By Courtney Barry

 

[Editor’s Note: As utilities and regulators consider how to meet evolving green-energy requirements most cost-effectively, they might begin exploring securitization financing mechanisms that utilities previously have used to recover costs from storm recovery, stranded assets and certain environmental obligations. Fortnightly covered this issue most recently in August 2008 (“Securitization, Mach II,” Paul Forrester, http://www.fortnightly.com/pdf.cfm?id=08012008_BusinessMoney.pdf). Contributor Courtney Barry provides an update from Texas.-MTB]

 

On September 10, the Texas Public Utility Commission approved securitization in the form of “ROC” (ratepayer obligation charge) bonds totaling nearly $540 million for Entergy Texas in damage recovery costs. Entergy says it will use the proceeds to recoup its costs resulting from hurricanes that struck its service territory in Texas and Louisiana in 2008. (The bonds include carrying costs of roughly $43.5 million, calculated at 10.86 percent per annum for 14 years.)

 

Just how are such bonds perceived by customers, the industry, and moreover, Wall Street? Quite favorably, as reflected by a Standard & Poor’s report this summer, noting that even during recessionary times, ROC bonds outperform ABS asset classes and are “insulated from the periodic budgetary process.” Additionally, S&P notes, the political environment “may be shifting in favor of ROC bonds as ratepayers recognize the projected lower funding costs associated with the bonds’ AAA ratings.”

 

But arguably ROC bonds benefit utilities most of all. “Ever hear the joke about the breakfast of ham and eggs? It’s similar,” says Joseph Fichera of Saber Partners, a Wall Street financial advisory firm. “The chicken is involved but the pig is committed. Here, the company is involved (Entergy), but the ratepayer is committed, and so is the commission.”

 

Fichera explains that the structure insulates Entergy from liability, because the company will get the proceeds from the bonds but it won’t get the bill. In this case, Entergy set up a special purpose transition funding entity called “BondCo” to handle the transition charges, issue the bonds, and then transfer proceeds back to Entergy.

 

Fichera adds that utility securitization bond characteristics sometimes are misunderstood. “Some people have labeled them as ‘asset-backed securities’ and have drawn comparisons with securitizations in the corporate market and the financial sector (i.e., credit card and mortgaged-back securities) that are inappropriate in comparison,” Fichera says. ROC bonds are “better,” he says, and are more comparable to government supported bonds. “These bonds have a particular government statutory guarantee,” he says.

 

However, association with other types of securitized financing instruments makes them particularly attractive to investors. ROC bonds deliver a better yield than their credit quality otherwise might support, because they’re sold in the securitization market, as opposed to the broader market for utility debt.

 

The Roots of ROC

ROC bonds for storm securitization costs started with Florida, then later in Texas and Louisiana. In Florida, FP&L originally asked for $1.7 billion in damage recovery requests for hurricanes in 2004 and ’05. The Florida Public Service Commission set recovery at $1.13 billion. Later, through a bond hearing, FP&L secured an additional $652 million. There was dissention because FP&L wanted to bump up the reserve much more than some interveners thought was necessary. But, says Charlie Beck, of Florida’s Office of Public Counsel, “Once they went to bonding, everyone was fairly supportive.” The commission initially reduced FP&L’s total allotment partly because it included surcharges that had been in effect for some time, and the commission wasn’t sure how to handle it in the novel ROC structure. “This being the first on the bonds, it took a long time to get it,” Beck said.

The question on the table now is: Why is this financing technique being used only to recover out-of-pocket costs for storm recovery? This was a hot topic over the summer at NARUC meetings.

 

“This is a very efficient, very low cost mechanism,” Fichera says. “Commissioners, ratepayer groups and others are asking, ‘Why aren’t we using this more, for traditional things like nuclear plants, capital expenditures, environmental mandates?’”

In fact some utilities are doing just that. For example, the West Virginia Public Service Commission recently approved Allegheny Energy’s request for $105 million in ratepayer obligation charge bonds to fund a scrubber project. However, few companies are likely to pursue ROC funding for anything beyond storm recovery and a narrow class of investments to meet clean air compliance obligations. This is because the ROC structure requires utilities to give up earnings with the project being financed, which creates a disincentive for companies that otherwise would prefer to build their rate base with traditional investment recovery mechanisms.

 

However, given growing cost pressures and government-mandated investment requirements, state commissions, ratepayer advocates and other stakeholders might start pushing utilities to use ROC funding more frequently. For example, in March 2009 the Natural Resources Defense Council suggested that the state of New York should establish a securitized-debt fund to finance conservation investments related to utilities’ efforts to achieve Regional Greenhouse Gas Initiative (RGGI) targets.

 

“Given potential rate shocks coming from capital expenditures to meet environmental and renewable energy mandates, this financing tool should be part of the mix with conventional financing,” Fichera says. With so many investment needs on the table,  the industry might work toward a compromise approach, allowing both ratepayers and shareholders to share in potential savings and get deals done.-CB

 

Posted: October 7th, 2009 under Uncategorized, carbon regulation, finance, green energy, renewables.
Comments: none

By Michael T. Burr

 

President Barack Obama on Oct. 1, 2009, asked the Environmental Protection Agency (EPA) to draft new rules for regulating greenhouse gas (GHG) emissions.

 

The announcement represents a challenge to Congress to push climate legislation forward quickly—in advance of the United Nations Climate Change Conference in Copenhagen, Denmark, scheduled for December 2009. The House passed the Waxman-Markey American Clean Energy and Security Act in June, which would create a carbon cap-and-trade program and would impose a federal renewable energy standard. The Senate is considering similar legislation, but whether it will reach a floor vote this year remains uncertain.

 

Of course, these developments are huge news for the U.S. utility industry, but they aren’t happening in a vacuum. U.S. climate policy has evolved during the past several years through a series of lawsuits and state and federal policy initiatives. Here’s how we got here:

 

2003-Present, RGGI Forms: Then-Gov. George Pataki of New York proposed creating the Regional Greenhouse Gas Initiative (RGGI). During the next several years, RGGI evolved into a coalition of 10 states that have committed to implementing a CO2 cap-and-trade program. RGGI started auctioning emissions credits last year.

 

2003-2007, Massachusetts v. EPA: The EPA denied a petition by several states asking the agency to regulate GHG emissions from new motor vehicles as a pollutant under the Clean Air Act. Petitioners appealed the EPA decision all the way to the U.S. Supreme Court, which in April 2007 ruled the states had standing as injured parties to bring the lawsuit, and clarified EPA’s authority to regulate GHGs under the Clean Air Act.

 

2005-Present, California Kyoto Pledge: California Governor Arnold Schwarzenegger signed an executive order in 2005 committing his state to reduce its GHG emissions to 1990 levels by 2020. “I say the debate is over,” he told delegates at the United Nations World Environment Day Conference on June 1, 2005. “We know the science, we see the threat and the time for action is now.” Of course Schwarzenegger was wrong; the debate wasn’t over. The Bush administration EPA blocked the state’s GHG rules, but this summer the Obama EPA reversed that ruling and allowed California’s standards constraining auto GHG emissions to go into effect. More California rules are expected next year, and more than a dozen other states are using California’s regulations as a template for enacting their own GHG constraints.

 

2003-Present, Connecticut v. AEP: In 2004, another group of state attorneys general filed suit against several electric utilities. In that case, the plaintiffs alleged the utilities’ CO2 emissions contribute significantly to global warming, a “public nuisance” under common law. And last month, on Sept. 21, 2009, the 2^nd Circuit Court of Appeals agreed the states have standing to sue under common law, and that the case should go to trial to determine whether the defendants’ emissions constitute a public nuisance.

 

2009, EPA Reporting Rule: One day after the 2^nd Circuit’s decision in Connecticut v. AEP, EPA Administrator Lisa Jackson signed a final rule that will require GHG emitters to start measuring and reporting their GHG emissions beginning in January 2010. Although the rule doesn’t establish limits or require reductions, it sets the stage for federal GHG regulations—whatever form they might take.-MTB

 

Posted: October 2nd, 2009 under Current News, Uncategorized, carbon regulation, climate change, energy policy, regulation, renewables.
Comments: none