Securitization allows utilities to offer long-term bonds to investors to pay off short-term debt. Securitization can ease impacts of stranded asset costs and extreme weather losses, but bankers and regulators agree that customer costs need oversight.
Herman K. Trabish Feb. 22, 2021, Utility Dive
Securitization is a financial tool that can reduce utility debt with low interest bonds secured by ratepayers, and with utilities’ growing costs related to COVID-19, the energy transition, and climate change, interest is accelerating.
But utilities and their customers are facing hundreds of millions or even billions of dollars in such costs, which is raising oversight concerns. When oversight has been introduced, it has led to lower interest rates and lower transaction costs, stakeholders in such proceedings told Utility Dive.
Duke Energy’s $1 billion proposal to use securitization to meet storm recovery expenses in North Carolina provides the criteria necessary for the commission to evaluate Duke Energy’s proposed transactions, Duke spokesperson Meredith Archie said in an email. It allows the commission “to determine whether and to what extent it wants to be involved in the transaction once it issues its order.”
But clear state laws on securitization are needed to “protect the public,” former Colorado Public Utilities Commission Chair and authority on securitization Ron Lehr said. State laws “should encourage regulators to ask what incentives are involved when big banks and a big utility work together and whether those incentives align with the public interest.”
Utilities and customer advocates differ on oversight. Duke, though committed to legislative and regulatory guidance on securitization, argued in its proceeding that it can manage bond term negotiations, and the financial transactions that follow, on its own. But with hundreds of billions in potentially securitized dollars at stake, customer advocates contend experts representing ratepayers should have a role in those negotiations.
Securitization is coming
Securitization allows utilities to offer long-term bonds to investors to pay off short-term debt. According to a 2018 Moody’s report, it “can be a credit positive tool for regulated utilities” because it is an “immediate source of cash” and can “avoid potentially credit negative events” like continued reliance on uneconomic fossil generation.
Ratepayers benefit because the cost of the securitized debt is lower than the utility’s typical cost of debt, which reduces the monthly bill impact, Moody’s added. The bonds have lower interest rates because they are long-term and secured by the high likelihood of customers paying their bills. But enabling state legislation is necessary for credit agencies to provide the AAA credit rating for securitized debt that makes interest rates low. (And it uses up credit that could otherwise be spent financing renewable energy and storage, rather than easing stranded asset situation for private, Wall Street traded firms/monopolies that charge 7-10% interest on investments paid for by the public).
At least five states passed legislation approving regulatory consideration of securitization by utility regulators in 2019, and at least 18 others have some kind of regulatory, legislative or advocacy effort in the works, according to Energy Innovation and others.
The 2020s are likely to see a lot more securitizations, said RMI Electricity Practice Principal and Stanford-Precourt Institute for Energy Research Associate Uday Varadarajan.
The Biden administration’s commitment to addressing climate issues is likely to accelerate retirements among the approximately 130 GW of remaining operating coal plant assets, he said, leaving about $90 billion in stranded costs eligible for securitization, not counting gas plants or other infrastructure that could be eligible.
It also does not include the huge debt associated with COVID-19, he added.
Shutoff moratoria allowing COVID-19-impacted residential and small business customers to defer utility payments without losing service have been invaluable to millions, according to the National Energy Assistance Directors’ Association (NEADA). But when the pandemic fades, national economic recovery could be impacted by potentially huge debts to utilities, NEADA added.
The December stimulus bill included $25 billion for unpaid rent and utility bills, and the Biden proposal would add $5 billion, but unpaid 2020 bills could require up to $70 billion, according to Moody’s Analytics Chief Economist Mark Zandi. Unpaid utility bills alone could reach $35 billion to $40 billion by March 2021, NEADA Executive Director Mark Wolfe said in November. And much of the debt has yet to be included in their estimates.
Securitization could address that debt, though state-enabling legislation is inconsistent in availability and in providing robust oversight, RMI’s Varadarajan said. “But even if securitization’s benefits are diluted, it can be of significant value to ratepayers because interest rates are almost always reduced” compared to typical utility interest rates.
Arguments for better oversight are, however, “critically important,” he added. The utility is responsible to its shareholders and the bank underwriting the securitized bonds, which means “utility and ratepayer interests might not be aligned.”
There are two key areas of oversight needed to protect customers as the billions of dollars in securitized offerings mount, according to Saber Partners CEO and securitization negotiations expert Joseph Fichera.
First, customers need to be represented in the negotiations.
There have been relatively few securitizations, and things like loan term, loan amount, and factors in the larger economy have varied significantly, Fichera acknowledged. But the limited data shows securitization negotiations that include ratepayer representatives have better results for customers, he said.
Past proceedings involving Duke Energy Florida, Centerpoint Energy Texas, and West Virginia’s Allegheny Power-Energy substantiated his concerns, Fichera said.
In Duke Energy Florida’s 2015-16 securitizations for storm recovery, Saber proposed a set of longer-term bonds than those proposed by the utility and its bankers, Fichera said. And the ones selected by regulators saved the utility’s customers “over $3 million on a net present value basis by achieving interest rates closer to those from long-term Treasury bonds.”
Financial advisor expertise was “instrumental” in obtaining customer savings in those proceedings, Deputy Public Counsel Charles Rehwinke confirmed in June 2016 Florida Public Service Commission testimony.
“These are issuances of hundreds of millions of dollars, and just a few tenths of a percent in inflated transaction charges can be real money.”
GridWorks Senior Fellow and former California utilities commissioner
Saber similarly contributed to significant customer savings in a 2009 West Virginia securitization case and a 2005 proceeding for Texas CenterPoint Energy.
Regulators can and do order the utility’s bank to use interest rates as close as possible to U.S. Treasury bond rates, Fichera said. But having a ratepayer representative in the negotiations assures the utility’s bank follows the order to obtain “the lowest rate possible.”
The second type of needed oversight is protecting customers from excessive transaction charges as the funds are dispersed and repaid, Fichera said.
In the 2015-2016 Florida securitization, Duke’s initial estimate of set-up and billing service costs were between $1.9 million and $2.9 million, Saber Senior Advisor Paul Sutherland said in an email. After Saber “analysis and pushback,” the utility settled on a cost of $395,000. Saber-identified unnecessary costs in West Virginia’s Allegheny Power-Energy 2007 securitization of coal plant upgrade costs led to $1.1 million in ratepayer savings, he added.
Three other “best practices” essential to regulatory proceedings on securitization described in April 2006 testimony to the Florida commission remain current, Fichera wrote. The first is that “decisions affecting ratepayers should be made in conjunction with someone with a specific and direct fiduciary duty to ratepayers.”
In addition, the standard for securitizations must be “the maximum present value savings for ratepayers,” he added. In the absence of that standard, “underwriters and investors will have the negotiating leverage to dictate a final cost to ratepayers.”
A third best practice is that every element of the final agreement must be certified by the utility, the underwriters and an independent advisor, in writing, as meeting that standard, he said.
These customer protections are not essential to obtaining AAA ratings, Moody’s Vice President and Senior Analyst Robert Petrosino said. The key is enabling legislation that allows the bond to be secured by customers. “Even without the lowest rates and transaction charges, a long-term, AAA-rated security will lower utility and customer costs.”
Securitization proceedings on utility proposals should and typically do include oversight from commissioners and consumer advocates, Petrosino acknowledged. “But whether the negotiation includes a team representing ratepayers is not relevant to the rating agency because pricing is determined by the marketplace and nobody else.”
Other experts said negotiations in securitization proceedings do require advisors on behalf consumers.
Regulators, utilities, lawmakers and ratepayers – oh my!
Regulators and utilities agree authority on securitization should be in enabling state law to make certain proceedings are done with high standards and are backed by the authority of the state.
In California, use of securitization to recover wildfire-related losses for utilities, some of it already approved, could involve as much as $12.5 billion. Its use for COVID-19 losses is also under discussion.
The commission “can only approve a securitization when we have legislative authorization to do so for a special purpose,” said California Public Utilities Commission (CPUC) spokesperson Terrie Prosper. “In our proceedings, public interest interveners participate fully and raise many questions,” including on who is to be part of the securitization negotiations and on how transaction costs will be overseen.
Final rulings on securitization debates about how to follow the law’s guidance come from an administrative law judge, she added. “If these issues are shown to require active intervention, the CPUC can take appropriate steps.”
Utilities expressed confidence that stakeholder proceedings allow ratepayer advocates to be heard, and that they are best positioned to recognize what protections their customers require.
Southern California Edison is “pursuing” what could be a $1.75 billion wildfire mitigation securitization under a CPUC order which “followed a robust, statutorily mandated process,” spokesperson Ron Gales said. The proceeding included stakeholder and public input, and the commission’s financing order “established a Finance Team to provide oversight into issuance of the securitization bonds.”
Duke “will use its best efforts to minimize costs and will certify to the Commission that the bonds provide quantifiable savings” for customers.
Duke Energy Carolinas could have $980 million in securitized bonds for storm damage mitigation in North Carolina by the end of 2021 and its current proceeding filings comply with all state legislative and commission guidance, Duke’s Archie said.
In its “many years of experience” with long-term debt issuances, the utility has always used “well-established business standards,” representing customers’ best interests, she added. In the current proceeding, Duke “will use its best efforts to minimize costs and will certify to the Commission that the bonds provide quantifiable savings” for customers.
In today’s utility securitizations, “the utility has no incentive, and no opportunity to create an incentive for itself,” for a higher interest rate or more transaction processing revenues, added former Commissioner with the New Mexico Public Regulation Commission Doug Howe. The utility receives the bond proceeds “in an upfront payment” and, afterwards, “is just a middleman with no control.”
Ratings agencies and the bond market “determine the rates” and the issuing financial institution has the “legal obligation to obtain the lowest offered rates in the market,” Howe said. A “bond trustee” handles implementation and most enabling legislation requires a commission-approved competitive solicitation in which “hundreds of trustees compete” to determine the trustee, he added.
“Legislation can obligate the commission to seek the lowest possible costs for ratepayers, but that does not necessarily mean the implementation will achieve it,” GridWorks Senior Fellow and former California utilities commissioner Mike Florio said. “These are issuances of hundreds of millions of dollars, and just a few tenths of a percent in inflated transaction charges can be real money.”
With securitizations accelerating in use and size, financial advisors can be important, sometimes in unexpected ways, he added. In a utility bankruptcy during his tenure, “we discovered the tax treatment could affect ratepayer value over time by around a billion dollars, and understanding that allowed reaching a settlement.”
Commissions without expertise, but aware that securitizations may benefit both utilities and their customers, might approve negotiations with shortcomings that financial advisors can identify, Lehr added. “Regulators should look for who has what incentives, and where incentives seem antithetical to the public interest, there may be a need for oversight.”
The financial obligation of utilities and their financial advisors is to utility shareholders, concluded a September 2020 white paper on securitization-enabling legislation, co-authored by Lehr. To correct that, state legislation should “support the commissions’ fiduciary duties to consumers and the public interest.”
Legislation should give regulators the authority and resources to carry out robust oversight, Lehr added. That includes “the authority to require evidence in the utility’s filing from a bond team representing ratepayers in negotiations on the deal structure and transaction fees.”
Legislation should also consider “the many purposes of securitization and not set limits except for the utility taking on too much debt,” Lehr said. California can use it for wildfires, Florida can use it for hurricanes, Duke can use it for coal ash cleanup, and West Virginia can use it for pollution control.
“It is probably better policy to authorize securitized bonds and not need them if other better options emerge than to need them and not have the authorization in place,” the white paper concluded.
Utility emissions, renewables goals accelerate, but coal retirements may be too slow
25 Feb 2021 | Houston, S&P by Jeffrey Ryser https://www.spglobal.com/platts/en/events/americas/caribbean-energy
Houston — US utility renewable energy targets and emission reduction goals remain on a rapid growth trajectory with 35 utility holding companies out of 51 now having very “aggressive” goals, including those for net-zero emissions and 100% carbon-free power among others. The 35 companies have 108 US utility subsidiaries, according to data compiled by S&P Global Platts. It has become more apparent that a challenging and expensive energy transition is ahead in US power if these companies want to meet these steep, long-term decarbonization goals. “Incorporating the rapid expansion of renewable energy within electricity markets presents unique challenges in the context of decarbonization,” said Kieran Kemmerer, Power Sector Analyst, North American Electricity Analytics.
“Incremental electricity demand from sources like electric vehicle charging and natural gas heating electrification must be met with intermittent resources that have diminishing capacity value at higher levels of market share,” Kemmerer said.
While energy storage is “staged to resolve some of the issues, electricity markets will continue to evolve to provide appropriate price signals to incentivize desired attributes,” he added.
Emera Energy and Puget Holdings were among the additions to the list of utilities with aggressive goals in first-quarter 2021.
Emera announced a target of net-zero by 2050 in February. In January, Puget Holdings announced it was effectively going beyond its net-zero carbon emissions target to become 100% carbon-free in its electricity supply by 2045. It joined 10 other holding companies with similarly aggressive carbon-free targets: CMS, Consolidated Edison, PNM Resources, IDACORP, Sempra, Excel, Avista, Pinnacle West, Hawaiian Electric and PG&E.
On Feb. 25, the CEO of American Electric Power, Nicholas Akins told analysts that his company will “continue to transform” its generation and plans to add more than 10,000 MW of wind and solar generation in regulated states by 2030. Akins said AEP’s goals are to achieve an 80% reduction in emissions by 2030 from its 2000 baseline and reach net-zero emissions by 2050.
In fourth quarter 2020, Entergy announced it was joining the group with a net-zero target, bringing along its five subsidiaries. In total, companies with net-zero targets now number 18 out of the 51 utility holding companies tracked.
In order to meet these aggressive targets, more coal-fired generation retirements will likely have to be accelerated. Some utilities are still stretching coal-fired retirements out almost 20 years.
In Q1 2021, Duke Energy sold a 19.9% stake in its Duke Energy Indiana utility, which relies almost entirely on coal and natural gas-fired generation, to Singapore’s sovereign wealth fund, GIC Private Limited, for $2.05 billion.
The proceeds, Duke said, would help it fund its almost $60 billion, five-year capital investment plan that “will accelerate its clean energy transition — and redeploy capital to support increased growth investments within its portfolio of regulated utilities.”
According to data from the Energy Information Administration, the US power grid relied on carbon-emitting fossil fuels for 60% of its utility-scale generation in 2020, down from 63% in 2019 and 64% in 2018. Last year, coal still represented 19% of the total; natural gas was at 40%; non-hydropower renewables represented only 10% of utility-scale power generation with solar at just 2% of the US total. Nuclear held a 20% generation market share, while conventional hydro represented 7% of the total.
“The current and scheduled pace of coal-fired power plant retirements needs to speed up in the next few years and emissions from their gas-fired counterparts must be eradicated for US companies to reach their decarbonization goals,” consulting firm Deloitte noted in a report released in late 2020.
It also noted that EIA projected the power sector’s emission reductions could “plateau, rather than accelerate as would be needed to achieve full decarbonization by 2050.”
According to Platts data, 21 US states plus Washington DC have carbon emission reduction or renewable energy goals that are extremely aggressive, meaning they are either net-zero emissions targets, 80% to 100% carbon-free targets or goals to have renewable power represent 80%-100% of their power generation mix at some point between now and 2050. A total of 38 states plus DC have some form of GHG reduction or renewable generation goal.
In late January, the governor of Minnesota, Tim Walz, Democrat, proposed that the state bring forward its target date for reaching 100% carbon-free electricity from 2050 to 2040.
His proposal followed a report by the Minnesota Pollution Control Agency that found that the state was not on track to meet its earlier goals of reducing economy-wide greenhouse gas emissions 30% below 2005 levels by 2025, and 80% by 2050. The report found that the state had reduced its greenhouse gas emissions by just 8% between 2005 and 2018, while the power sector had seen emissions from generation fall 29% since 2005.
The Minnesota governor also called for the “strengthening” of the state’s renewable portfolio standard which currently calls for just 26.5% renewables by 2025.
belching coal plant is easy to identify as a probable greenhouse gas polluter, because…..
Coal emissions are point source pollution—like a chemical spill in a stream, the pollution can be traced back to a specific activity at a precise place.
But is measuring the carbon produced at a power plant the best way to monitor emissions? A team of scientists recently took a different approach to estimating carbon dioxide: the bottleneck method. Instead of considering the pollution emitted only at the end use, burning phase of fossil fuel use, the researchers considered all phases: mining, transport, refining, and burning.
Their study identified the worst emissions offenders, and the results were surprising: oil and gas pipelines. The researchers noted that the companies enabling greenhouse gases emissions are most at risk of climate mitigation lawsuits.
The new study, published in Energies, introduces the bottleneck method. “Most of the work that’s been done in this area in the past is looking at kind of end use because that’s where most of the emissions occur,” said Joshua Pearce, a materials and electrical engineering professor at Michigan Technological University and coauthor of the new study.
Using the bottleneck method, all emissions a facility enables are considered in carbon tallies, including extraction, transport, and end use.
“Bottlenecks are the limiting factor for a total amount of emissions,” said Pearce.
“As more science provides unquestionable evidence that certain facilities are creating economic harm to others,” Pearce said, the bottleneck approach could identify the biggest offenders. It’s this carbon parsing that will likely become more important in climate mitigation efforts.
The researchers collected publicly available data for the amount of fuel and the emissions caused by those fuels from coal, oil, and natural gas. They also gathered emissions data from the entire life cycle of the fuel, including extraction, transport, and end use.
Natural Gas Pipelines
- Bottleneck emission analysis showed that 9 of the top 10 carbon polluters were oil and gas pipelines.
The bottleneck analysis showed that 9 of the top 10 carbon polluters were oil and gas pipelines (47% and 44%, respectively), while a coal mine took the remaining spot in the top rankings.
In comparison, point source methods revealed that the top 10 polluters were oil pipelines (eight spots) and coal mines.
The top nine emitters were unexpected, said Pearce, adding he was especially surprised “that natural gas showed up at all.”
Pearce noted that natural gas has lower emissions per unit energy than coal, so it can seem like a good solution—a bridge fuel—for reducing carbon. “But our study showed that when you step away from point source emissions and go to the bottleneck, it turns out that natural gas pipelines are some of the worst offenders,” said Pearce. “They’re allowing the most carbon emissions.”
“That really shocked me, especially the gas piece,” said Michael Craig, an energy systems professor at the University of Michigan School for Environment and Sustainability who was not involved in the study. “Oil I can see, but I would have expected a coal mine to be the worst.”
For natural gas, the biggest emissions came from pipeline transport. The sheer length of pipelines—the Transcontinental Gas Pipeline (Transco) alone branches into more than 16,900 kilometers (10,500 miles) of pipeline from Texas to New York—means there are lots of places to emit gas.
“Especially for older pipelines and pipeline networks, you get leaking. And methane is a pretty severe greenhouse gas,” said Pearce.
He noted that fixing or not fixing leaks can be an economic decision for pipeline owners—minor leaks might cost more to repair than the loss of gas into the air.
“That’s why there’s this intense debate about fugitive emissions,” said Craig. “Especially what is the rate of fugitive emissions along the natural gas supply chain.” He added that when determining the best way to decarbonize fuel systems, the way emissions are measured makes a difference. “When we account for those upstream emissions, do we come up better or worse by burning gas in the natural gas versus coal?”
The majority of these pipelines, almost three quarters, are owned by multinational corporations. For example, of the “companies that are responsible for the most emissions in the U.S., the big one, unquestionably, is Enbridge. And that’s a Canadian firm,” said Pearce. “So you’ve got a Canadian company responsible for roughly 74% of the oil industry’s carbon emissions in the U.S.”
Mitigation and Litigation
“If [a company is] trying to make the decision ‘Should I build a new pipeline right now?’ the answer is absolutely not.”
Although the researchers said Transco is the worst emissions offender, Craig pointed out that the pipeline also allowed regions to reduce their dependence on coal plants. “The Transcontinental Gas Pipeline is an essential piece of supporting infrastructure that has allowed New England to decarbonize,” he said.
“I think it’s interesting to think about,” said Craig. “If you were designing policies from scratch, where would it be most cost-effective to direct those policies?” He noted that pipelines are still the most efficient way to move oil and natural gas, and at the moment, the need for those fuels isn’t going away.
The bottleneck method may also contribute to the way litigation of polluters proceeds.
As droughts, floods, heat waves, and storms intensify with climate change, new climate litigation will go after the worst carbon offenders. Many of these offenders are the multinational corporations of the Global North, which are responsible for 92% of carbon emissions worldwide.
The researchers noted that their bottleneck approach is more effective than point source calculations at capturing a company’s “true liability” for pollution. Legal actions could be focused on companies that are the major polluters through the whole cycle of fossil fuel use.
The bottleneck method could also point out which companies could benefit from mitigation measures. Pearce said their goal was to dig into the life cycle of fossil fuels with a new perspective that might give companies pause when thinking about new infrastructure.
“If [a company is] trying to make the decision ‘Should I build a new pipeline right now?’ the answer is absolutely not,” said Pearce. “Your money is much better invested elsewhere.”
—Sarah Derouin (@Sarah_Derouin), Science Writer
__Citation: Derouin, S. (2021), The surprising source of greenhouse gas emissions, Eos, 102, https://doi.org/10.1029/2021EO155245. Published on 01 March 2021