Securitized transition costs: Rethinking who wins and who loses

Electricity Journal

Volumn 11, Issue 5, 1998, Pages 58-65

  Michaels, Robert J ^a,b  

^a CALIFORNIA STATE UNIVERSITY   (United States)

^b Hagler Bailly Inc ^*  (United States)

Author keywords

[No Author keywords available]

Indexed keywords

FINANCIAL INNOVATION; TRANSITION COSTS;

ELECTRIC UTILITIES;

EID: 0032093110     PISSN: 10406190     EISSN: None     Source Type: Journal    
DOI: 10.1016/S1040-6190(98)00051-7     Document Type: Article

References (54)

1. 1. Re lack of a theory, see Ronald J. Mann, Explaining the Pattern of Secured Credit, 110 HARV. L. REV. 625-80 (1997).
2. Re the possible efficiency of secured credit, see Thomas H. Jackson and Anthony T. Kronman, Secured Financing and Priorities among Creditors, 88 YALE L. J. 1143-82 (1979).
3. Re its inefficiency and inequity, see Lynn M. LoPucki, The Unsecured Creditor's Bargain, 80 VA. L. REV. 1887-1963 (1994).
4. 2. See, for example, George J. Benston, The Future of Asset Securitization: The Benefits and Costs of Breaking Up the Bank, J. APPLIED CORP. FIN., Spring 1992, at 71-82.
5. 3. This necessary point is made by utility representatives Ward L. Smith and James W. Durham, Securing Lower Costs for the Present and Future, ELEC. J., Oct. 1997, at 20-26.
6. 4. Lewis S. Ranieri, The Origins of Securitization, Sources of Its Growth, and Its Future Potential, in LEON T. KENDALL AND MICHAEL J. FISHMAN (EDS.), A PRIMER ON SECURITIZATION 31 (MIT Press, 1996).
7. 5. Lewis S. Ranieri, id., at 4.
8. 6. J.P. Morgan Securities (June 2, 1997) (Presentation to Energy Daily Finance Forum, Washington D.C., transparency).
9. 7. Joseph C. Shenker and Anthony J. Colletta, Asset Securitization: Evolution, Current Issues, and New Frontiers, 69 TEX. L. REV. 1369-1429, at 1371 (May 1991).
10. 8. Lights, Camera, Securitize, WALL STREET JOURNAL, Sept. 11, 1997, A1.
11. 9. Smith and Durham, supra note 3, at 26.
12. 10. In the only pre-California securitization by an American utility, Puget Sound Power & Light Co. issued $202 million of bonds collateralized by its right to collect compensation for conservation expenditures from consumers. See Fitch Investors' Service, Guidelines for Rating Debt Backed by Regulatory Assets, Sept. 30, 1996, at 7.
13. 11. See, e.g., California Public Utilities Commission (CPUC), Decision 97-09-056, Application of Southern California Edison Co., Sept. 3, 1997. The legalisms of securitization in California are discussed in detail by Walter R. Hall III, Securitization and Stranded Cost Recovery, ENERGY L. J., Vol. 18, No. 2, 363-404 (1997).
14. 12. Large commercial and industrial customers are not benefited by the RRBs. Instead, their rates will be frozen and utilities must collect what transition charges they can from them by Dec. 31, 2001, with minor amounts extending past that date.
15. 13. Southern California Edison news release, at www.sce.com/html/news/ press/97-229.htm; Market Grabs $2.9 billion in Bonds on PG&E Stranded Costs, at 6.42%, ELEC. UTIL. WK., Dec. 1, 1997, at 1.
16. 14. Susan Abbott, Stranded Cost Securitization: Analytical Considerations, ELEC. J. , Oct. 1997, at 15. The text says "132 million."
17. 15. Penn. Forges Final Choice Plan for PECO with Landmark Settlement, ELEC. POWER ALERT, May 6, 1998, 8.
18. 16. PECO Energy Files Appeals to PUC Restructuring Order, Jan. 22, 1998 press release at www.peco.com/investor/ press.html.
19. 17. Massachusetts Competition Bill Passed and Governor's Signature is Expected, ENERGY REP., Nov. 24, 1997, at 1; ComEd Plans $6.8 billion Securitization Issue, MEGAWATT DAILY, Mar. 25, 1998, at 1.
20. 17. Massachusetts Competition Bill Passed and Governor's Signature is Expected, ENERGY REP., Nov. 24, 1997, at 1; ComEd Plans $6.8 billion Securitization Issue, MEGAWATT DAILY, Mar. 25, 1998, at 1.
21. 18. CPUC, Decision 97-09-056, 2. The bonds are not debt of the State of California. Investors must be informed that the bonds are not backed by the State's "full faith and credit."
22. 19. See Benston, supra note 2, at 76.
23. 20. Pennsylvania House Bill 1509 (1995), § 2812(B)(2). Objections to the plan have included the possibility that the cash inflow retires "stranded" debt, but allows issuance of replacement debt, in effect a "laundering." See IPALCO Enterprises, Inc., The Securitization Swindle, A White Paper (May 1997), 25. A more accurate and less inflammatory term is "refinancing," a process whose interest rate benefits will be passed through to ratepayers.
24. 21. California utilities' bonds are over-collateralized by 0.5 percent more committed revenues than required to pay off the face value of the bonds. Calif Securitization Fees Alone Could Hit $1 Million, ELEC. DAILY, Nov. 14, 1997, at 1.
25. 22. Lori A. Burkhart, Credit Rating Firms Savor Restructuring, Search for a New Formula, PUB. UTIL. FORT., Feb. 1, 1997, at 27-30.
26. 23. The CPUC noted that the increase in recorded debt in Southern California Edison's consolidated financial statements (because the bankruptcy-remote issuing entity must be aggregated with the company for reporting purposes) "is not expected to affect Edison's utility credit ratings, as it is expected that the rating agencies will determine that the RRBs, which are not supported by Edison's general revenue stream, do not affect Edison's creditworthiness." Decision 97-09-056, 19.
27. 24. Some California customers are finding that the first bond-related collections they must pay have exceeded the mandated rate reductions. In the first month of the securitized reduction, PG&E's customers found themselves paying $71.8 million to finance $33.8 million in savings. Southern California Edison's customers paid $8.6 million for $13.4 million in reductions. Ironically, consumer groups have pointed out that under traditional ratemaking, PG&E's customers would have enjoyed a 10% reduction for the current year without the financing because of drops in mandated payments to cogenerators under certain standard offer contracts. Restructuring Countdown: Finance Charges for 10 Percent Rate Reduction Exceed Reduction, CALIF. ENERGY MARKETS, Mar. 6, 1998, at 10.
28. 25. See, e.g., Hon. Frank J. Kelley, Securitization: A State Attorney General's Perspective, ELEC. J., Oct. 1997, at 39.
29. 26. Robert S. Pindyck, Irreversibility, Uncertainty, and Investment, 21 J. ECON. LIT. 1110-48 (Sept. 1991).
30. 27. This also raises the question of why regulators have not considered securitization of other utility income as a more general policy. See Shimon Awerbuch and Leonard S. Hyman, Demystification - The Economic Realities of Securitization, ELEC. J., Oct. 1997, at 28. One possibility is that more general securitization will exempt important utility functions from regulatory oversight on grounds of financial commitment. See Kenneth Rose, Securitization of Uneconomic Costs: Whom Does it Secure, PUB. UTIL. FORT., June 1, 1997, at 32-37.
31. 27. This also raises the question of why regulators have not considered securitization of other utility income as a more general policy. See Shimon Awerbuch and Leonard S. Hyman, Demystification - The Economic Realities of Securitization, ELEC. J., Oct. 1997, at 28. One possibility is that more general securitization will exempt important utility functions from regulatory oversight on grounds of financial commitment. See Kenneth Rose, Securitization of Uneconomic Costs: Whom Does it Secure, PUB. UTIL. FORT., June 1, 1997, at 32-37.
32. 28. The CPUC approved Southern California Edison's issue upon a showing by the company that 10-year bonds discounted at 10 percent (rather than the 6.3 percent coupon interest) would result in net present value benefits that met the rate reduction criteria. See CPUC Decision A.97-05-018, 17.
33. 29. Enova, Pacific Enterprises Unveil New Joint Venture, CALIF. ENERGY MARKETS, Mar. 14, 1997, at 9.
34. 30. U.S. Gen Gets NEES Plants for $1.59 Billion, ELEC. DAILY, Aug. 7, 1997, at 1.
35. 31. Robert Michaels, After Stranding Recovery, What?, PUB. UTIL. FORT., June 1, 1996, at 24-28.
36. 32. Olivier Jean Blanchard, Florencio Lopez-de-Silanes, and Andrei Schleifer, What do Firms Do with Cash Windfalls? 36 J. FIN. ECON. 337-60 (1994).
37. 33. This was the outcome of numerous diversifications spawned by free cash flows that came with the nuclear completions of the mid-1980s. One author found that his representative sample of diversifications had an aggregate return of approximately zero. Charles M. Studness, Earnings from Utility Diversification Ventures, PUB. UTIL. FORT, Sept. 1, 1992, at 28.
38. 34. Free cash can just as well come from generation divestitures as from stranding recovery.
39. 35. Michael C. Jensen, The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems, 48 J. FIN. 831-80 (Sept. 1993).
40. 36. For a list of examples and data on their performance, see Blanchard, supra note 32, at 337-60.
41. 37. The first in a long literature of case studies that debunk predation is John McGee, Predatory Pricing: The Standard Oil Case, J. L. & ECON., Oct. 1958, at 137-69.
42. 38. Philip Areeda and Donald Turner, Predatory Pricing and Related Practices Under the Section 2 of the Sherman Act, 88 HARV. L. REV. 697-733 (Feb. 1975); Paul L. Joskow and Alvin K. Klevorick, A Framework for Analyzing Predatory Pricing Policy, 89 YALE L. J. 213-70 (Dec. 1979); William J. Baumol, Quasi-Permanence of Price Reductions: A Policy for Prevention of Predatory Pricing, 89 YALE L. J. 1-26 (Nov. 1979).
43. 38. Philip Areeda and Donald Turner, Predatory Pricing and Related Practices Under the Section 2 of the Sherman Act, 88 HARV. L. REV. 697-733 (Feb. 1975); Paul L. Joskow and Alvin K. Klevorick, A Framework for Analyzing Predatory Pricing Policy, 89 YALE L. J. 213-70 (Dec. 1979); William J. Baumol, Quasi-Permanence of Price Reductions: A Policy for Prevention of Predatory Pricing, 89 YALE L. J. 1-26 (Nov. 1979).
44. 38. Philip Areeda and Donald Turner, Predatory Pricing and Related Practices Under the Section 2 of the Sherman Act, 88 HARV. L. REV. 697-733 (Feb. 1975); Paul L. Joskow and Alvin K. Klevorick, A Framework for Analyzing Predatory Pricing Policy, 89 YALE L. J. 213-70 (Dec. 1979); William J. Baumol, Quasi-Permanence of Price Reductions: A Policy for Prevention of Predatory Pricing, 89 YALE L. J. 1-26 (Nov. 1979).
45. 39. Frank H. Easterbrook, Predatory Strategies and Counterstrategies, 48 U. CHI. L. REV. 237-63 (1981); John McGee, Predatory Pricing Revisited, J. L. & ECON. 23 (Oct. 1980), 289-330; JEAN TIROLE, THE THEORY OF INDUSTRIAL ORGANIZATION Ch. 9 (MIT Press, 1988).
46. 39. Frank H. Easterbrook, Predatory Strategies and Counterstrategies, 48 U. CHI. L. REV. 237-63 (1981); John McGee, Predatory Pricing Revisited, J. L. & ECON. 23 (Oct. 1980), 289-330; JEAN TIROLE, THE THEORY OF INDUSTRIAL ORGANIZATION Ch. 9 (MIT Press, 1988).
47. 39. Frank H. Easterbrook, Predatory Strategies and Counterstrategies, 48 U. CHI. L. REV. 237-63 (1981); John McGee, Predatory Pricing Revisited, J. L. & ECON. 23 (Oct. 1980), 289-330; JEAN TIROLE, THE THEORY OF INDUSTRIAL ORGANIZATION Ch. 9 (MIT Press, 1988).
48. 40. "With their high cost assets paid for the utilities will be better able to drive out their competitors. After the transition period, they will be able to charge what the market will bear." Kelley, supra note 25, at 42.
49. 41. Paul L. Joskow, Does Stranded Cost Recovery Distort Competition?, ELEC. J., April 1996, at 31-45.
50. 42. One set of antitrust defendants successfully used such a calculation to show the unprofitability of plaintiff's charge of predation. Matsushita Electronic Industries Co. V. Zenith Radio Corp., 475 U.S. 574 (1986). Also see Kenneth G. Elzinga and David E. Mills, Testing for Predation: Is Recoupment Feasible? 34 ANTITRUST BULL. 869-93 (Win. 1989).
51. 43. One independent power producer has recently filed such a complaint over long-term antibypass contracts between industrial customers and an incumbent utility. See Indeck Energy Services, Inc. v. Consumers Energy Co., Case No. 97-10366. (E.D. Mich.)
52. 44. This full loading of Michigan's interconnections at important times makes Attorney General Kelley, note 25 supra, particularly concerned about predation in his state. Indeck Corp., id., is claiming that such contracts between defendant utility and large users help render predation profitable.
53. 45. The fact that utilities value recovery highly is no indication that they know something the rest of us do not. If utilities knew that much more than the rest of us, competition might never have come along.
54. 46. Restructuring Countdown, CALIF. ENERGY MARKETS, Oct. 3, 1997, at 15.