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Securitization, Mach II

Green investments require bulletproof financing.

Fortnightly Magazine - August 2008

will collect the fees for repayment of the debt. Further, the Act states that the debt associated with the bonds will not be shown on the books of the related utility. 16

Several other states have adopted similar legislation, including Florida, Texas and West Virginia.

A subsequent attempt occurred in May 2007, when Allegheny Energy, parent of Monongahela Power (senior secured rating: Baa3) and Potomac Edison (senior secured rating: Baa3), issued $345 million and $115 million, respectively, of environmental control bonds under West Virginia Code §24-2-4e. 17 The bonds were used to finance the installation of flue-gas desulphurization units (commonly referred to as “scrubbers”) and related facilities on the Fort Martin coal-fired power plant in Monongalia County, W.Va. The bonds were rated AAA by Standard & Poor’s and Aaa by Moody’s Investors Services—superior to the related utilities’ Baa3 ratings. The required financing order 18 was issued after a protracted proceeding and later was amended by joint stipulation to accelerate the securitization in order to take advantage of attractive interest rates and avoid the risk of further escalation of project costs for the scrubbers and related facilities.

The costs of implementing the Clean Air Act’s Phase II reductions under Title IV, §405, 19 as well as mercury limitations under the proposed Clear Skies Act, 20 are estimated to exceed $60 billion by 2020. 21 Of course, the U.S. Court of Appeals for the District of Columbia Circuit struck down EPA’s 2004 Clean Air Mercury Rule 22 on Feb. 8, 2008, for exempting power plants from more stringent mercury pollution requirements under the proposed cap-and-trade scheme. At press time, the EPA’s plans for a new mercury rule were unknown. In addition, this same court found “several fatal flaws” in EPA’s Clean Air Interstate Rule and, as a result, vacated the rule in its entirety and remanded the matter back to EPA to promulgate a rule consistent with the Court’s opinion.

Nevertheless, future clean air requirements likely will generate significant opportunities to finance mandated pollution compliance costs using securitization techniques—without burdening electric utility balance sheets with the related obligations.

Storm Reconstruction Bonds

Following Hurricane Andrew in 1995, commercial insurance for property or casualty damage to electric transmission and distribution facilities owned by coastal utilities became substantially more expensive — even with larger deductibles or self-insurance — or unavailable on commercially acceptable terms. For the next 10 years, coastal utilities often were permitted to charge rates in amounts thought sufficient to establish appropriate reserves for storm recovery and reconstruction. These reserves were depleted in the devastating U.S. hurricane season of 2005, which included Hurricanes Katrina, Rita and Wilma. 23

As a result, Florida, Louisiana, Mississippi, and Texas all passed laws facilitating storm-recovery securitization. 24 The first completed storm-recovery securitization transaction was FPL Recovery Funding’s $652 million of Senior Secured Bonds, authorized by a financing order for Florida Power & Light (issuer rating: A/A1 and short term rating: A-1/P-1) in June 2007. 25 The bonds were rated AAA by Standard & Poor’s and Aaa by Moody’s Investors Services and, as with Allegheny Energy, these ratings were superior