In the News: Recent Developments

October 12, 2005

Florida Readies Storm-Recovery Debt Plan for Private Utilities

By Shelly Sigo

BRADENTON, Fla. — Florida is joining about a dozen states in allowing investor-owned power utilities to securitize an added charge on customers’ bills in order to issue taxable bonds and recoup costs spent on hurricane damages last year.

In Florida, the new credits are called storm-recovery bonds and one industry expert believes other states may consider using them in light of damages caused by this year’s powerful hurricanes in the Gulf of Mexico.

The Florida Public Service Commission last week awarded New York-based Saber Partners LLC the job of being its financial adviser as the PSC moves forward with crafting the policies and documentation that will become the basis for utilities to petition for the right to issue the bonds.

While these are not municipal bonds, Saber Partners chief executive officer Joseph Fichera described them as unique corporate bonds with a government guarantee that earns triple-A ratings.

“These are special securities that probably have the highest quality security other than U.S. Treasuries,” Fichera said. “They are backed by a charge on everyone’s electric bill and irrevocably guaranteed by a government regulatory authority to adjust rates to pay debt service.”

Other states have allowed such high-quality bonds, similar to asset-backed securities, to recover costs in cases of utility deregulation. Wisconsin has allowed similar bonds to be used for environmental cleanups. They are often called transition, ratepayer-backed, utilitytariff, rate-reduction, or stranded-cost bonds.

While Florida’s electricity market has not yet been deregulated, the storm-recovery bonds are designed to obtain the lowest cost for ratepayers while balancing issues between the private and the public sector, such as repairing damaged utilities, Fichera said.

“These corporations wouldn’t be able to sell these bonds without the government’s support,” he said.

Saber has provided financial advisory services to a number of states, including Wisconsin, Texas, and New Jersey, which was one reason the Florida PSC said the firm was tapped to help establish the storm-recovery bond program.

“These are non-recourse to the company and there’s no shareholder risk — the proceeds go to the utility, but the bill goes to the ratepayer,” Fichera said. “There needs to be some process set up to protect ratepayers.”

The Legislature passed SB 1366, which was signed by Gov. Jeb Bush earlier this year, authorizing the bond program under the Florida PSC. The bill states that storm-recovery bonds do not directly, indirectly, or contingently obligate the state or any agency, political subdivision, or instrumentality of the state to levy any tax or make any appropriation for payment of the bonds, other than in their capacity as consumers of electricity.

In SB 1366, the state pledges that it will not take any action to alter a PSC financing order, which grants “irrevocable, binding, and non-bypassable storm-recovery charges on ratepayers’ bills.”

The bill also pledges that the state will not take any action that would “reduce, alter, or impair storm-recovery charges that are to be imposed, collected, and remitted for the benefit of the bondholders and other financing parties until any and all principal, interest, premium, financing costs and other fees, expenses, or charges incurred, and any contracts to be performed, in connection with the related storm-recovery bonds have been paid and performed in full.”

“Our investor-owned utilities had storm reserve funds built up since the early ’90s, after Hurricane Andrew, when they went to self-insurance,” explained Mark Futrell, an economic analyst with the Florida PSC.

After Andrew decimated South Florida in 1992, insurance for transmission facilities became too costly and utilities began self-insuring by building yearly reserves for future storms, Futrell said.

“After the hurricanes last year, the funds they built up went to zero, in fact to a huge deficit in some cases, so the Legislature gave the PSC the authority to deal with that deficit,” he said. “A utility may petition us to use securitized bonds to pay for the deficit in reserve funds or outstanding expenditures.”

Several utilities, some of which pushed for SB 1366, are already receiving surcharges on ratepayers’ bills to recover storm damage costs until the PSC is ready to begin processing petitions for the storm-bond program.

For example, Florida Power & Light Co. — the state’s largest investor-owned utility — estimated its total damage from the hurricanes at about $1 billion. Insurance reimbursed $109 million of those expenses.

After certain adjustments, the PSC allowed the utility to recover $442 million plus interest and taxes through a special surcharge over three years. FP&L had $352 million in reserves before last year’s hurricanes. It is expected to seek authorization to issue bonds — less what’s been collected from the surcharge — as well as a yet-unknown amount to replenish reserves.

Saber will help the PSC prepare for utilities submitting petitions to issue storm-related bonds, as well as monitoring issuance costs and the actual sale of bonds.

The PSC will determine how much a utility can recoup through bond proceeds, which also covers issuance costs for the utility and the commission as well as the utility’s federal taxes on the bond proceeds, all of which are secured by a charge assessed to ratepayers.

The commission is responsible for levying the finance charge on ratepayers’ bills. Because of volatility in the energy industry, the charges against ratepayers securing the bonds will be reassessed every six months, with the PSC making adjustments as needed.

Like programs in other states, the non-recourse bonds would be secured by non-bypassable charges on customers’ bills. That means the charge is assessed as long as the ratepayer lives within the coverage area of the utility that issued the bonds, even if the ratepayer moves within the coverage area or gets electricity from another provider. If a ratepayer moves from the coverage area, the PSC must adjust the charge on the remaining ratepayers to ensure payment of debt service.

A special-purpose corporation — often called a bankruptcy-remote facility — would be established to collect the charges from ratepayers and pay debt service as long as the bonds are outstanding. This enables the utility to receive the bond proceeds and keep the income off the company’s balance sheet.

To investors, the bonds are state and federally taxable. However, they are tax-exempt from state taxes for people who live in Florida.

Industry analysts expect the Florida credits to be attractive to national and international investors, especially since the Sunshine State has an average 3.3% annual growth rate in residential electric sales.

According to a utility industry specialist, the only difference between an investor-owned utility issuing storm-recovery bonds and recouping costs from ratepayers and a public utility issuing tax-exempt municipal bonds is that the latter can tap the Federal Emergency Management Agency to recoup some expenses.

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