April 8, 2006
The Risks, Benefits and Responsibilities of Issuing Ratepayer Obligation Charge Bonds in Securitization
By: Joseph S. Fichera
Remarks before the Florida Public Service Commission
Thank you for the opportunity to address the Commission directly.
As a financial advisor, Saber Partners has completed 6 utility securitizations with 4 pending totaling about $7 billion. This includes assignments in Texas, Wisconsin, Vermont, New Jersey and West Virginia as well as Florida. In each case, we have a fiduciary duty to the Commission and to ratepayers.
Representing the Saber Partners team in this proceeding are a former regulator, Rebecca Klein, a former chief financial officer of a major investor-owned utility, Mike Noel, and a former underwriter and current investment banker, Joseph Fichera
As Mr. Noel pointed out, the fundamental characteristic of this financing — versus all other financings — is that the full economic burden of repayment falls squarely on ratepayers — not a penny of shareholder funds are spent or even at risk.
My testimony focuses on the unique situation this creates for the Commission to consider. Perhaps $1 billion will be raised and the natural question for the people who will be responsible for paying it back is —”at what cost”? If you told your brother-in-law that you would agree to pay his mortgage, wouldn’t you want to have final say over the interest rate and terms?
You are being asked to use your powerful regulatory authority in ways that have not been previously done in Florida and to forgo your future regulatory review in order to create a bond of unusual strength, a completely separate credit from FPL. The reason for this isâ€¦ that, in doing soâ€¦. you expect to get the lowest cost of funds available in the market at the time. If cost doesn’t matter and the best deal possible doesn’t matter, then we can save much time and expense and fees and just sell these bonds at whatever rate underwriters and investors want.
But cost does matter.
The capital markets are often thought as a “black box” of buyers and sellers rapidly exchanging millions of dollars. They are thought to produce efficient results because each participant pursues it own economic interest and prices are determined through competition and the free flow of information.
But there needs to be a balance of competing interests in any negotiation. In this transaction, the balance is broken.
The people responsible for repaying the bonds, the ratepayers, are not, at present, represented at the negotiating table. They are not protected — unless the Commission acts to represent those interests, the results are likely to be skewed against ratepayers’ interests because that’s how the capital markets work. And all top rated securities, even AAA securities, do NOT price the same; there are differing views. Nothing is automatic except that self-interest rules. As Mr. Olson of Credit Suisse said to you yesterday, he represents his own interests as FPL does of its own interests. This lack of representation of ratepayer interests can affect the pricing, the transaction documents and every aspect of the deal.
Nothing will occur without the hard work and collaborative efforts of the parties involved. The company and the commission can work together and they can create the balance necessary to manage competition among underwriters and investors.
11 states have done these transactions and it has been a learning process ever since.
My testimony describes this evolution and the “best practices” available to the Commission. These “best practices” cover three principal areas:
Ratepayer representation and protection
The decision-making standard
The first element is effective REPRESENTATION of the interests of the Commission and ratepayers at every step through the conclusion of the process. Decisions affecting ratepayers should be made in conjunction with someone with a specific and direct fiduciary duty to ratepayers.
The next element is the DECISION MAKING STANDARD, a critical element. The standard should be the best possible deal for ratepayers at the time of pricing, the lowest possible cost of funds. Anything less, allows for less than optimal resultsâ€¦.why is this? Simple common sense, without a lowest cost, best price standard “why bother?” There is little incentive for any additional effort.
I have been an underwriter for almost 20 years. I served on the other side of the table with issuers and with investors. I have been intimately involved in every aspect of the offering process in 6 ratepayer-backed transactions. The capital markets are full of risks and opportunities. The facts are that unless you negotiate hard on your behalf with Wall Street, with sophisticated and large investors with differing views, you will leave substantial amounts of money on the table. Each side is looking out for their own economic interests.
So, without a clear standard and a negotiating position that includes the potential for saying “no” when evaluating offers, underwriters and investors will have the negotiating leverage to dictate a final cost to ratepayers. Remember, the best way to lose control of the sale price of your house is to tell prospective buyers that you must sell your house today because you really need the money now. Pricing leverage will quickly shift.
The final element is for key transaction participants — FPL, underwriters, and financial advisors — to deliver WRITTEN REPRESENTATIONS to the Commission, certifying that what they have done has led to the lowest cost of funds consistent with market conditions at the time of pricing. It’s a basic business principle — “put it in writing.”
Any prudent person would want it in writingâ€¦for example, investors want documentation before they give up their moneyâ€¦they don’t rely on oral representations solely before investingâ€¦ With Sarbanes Oxley and a heighten need to maintain public confidence in business, certifications have become a part of normal business “best practices.”
This certification process has been employed successfully in Texas and New Jersey, and is required in Wisconsin and West Virginia. 7 major underwriters have delivered these certificates on our transactions, along with all 4 utilitiesâ€¦The Florida ratepayers deserve no less.
We are completely committed to working with the Commission and Staff, FPL and underwriters to make this a successful and timely transaction.
Our goal is to work cooperatively in a collaborative process with all parties but to never sacrifice ratepayers’ interests for mere sake of expediency.
We believe that the Commission should be the final decision maker, and we will provide all the information and analysis that you will need to reach a fair and equitable resolution of these complex issues.