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 Big Build, 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

By Michael T. Burr

 

The London-based Institute of Mechanical Engineers (IME) published a thought-provoking report in August examining the role of geoengineering strategies for dealing with climate change. The report is interesting partly because of the technologies it examines, but mostly because of the policy argument it raises.

The report focuses primarily on three approaches, namely:

- CO2 scrubbing artificial “trees,” containing sorbents that would require subsequent burial;

- Algae-growth strips, attached to buildings and later harvested for biofuel production; and

- Reflective roofing, intended to direct solar radiation back into space and reduce AC demand.

 

Although these approaches seem novel and interesting, I’m not sure they really comprise geoengineering. The National Academy of Sciences defines geo-engineering as “large-scale engineering of our environment in order to combat or counteract the effects of changes in atmospheric chemistry.” Examples include seeding the stratosphere with reflective sulfur aerosols, or stimulating phytoplankton blooms by fertilizing ocean shallows with iron. By contrast, the hands-on, site-specific technologies discussed in the IME report would face a very steep growth curve before they could resemble “large-scale engineering.”

 

Quibbling aside, however, the IME report merits attention, if only because it makes an important point that’s been mostly ignored in the climate policy debate. In short, most discussions seem to position geoengineering as a “Plan B” approach to addressing climate change. In other words, if Plan A fails, and greenhouse gas (GHG) reduction and mitigation fall short of what’s necessary to avoid a climate catastrophe, then we’ll default to Plan B — direct intervention in the global climate, vis-à-vis geoengineering.

 

The IME report suggests that if we wait for GHG policies to fail before putting R&D resources into geoengineering, then it might be too late for geoengineering to work — or to be more precise, reining-in a runaway climate might require desperate geoengineering measures, incurring higher costs and yielding more damaging side-effects for the environment than we’d get with more moderate approaches. Instead, the report argues, policy makers should treat Plans A and B as complementary rather than exclusive approaches, and should consider geoengineering as part of an integrated strategy — a strategy that notably includes adapting to the inevitable climate change that already is happening and almost certainly will continue, to some degree, no matter what we do.

 

“Two decades of failed global mitigation efforts should be a wake-up call,” the report states. “It could be geo-engineering that provides the global community with those extra years to introduce effective mitigation and adaptation strategies, and, in the long term, remove some of the existing CO2 from the atmosphere. As such, Plan B needs to be upgraded to become a fully integrated part of a comprehensive three-point approach embracing mitigation, adaptation and geo-engineering.”

In other words, if we’re re-tooling for a more sustainable future, then we should make sure we’re using all the tools at our disposal — not just the ones that adapt our economy, but also the ones that adapt the climate itself. In the long term this might turn out to be the inevitable strategy, given the century we’ve spent gasifying the planet’s fossilized carbon. But that strategy will be cheaper and less damaging if we accept and pursue geoengineering earlier, rather than later in the process. -MTB

Posted: September 1st, 2009 under Uncategorized, carbon regulation, climate change, energy policy, geoengineering.
Comments: none

By Michael J. Zimmer

I like the fundamentals of the biomass footprint even more now this year. Wind is facing trouble with the PTC extension, turbine product availability, a nagging de minimis capacity factor, and need for transmission that isn’t being developed nationwide. Transmission constraints could strand many new renewable energy projects over the next five years, as occurred for cogeneration, small power producers and independent power projects during the prior decades.

Now is the time to diversify the renewables supply base with existing technologies that have more base-load attributes—such as geothermal, hydropower and biomass, including landfill gas and municipal solid waste. Biomass in particular offers great potential for increased expansion in the next five years.

The key to success for advanced biomass development will arise from the ability to lock up sufficient and reliable fuel supplies. Failure to do this will keep biomass from scaling up until non-cultivated, closed-loop fuels become competitive on an emissions-cost adjusted basis. The determining factors are political, structural and technical/agronomical at this stage.

The political issue comes down to GHG regulation and setting carbon costs. If the GHG regulatory calculus prices carbon under $50 a ton, it will be a long time before any alternative power sources can really compete with fossil fuels, particularly coal. Until carbon emissions credits reach $50 a ton, coal plants won’t sequester carbon, but likely will just buy credits in a compliance regime. That’s exactly what occurred after enactment of the Clean Air Act Amendments of 1990, when major scrubber investments and more capital intensive strategies were postponed for a dozen years or more.

The technical issue arises from the difficulty of securing firm fuel supplies. A closed-loop solution could project biomass ahead of wind and solar in many ways, making it the least-cost renewable supply option with better operating characteristics. But I’m hearing more discussion bemoaning the possible environmental costs of increasing reliance on cellulosic energy sources. What happens after 10 cycles of harvesting switchgrass, poplar and kudzu, without any serious fertilizer input? A natural biome replaces humus nutrients with necrotic material from the previous growing season. If we’re burning that material, the humus will disappear and eventually the soil will turn into sand.

However, by aggregating supplies under a regional “hub” approach, a closed-loop system can allow careful management of growing biomass areas. And of course biomass fuels from such sources as forest thinnings, sawdust and bark from private and government properties could be aggregated by rural communities. Rural development funds to supply clean, untreated lumber for biomass power production could revitalize local forest industries. And federal and state lands can contribute feedstocks from efforts to cull overgrowth and avoid forest fires.

Additionally, biomass power plants with waste-heat capture equipment can provide thermal energy for drying, processing or other industrial or commercial purposes. This enhances the community tax base, prompts a new feedstock industry, increases local jobs and contributes to the local economy.

From a public-policy perspective, the critical factor will be for lawmakers to include supply chain and logistics support in energy legislation, to create a closed-loop biomass fuel industry and provide proper scale to capture the potential of biomass power. Inordinate focus on creating incentives for supply, without anticipating the complete logistics of transportation, storage, handling and distribution, is a fatal flaw of many of our national energy strategies for all of our fuels and power strategies. Correcting this flaw will allow the industry to harvest the true potential of dispatchable biomass power.

Michael J. Zimmer is Of Counsel with Thompson Hine LLP in Washington, D.C.

Posted: June 26th, 2008 under biomass, carbon regulation, renewables.
Comments: none

By Michael T. Burr

Every article we publish in Public Utilities Fortnightly is incomplete. The virtual cutting room floor is always littered with content that didn’t fit for one reason or another.

For this year’s CEO Forum feature story, we asked several utility leaders about climate change regulation. Very little of what they said made it into the June cover story, “Conservation Compact,” so we’re presenting a more complete edit of their responses here in the Public Utilities Blog.

While it’s fair to say none of the CEOs departed far from their corporate message about the topic, their comments illustrate growing concerns among utility executives about how to regulate greenhouse gases fairly and effectively.

Chris Dutton, Green Mountain Power

Fortnightly: Given your experience in a RGGI state, what’s your perspective on federal greenhouse gas regulation? How can utilities reach a compromise on GHG regulation and allocation methodologies?

Dutton: I think the better and fairer approach is a carbon tax. Whether that’s politically feasible is another issue, but that’s a more competitive and less cumbersome approach than a cap-and-trade program, which has a whole host of complications associated with it.

New England as a region has a relatively small carbon impact, in terms of generation, because of the predominance of natural gas and nuclear power in the supply. There’s very little coal in New England, so those issues are a little different for us than they are for parts of the country that depend on coal-fired generation.

One of the things we’ve been able to do outside the power supply arena is to change the way we behave in the four corners of our business. We’ve converted all our line trucks and operating vehicles to biofuels. And we operate with an office blueprint that is radically different from what’s typical in our business. At Green Mountain Power there are no private offices. I as the CEO have a work area that’s about 9’x9’, and we have low partitions. There’s no private office. That’s meant we require a lot less office space than is traditionally the case, and you can guess the corporate culture advantages this approach brings. We try to be very transparent in our behavior within the company and in our interactions with both regulators and the general public, and a part of that transparency is the idea there are no hidden agendas. Part of that concept is no private offices.

We’ve been operating this way for about eight or nine years and we just love it. It gives the place a sense of energy and direction that didn’t otherwise exist. But also, shen you operate in a place that doesn’t need as much space, you don’t need to heat and cool it.

J. LaMont Keen, Idaho Power

Fortnightly: What’s your perspective on mandatory greenhouse gas regulation?

Keen: GHG regulation now seems certain to happen. The presidential candidates both support regulation in some form and it has been ruled that carbon is a pollutant that EPA should regulate. The discussion now centers on how and what type of regulation will occur.

Whatever the form carbon regulation takes, it’s important that regulatory efforts be applied economy-wide. We recognize the electric utility industry is probably the easiest to regulate, but if carbon regulation is to succeed no single sector should be unfairly burdened. More importantly, time frames should also be consistent with development of the carbon capture and sequestration technologies needed to comply.

If applied appropriately, either a carbon tax or a carbon cap-and-trade mechanism could work. Either way, the key is getting adequate research dollars collected and applied toward developing the necessary technologies.

In a cap-and-trade program, how allowances would be apportioned is the million dollar question, raising serious issues of effectiveness and fairness no matter how the apportionment is done. Whatever method takes place, it is appropriate that companies gain some recognition for the wisdom of earlier decisions to invest in and develop emission-free forms of generation.

Fortnightly: How will the industry reach a compromise on that? I’m hearing diametrically opposed views on this.

Keen: I don’t believe it’s appropriate for the allocation method to come out in a way that’s biased against companies with a smaller carbon footprint today. Some of the concepts I’ve heard discussed might do that.

I think it’s very speculative at this point. The devil truly is in the details, and it’s going to be a divisive issue for the industry. It’s possible for the industry to come together and strike a balance, but we have some fundamentally different starting positions for the discussion.

Bill Johnson, Progress Energy

Fortnightly: What’s your perspective on federal greenhouse gas regulation?

Johnson: Carbon regulation is a certainty. We believe that a well-designed cap and trade system will have the least negative impact on our customers and the overall economy, and will help us make real progress toward a low-carbon economy. An effective climate change policy must be achievable with timelines that are in harmony with technology. It must also be affordable, with reasonable allowances that put all states and players on a level field, and include provisions that protect consumers from rate shock and limit the damage to the economy.

Fortnightly: What would a level field look like for a ratepayer in a state that already has a relatively small carbon footprint, and has been paying high rates for a long time? Should their climate friendly infrastructure pay off in this level field?

Johnson: This whole subject is pretty complicated. When allocating allowances, those most affected by the new standards should get the most mitigation. Coal dependent customers will carry the brunt in two ways, paying for emissions and paying for new infrastructure. We need to have no-cost allowances in the early years, and more costs as technology develops.

Allocation of allowances ought to be based on emissions levels. Carbon emissions is where the allowances ought to go. I don’t think it’s a good idea to try to increase rates in some parts of the country because rates in other parts are higher. That doesn’t seem like a sound public policy basis for addressing carbon emissions.

Mark Jacobs, Reliant

Fortnightly: What’s your position on federal GHG regulation?

Jacobs: We’re committed to environmental stewardship. The best approach is a national policy rather than state by state. We believe a cap-and-trade system is the best approach, because it has worked incredibly effectively for SOX and NOX, and we also think it’s important that any legislation provide enough lead time to allow new technologies and market forces to work.

Energy efficiency is one of the easiest and most cost-effective approaches to addressing GHG emissions, and the smart energy things we’re doing will have a meaningful impact on the carbon footprint.

What happens to credits and allocations of allowances will get a lot of attention and debate, but we believe there should be a bridge provided for existing generation, and some of the proceeds raised by the auction need to go into development of new technology. We don’t think it’s appropriate to be taking proceeds and subsidizing known technologies. Someone might say they ought to get a price break for building a nuclear plant, but the prices are such today that people will build it without the incentive. We ought to take the proceeds and put them into the technology solutions to store CO2.

Dennis Wraase, PHI Holdings

Fortnightly: Given your experience in RGGI states, what’s your perspective on federal greenhouse gas regulation? How can various utilities and generating companies, with different resource strategies, reach compromise on things like allocation methods?

Wraase: As someone who operates in four states—which fortunately are somewhat together in RGGI—I think it would be far better to have a federal standard than to have 50 states doing 50 different things. Also the sooner we get to this, it will solve an awful lot of problems with power plants that need to get built and technology that needs to get developed.

A lot of the efficiency projects we do don’t include social cost. So once a dollar value is assigned to carbon, there may be more efficiency projects that become cost beneficial. That would be helpful.

As for a compromise, I’m not sure the industry will ever come around to agreeing, and neither will the states. This is a winners-and-losers proposition. That’s why I’m one of those who’d be more in favor of a tax as opposed to cap and trade. It avoids a lot of problems associated with how you allocate allowances, which is highly controversial. A tax is easily understood and can be applied economy wide.

Posted: June 24th, 2008 under carbon regulation, climate change, energy policy.
Comments: 1