When an electric utility invests in a resource to serve its customers, it does so with the belief that the asset underlying the investment can be pledged as collateral to secure debt capital. But what happens if the asset is not owned by the company and, therefore, provides no collateral? The following situations illustrate:
Electric utility "A" chooses to build a small generating plant to meet the future needs of its growing customer base. It secures project financing for the new plant. Once the unit becomes operational, utility A pledges the asset as collateral to obtain permanent, lower-cost financing.
Electric utility "B" also enjoys a growing customer base, but chooses to meet part of its future needs by suppressing electric usage through investment in a demand-side management (DSM) energy-conservation program. Unlike utility A, utility B does not own the asset underlying its investment (em its customers do, through grants to install energy-conservation measures in their homes and businesses. Since the utility does not own the asset, there is no collateral to support lower-cost financing.
In the not-so-distant past, situation B would have posed little concern. State regulators would have conducted a prudence review for the conservation investment. Following approval, they would have added costs to the rate base and allowed amortization over the appropriate time period, giving the utility an opportunity to recover its investment. But in today's environment, lack of ownership of a DSM asset raises concerns not present in construction of a generating plant.