Pam Boschee
Managing Editor
In an unprecedented arrangement, the Public Utility Commission (PUC) of Texas has appointed an investment banker-advisor to oversee the issuance of almost $2 billion of transition bonds by the three largest Texas utility companies-Reliant Energy, Central Power and Light Co. and TXU Electric Co. As a result, ratepayers stand to save at least $310 million.
The Texas Legislature last year adopted a new law introducing retail competition in the sale of electricity, to begin on Jan. 1, 2002. The legislation contained a provision specifically charging the PUC to ensure the lowest transition costs. To fulfill this legislative duty, the PUC appointed Prudential Securities Inc. as its investment banker advisor, assigning it the authority to oversee and approve the structuring, marketing and pricing of the bonds by the utilities and their chosen underwriters.
The money raised through transition bond transactions will be used by the utilities to refinance or retire more costly outstanding debt and stock. The savings will be passed entirely and directly to Texas ratepayers in the form of lower utility bills.
In each bond offering, Prudential Securities must determine if the lowest transition bond charges are achieved under the prevailing market conditions. It must also ensure that the competitive market for electricity is protected when the transition bond issue is structured and that the money raised is spent in accordance with the PUC’s financing orders to achieve the lowest possible cost to consumers.
Why is this arrangement significant? Joseph S. Fichera, managing director of Prudential Securities and the leader of the PUC advisory team, explained that the money raised through transition bonds goes to the utility company, but the bill for payback of the debt goes to the customers. Unlike other corporate bond transactions, he said, “the company is never on the hook for the money.” He added that although utilities across the country care about their ratepayers in transition cost recovery, the unique way in which transition bonds are structured “does not provide any meaningful economic incentives for them to keep transition charges at their lowest possible level.”
Fichera highlighted the unique aspects of Texas’ arrangement. He said, “In California, Massachusetts and Pennsylvania, there was no such legislative duty assigned to the [public utility] commissions in their authorization or securitization. “On other transition bond offerings, some states chose one of the lead underwriters rather than overseeing directly the structuring, marketing and pricing of the bonds. Also, “unlike other financial advisors, the firm has been given decision-making authority equal to each sponsoring utility company.”
The Texas PUC recently approved transition bond refinancings of $797 million for Central Power and Light Co., $364 million for TXU Electric Co., and $751 million for Reliant Energy. The projected ratepayer savings of $310 million assume that the utility bonds are issued at interest rates of no higher than 8.75 percent to 9 percent. For every quarter of one percent (0.25%) reduction in interest rate, ratepayers would save an additional $30 million on their utility bills.
Fichera said previously in an open meeting of the PUC that “there’s a list of due diligence selections I will have or things I would expect the underwriters to open up to me so that I can verify [this is the lowest cost possible] rather than [they] just presenting me something and saying, ‘Well, that was the best.’ I need to look at the book and to look at orders, what was your marketing plan, what was your approach to the market, how many people were contacted, what were the orders?”
The PUC instructed Prudential Securities to veto any proposals by the utilities and their underwriters that do not comply with the Commission’s directives. The PUC fulfills its legislative duty by having final approval authority concerning each bond issue’s final structure and pricing.
The second phase of transition bond financing orders will begin later this year when utilities may make application to the PUC to securitize additional amounts of their stranded costs if they demonstrate tangible and quantifiable benefits to the consumers. Moody’s Investor Services estimated there might be from between $3 billion to $5 billion of additional bonds authorized.
