-7 and 37-38.

6 Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989).