ORIGINAL REPORTING: Bankers Call For Scrutiny Before Securitization

Possible hundreds of billions in US power sector securitizations spur ratepayer protection debate; Securitization can ease impacts of COVID-19 moratoria debt, stranded asset costs, and extreme weather losses, but bankers and regulators agree that customer costs need oversight.

Herman K. Trabish, Feb. 22, 2021 (Utility Dive)

Editor’s note: More scrutiny is needed of how the hundreds of billions – if not trillions – of customer dollars will be spent to cover accrued power sector costs for COVID and the climate crisis.

Securitization is a financial tool that can reduce utility debt with low interest bonds secured by ratepayers, and with utilities' growing costs related to COVID-19, the energy transition, and climate change, interest is accelerating. But utilities and their customers are facing hundreds of millions or even billions of dollars in such costs, which is raising oversight concerns. When oversight has been introduced, it has led to lower interest rates and lower transaction costs, stakeholders in such proceedings told Utility Dive.

Duke Energy's $1 billion proposal to use securitization to meet storm recovery expenses in North Carolina provides the criteria necessary for the commission to evaluate Duke Energy's proposed transactions, Duke spokesperson Meredith Archie said in an email. It allows the commission "to determine whether and to what extent it wants to be involved in the transaction once it issues its order."

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But clear state laws on securitization are needed to "protect the public," former Colorado Public Utilities Commission Chair and authority on securitization Ron Lehr said. State laws "should encourage regulators to ask what incentives are involved when big banks and a big utility work together and whether those incentives align with the public interest."

Utilities and customer advocates differ on oversight. Duke, though committed to legislative and regulatory guidance on securitization, argued in its proceeding that it can manage bond term negotiations, and the financial transactions that follow, on its own. But with hundreds of billions in potentially securitized dollars at stake, customer advocates contend experts representing ratepayers should have a role in those negotiations.

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Securitization allows utilities to offer long-term bonds to investors to pay off short-term debt. Ratepayers benefit because the cost of the securitized debt is lower than the utility's typical cost of debt, which reduces the monthly bill impact, Moody's added. The bonds have lower interest rates because they are long-term and secured by the high likelihood of customers paying their bills. But enabling state legislation is necessary for credit agencies to provide the AAA credit rating for securitized debt that makes interest rates low.

At least five states passed legislation approving regulatory consideration of securitization by utility regulators in 2019, and at least 18 others have some kind of regulatory, legislative or advocacy effort in the works, according to Energy Innovation and others. The 2020s are likely to see a lot more securitizations, said RMI Electricity Practice Principal and Stanford-Precourt Institute for Energy Research Associate Uday Varadarajan. The Biden administration's commitment to addressing climate issues is likely to accelerate retirements among the approximately 130 GW of remaining operating coal plant assets, he said, leaving about $90 billion in stranded costs eligible for securitization, not counting gas plants or other infrastructure that could be eligible… click here for more

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