The Public Service Commission of West Virginia recently approved a plan that would allow Allegheny Power to use ABS to finance an emissions control facility at a West Virginia plant.
With that decision rendered, Allegheny Power plans to issue about $365 million in ABS, part of which will be collateralized by an environmental control charge that will appear on consumers' utility bills. The utility authority's approval essentially allows Allegheny to upgrade its Fort Martin power station in West Virginia, to include equipment that will remove sulfur dioxide from coal burning emissions. The so-called scrubber technology will bring the plant, built in 1960, into compliance with the latest emissions controlrule from the Environmental Protection Agency, said Allen Staggers, a spokesman for Allegheny Power.
The proceeds include three components. About $338 million will cover the capital cost of the scrubbers, a cap of $14.25 million will cover indirect upfront financing costs and up to $12.75 million will cover direct upfront financing costs. The bond repayments will be secured by the environmental control charge passed on to consumers, said Staggers.
Passed in March 2005, the Clean Air Interstate Rule calls for 28 states and the District of Columbia to reduce nitrogen oxides and sulfur dioxide emissions from power plants by 2015. Allegheny hopes to have its scrubbers up and running by 2009, said Staggers. Based in Greensburg, Pa., Allegheny Power serves consumers in Pennsylvania, Maryland, Virginia and West Virginia. Its sister company, Allegheny Energy Supply, burns about 18 million tons of coal a year to produce energy. In 2005, its power plants generated about 48 million MWH of electrical energy.
"Scrubber technology is fairly expensive to install, so that West Virginia and Wisconsin have passed legislation that allows utilities to use securitization as a means to finance the upgrading of facilities," said Howard Siegel, chair of the climate and energy group at law firm Brown Rudnick Berlack Israels. Although the firm is not involved in Allegheny's plans, it works extensively in areas that combine climate, energy and structured finance.
Because utility companies have to pass on some of the costs of upgrading their facilities to consumers in the form of rate increases, the utility companies have to get a rate increase approved by the local agency providing oversight, said Ronald Borod, chair of Brown Rudnick's structured finance group.
Allegheny has not decided when it will launch the securitization for the Fort Martin plant. Because the energy industry is tightly regulated, a long process still lies ahead to securitization. Among other hurdles that Allegheny must clear, the PSC of West Virginia will review the potential deal's structure and pricing, secure its own financial advisor and confer with whichever investment bank Allegheny Power chooses to underwrite the deal.
Now that many stranded costs securitizations are being paid off, several states have passed legislation that allow power companies to use securitization to pay for upgrades to reduce emissions, and in the case of Florida, storm recovery.
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