Allegheny Energy, Inc., a Greensburg, Pa.-based utility company, filed with the West Virginia Public Service Commission last week for a financing order to issue two 15-year environmental control bonds totaling $381 million. The bonds requested, at sizes of $214 million and $167 million each, will be used to finance improvements to a power plant in Fort Martin, W.Va., according to Allegheny spokesman Allen Staggers. The bonds represent a new breed of stranded cost, or rate reduction bonds.

The W.V. Public Service Commission was granted permission to issue the financing orders by the state legislature earlier this month, and the public utility commissions of Florida and Idaho have also recently been granted permission to issue similar financing orders. Those states will also issue bonds to aid in modernizing environmental controls and, in the case of Florida, repairing hurricane damaged power lines and equipment. The use of funds to finance improvement projects represents a departure for the stranded cost sector.

Traditionally, such bonds have been used to help power companies recoup the costs associated with power industry deregulation. The bonds are are funded by revenues generated from an increase in energy costs passed to utility customers, often facing political pressure initiated by consumer groups that feel the rate increases are unfair.

This new breed of energy cost bonds, however, is unlikely to garner such political opposition, as the proceeds from their sale will be used primarily to fund projects that directly benefit consumers. Joseph Fichera, CEO of advisory firm Saber Partners, even feels the bonds should be called by a different name than rate reduction or stranded cost bonds - utility fee, or ratepayer-backed bonds - because they represent a different use of the funds. "The ratepayers pay either way, but these bonds will be seen as more consumer friendly," Fichera said, given that the proceeds will be used for other than stranded costs. Saber acts as an advisor to the states of New Jersey, Texas, Wisconsin and Vermont on bond issuance in the utility sector and is in competition to advise Florida, Idaho and West Virginia.

Since Florida, Idaho and West Virginia are fully regulated states, the bonds will likely be more "socially acceptable" and not tied to any power market deregulation, added Fichera. That means there is less risk that the financing orders will be revoked by the state legislatures under pressure from their constituencies. That, in turn, is expected to translate into tighter new-issue spreads. The rate reduction bond sector has tightened significantly since the August 2003 pricing of Oncor Electric's $500 million series 2003-1 transaction, and Fichera anticipates the new breed of bonds price even further through on-the-run sectors.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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