Securitization is a financial process that allows a utility to issue bonds to recover costs. They receive up-front pre-approved costs in one lump-sum payment rather than over time through rates. Utility customers pay a surcharge on their bills to fund this. The utility company then transfers the funds to bondholders as payment.
Utilities use securitization for a variety of purposes. It allows them to accelerate recovery of storm-related expenses, fund environmental upgrades to power plants, and speed up payment of expensive power plants.
Proponents argue that securitization is beneficial to ratepayers because it replaces higher-cost debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. with lower-cost bond debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. . This reduces financing costs that would otherwise be passed on to the consumer through rates. Opponents are concerned about securitization for several reasons, including the following:
- It requires ratepayers to assume a long-term investment risk that shareholders typically should bear.
- It provides no incentive to mitigate costs because once a financing order is issued, it cannot be adjusted.
- It guarantees a payment stream that in future may be entirely inappropriate.
- It does not necessarily guarantee the utility will use the money wisely or for its intended purpose.
- It could reduce market competition by making a large sum of cash available to the utility but not to its competitors.
- It forces ratepayers to take on market
- risk that investors should bear because of stranded costs.
State policymakers should rely on securitization only when it results in the lowest overall costs for consumers. Securitization plans must include consumer protections.
Securitization should only be allowed when each of the following conditions is met:
- 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 equitably shared among customer classes.
- The reduced risk to the utility should be reflected in a reduced rate of return.