Securitization of costs or debts. Some utilities and states have it.
Let’s describe what securitization is. Most simply: Turning utility costs into bonds. In finance, bonds are a kind of debt already, but not all debt is in the form of bonds.
Securitization is being used when funds are needed “to smooth deregulation, reduce renewable and distributed generation costs, defer utility debt and finance pollution control upgrades …and storm recovery” (Source)
Securitizing debt is not a requirement. Management decides whether to do it. States must approve the use of securitization. Both North and South Carolina have looked into this financial tactic.
“There is ongoing demand from big institutional investors like banks, pension funds …” (But no infinite market) (Source)
The positives: 1) In securitization the utility does not earn a return, unlike typical capital that is deployed. That can save money for customers. 2) A company can pay off existing debt with new funds.
The negatives: 1) It does not eliminate debt, it changes it. 2) It can commit future revenues from customers to service the debt.
- The National Association of Regulatory Utility Commissioners have a 2016 presentation about securitization posted inline. While a few years old this provides interesting information.
- The Sierra Club provides its viewpoint about securitization in a 2018 paper.
ECC publishes this as a brief, educational resource about energy. ECC is not a financial adviser or source, and does not provide any viewpoint about investments.