Moody's Investors Service has concluded that a properly structured securitization backed by the future cash flow from a utility's stranded investments can achieve a credit rating higher than the rating of the senior debt of the utility.
Moody's said this ability bodes well for the increasing number of investor-owned utilities expected to issue up to $75 billion of such securities by 2000 to recover uneconomic investments.
In the report, Stranded Utility Costs: Legislation Jolts the ABS Market, Moody's predicted the securities' high ratings will attract asset-backed investors (em typically AA or AAA (em because, "The stream of fees that will support these securitized transactions isn't linked to the existence of any specific utility, but to customer usage, and must by law be paid."
Legislative Issues. However, Moody's warned that understanding the legislation which created the fees is vital in assessing the credit risk of stranded cost securitizations. Legal concerns include the property right characteristics of the fee revenue stream; the transfer and assignability of those rights; security interest issues; and provisions for a true-up mechanism. Moody's pointed out state law usually treats the sale of utility's fee revenue to a financing entity as a true sale rather than a pledge for other means of financing. Such language simplifies the legal analysis regarding the ownership of the asset, which usually requires substantial legal analysis in other securitizations.
Political Risk. Investors should focus on provisions for rescinding or altering the legislation/rate order that authorizes the tariff.
Revenue Support. Stranded cost securitizations involve an analysis of many elements found in securitizations of future receivables, because revenue from fees supports the securities not assessed or billed to the obligers at the date of the securitization closing.
Real-Life Experiences. Moody's had estimated that stranded costs for U.S. utilities total $136 billion. It noted however, that worldwide, only three securitizations of stranded cost fees have been completed to date.
The first completed securitization is a tariff designed to help Puget Sound Power & Light Co. recover expenses for energy conservation programs, including demand-side management. Puget Power's regulatory assets were securitized in a $202.25-million transaction, completed in June 1995. (See, "Mortgaging Your Conservation: A Way Out for Stranded Investment?" By Andrea L. Kelly and Donald E. Gaines, PUBLIC UTILITIES FORTNIGHTLY, Oct. 15, 1995, p. 21.) Moody's noted the Puget Power transaction technically was not a stranded cost securitization, but a securitization of cash flow from conservation assets.
The second securitized asset, according to Moody's, is the June 1996 Nuclear Moratorium Asset transaction, consisting of revenue from a 3.54-percent fee imposed on utility customers in Spain to finance the costs of closing three nuclear power plants in 1984. A guarantee from the Spanish government supported the 25-year deal. Lastly, fees used to defray costs from the closure of Italian nuclear power plants were securitized in Orchid Securities, a $355-million deal that closed in May 1996.
New Legislation. Although only three transactions so far have been completed, recent legislative activity has enhanced prospects for securitization. For example:
California (em Assembly Bill 1890 provides a framework for the state's investor-owned utilities to issue debt securities backed by revenues received from competitive transition charges that the California PUC has authorized;
Pennsylvania (em H.B. 1509 (the Electricity Generation Customer Choice and Competition Act) is similar to California's new law, except that a concurrent rate reduction is not a condition for implementation of a tariff. The Pennsylvania law anticipates securitization of the fee revenue, including the PUC's right to issue an irrevocable order, a pledge by state government not to alter or reduce the value of the transition charge (except if adequate compensation is paid), and a true-up mechanism. The maximum term for any securities issued is 10 years.
New York (em Proposed legislation, "The Electric Ratepayers Relief Act of 1996," is similar to the California bill. The act would create qualified rate orders issued at the discretion of the New York PSC. It also would allow a utility to recover all or some of its qualified intangibles expenses through application of user fees. (See, "Stranded Costs: Qualified Financing for Intangible Assets," by Anastasia M. Song and Hugh M. Dougan, PUBLIC UTILITIES FORTNIGHTLY, Oct. 1, 1996, p. 44.)
Rhode Island (em Legislation passed last year allows for stranded cost recovery.
More than 40 states are also considering electric utility deregulation, which Moody's predicts will provide further impetus for additional securitization of stranded costs.
Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.