Utility-Fee Deal Studied in Kentucky

September 23, 2011

Utility-Fee Deal Studied in Kentucky

By Matt Birkbeck

A plan has emerged in Kentucky to use securitization to pay for up to $2.5 billion of environmental upgrades to coal-fired power plants. The plan is being pushed not by energy producers themselves, but by a group representing some of the state’s largest industrial companies. The group, Kentucky Industrial Utilities Customers, believes a utility-fee securitization represents the best option for funding the upgrades, and is now lobbying members of the state legislature to introduce a measure authorizing such a plan.

Power companies in the state aren’t currently allowed to sell utility-fee bonds. The bond issue would be modeled after two 2007 transactions in West Virginia, where Allegheny Energy sold a total of $460 million of utility-fee bonds to pay for improvements to coal-fired plants. Indeed, the group of industrial customers in Kentucky took a close look at the West Virginia deals before launching its campaign.

“There is no doubt they are looking at how they did it in West Virginia, where securitization worked,” said Joseph Fichera, chief executive of Saber Partners, a New York firm that advised on the West Virginia transaction.

In Kentucky, the state’s two main power utilities Kentucky Utilities and Louisville Gas & Electric said last week that new U.S. Environmental Protection Agency standards could force them to shutter three power plants in the next five years. The alternative is to modernize the plants, but the utilities view the upgrade costs as prohibitive. That’s where securitization comes in. In West Virginia, Allegheny’s triple-A-rated bonds were backed by a surcharge on customers’ bills that averaged $2-3 per month. In addition to the state legislature, the Kentucky Public Service Commission would need to sign off on the plan.