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April 19, 2006

Florida Power Seeks to Issue Bonds for Hurricane Cost

By Darrell Preston, Published in Bloomberg News / BusinessWire

— Florida Power & Light Co., the state’s largest utility, is seeking approval to issue $1.72 billion of bonds, backed by a surcharge on customers’ electricity bills, to cover the cost of rebuilding after hurricanes.

Florida’s Public Service Commission begins hearings today to consider whether the utility may issue hurricane bonds and for how much. The state’s lawmakers last year became the first in the U.S. to approve legislation allowing utilities to sell bonds for paying hurricane repair costs.

“It’s a new approach to hurricane recovery that’s never been done before,” said Kevin Bloom, spokesman for the Public Service Commission, which regulates state utilities. “It will be decided at the discretion of the commission.”

Bonds backed by a guarantee that regulators will set customer charges high enough to repay the debt typically carry the highest ratings. U.S. states have sold $30 billion of such bonds in the past few years, mostly for utilities in deregulated states to recover investments made before the market was opened.

The Florida power commission is expected to rule on the proposed hurricane-bond financing in mid-May, which means the bonds could be sold a month to two months later, said Bill Swank, spokesman for Juno Beach, Florida-based FPL Group Inc., parent of Florida Power & Light.

Commissioners also must decide whether to compel the utility and its financial adviser and underwriters to certify that they sold the bonds at the lowest possible interest rate, as similar utility-bond deals in Texas and New Jersey required.

‘Lowest-Cost’ Standard

Florida’s utility commission hired New York-based Saber Partners to advise it on the proposed Florida Power sale and ensure that any bonds would be sold at the lowest possible cost to ratepayers, Bloom said. Last year, lawmakers removed a provision in the legislation that would have required a “lowest- cost” standard on any bond sale. The law left it to the discretion of the commission to decide whether to use such a standard.

Moray Dewhurst, Florida Power’s chief financial officer, argued in written testimony submitted before the hearings that “it is not humanly possible to know” whether a financing will produce the lowest cost.

Saber Partners Chief Executive Officer Joseph Fichera, in separate testimony, said adopting a “reasonable cost” standard instead could cost tens of millions of dollars in additional debt expense that customers would have to pay.

“There is no reason to pay any more for a bond issue than is necessary,” Fichera argued in testimony about the lowest-cost standard. “One dollar has the same quality as another dollar, and a bond issuer only wants the most dollars for the lowest cost.”

Lack of Insurance

Florida Power, which serves about 4.4 million people, needs to sell the bonds because it can’t obtain insurance to cover hurricane damage to power lines, poles and other parts of its distribution system, Swank said. The company is seeking $850 million for hurricane damage in 2005, $215 million for 2004 and $650 million for a reserve against future storms, Bloom said.

At today’s hearings, the commission heard from officials at the utility, who argued that its shareholders shouldn’t bear the cost of rebuilding after hurricanes, and experts on maintenance of the company transmission system.

If the company is authorized to sell the full amount requested, customers will pay a surcharge of $1.58 per thousand kilowatts of electricity over the bonds’ 12-year life. Customers already are paying $1.65 per thousand kilowatts to help repair damage from Hurricanes Charley, Frances, Ivan and Jeanne in 2004.

Public counsel Harold McLean is challenging the need for $650 million of reserves, saying $200 million would be enough. Swank said $650 million would give the utility enough so it wouldn’t have to come back for more anytime soon.

“We’re living in an era where there is a higher incidence of hurricanes,” Swank said. “This will give us what we need for a while.”)


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