Emergency Utility Costs Trigger Increase in Taxpayer-Funded Collection Obligations – Market

US consumers saw their electricity bills rise by an average of 14.3% last year. These rising costs are not expected to reverse any time soon. Utilities are trying to fund all sorts of costs, like repairing all the damage from the storms that hit much of the country this winter.

To pay for these expenses, utilities are increasingly turning to what is called “securing”. You may recall that securitized mortgages played a big role in the lead up to the Great Recession. In the utilities sector, the first major experiment with securitization dates back more than two decades, when now-defunct Texas energy giant Enron and other power traders manipulated power markets. California’s newly deregulated.

Two Enron employees have been recorded bragging about abusing Western taxpayers:

“So the rumor is true?” They are [expletive] take all the money back from you guys? All the money you stole from those poor grandmas in California? joked an Enron trader, referring to state officials’ demands that companies and traders pay refunds.

“Yeah, Grandma Millie, man,” replied a second trader.

Following the price hike, California utility Pacific Gas and Electric filed for bankruptcy, and another threatened to follow, said Mark Toney, who runs The Utility Reform Network.

“The state had to buy emergency electricity at extremely high prices. And so there was a huge amount of debt left,” Toney said. “It was the first securitization of utilities in the country.”

Utilities issued long-term bonds to fund the emergency debt that accrued when California bought all that emergency power and passed the expense on to taxpayers.

“And for about 20 years when you looked at your monthly bill, there was [a line item] for paying off the debt,” Toney said.

But when that debt was nearly paid off, another crisis erupted: wildfires started by equipment owned by PG&E and other utilities. California responded by creating a $21 billion wildfire insurance fund, half of which is paid for, again, by customers.

“It now shows up on our monthly utility bills. And while we thought we were going to get some rate relief, that didn’t happen,” Toney said.

Securitization is not limited to California. More than half of states have legislation in place allowing utilities to use securitization to reimburse massive one-time expenses. Bloomberg estimates that the recovery bond market has exploded nearly 800%, from $2.3 billion in 2021 to around $20 billion last year. They covered costs such as disaster repairs, collection shortfalls caused by the pandemic and the decommissioning of old power plants.

“It avoids the rate shock you would have if you immediately used something like this,” said Richard McMahon, senior vice president of the Edison Electric Institute, an association representing all publicly traded U.S. electric companies.

Securitization works by spreading costs over time and can be cheaper than traditional utility financing because the bonds are guaranteed by the state, he said. “It’s a lot cheaper in terms of the interest charges you have to pay investors by doing it through securitization.”

But proponents say one-time events increasingly paid for by securitization aren’t so “one-time” when you factor in climate change. In the case of the killer winter storm in Texas and neighboring states two years ago, gas and electricity prices skyrocketed. Maria Reyes, deputy director of the Texas-based nonprofit Shift Commission, calls the incident an industry failure.

“They haven’t weatherized their equipment. They didn’t prepare for what was coming,” Reyes said.

Ratepayers shouldn’t have to pay exorbitant energy prices charged by natural gas companies, which utilities have passed on to customers, she said. “Businesses, industry, the market, shareholders – they should bear the brunt” at a time when 1 in 6 American families are behind on their utility bills, according to the National Energy Assistance Directors Association.

While securitization has its benefits, the approach requires careful consideration and oversight, said Bruce Biewald, CEO of consulting firm Synapse Energy Economics.

“In many cases, these costs may not have to be recovered. Or maybe the regulators, if they looked at the costs, would see that they weren’t all incurred cautiously,” Biewald said.

As the industry turns more to securitization, he said customers could end up paying emergency costs for decades – and more frequently.