Securitization fails the test for financing environmental capex.
Thomas Feldman is a principal at Concentric Energy Advisors.
The capital outlays required to comply with impending EPA regulations, and the associated impacts on utility customer rates, have increased interest in securitization financing as an alternative to the traditional mix of debt and equity used to finance utility capital expenditures. States like Wisconsin and West Virginia already have passed legislation allowing the use of securitization bonds to fund environmental upgrades, and several others have or are considering it.
Certain stakeholders claim that financing 100 percent of the cost of environmental retrofits with highly rated securitized debt reduces the overall cost to ratepayers. However, securitizing productive, long-lived utility assets is an extreme remedy that should be pursued only by utilities that can’t reasonably access traditional capital markets. This is because securitization 1) might not provide any rate benefits to customers; 2) has the potential to negatively affect investors and corporate credit ratings; and 3) risks several unintended consequences.