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<title>The Securitization Dance Hall Tango</title>
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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<td width="75%" valign="top"><img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" WIDTH="375" HEIGHT="75"><p><b><u>January 1998</u><br>
</b><font size="6"><strong>THE SECURITIZATION DANCE HALL TANGO</strong></font></p>
<p><strong>by Roger Feldman -- Bingham, Dana and Gould, P.C.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
04/98</em>)</font></p>
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<p> <font FACE="Palatino" SIZE="1"></p>
<p ALIGN="JUSTIFY"></font><font face="Arial">As we roll into the 1998 Congressional
election year, eyes will be turned, of course, to whether Federal legislation of retail
electric access will be enacted. While the need and the likelihood of mandatory
legislation are a function of many factors, it is increasingly clear that politically its
future - and also the potential value of the legislation - will arise from the permitted
monetization of utility stranded costs whether through "securitization" (which
may involve issuance of "rate reduction" bonds).</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Several interesting factors lead to this conclusion.
First, the DOE Energy Information Agency (EIA) has raised the reality of deregulatory
economics into bold relief raising it above the level of populist rhetoric. In its
catchily named study, "Electricity Prices in a Competitive Environment: Marginal Cost
Pricing of Generation Services of Financial Status of Electric Utilities: A Preliminary
Analysis through 2015, EIA notes that while competition will likely lower electricity
prices in most areas of the United States for end use consumers, many of the short term
savings will be offset if State authorities mandate recovery of stranded costs. Indeed,
with 100% recovery, competitive prices would differ little from where regulated prices
would be! (Of course, commercial and industrial classes of consumers would do much
better.) Other securitization critics have articulated this conclusion more violently:
"Like trying to craft fine furniture with a chain saw" asserted an NRRI
economist; a "utility bailout" declaimed an Illinois commissioner.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Second, the issue is not one of merely academic
debate: a mere trailing rain cloud after the thunderhead of deregulation/retail access has
passed by. In each of the bi-coastal State leaders in deregulation, Massachusetts and
California, consumer groups have filed ballot initiatives to roll back what has already
been passed. A coalition of California consumer groups have filed a ballot initiative to
roll back electric rates by 20% and prohibit utilities from passing on the
"bailout" costs of nuclear power plants to consumers. If this latest assertion
of California citizen democracy makes it to the ballot, issuance of future
"securitization" bonds authorized by the California legislation would be
jeopardized. In Massachusetts, repeal of deregulation legislation is being sought, and
Ralph Nader has signed on to the effort to stop the "hidden tax" of
securitization and thereby to cover estimated unrecovered $10 billion in stranded costs -
after powerplant divestiture.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Third and fourth, competitive notes sharpen the
equities of the issue. In both California and Massachusetts the utility assets sales to
date have been at hefty premiums; the nuclear plants, of course, have not been sold. The
issue nevertheless remains one with vitality. Perhaps this is partly because, as
NRRI’s research highlights, while the extent of actual utility stranded costs are
extremely downwardly sensitive to market power price increases, the amount of bonds issued
to securitize stranded costs - and benefiting utilities - is not. "A mismatch between
the benefits of securitization and its uses" intones NRRI. What they are saying is
that in the utility/consumer coin flip: it is heads utilities win, tails consumers lose.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">In addition, Securitization which obviously props up
home state utilities in the midst of deregulation, is a spoke in the wheel of competition
to out-of-staters. Or, as they have framed the issue: it will allow California utilities
an unfair advantage since they will be able to go virtually debt free into the deregulated
era. "This is an out-of-state energy company vs. California energy companies"
issue opines a pro-utility California state legislation opposing the ballot initiative. In
sum, securitization has given deregulated retail access on interclass and inter-state
energy supplier disputational character.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Where does that tactically leave private power? Its
conceptual model for Federal legislative change has been a sophisticated one: interstate
competitive pressures forcing states to act themselves, and Federal legislation to provide
national cohesion on issues demanding federal action, such as reciprocity, grandfathering,
and state authority to order retail wheeling and transmission issues. This so-called
"tango strategy" contemplates of the Federal and State dancers
"answering" each other more successive (and presumably more deregulatory
progressive) moves.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">But there is a wet spot on the dance floor: a
problem with the private power approach. It overlooks the spin which stranded cost
recovery may give both to the nature of State deregulation and the role which Federal
consistency legislation must play. The four anti-securitization factors summarized above
may prevent the dancers from reaching desired synchronization.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">There may be an element of wishful thinking in this
myopia: private power is seeking the same securitization benefits as are IOUs. If IOUs
lose, so does private power, on its QF contracts which are priced above, what it is
expected the market will bear. Strand IOUs; strand IPPs as well.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Definitely a conundrum for a business class which
started life with the sympathies of the Naderites and now must look for succor to the
rating agencies. More significantly, it could be that IOU securitization initiatives will
prove a roadblock on the much sought after superhighway to deregulation if opposition to
stranded cost recovery grows too strong. Ability to compete early and often by private
power in deregulating states could be impaired. The elegant private power tango could turn
into a chicken dance . . .</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">As private power enters the new year then,
reconsideration of the industry’s posture on the need for Federal legislation and the
form it should appropriately take - particularly, as it relates to securitization - has
some merit.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">This is one tango with so many players it’s
really a line dance (and possibly a dirty one as well). It takes more than two to
securitize.</font><font FACE="Palatino" SIZE="1"></p>
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text-align:left"><font face="Arial" size="2">
<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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