In the aftermath of Winter Storm Uri and the market turmoil that ensued, legislation that contemplates using securitization to potentially fund related economic damages and other dislocation has been proposed in both Texas and Oklahoma; however, in many cases, the proposed legislation does not contemplate critical requirements under the applicable rating agency methodologies. Consequently, any attempted transaction might not obtain the highest possible ratings-one of the key benefits to using securitization.
For example, in Texas there are at least 40 pending bills relating to fallout from Uri, and, of these, at least seven (not counting companion bills) propose the use of securitization. While a detailed review of each of the bills is not practical, a summary of them follows.
TEXAS
Electric Utilities
Senate Bill 1757: Relating to
securitizing costs associated with electric markets; granting
authority to issue bonds.
Description: CSSB 1757 would create the Texas
Electric Securitization Corp., a securitization corporation to
provide a lower-cost financing mechanism for securitizing unpaid
and short-paid invoices to the Electric Reliability Council of
Texas (ERCOT). The issuance must be used for the purposes of
financing default balances that would otherwise be uplifted to
ERCOT's wholesale market participants as a result of market
participants defaulting on amounts owed after an extreme pricing
event. The bill calls for costs to be allocated on the same basis
as the underlying default would have been uplifted to the entire
market pursuant to the current ERCOT default uplift protocols. A
committee substitute bill, which added further explanation of
non-bypassable allocation charges to ensure entities cannot exit
the market to escape uplift charges to the filed bill, was adopted on April 13 by the Senate Committee on
Business & Commerce and recommended to the full Senate.
House Bill 4492: Relating to
securitizing costs associated with electric markets; granting
authority to issue bonds.
Electric Cooperatives
Senate Bill 1580: Relating to
the use of securitization by electric cooperatives to address
certain weather-related extraordinary costs and expenses.
Description: CSSB 1580 provides electric
cooperatives the option to utilize the financial tool of
securitized financing to fund the unprecedented impact of Uri. The
costs incurred during the winter freeze will be entirely built into
the rates of electric co-op members.
Senate Bill
1950: Relating to the use of
securitization by electric cooperatives to address extraordinary
costs and expenses resulting from Uri.
House Bill 3544: Relating to
the restructuring of certain electric utility providers.
Description: CSHB 3544 aims to amend the utilities
code to allow electric cooperatives to use securitization
financing.
Gas Utilities
House Bill
1520: Relating to the recovery and
securitization of certain extraordinary costs incurred by certain
gas utilities; providing authority to issue bonds and impose fees
and assessments.
Companion bill: Senate Bill 1579.
Description: CSHB 1520 seeks to provide rate
relief to customers and support the financial strength and
stability of gas utility companies by providing securitization
financing for gas utilities to recover applicable extraordinary
costs incurred from catastrophic events.
Senate Bill
1579: Relating to the recovery and
securitization of extraordinary costs incurred by certain gas
utilities; authority to issue bonds.
Companion bill: House Bill 1520.
OKLAHOMA
Similarly, in Oklahoma, Senate Bill 1049 (adopted and sent to the governor on April 20), relating to unregulated utilities, authorizes the Oklahoma Development Finance Authority to provide a pooled loan program for specified costs incurred for a specific time period by certain utilities.
TAKEAWAY
While a thorough examination of the rating methodologies of the three major rating agencies1 is beyond the scope of this article, the key requirements of each methodology are relatively clear:
- There must be a public hearing on the merits that concludes that the securitization is the best option;
- The hearing must be before a governmental body with rate-making authority over the applicant;
- The body must issue a financing order authorizing irrevocable and non-bypassable charges that are a recognized property right and that can be/are pledged to support the related bonds;
- The state must provide a non-interference pledge; and
- The financing order must permit periodic adjustments of rates and collections to ensure that all principal and interest on the bonds is sold in a timely manner.
In almost all of the pending bills, one or more of these key requirements is absent.
Footnote
1 For Fitch Ratings, click here; for Moody's Investors Service, log in here; for Standard & Poor's, log in here.
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