New York and Hawaii are the next two U.S. states to legislate rate reduction bonds.
Rate-reduction bonds, sometimes called utility receivables, stranded-asset securitizations or storm-recovery bonds -- are backed by the future collections of special charges applied to electric utility bills, which is based on power usage and can vary from year to year based on weather or economic conditions.
To protect bondholders from fluctuations in collection, the deals are structured with a “true-up” mechanism. The true-up adjusts tariff charges to existing and future retail electric customers to ensure timely payment of the bonds.
In New York State the state legislature has adopted, and is expected to sign into law, the Long Island Power Authority reform act related to the restructuring of the utility company. Part B of the legislation provides a statutory basis and process for the issuance of securitization bonds.
LIPA has already initiated steps to get a deal done in anticipation of the new law.
In June LIPA issued a memo to its trustees requesting the approval of Goldman Sachs and Morgan Stanley as senior underwriters for the initial issuance of securitization bonds. LIPA declined to comment on the story.
The securitization would lower customers’ electric utility costs, according to a Moody’s Investors Service report.
LIPA’s electric rates are driven up by the high interest rates on its $7 billion of debt. LIPA customers currently pay a portion of that debt through the delivery charge in their utility bills, explained Moody’s.
“Issuing securitization bonds with lower interest rates to refinance the higher cost debt would lower LIPA’s service and therefore customers’ electricity costs,” said analysts at Moody’s.
A similar securitization law went into effect in Hawaii on June 27. The law establishes a clean energy infrastructure financing program for Hawaii.
According to the Moody’s report, the legislation allows rate recovery bonds to be issued to recover the financing costs of clean energy technology, demand response technology and demand side management infrastructure, programs and services.
With New York, 18 states will have securitization legislation in place for rate reduction bonds. Electric utilities in 16 of the 18 states have issued bonds, the exception being Hawaii, noted Moody’s.
