No need to feel stranded waiting for more stranded cost debt issues, with market players predicting a boom year. Expectations are for another $6 billion of these utility bonds during the second half of 1999.

Jim Esselstine, analyst at Lehman Brothers, said he expects three new issues of these rate reduction bonds to arrive on the Street before the new millennium. He predicts the first out of the gate will be an $800 million deal from Boston Edison, to be followed by a $2.5 billion to $3 billion securitization from Pennsylvania Power and Light Co. Late in the year he anticipates a possible $2.5 billion funding effort by New Jersey's Public Service Electric & Gas.

Esselstine said the market for rate reduction bonds is unfolding as anticipated and the timing is not surprising to him. While only about 15 states have to date adopted legislation to foster utility deregulation and opened their markets to competitive forces, these states actually cover most of the higher-cost areas of the country, according to Esselstine. The states that have adopted measures probably represent at least half of the country's population.

The latest state to pass deregulation legislation is Texas with the bill now awaiting the Governor's signature. Ohio is also on line to pass legislation, but has not provided for stranded cost recovery. Utilities there will have to plead their cases before the State Utility Commission to recover costs.

Deregulation and stranded cost recovery do not necessarily go hand in hand, said Bern Fischer, structured finance specialist at Standard & Poor's. He said deregulation is only the first step and specific language is needed for the stranded cost recovery. These financings actually benefit the ratepayers, Fischer explained, noting that the utility's cost of capital is higher than that of the interest on a securitization. Since ratepayers are obligated one way or another to repay the stranded costs, these programs work to lower such expenses.

Scott Brown, vice president at Exelon Energy - a subsidiary of the last big stranded cost securitizer this year, Pennsylvania's PECO Energy - said that the trend towards nationwide adoption of state-sponsored energy deregulation programs might actually get a boost from two bills currently being pushed in Senate committees on the federal level.

These measures, Brown said, would likely mandate that all states deregulate their energy economy by a certain time. However, he believes any such legislation would likely carry provisions stating that measures already adopted at the state level will be deemed in compliance with federal law. In order to avoid being dictated to by the federal government, states would probably find an added incentive to adopt deregulation before Washington acts, he added.

According to Brown, efforts are now underway to try and bring these two measures together in the Senate.

The Pennsylvania experience is important, according to market sources, because it shows that under the right conditions, customers will switch electric providers in a deregulated environment. - Dave Feldheim

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