Securitization

Background

Securitization is a financial mechanism by which a utility can recover certain costs up front in one lump-sum payment rather than piecemeal over time. Utilities securitize a stream of revenue by issuing bonds, which are backed by an irrevocable guarantee of repayment made under state law. In such cases, utility customers pay a surcharge that the utility will transfer to bondholders as payment.

In the 1990s some states enacted statutes authorizing the securitization of utilities’ “stranded costs” as part of retail electricity restructuring (see this chapter’s section Electricity Restructuring—Stranded Costs). Today utilities propose securitization for a variety of purposes, including accelerating the utilities’ recovery of storm-related expenses, funding retrofits to comply with environmental laws, and paying down expensive power plants.

Proponents argue securitization is beneficial to ratepayers because it replaces the utility’s higher-cost debt with lower-cost bond debt, which reduces financing costs. The lower interest rate reflects the provision in the securitization law stating that customer repayment is irrevocable and guaranteed. Proponents of securitization contend that lowering financing costs benefits consumers, in that it reduces the financing charges that are passed along via utility rates.

Opponents are concerned that securitization:

  • requires ratepayers to assume a long-term investment risk that shareholders typically should bear;
  • provides no incentive to mitigate costs, because once a financing order is issued it cannot be adjusted;
  • guarantees a payment stream that in future may be entirely inappropriate;
  • does not necessarily guarantee the utility will use the money wisely or for its intended purpose;
  • could reduce market competition by making a large sum of cash available to the utility but not to its competitors; and
  • forces ratepayers to take on market risk that investors should bear due to stranded costs.

Securitization: Policy

Consumer protections

In this policy: State

State policymakers should rely on securitization only when a finding is made that it will reasonably be expected to result in the lowest overall costs for consumers and when the following consumer protections are included in the securitization plan:

  • The securitization proceeding is a public process and allows the financing order to be appealed in court.
  • Recovery is permitted only for reasonable, prudent, and known and measurable capital costs.
  • Any other revenue and reimbursements, such as insurance proceeds and government grants, are offset.
  • Charges are “trued up” annually to reflect changes in the customer base, explicitly shown on the customer bill, and fairly shared among customer classes.
  • The reduced risk to the utility should be reflected in a reduced rate of return.