Regulatory Proposal Cuts SCE’s $1B Ratepayer Bond Request in Half

By Published On: October 12, 2021

A California Public Utilities Commission proposal agreed with ratepayer advocates that Southern California Edison is overreaching in its request for $1 billion in long-term ratepayer-backed bonds. The Administrative Law Judges would allow the utility to recover only its $517 million in wildfire capital expenses from a bond securitization. The judges’ proposal excludes from the bond refinancing $401 million in SCE fire mitigation operation and maintenance costs plus $77 million in utility bill debt because the interest and financing costs paid to bondholders over a 25-year bond would increase, rather than decrease, ratepayers’ tab compared to traditional financing.

The “time-value-of-money benefits associated with securitizing the O&M and uncollected debt recovered by a 25-year bond is substantially outweighed by associated financing costs and higher utility rates for future customers,” concludes the pending decision by Judges Christine Powell and Jason Jungries.

The proposal is on next week’s CPUC business agenda.

Powell and Jungreis agreed with the unusual consensus between the California Large Energy Consumers Association, the Energy Producers Users Coalition, and The Utility Reform Network that including the $488 million in operation and maintenance expenses and uncollected debt in a long-term SCE customer-backed bond would add $134 million to ratepayers’ tab. Also at issue is the fairness of saddling future SCE ratepayers with those costs. Customers who “begin service in years 2-25 will not benefit from the cost of securitizing the O&M expenses, yet will be required to pay higher rates for those expenses,” TURN argued.

It and the two business representatives called for collecting the $488 million of wildfire O&M costs and utility bill arrearages over three years via commercial paper.

Typically, capital expenses get recovered over many years, specifically over the life of the asset used for depreciation purposes. Utilities get to charge a profit or rate of return on top of the expenses. Using securitization instead can reduce costs to ratepayers because it does not include a rate of return and comes with lower costs than traditional financing. Using securitization to cover SCE’s wildfire capital expenses is not being contested.

In contrast, O&M and uncollected utility bills are because they generally get recouped over a year with no or minimal carrying costs, according to TURN.

SCE estimated $196M in savings

SCE insisted that using a $1 billion long-term bond to cover all three categories of costs would save ratepayers $196 million because it would get spread out over a quarter of a century. That is because the amount in today’s dollars drops in value over time, under what is known as net present value principles. The savings over 25 years is compared to cost recovery over the 12 months routinely used in revenue balancing accounts where SCE is tracking those costs.

SCE said long-term securitization would both alleviate rate pressure on its customers and avoid harming its credit ratings.

Or that’s what the utility had argued. Early this week, SCE proposed issuing five-year ratepayer bonds to cover its $488 million in O&M, which includes tree removal, and pandemic utility bill debt, instead of 25 years. Or in the alternative, via a term determined by the finance team.

This is SCE’s second request to use ratepayer bonds instead of traditional financing to cover its wildfire capital expenses under fairly new laws, AB 1054 and SB 901. The first request for $337 million was approved last November but only after the bond was extended to 23 years and a CPUC-appointed financing team was established to oversee the bond. A subsequent law was passed, AB 913, that allows utilities to collect unpaid debt arising from Covid 19 with ratepayer bonds.

Subsequently, the CPUC also approved Pacific Gas & Electric’s $7 billion bond securitization for some of its wildfire costs.

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