In the News: Recent Developments

Wed., Nov. 30, 2011


Sen. Daniels: 614-466-8156
ELECTRIC DISTRIBUTION UTILITIES (Balderson T) To establish standards for the securitization of costs for electric distribution utilities.


After hearing testimony, the committee accepted a substitute bill. According to a Legislative Service Commission comparison document, it does the following:

  • Requires that charges be applied to all of a distribution utility’s customers as long as they remain its customers, unless a customer later receives distribution service from another distribution utility in the same area;
  • Requires that if a customer purchases generation services from a CRES provider, the distribution utility must collect charges directly from that customer;
  • Expands a tax exemption for phase-in-recovery revenues;
  • Expands party standing for financing order and Supreme Court proceeding;
  • Extends the ability for parties to incorporate by reference in their application information files in a prior MRO or ESP proceeding;
  • Addresses how proceedings before the Public Utilities Commission of Ohio will be dealt with under Chapter 4903 of the Ohio Revised Code;
  • Requires that ESP phase-in costs be securitized only in accordance with the bill;
  • Provides that costs can also be used in connection with the use of proceeds from phase-in recovery bonds;
  • Defines financing costs to include accounting or other professional fees and expenses related to issuing or servicing bonds or obtaining a financing order
  • Specifies that carrying charges can be incurred before, on or after the bill’s effective date.

Chairman Daniels said he does not intend to accept any more substitute versions of the bill but will accept amendments in his office through close of business Monday.

Kevin Schmidt, public policy services director for the Ohio Manufacturers Association, testified as a proponent, saying securitizing certain utility costs can be a means to lowering rates for customers. He said bill provisions stating that the utility can only issue phase-in recovery bonds after all judicial reviews are exhausted is an essential protection for customers because it means customers are only subject to refinancing once it is settled that they own the debt.

Interim Ohio Consumers’ Counsel Bruce Weston spoke as an interested party, saying his office see securitization as a potential benefit to consumers, but calling for a few amendments to improve the bill. He said the bill should include a least-cost standard for securitization transactions to ensure customers are getting the best deal; a transparent process for reviewing securitization requests, including a public hearing and the advice of an independent financial adviser; and some technical changes to conform the legislation to existing procedures in law.

Weston said the bill’s current standard that securitization be “reasonably expected” to save customers money is too uncertain, and some states have included a least-cost standard in their securitization legislation, including Florida, Michigan, New Jersey, Texas and Wisconsin.

Weston said other states’ experiences show the importance of hiring an independent financial adviser in achieving the best securitization deals. He said a hearing is important so that customer parties get a chance to present evidence for the Public Utilities Commission of Ohio to weigh when considering securitization requests.

As to technical amendments, Weston said the bill should be changed to ensure that all parties who participated in cases that authorized costs that are eligible for securitization should be provided standing in cases that determine financing orders for securitization. He said the wording of the legislation should also be made consistent with other sections of state law regarding utility regulation.

Sen. Jones told Weston she’d been hearing from people opposed to a least-cost standard, and asked why he thought that was. Weston responded that some people might envision enforcing a least-cost standard to require a longer process, but Weston said the OCC is trying to work within the bill’s framework and not stretch out the timeline proposed. He said if parties can stipulate some facts up front, it could shorten the process.

Jones asked if the PUCO shouldn’t be given authority to order securitization, rather than waiting for utilities to seek it out, given that the stated purpose is to save customers money. Weston said he was unsure if other states did that, but said, “Yes, in fact it would be better if the PUCO and not the utilities had the ultimate control over the process.”

Jones asked if the bill could achieve the goal of a least-cost standard by instead creating an express fiduciary duty to protect ratepayers when making securitization decisions. Weston said he generally prefers a more-specific standard.

Sen. Seitz said the least-cost standard is somewhat reminiscent of the Environmental Protection Agency’s “best available technology” standard for pollution controls, which he said has sparked excessive spending in relation to the benefits of the technology.

“We don’t want to be spending dimes to chase nickels,” he said.

Weston said he understands the point but doesn’t think a least-cost standard would cause such problems.

Two utility representatives testified in favor of the legislation: Bill Ridmann, vice president of rates and regulatory affairs for FirstEnergy Service Company, and Jim Ziolkowski, rates manager for Duke Energy Business Services. Both said that securitization can save money for utilities and their customers, and that the processes set out in the bill will help ensure the securitized assets remain low-risk investments.

In response to questions, both said they would not favor Sen. Jones suggestion that the PUCO be able to initiate the securitization process, but would prefer to allow utility companies to choose whether securitization is best for them.

Joe Fichera, CEO of Saber Partners, said his adviser firm has helped to oversee 11 utility securitization transactions worth more than $8 billion for seven utilities in five states.

He said successful securitization transactions involve a balancing of the interests of all parties involved in structuring, pricing and executing the transaction so as to avoid overpaying.

He said such successful transactions happen when there is informed, conflict-free representation of consumers’ interests at the negotiating table, and experienced and independent advisers helping the PUCO.

Fichera argued for establishing something akin to a least-cost standard in the legislation, saying lack of such a standard could leave utilities without the incentive to pursue additional cost savings. He said the reasonableness standard in the legislation now is not good enough.

“The facts are that unless you negotiate hard on your own behalf with Wall Street, with sophisticated and large investors who have differing views, you will leave substantial amounts of money on the table; in this case, ratepayer money. Each side is looking out for its own economic interests. So without a clear standard and 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 taxpayers. 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,” he said.

He said requiring written representations from participants that they’ve sought the lowest cost option is a best practice for businesses.

Sen. Coley asked in what particular role an adviser such as Fichera would work. Fichera said in other states, advisers generally have assumed a fiduciary duty to the utilities commission.

In response to a question from Sen. Seitz, Fichera said it is customary to have the adviser’s fee at least partly based on performance and the ability to achieve the lowest cost.

Seitz asked Fichera if substituting “optimal” for “reasonable” as the cost standard could be a compromise to the least-cost standard. Fichera said that would be an improvement, although he’d refer “maximum” to “optimal.”

“You can see that lawyers were working on this, as opposed to finance people,” said Fichera.

Seitz also suggested that the committee examine how former Treasurer Richard Cordray handled the securitization of Ohio’s tobacco settlement money for lessons on how to address this legislation.

© 2011, Hannah News Service, November 30, 2011

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