Like a physician with her stethoscope at the outset of a check-up, astute shareholders and directors should use the level and trend of a utility’s market-to-book ratio (MtB) as one of the first...
Securitization, Mach II
Green investments require bulletproof financing.
that action is required to restore such margins to adequate levels. 37 Areas of greatest concern include California, New England, Texas and the Midwest. 38 It is unlikely this capacity will be achieved through demand-side measures or the addition of renewable or nuclear generation, which require special considerations for planning, design, and operation in bulk power markets. Renewable resources often are characterized by their remote location, interconnection over difficult terrain and, due to their variable nature, the related requirements for base-load dispatch flexibility, spinning reserves, voltage support, and other ancillary services for the related market. 39
Because the carbon-reduction technologies that will be required remain commercially unproven, estimates of the associated costs are more speculative than usual. Nevertheless, the total seems likely to reach several hundred billion dollars. Again, the compliance costs, including proposed synthetic compliance, could be recovered using stranded-cost securitization techniques, which would provide efficient financing and greater flexibility when determining the most appropriate equipment and facilities to effect the required carbon reduction and when to install such equipment and facilities.
With the demonstrable success of stranded-cost securitizations, utilities likely will expand their use of this securitization method. Indeed, this already has been demonstrated successfully by some transactions for mandated environmental-control expenditures and storm-reconstruction costs.
The opportunity to use stranded-cost securitization techniques to satisfy community, regulatory and other requirements for GHG reductions, yet defer critical and potentially imprudent decisions regarding specific related plant and equipment for such reductions until the related reduction technology is commercially proven, should also be attractive to fossil-fired power plant owners, developers and sponsors.
1. See, for example, Fitch Research’s Guidelines for Rating Debt Backed by Regulatory Assets , Sept. 30, 1996 and Fitch Ratings’ Rating Criteria for U.S. Utility Tariff Monetization Bonds , Sept. 11, 2006. Similarly, Standard & Poor’s Securitizing Stranded Costs , Jan. 18, 2001.
2. Fitch Ratings’ Rating Criteria for U.S. Utility Tariff Monetization Bonds , Sept. 11, 2006, at p.1.
3. See Federal Energy Regulatory Commission’s Order 500, described at: http://www.eia.doe.gov/oil_gas/natural_gas/analysis_publications/ngmajorleg/ferc500.html (this link and, unless otherwise noted, all other links herein last viewed on Feb. 25, 2008) and the preceding superceded Order 436, described at: http://www.eia.doe.gov/oil_gas/natural_gas/analysis_publications/ngmajorleg/ferc436.html.
4. See, for example, Moody’s Investors Service’s New Issue Report for Nuclear Moratorium Asset Securitization Fund .
5. See Moody’s Investor Service’s New Issue Report, May 29, 1998 for Puget Power Conservation Grantor Trust 1995-1 (reprinted from an original report dated Dec. 15, 1995).
6. See, for example, Fitch Ratings’ Rating Criteria for U.S. Utility Tariff Monetization Bonds , Sept. 11, 2007 at p.9.
7. U.S Constitution, Contracts Clause. In addition, individual State constitutions often include similar protections.
8. U.S. Bill of Rights, Fifth Amendment.
9. Other reviews of stranded-cost securitizations include the Congressional Budget Office’s Electric Utilities: Deregulation and Stranded Costs, October 1998, available at: http://www.cbo.gov/ftpdocs/9xx/doc976/stranded.pdf.
10. Available at: http://www.irs.gov/pub/irs-drop/rp-02-49.pdf.
11. Available at: http://www.irs.gov/pub/irs-drop/rp-05-62.pdf.
12. See, for example, Moody’s Investors Service’s Stranded Utility Costs Securitization: An Energized Market, Feb. 4, 2000 and Stranded Costs: A Resilient Asset Class , Jan. 3, 2005. Similarly, Fitch Ratings’ Utility