New Bonds Put Ratepayers 100% on the Hook, and the Tab?

23 Sep 2020

Consumer advocates are warning that a test case before the California Public Utilities Commission will set a grave precedent for Californians if regulators give it the okay. At issue is how much private utilities get to charge ratepayers for bonds they issue to cover their wildfire costs, including protecting against blazes.

Southern California Edison plans to issue $327 million in bonds, specifically a type of instrument known as securitized bonds, which are paid back entirely by ratepayers.

The top concern is that the ground rules and procedure the CPUC approves in this proceeding will be the precedent for subsequent pricey bond issuances paid back by ratepayers under AB 1054. The Southern California utility is the first to test the 2019 law by Assembly Utilities & Energy Committee Chair Chris Holden (D-Pasadena), which creates a $21 billion pot funded by ratepayers and shareholders. Utilities get to tap into it to cover wildfire costs deemed reasonable to avoid being driven near or into bankruptcy.

Under AB 1054, securitized bonds covering part of ratepayers’ tab must produce the maximum customer savings possible. Whether Edison’s proposal does that is in dispute.

Financial opiates

“SCE’s financing order is the first of billions of dollars of financial opiates that will set a market template,” John Geesman, former California Energy Commissioner, said. He’s keeping tabs on this case because of his involvement in the upcoming CPUC hearing on Pacific Gas & Electric’s proposal to issue $7.5 billion in securitized or ratepayer bonds. They will pay back part of the tab of the utility’s second bankruptcy arising from massive wildfire liability, which was finalized in June.

Over the next three years alone, $15 billion will be added to the rates of Edison, PG&E and San Diego Gas & Electric for fire-related costs, Holden warned last week. The expenditures are detailed in their wildfire mitigation plans. As high as the multi-billion-dollar figure is, it is only a partial picture. It does not include what customers will pay for utility losses arising from the pandemic and the resulting drop in commercial and industrial demand.

Edison’s pending proposal is its first application seeking recovery of costs for hardening its equipment against wildfire risks. That includes expenditures for everything from more switches on power lines to limit the impact of power shutoffs to advanced weather systems.

Edison’s proposal also will be followed by bond securitization proposals by California’s other two investor-owned utilities and the Department of Water Resources.

“It’s no surprise the dosages start small, then ramp up,” Geesman said. He noted that securitized bonds do not impact the utility or shareholder bottom line. “Nobody is responsible here.”

Geesman, a former investment banker, noted the contrast with traditional utility financing, which gives the utility an incentive.

Source: Energy Innovation

Consumer protections at risk

AB 1054 sets a high bar on consumer protections. But in this initial case before the CPUC, Edison proposes shortening the oversight period and streamlining subsequent recovery bond requests. Experts say this undermines the law’s consumer protections.

“SCE’s financing application complies with the statutory requirement of AB 1054,” spokesperson Ron Gales said. The company will respond to intervenor comments in briefs filed Friday.

Edison wants regulators’ jurisdiction to end after they approve the financing, according to testimony filed with the CPUC the last few days. The rub is the current inadequacy of information about the utility’s proposed 18-year bond with its underwriters, Barclays.

Edison’s failure to move the constrained 120-day proceeding along expeditiously, and concerns that the bond proposal does not comply with the new law, also raise red flags. Holden’s measure directs expedited securitization proceedings of 120 days.

The 120-days is “a fraction of the time typically devoted to a rate setting application at the Commission,” The Utility Reform Network complained in Sept. 18 testimony. “Edison didn’t do anything to create a sense of urgency,” making matters worse, TURN General Counsel Bob Finkelstein told Current.

The Energy Producers and Users of California objected to Edison’s delayed responses to data requests. That undermined the ability of parties to develop complete testimony, it asserted Sept. 22.

If the CPUC gives up all future review, it “would not have sufficient, accurate and non-biased information” about SCE compliance “with all legislative requirements and the terms of the financing order,” Aaron Rothschild, representing Wild Tree Foundation, warned. The financial analyst said consumers would pay a lot more under Edison’s 18-year bond. One with a 30-year maturity would save consumers at least $30 million.

TURN backs Wild Tree’s call for continued commission involvement until the bonds are issued to ensure consumers get the best deal possible. “It is really important that the Commission get this right,” Finkelstein said.

The last time utilities sold securitized bonds in California was in 2004. PG&E was given authority to issue about $3 billion after its first bankruptcy reorganization. The CPUC maintained its oversight role.

SCE’s application filed July 8 also seeks unprecedented permission to get automatic approvals of its bond issuances to recover a total $1.575 billion in capital expenditures using something called the “Advice Letter” process. It also wants the time on this less stringent process to be cut in half, to 60 days. Several parties protested.

Seeking approval under an Advice Letter, Cal Advocates argued Sept. 18, “will not allow sufficient time nor provide the transparency that is called for with these requests.” 

Maximum rate reduction?

How much customers ultimately pay for the recovery bonds depends on many factors. The big-ticket items are the bonds’ interest rate, the number of years it is in effect, and associated fees, including to the underwriters.

AB 1054 mandates securitized bonds “reduce, to the maximum extent possible, the rates on a present value basis that consumers would pay as compared to traditional utility financing.” The value, also known as net present value, is the current cost of future dollars. (See sidebar).  The assumption is that applying a net present value formula helps eliminate avoidable costs.

TURN asserts that while Edison’s financing proposal shows it would reduce rates, it does not demonstrate a reduction to the maximum extent possible. That includes because of failing to evaluate different length bond maturities, and fewer phased securitizations.

Edison “is over-reliant on its underwriters’ advice” as to whether the bond terms satisfy AB 1054 to ensure the lowest costs possible to ratepayers, Wild Tree’s Rothschild added. He pointed to the “inherent conflict of interest between underwriters and consumers,” with the former aiming to maximize its profit.  

According to the utility, the bonds would add $23.87 million to its 2021 annual revenue requirement. That is estimated to be an average residential rate impact of $0.22 per month next year.

“It is anybody’s guess as to what the numbers are,” Finkelstein said.

Cal Advocates protests how the bond costs will be allocated. It warns that residential ratepayers will pay three times more than commercial and industrial customers for wildfire mitigation protection. Vanessa Martinez, Cal Advocates financial analyst, pointed out that bonds issued by the Department of Water Resources during the 2000-01 energy crisis, in contrast, were based on an “equal cents per kilowatt basis.”

A proposed decision on Edison’s financing order is expected in mid-October. A CPUC vote is set for Nov. 5.

AB 1054 was passed last year in response to a bill the previous year, SB 901, by Sen. Bill Dodd (D-Napa). SB 901 mandates that PG&E, Edison, and San Diego Gas & Electric file wildfire mitigation plans that must be approved by the CPUC before there can be cost recovery.

Elizabeth McCarthy

Updated 5:15 PM on 9.23 to include SCE’s comments.

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