As the high cost of electricity last summer takes its toll on the financial health of two California power distributors, the long-term effects that price surges might have on outstanding stranded-cost securitizations are up in the air.
Negative press surrounding the financial outlook for California utilities Pacific Gas & Electric and SoCal Edison has helped send stranded-cost bond spreads significantly wider recently. The bonds typically trade at five basis points wider than credit card paper, but have widened an additional five to 10 basis points over the past few weeks, to trade at 10 to 15 basis points over credit cards of comparable terms.
However, it is still too early to tell if the situation could have any lasting impact on the market, market observers said.
"If the power prices don't come down, or if regulators don't agree to let the companies recover the money, you would have a problem," said Peggy Jones, head of fixed-income utility research at Prudential Securities, referring to legislation that prohibits the utilities from passing along cost increases to consumers. "Those are two very important ifs though. Particularly, if the power prices do seem to be coming under better control, I think people will see the problem as more manageable and won't be as concerned."
Should a utility fail, it would be the responsibility of the new power provider to collect on the securitization tariff, as is noted in the legislation permitting the securitization of stranded costs.
"I think there's a long downward slope the utilities have to take before they're ever going to be in that situation," said Bruce Fabrikant, vice president and senior credit officer of Moody's Investors Service. "But in any event, the securitization tariff will be collected regardless of the solvency of the utility."
Dean Criddle, an attorney with the law firm of Orrick, Herrington & Sutcliffe LLP, noted that Public Service New Hampshire did declare bankruptcy some time ago. "It's always a theoretical possibility for any utility, and that's why the offering documents had to address that possibility when the securitization bonds were issued. There's considerable disclosure," he said.
"Even if there was a disruption in the cash flow, within the structure, there is a reserve fund which would clearly be more than sufficient to cover," said Jeff Salmon, head of asset-backed research at Barclays Capital.
What market observers are concerned about, though, isn't whether the tariffs will be collected, but how to improve the financial situation the utilities are in.
Most agree the structure of the bonds themselves are stable, however.
"There was some selling in sympathy," Salmon added. "Our view here is the structural integrity is sound. We've kind of taken the view that spreads are widening, yeah, maybe this could be a buy opportunity."
Part of the reason California is experiencing problems is that the utilities do not own any power-generating facilities to reduce electric prices. In Illinois, which has outstanding rate-reduction bonds, utilities such as Commonwealth Edison still control a majority of generating facilities, a factor more common among Midwest states, said Prudential's Jones.
Still, states like Massachusetts and Pennsylvania have price-cap legislation similar to California, and outstanding bonds from PECO and Boston Edison could experience some spread widening heading into the winter.
"But just a few basis points isn't telling anyone that the bonds aren't going to be alright," Jones said. "It's just incorporating some uncertainty and complication."
For now, though, it seems many market observers are watching to see how the power market plays itself out before issuing any states of alert for outstanding rate-reduction bonds.
