CPUC Judge Adds Ratepayer Protections to $337M SCE Bond

20 Oct 2020

The California Public Utilities Commission pushes back against a controversial proposal by Southern California Edison to put its ratepayers on the hook for $337 million in new debt. The utility plans to raise the money from bondholders to cover its costs of hardening power equipment against fire threats, which will be fully repaid by SCE customers.

An administrative law judge proposes establishing a financial team to ensure that this first revival of utility securitized bonds comes with the lowest possible costs to ratepayers. Judge Jason Jungreis also rejects SCE’s request to recover the remaining balance of $1.24 billion of capital expenses to reduce its system’s fire dangers via a truncated Advice Letter process at the CPUC.

SCE’s first ratepayer-backed bond alone might not be a big deal if it weren’t for the fact that it’s the test case for a new law, AB 1054. It also could potentially saddle ratepayers with up to $30 million in extra costs, according to intervenors.

AB 1054 by Assembly Utilities & Energy Chair Chris Holden allows utilities to issue a total $5 billion in securitized bonds to recoup their wildfire mitigation costs. This financing is less costly for ratepayers because it cuts back utility returns on investments and does not fold the costs into the ratebase.

Source: Energy Innovation

In addition, Edison’s proposed financing order is the first of an expected $15 billion in similar bond issuances backed 100% by ratepayers to be requested by California investor-owned utilities. Pacific Gas & Electric has already filed to recover $7.5 billion from its customers pursuant to its second bankruptcy, finalized in June.

The SCE proceeding is being watched closely by Wall Street.

A “sensible path”

If Judge Jungreis’ Oct. 16 proposed decision is approved by the CPUC, “it will take the only sensible pathway to meeting the quick turnaround time required,” by AB 1054 and the “substantive requirement that ratepayer costs be minimized by retaining oversight over the terms of the bonds following approval of a financing order,” April Rose Maurath Sommer, Executive & Legal Director of intervenor Wild Tree Foundation, told Current. She and others expect the proposal to be adopted by the Commission, including because of the tight statutory time frame.

SCE spokesperson Ron Gales said the company is pleased with a timely issuance of the proposed decision, adding “its financing application for securitization was approved.”

In addition to Wild Tree, other intervenors include The Utility Reform Network, Energy Producers & Users Coalition, Coalition of California Utility Employees and Cal Advocates.

Financing order uncertainties

Citing the vagaries of the bond market, the bond maturity, which SCE proposes to be 18 years, and interest rate unknowns, the administrative law judge is not taking the utility’s word that its underwriters will issue $337 million in bonds at a far greater savings for ratepayers compared to traditional utility financing. AB 1054 requires utilities recoup these fire- and climate-related costs at the lowest possible cost to customers.

Judge Jungreis points out risks of the utility’s financing proposal. Its “underwriter does not have a vested interest in maximally reducing the Recovery Bond’s interest rate, that the Commission would only be provided notice of the details of the process but not be engaged in the process, and that SCE is proposing a process that would not be in keeping with Commission past practice.”

The third comment refers to the last time the CPUC okayed a utility securitization, which required a financing team be involved in the utility’s issuance. That was in 2004 when it approved Pacific Gas & Electric issuing bonds to recover part of the tab of its first bankruptcy, which was repaid by ratepayers. And the parameters at that time were not as strict as those set by AB 1054.

Jungreis agrees with Wild Tree on the need for a financing team. It is to be made up of utility and CPUC staff and “any necessary outside financial and legal expert in a pre-issuance review process to create a bond with material terms that can meet the statutory requirements, in particular, minimization of ratepayer cost.” He noted Wild Tree’s point that of a total 16 like securitized bonds issued across the country over the last decade, 14 included a financing team with independent advisors to keep a lid on ratepayers’ costs.

The financial team’s pre-issuance review of SCE’s bond terms includes approving the fees–from the servicing fees to those of the underwriter.

Edison rejected calls for a financial team to oversee the bond issuance, arguing it would add ratepayer costs. The proposed ALJ decision is not concerned by the cost of financial advisors. It is expected to be well below what SCE estimates it will pay its underwriter and legal advisors, $1.3 million and $2 million, respectively.

The final terms of the ratepayer recovery bond will be detailed by SCE in an advice letter. CPUC staff may reject the proposal.

Fast-track Advice Letter for bonds rejected

The proposed decision prohibits Edison from using a less thorough review for subsequent financing orders because once issued they are irrevocable and include “unavoidable costs on ratepayers.” Subsequent financial recovery requests must be made in a formal proceeding that includes use of a finance team as detailed in the proposed decision.

Jungreis also approves the CPUC’s fee of $175,600 for authorizing this financing order.

Because of a 120-day time limit in AB 1054, this proposal postpones deliberation over how to cover the costs associated with struggling ratepayers until Phase 2 of the SCE general rate case.

Edison and other parties will be filing comments on the decision this Friday.

The CPUC votes on this proposal Nov. 5.

–Elizabeth McCarthy

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