It is becoming clear that the cost of maintaining and modernizing our electricity grid is going to require large capital expenditures by our local electric utilities. Financing these investments, while keeping electric rates from rising further, is going to be a challenge.

One policy that could help do this, which has already been used across the country, is utility securitization.  

What is Utility Securitization?

From putting up new power lines, to building substations, to dealing with the aftermath of storms, electrical utilities often need to invest large amounts of money into infrastructure projects. Normally, investor-owned utilities, like Eversource, National Grid, Unitil, and Rhode Island Energy, don’t charge customers for these projects upfront, instead opting to have customers gradually pay for these costs in their bills. To make this possible, utilities pay the upfront infrastructure costs through a mixture of taking on equity (raising money by selling stocks in the company) and debt (issuing bonds), and then paying off these costs via revenue from their customers collected over time. 

This system is profitable for the utilities and makes sure the full cost of major projects is not passed onto customers immediately (which would cause rates to dramatically fluctuate). The downside of this system is that the way that utilities borrow money is relatively expensive, and these financing costs increase the total cost paid by utility customers. In response, some states have turned to securitization.  

Securitization is a process by which some of the costs of utility spending are packaged together and sold to another organization called a special purpose entity (SPE), which importantly is legally a separate business from the utility. The SPE then goes to Wall Street and offers to sell a large number of bonds to investors.  

If all goes to plan, investors then buy these bonds from the SPE at a low interest rate, allowing the SPE to send one lump sum payment to the utility to cover some of its costs. 

 Investors buy these low-interest bonds because the state involved in the securitization process has passed legislation making it very clear to investors that these bonds will be repaid by the customers of the securitizing utility through their customers’ electric bills.  This promise by the state that these bonds will be repaid (even if the utility involved goes bankrupt) makes them low-risk assets that investors will be willing to buy, even if these bonds pay a low interest rate.  

As can be seen in the map bellow dozens of states have already passed securitization bills authorizing its use to cover a verity of different costs including those stemming from electric restructuring (shown as yellow), energy conservation (orange), power plant retirement (green), environmental compliance (red), weather-related costs (purple), infrastructure (dark blue) and multiple areas (light blue). 

If done well, this process can reduce electric rates, because while customers now need to send money through their electric bills to the SPE to pay off the bonds, they don’t need to pay as much money to the utility itself. This is because when an asset is securitized, a utility can no longer ask its customers to pay for it because the SPE has used the money it raised from bonds to pay the utility upfront. This actually reduces utility profits. 

So, while securitization can create a new line item on customers' electric bills, if done well, the total bill will still be less than what it would be without securitization. In fact, as the next section shows, states across the country, including Massachusetts, have already benefited from securitization.  

How Securitization Can Save Money 

Securitization primarily works for two reasons:  

One is that raising money by issuing debt (though bonds) is cheaper than raising money by issuing equity. Because utilities normally raise money through a mixture of debt and equity, paying the utility through an SPE, which only raises money by issuing lower-cost debt, decreases the overall financing costs.

The second major reason securitization can save money is a side effect of the first, which is that when securitization is used to finance an investment, electricity customers are no longer indirectly paying utility investors’ taxes. This is because when utility investors make money on their equity investments, they need to pay taxes on those earnings to the federal and state governments. Under normal utility commission procedures, the cost of these taxes is factored into the payments going to utility investors.

The overall savings from securitization can be significant, in 2005 Boston Electric/NSTAR (now Eversource) was allowed to securitize $675 million in costs relating to restructuring (this was when electric utilities stopped owning their own power plants and instead started to have to buy power from independent generators). This action was expected to save ratepayers $118 million.

In another example, a utility in Florida securitized $1.3 billion in costs related to the early retirement of a nuclear plant, which resulted in $680 million in ratepayer savings. And a utility in Wisconsin securitized $100 million to cover the retirement of coal plant, saving an estimated $40 million over 15 years. By one count, there had already been 66 utility securitization processes by 2021. 

That all being said, while securitization can reduce electric rates, there are instances in which its use could result in higher rates. 

When Securitization Isn’t the Right Tool 

One way securitization can result in higher bills is if costs that would normally be paid upfront by electricity customers are instead securitized. For instance, one West Virginia utility proposed securitizing the cost of operating its expensive coal power plants. While doing so would decrease ratepayers' costs in the short term, in the long run, it would result in higher bills because now customers would still have to pay off those costs with interest. Similarly, securitizing energy efficiency program costs, which would otherwise be immediately passed through to ratepayers, can also result in higher long-term costs. Since all utilities have a mix of costs that are financed and repaid over time and costs that are pretty much immediately paid by customers, it’s important to ask which costs are being securitized.  

What the Governor’s Energy Affordability Bill Proposes 

While Massachusetts has used securitization in the past, the legislation that authorized securitization only did so to cover certain costs related to the electric restructuring process. Now that that process is complete, the only way securitization could happen again is if the legislature passes another bill to allow it to be used on different kinds of costs. That’s exactly what the Governor has proposed when she filed H.4144.  

Under the bill as filed, utilities would be allowed to securitize certain costs stemming from the energy efficiency program Mass Save, some costs related to projects reducing greenhouse gas emissions, some costs related to building out the electric grid, certain gas costs, and storm-related costs. 

While H.4144’s securitization language may help reduce some customer bills, we believe four changes could make it much more impactful:  

1. Put the DPU in the driver’s seat.

The bill, as written, would give utilities the ability, but not the obligation, to apply to the Department of Public Utilities to securitize certain costs. This means securitization would only happen when it's in the utility's interest for it to happen. This reduces securitization's ability to save customers money, because any opportunity that would benefit customers but harm utility profits would rarely, if ever, be allowed to go forward. Giving utilities this veto power is not necessary; Texas and Connecticut have already passed bills allowing state utility commissions to order utilities to securitize assets.

2. Add strong cost-effectiveness tests.

Legislation from Colorado, among other states, requires securitization plans to prove they are cost-effective and will materially reduce electric rates to be approved. This is a good policy because it makes sure securitization plans serve both the short- and long-term interests of electric customers, rather than simply pushing costs onto the shoulders of future customers.

3. Remove arbitrary limitations.

While limiting to securitization to only situations where it is cost-effective is advisable, many states have gone further and limited securitization to only being used for certain costs (such as limiting its use to only storm costs, or only up to X billion dollars). This is a political choice rather than a necessary feature of securitization. Leaving the scale of securitization to the discretion of the DPU could give the department an important tool to financially manage unexpected crises such as floods, wildfires, hurricanes, or a utility’s bankruptcy.  

4. Take out gas securitization. H.4144 allows for gas utilities to securitize some of their costs. While this may be a good idea in theory, in practice, selling bonds that would have to be repaid by future customers is a risky proposition when the number of gas customers is expected to steadily fall over time.  

Securitization, if done well, can be a powerful tool to reduce electric rates. We hope that the Commonwealth’s lawmakers will carefully consider this policy as they work to promote energy affordability this session.