March 30, 2010

Louisiana Lawmakers Eye Bill to Allow Securitization Bonds

The Louisiana Legislature, which convened its 2010 session on Monday, soon will take up what may well be a first-of-its-kind proposal to permit electric utilities to issue securitization bonds for new power plants, long-term fuel supply and a wide range of other capital investments.

Utilities over the years have not been big fans of securitization or “ratepayer obligation charge” bonds, which are highly rated, low-interest bonds repaid through dedicated, multi-year charges on customers’ bills, preferring instead to incorporate all their investments into rate base so they can earn a rate of return on them.

There have been exceptions, or course, including the use of securitization bonds for stranded-cost recovery by utilities in California and Texas when those states deregulated parts of their electric industries, and in the past five years or so for post-hurricane storm-cost recovery by utilities in Florida, Louisiana and Texas.

Also, the West Virginia Public Service Commission in 2007 and again in 2009 approved plans by Allegheny Power to issue ROC bonds to pay for major environmental projects at utility coal plants. Louisiana’s H.B. 1207, however, would go further, by enabling utilities to issue securitization bonds to recover the costs associated with the cancellation of new plants or transmission lines, “any other type of capital investment in excess of $350 million,” long-term fuel supplies, and storage of spent nuclear fuel, a well as the costs associated with “repurchasing equity or retiring any existing indebtedness related to any of the foregoing.”

Prospects for the bill are uncertain, but it has the support of the state’s largest utilities. H.B. 1207 is similar to the already existing Louisiana Electric Utility Storm Recovery Securitization Act that was passed in 2006 and commonly referred to as Act 64, said Mark Kleehammer, vice president for regulatory affairs for Entergy Louisiana and Entergy Gulf States Louisiana. The bill on Monday was assigned to the House of Representatives’ Committee on Commerce.

“We feel that this new Investment Recovery Securitization Act could provide a benefit to customers in certain instances,” he said, adding that such a law “could be used to lower financing costs for major projects. That, in turn, would lower the overall amount that customers pay for those projects.”

Cleco Power also supports bill

Cleco Power also supports the bill “because passage could help save our customers money,” said Dilek Samil, the utility’s president and COO. “We’ve used this financing structure in the past to help lower storm costs for customers after hurricane Katrina and Rita.”

In a “Law Flash” or issue update sent to clients earlier this month, five attorneys at the law firm of Morgan, Lewis & Bockius said that “[w]hile most utilities may prefer to finance their capital investments in traditional ways so as to increase rate base, as capital needs in the utility industry rise, it may become more difficult to raise sufficient capital through traditional means, particularly without jeopardizing credit ratings.”

The attorneys — Bobbi O’Connor, Robert Reger, Stephen Kinney, Marc Lasky and William Baker — added that utilities “may also wish to avoid the regulatory risk associated with certain types of investments or rate proceedings. Therefore… securitization should be considered as an alternative means to finance costs incurred as a result of climate change legislation or regulation, smart grid projects, smart meters, and renewable portfolio standards,” among other things.

“Securitization provides benefits for both the utility and its customers,” the attorneys said. “For the utility, all costs are recovered upfront through the sale of the bonds, eliminating any recovery risk. In addition, this type of financing preserves credit metrics and lessens the pressure to issue additional equity. Even though the securitization will appear on the utility’s consolidated balance sheet, rating agencies generally ignore the debt for credit analysis purposes because it is an obligation of the special-purpose entity issuer, not the utility. As noted, though, the utility loses the ability to include the investment in rate base and earn a regulated return on it.”

During a joint interview with three of the Morgan, Lewis & Bockius attorneys, Robert Reger said that utilities in several states that do not yet have laws permitting securitization are considering pushing for legislation to allow it. He declined to identify the utilities or the states, but said that securitization bonds will likely become more widely used as utilities confront the high cost of modernizing and revamping their generation, transmission and distribution systems as regulators fight to hold down retail rates.

Joseph Fichera, senior managing director and CEO at New York City-based financial adviser Saber Partners, said that the securitization or ROC-bond approach can provide real benefits to ratepayers, and shareholders, but only if regulators employ “best practices” and protections like those contained in the recent West Virginia financing orders to ensure that it is not “a give-away to investors and underwriters.”

Fichera, who has advised the Florida Public Service Commission and the West Virginia PSC on securitization bonds issued by electric utilities in those states, said that “[t]he tension has always been about how utility balances benefits to ratepayers versus shareholders.” Utilities, he said, “have a strong desire to build rate base and generally are not willing to give up any earnings in order to just lower costs for ratepayers at shareholders’ expense.”

Securitization or ROC bonds offer promise in significantly lowering costs, said Fichera, but will only see more widespread use if utilities and consumers are willing to compromise, perhaps by agreeing to share savings, with the ratepayers receiving most but not all of the savings that securitization provides.

Fichera also dismissed as “a red herring” the assertion by some securitization critics that permitting the securitization or ROC-bond approach would be “a slippery slope” that would require utilities to take a significant share of their investments “off-balance sheet.” Rating agencies already have indicated that they would raise red flags if more than 20% or 25% of customers’ monthly bills were tied to paying back ROC bonds, he said. — Housley Carr

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