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Indiana, Kansas add new financial tool for coal plant retirement

Indiana and Kansas are now among the states authorizing utility commissions to use securitization to allow electric utilities to finance the early retirement of certain generating plants.

The financing mechanism has been around for a long time, but more recently has been used as a public policy tool to pay for shutting down an entire power plant.

Two important concerns are behind this effort. One, coal is an expensive fuel compared to natural gas and renewables. Second, and at the top of the list for many securitization supporters, securitization offers a way to retire coal plants early and accelerate CO2 reductions.

Securitization shifts power plant costs from a utility to its ratepayers, who, in effect, buy the plant and shutter it. Securitization is often compared to a homeowner refinancing a mortgage to take advantage of lower interest rates. A deal depends on top-rated credit and bonds, both of which are achieved because ratepayers are aggregated, into a group that is guaranteed by law to pay off the “mortgage.”

The utility realizes two big savings: it can pay back the money it borrowed to build the plant, thereby avoiding huge amounts of interest. Second, because the plants targeted for securitization are inefficient or otherwise expensive to run, the utility can meet customer demand with lower cost generation. Ratepayers benefit from avoided costs and cheaper power. They pay for the shuttered plant through a new rider on their bills, but the total cost of the securitization package is less than if the utility continued to use the older, inefficient plant.

Ashok Gupta, Senior Energy Economist for the Natural Resources Defense Council, is a specialist in utility securitization. He emphasizes that ratepayer benefits must be documented through formal proceedings, similar to rate case hearings. “If you don’t create a win-win-win situation then the whole effort doesn’t work. This has to be demonstrated as a win for the environment, consumers and shareholders.”

The Indiana state Senate on April 1 voted unanimously to pass a securitization-related measure, SB 386. The legislation takes a measured approach, and would limit securitization to facilities within 24 months of retirement and equal to 5 percent of the utility’s rate base. The bill is headed to Indiana Gov. Eric Holcomb’s desk.

The Indiana process starts with an electric utility filing a petition for a “financing order” with the Indiana Utility Regulatory Commission, which must determine that the financing provides “timely rate savings for customers.”

SB 386 seeks further study on securitization regarding program expansion, possibly allowing “additional electricity suppliers to securitize costs associated with retired electric utility assets.”

Tim Phelps, president of the Indiana Conservative Alliance for Energy, testified in support of SB 386. He noted that “more and more utilities are making the decision to shutter outdated and expensive generation facilities in favor of less expensive or cleaner energy options.” He said that “securitization will give companies creative tools” for managing outstanding debt – directly benefiting ratepayers who otherwise would be stuck with the bill.”

In Kansas, HB 2072, signed by Gov. Laura Kelly on April 9, establishes a process similar to Indiana’s. A utility will file for a financing order, for review by the Kansas Corporation Commission. Costs must be deemed “just and reasonable” and new charges “are expected to provide net quantifiable rate benefits to customers when compared to the costs that would result from the application of the traditional method of financing and recovering the securitized utility tariff costs with respect to energy transition costs or avoid or mitigate rate impacts on customers.”

HB 2072 received strong legislative support. The House voted in favor of the measure, 113-9; the Senate, 32-7.

Evergy, a utility with 1.6 million customers in Kansas and Missouri, supported the bill.

Darrin Ives, vice president of Regulatory Affairs at Evergy, said “securitization is simply a financial tool to help reduce the costs of financing unrecovered assets – that is, power plants that still have costs to be recovered. It’s a win-win tool that allows the utility to recover those costs and for customers to realize a savings.”

Securitization supporters frequently reference “win-win-win” scenarios. Many securitization supporters, such as the Rocky Mountain Institute and the Sierra Club, seek financial packages that go beyond just covering a utility’s plant-related costs.

These groups advise that securitization offers an opportunity to include the human and social costs that are an inevitable part of the transition from fossil fuels to renewables, that securitization can and should include benefits for people and communities, e.g., coal miners and localities dependent on coal. Even with these additional costs, these proponents argue, ratepayers would still save money.

J. Paul Forrester, an attorney with Mayer Brown in Chicago, has extensive experience in utility securitization. Forrester was asked about financing packages that expand to include additional social services. Do such deals indeed still save money for ratepayers?

His answer was an unqualified “yes,” securitization does offer a window of opportunity to replace an otherwise lose-lose financial forecast with one that really can provide broader benefits. He said that utilities will support programs that benefit impacted communities if the financing deal is done properly. “Integrated resources planning changes the discussion for utilities,” Forrester said. “Utilities know that people and communities can take a significant hit as generation shifts away from legacy fuels. Securitization can provide a way to lessen those consequences.”

Tom Ewing

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