Published February 15, 2021
CUB is tracking several legislative issues arising in this year’s Legislative Session that we believe would benefit Minnesota consumers by driving down the cost of energy. Among those issues is Representative, and Chair of the House Climate and Energy Finance and Policy Committee, Jamie Long’s (DFL-Minneapolis) proposal to enable “securitization” as a tool to help Minnesota utilities retire aging coal plants more cost-effectively.
The legal and financial mechanics of securitization are complicated – too complicated to easily summarize in a blog post. But, I will try.
First, consider a hypothetical:
Say you purchased a car several years ago. At the time you purchased it, it was a state-of-the-art, modern automobile that provided a highly-fuel efficient means of transportation. It was expensive, however, and you had to invest a lot of your own savings and take out a high-interest loan to pay for the car. Now, years later, you are still driving the car and paying off that loan. The car has proven to be expensive to maintain. Many new cars on the market are far more fuel-efficient, pollute less, and are otherwise better transportation options for those newly in the market. You would like to purchase one of these newer cars, but you cannot afford to do so while still paying off the loan on the older car. This leaves you stuck driving an old, inefficient car that is expensive to maintain, has high emissions, and that may not be fully paid off before you eventually decide to stop driving it.
Utilities that own aging coal-fired power plants are often in a similar situation. When a utility first invested in a coal plant, the coal plant was considered to be a cost-efficient means of producing energy. The utility built the plant using a combination of capital investments and interest-bearing debt with the expectation that it would recover the costs of its investments, and pay off the debt, using revenue generated from the utility’s customers.
Now, in 2021, utilities find that coal plants produce energy that is more expensive and more polluting than energy produced using alternative energy resources such as wind, solar, or natural gas. For this reason, many utilities would like to retire their coal plants and shift to utilizing cleaner and more cost-effective energy. However, for the utility to recover its investment in the plant, pay off any outstanding loans, and invest in the replacement generation, it may need to raise rates on ratepayers.
Securitization offers a solution to this problem.
In a nutshell, securitization is a financing tool that enables a utility that has not paid off an aging coal plant to “refinance” that obligation on more favorable terms. (I use the term “refinance” loosely; though the end goal is similar, securitizing debt on a coal plant is more complicated than refinancing a residential mortgage.) This “refinancing” is accomplished when the utility repackages unrecovered investments and remaining debt owed on the plant into bonds that are secured by revenue the utility collects from its customers. Because most utility customers consistently pay their energy bills, customer payments are a highly reliable source of revenue for the utility – and, therefore, a solid means of “backing up” the utility’s obligation to pay off the bonds. Plus, the bonds are issued at a lower interest rate than what the utility had previously been paying on debt owed on the plant. This enables the utility to pay off its debt more quickly.
The utility uses proceeds from selling the bonds to recover its investment and pay off its remaining debt on the plant, then pays off the bonds by adding a line item to customer bills that it collects over several years. Thanks to the low interest rate on the bonds, the amount customers pay to cover the utility’s bond obligations is lower than what they would have paid to enable the utility to recover its investment and pay off its original debt. Also, because the operating expenses of an old coal plant are so high, shutting it down early is often a good business decision. Between reducing interest the utility owes on outstanding debt and reducing operational costs, the utility can save enough money to invest in newer, cleaner, and more cost-effective technologies, with money left over to lower ratepayer costs and assist workers at the coal plant in transitioning to new jobs after the plant closes.
Due to the complexities of securitization, it is a tool that must be implemented legislatively. Namely, for it to be an option available in Minnesota, the state legislature would need to pass a law that: (1) gives the Public Utilities Commission (PUC) the authority to issue an order approving a securitization arrangement proposed by a utility, and (2) limits the PUC’s ability to adjust the terms of that order once it has been issued. The former requirement permits (and requires) the PUC to consider the pros and cons of securitization under the specific circumstances presented, and enables the PUC to help ensure securitization is implemented in a manner that does not harm ratepayers. The latter requirement gives credit rating agencies and investors reviewing the terms of the bonds the assurance that those terms cannot be easily altered without additional legislation – a key component in the high credit rating and marketability of the bonds.
Representative Long recently led an informational hearing in the House Climate and Energy Finance and Policy Committee discussing securitization as an option that should be considered in Minnesota. He is crafting a bill that is based on model legislation in other states that have implemented securitization. Notably, the bill includes language that would ensure a portion of the revenue generated from securitization bonds would help fund worker transition, training, and unemployment benefit programs to help Minnesota coal plant workers transition to new jobs upon the retirement of a coal plant.
Meanwhile, Minnesota Power is actively considering securitization as a tool to help it retire its aging Boswell Energy Center coal plant (Units 3 and 4) in Cohasset, MN. Doing so could help Minnesota Power achieve its recently announced plan to be 100% carbon free by 2050. The PUC has required Minnesota Power to file a securitization plan for Boswell with its latest Integrated Resource Plan (IRP), which the utility filed on February 1, 2021. The Securitization Plan, available here, discusses the hypothetical effects of securitization upon the retirement of Boswell Units 3 and 4 in either 2030 or 2025. The plan also measures the effects of securitization against a “business-as-usual” case without early retirement of Boswell and a traditional utility financing case for financing the retirement of Boswell without securitization. The plan notes that securitization could reduce the amount of money that Minnesota Power needs to collect from ratepayers as it retires Boswell.
CUB supports securitization as an option to help effectively retire the state’s remaining coal plants, including Minnesota Power’s Boswell plant. If implemented effectively, securitization will help enable Minnesota utilities to achieve zero-carbon or reduced-carbon goals, will help Minnesota lead the transition away from fossil fuels into a renewable energy future, and will help Minnesota ratepayers save money. Meanwhile, funds generated through securitization would help Minnesota’s coal plant workers transition into new jobs upon the inevitable retirement of aging coal plants. All, told, securitization could be a win-win-win-win for Minnesota.
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