Green investments require bulletproof financing.
J. Paul Forrester is a partner with Mayer Brown LLP in Chicago. Email him at jforrester@mayerbrown.com. Forrester acknowledges the help of his colleagues, Mary C. Fontaine, Carol A. Hitselberger and J. Bradley Keck. The views expressed are those of the author alone and not Mayer Brown LLP or its clients.
Originally developed to compensate U.S. electric utilities for regulatory assets rendered uneconomic by deregulation, so-called “stranded-cost” securitization techniques are finding new applications. Examples include financing mandatory pollution-control equipment and other similar investments; catastrophic storm reconstruction expenditures; and possibly “synthetic” carbon-emissions reductions for new fossil-fueled power plants or purchases.
For many U.S. electric utilities, deregulation of wholesale power supply markets in the late 1990s rendered substantial plant, equipment, and other regulatory assets economically obsolete. As compensation, the affected utilities, regulators, and consumer representative groups crafted stranded-cost securitizations to permit utilities to recover the related stranded costs through special rates charged to customers and the sale proceeds of bonds backed by such charges. These bonds in many cases were euphemistically referred to as “rate-reduction” bonds, although the securitization charges often increased rates to affected customers. In connection with such securitizations, the primary U.S. rating agencies developed specific criteria and methodologies for such stranded-cost securitizations. 1