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Perspective

Fortnightly Magazine - October 1 1998

a public utility commission following passage of a new statute (usually long, mechanical, technical and filled with legalese). "Administrative" securitization is that done according to the powers of a utility commission provided for by an existing statute (usually broad, simple and flexible). It is all a battle over a definition - in this case, of the word "property."

In California, the opinions of counsel that justified the 'AAA' ratings analyzed the term "transition property" - embedded at the center of the California enabling law (AB 1890) - but only by analogy to the definition of "property" under existing law. Counsel acknowledged that they could find no body of law on which opinions about the term "transition property" could be based. The statute was brand new. It was "back to the future" for any legal opinion. This approach prompts the question: Why take the extra step and reinvent the wheel?

Under administrative securitization, property is indeed the cornerstone, so there is no need to reason by analogy. The concepts involved in securitization lend themselves enormously well to the creation of a stable and assignable property right - the notion sought to be achieved in California. But in the end, it is only the PUC that can determine the amount of "transition" or other property for which recovery is provided and the rate path through which that is achieved just as with ratemaking.

To those who wonder why we adopt new policies when the old ones would have worked just fine, I have a suggestion. Instead of wasting all of this time drafting securitization legislation, let's use the regulatory framework that's already in place. Because, contrary to what most people in the industry think, specific legislation is not necessary for securitization.

The Statutory Models

Securitization first showed up for electric utilities when Puget Sound Power & Light couldn't meet the issuance tests for new bonds under its mortgage. That occurred soon after the Washington Public Power Supply System disaster, so investors were rightly worried about what a promise from a Washington company and its regulators would or would not be worth. The company's bankers suggested securitization - in this case, for intangible value in demand-side management, a popular conservation tool in the Pacific Northwest. It was also suggested, since this was a new technique and the company had a problem accessing the capital markets, that new legislation would prove useful to support the financing, and so a law was adopted to support a $225-million issue. (See, Andrea L. Kelly and Donald E. Gains, "Mortgaging Your Conservation: A Way Out for Standard Investment?" Public Utilities Fortnightly, Oct. 15, 1995, p. 24). However, a lawyer with a leading New York utility firm severely criticized the statute in question as inadequate from many legal points of view.

Several years later, along comes the California restructuring law. Again the bankers recommended securitization, this time for stranded generation, citing the Washington statute as the proper model, and saying that significant savings could be achieved by dissociating the credit of the transaction from the utility's corporate credit, the essence of