In the News: Recent Developments

November 30, 2011

Senate Panel Rewrites Electric Securitization Bill, To Consider Additional Changes

Consumer advocates pushed for changes to an electric utility proposal Wednesday that they say would save customers money, but it was one of several ideas that senators declined to include in a revised version of the bill.

The Senate Energy & Public Utilities Committee adopted a substitute version of a measure designed to help utilities securitize certain deferred costs (SB 248) and will consider additional amendments next week before voting, Chairman Sen. David Daniels (R-Greenfield) said.

The new version alters language allowing utilities to recover costs to be securitized, exempts the revenue stream from local taxation, adjusts the procedure for review proceedings, addresses financing costs and makes other changes, according to a summary by the Legislative Service Commission. (LSC Comparison Document)

Chairman Daniels said proposed amendments were due in his office by the close of business Monday and members will spend the remainder of the week reviewing the proposals with interested parties to make sure everyone has had a chance to review them.

“We’re not going to have an issue pop up at the last minute where people say, ‘we didn’t have a chance to weigh in on that,’” he said.

Another version of the bill would have excluded certain costs associated with electric generating facilities from securitization. The provision created pushback from some utilities, which are at odds over whether ratepayers or company shareholders should bear the cost of power plant construction.

Sen. Daniels said in an interview that he decided not to include the provision in the substitute bill because it surfaced too late in the process.

“So we’re taking this out and we’re going to have debate on these issues. People are not seeing those provisions at nine o’clock the night before we’re bringing them up for consideration,” he said.

Testimony: Consumer advocates said the proposal could allow utilities to proceed with securitization even if savings to customers amounted to “a penny” unless lawmakers strengthen the measure.

Interim Ohio Consumers’ Counsel Bruce Weston said the agency supports the concept of securitization, but asked senators to amend the bill to ensure customers get the full benefit of the cost-savings.

Language that would require the Public Utilities Commission of Ohio to authorize securitization if it can be “reasonably expected” to save money for customers leaves the potential benefit too uncertain, he said. Several other states have included “least cost” language in their laws that utilities to obtain the best possible deal, he added.

Mr. Weston also requested members include an amendment that would require a public hearing on securitization cases and require the PUCO to engage an independent financial advisor to help minimize costs for customers. He called the securitization application process “a form of ratemaking” and said interested parties should have the opportunity to present evidence for the PUCO’s consideration.

Sen. Shannon Jones (R-Springboro) said she had heard “strong opposition” to including a least-cost standard in the bill and asked the witness why there was so much resistance.

Mr. Weston said he thought utilities might oppose the idea because it could require more extensive proceedings. The current language is a very flexible standard that would not require much review, he said. “Right now cost savings could be a penny.”

Sen. Jones noted the bill would only allow utilities to request securitization and asked the witness if he thought the PUCO should be allowed to require it when in the best interests of ratepayers. Mr. Weston agreed that situation might arise when utilities might not want to securitize even if it would benefit ratepayers.

Sen. Jones asked if amending the bill to require fiduciary duty for ratepayers would achieve the same goal.

Mr. Weston said having specificity would be more beneficial for residential customers. “The more general is the law, the more lawyers argue about what the law means.”

Sen. Bill Seitz (R-Cincinnati) questioned whether the proposal’s ancillary costs of hiring auditors, financial advisors, more utility attorneys, and PUCO hearings would offset benefits that could be gained from requiring a least-cost standard. “In arguing what ‘least’ means, aren’t we really spending dimes to chase nickels?”

Mr. Weston said he believed the proposal would still benefit customers, despite the additional costs.

Sen. Seitz also asked about a potential compromise that would ensure securitization savings were better allocated between ratepayers and utility shareholders to give companies an incentive to obtain a better transaction deal. Mr. Weston said there were other similar arrangements that are very complex, but said he was open to the idea.

Meanwhile, American Electric Power Ohio testified against the OCC’s proposal during a hearing on a companion bill (HB 364) in the House Public Utilities Committee.

Renee Hawkins, managing director of corporate finance for American Electric Power, said the proposal to add “least-cost” language to the bill was unnecessary.

“A company’s goal is always to issue securities at the lowest cost consistent with market conditions. As a utility, we are especially sensitive to it because we are also subject to a prudence standard,” she said.

Issuing bonds in a “well-known, established type transaction” is the best way to get the lowest cost, Ms. Hawkins said, noting at least 54 utilities have securitized a total of $44 billion to date.

AEP Texas Central Company had to spend a lot of time and money to consider and evaluate alternatives, such as derivative products, that could theoretically have reduced costs as a result of least-cost language in Texas’s law, she said. “The lowest cost can be realized by executing a timely transaction consistent with both prior utility deal and investor expectations so that investors place competitive orders in subscribing to the deal.”

Rep. Mike Foley (D-Cleveland) ask why AEP opposed to inserting the standard into the bill if the utility already attempts to get the lowest transaction cost.

Ms. Hawkins said requiring the involvement of financial advisors made the process very costly and required AEP to take expensive trips oversees to meet with European investors and consider complex cross-currency swaps. “You spend a lot of time legal fees and advisory fees making sure you go through every possible option.”

Joseph Fichera, chief executive officer of New York-based advisory firm Saber Partners, LLC, testified in support of including a least-cost decision-making standard in the legislation.

The witness said his company had helped complete 11 utility securitization transactions in other states that helped achieve the best deal for ratepayers.

Involving independent advisors in securitization balances the various interests and ensures ratepayers don’t overpay for the various transaction costs, he said. “This is not an off-the-shelf financing … it’s unique in that not one penny of shareholders’ dollars are at risk. The total burden goes to ratepayers.”

With ratepayers’ money at risk, it’s in the state’s interest to ensure that they get the best deal by making sure they’re represented at the negotiating table, he said.

Mr. Fichera allowed his position on the bill represented his own self-interest, but warned lawmakers that capital markets work best when there is a balance of competing interests. Saber’s involvement in other states has saved utility customers tens of million of dollars compared to independent benchmarks, he said.

Without a clear standard and the ability to reject potential offers, underwriters and investors will have the leverage to dictate a final cost to ratepayers, he said, urging members not to relinquish control over the process by setting “artificial deadlines.”

Responding to a question from Sen. Bill Coley (R-West Chester), Mr. Fichera said the PUCO should have an independent advisor to review various options that will help determine best course of action in securitization cases.

“You don’t just want to go to a Goldman Sachs or a Morgan Stanley and say, ‘what do you think we should do?’” he said. “If you level the playing field, then you’re going to get the most efficient transaction.”

In other states, Saber has had a fiduciary duty to the regulatory commission, he said in response to further questioning. Independent advisors should not be chosen by the utility that is seeking to securitize.

Responding to a question from Sen. Seitz, Mr. Fichera said his company typically works for a minimum fixed fee with an additional performance fee based on the amount of customer savings achieved.

Jim Ziolkowski, rates manager for Duke Energy Ohio, testified as a proponent for the bill.

The PUCO authorizes recovery for certain utility costs, which can be deferred to soften the impact to customers, he said. Securitization could reduce the financing costs associated with collection of a deferral, he said, pointing to provisions of the measure that would help the company achieve a AAA bond-rating.

However, debt issuance is not always the most appropriate method to recover costs, he said. “Electric companies should always have the ability to make the business decisions that in their estimation, best enable them to fulfill their obligations and mission,” he said, adding the bill allows utilities flexibility in the decision-making process.

While Duke currently has no deferrals that the company deems appropriate for securitization, that might change in the future, Mr. Ziolkowski said, urging members to avoid placing limitations on different types of recoveries that could have unintended consequences.

William Ridmann, vice president of rates and regulatory affairs for FirstEnergy Service Company, said replacing cost deferrals that the PUCO has previously approved with long-term bonds that have a higher credit rating and lower interest rate could save customers million of dollars.

FirstEnergy’s carrying charge rate of 6.85% allowed on its deferrals approximates the embedded cost of long-term debt, he said. If securitization bonds were issued today, it would be in the range of 3.5% to 3.75%.

Sen. Coley asked the witness about Sen. Jones’ idea of authorizing the PUCO to order utilities to securitize certain costs when in the best interests of customers. Mr. Ridmann said decisions about securitization should be left up to the discretion of the utilities.

Kevin Schmidt, director of public policy for the Ohio Manufacturers Association, said the organization supports the notion of clarifying the law regarding securitization of certain utility costs.

The provision allowing utilities to issue phase-in recovery bonds only after all judicial review has been exhausted will ensure customers are subject to refinancing after it is settled that they own debt, he said.

© 2011, Gongwer Report, November 30, 2011

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