STATE OF CONNECTICUT
DEPARTMENT OF PUBLIC UTILITY CONTROL
TEN FRANKLIN SQUARE
NEW BRITAIN, CT 06051
DOCKET NO. 00-05-010 APPLICATION OF THE CONNECTICUT LIGHT AND
POWER COMPANY FOR APPROVAL OF THE ISSUANCE
OF RATE REDUCTION BONDS AND RELATED
TRANSACTIONS
November 8, 2000
By the following Commissioners:
Glenn Arthur
Linda Kelly Arnold
Jack R. Goldberg
DECISION
I. INTRODUCTION
A. Summary
B. Background
C. Conduct of the Proceeding
D. Parties and Intervenors
II. ANALYSIS
A. The Proposed RRB Transaction
B. Transition Property
C. Formation/Capitalization of SPE and Sale of Transition Property
D. Issuance of SPE Debt Securities and RRBs
E. The RRB Charge
1. Exit Fees
2. Reduction in Overall Cost of Capital
3. Working Capital Allowance
4. CTA Shortfalls
5. Ongoing Transaction Costs
F. Servicing of RRBs
G. Third Party Suppliers
H. Credit Enhancement
I. Tax Considerations
J. Accounting and Financial Reporting
K. True-Sale Opinion and Collection Shortfalls
L. Savings/Benefits to Ratepayers
m. Use of Proceeds
III. FINDINGS OF FACT
III CONCLUSION, AUTHORIZATIONS AND ORDERS
A. Conclusion
B. Authorizations
C. Orders
DECISION
i. Introduction
a. Summary
Sections 8 and 9 of Public Act 98-28, codified as Section 16-245e and
Section 16-245f of the General Statutes of Connecticut (Conn. Gen. Stat.),
permit an electric distribution company to submit a request for
securitization through rate reduction bonds (RRBs) of certain stranded costs,
including mitigation costs, generation-related regulatory assets, long-term
contract costs that have been bought out or bought down, and refinancing
costs. In this Decision, the Department of Public Utility Control
(Department) approves the issuance of a financing order approving and
authorizing the issuance of RRBs by The Connecticut Light and Power Company
(CL&P or Company). The rate reduction bonds will be used for the recovery of
certain stranded costs and related transactions pursuant to Conn. Gen. Stat.
Sections 16-245e to 16-245k. The Department also finds that the Company has
satisfied the condition precedent for the issuance of the RRBs; namely that
CL&P has demonstrated that the savings attributable to such funding will be
passed on directly to customers and that such funding will not give CL&P or
its affiliates an unfair competitive advantage.
The Financing Order provides for the collection of the monies to fund or
pay the RRBs through a non-bypassable rate reduction bond charge. This RRB
Charge will be a component of the Competitive Transition Assessment (CTA) in
amounts sufficient to recover the principal, interest, credit enhancement,
fees and expenses associated with the RRBs. The RRB Charge will be applied
equally to all retail customers within the same class.
This Decision also finds that there is a clear ratepayer benefit from
the issuance of the RRBs. Chiefly, ratepayers pay a carrying charge of
10.85% on outstanding regulatory assets. Ratepayers would benefit if the
all-in costs of securitization through RRBs were lower than the 10.85% cost.
Based on current market conditions, it is anticipated that the carrying
charge to ratepayers of 10.85% will be reduced to approximately 7.91% through
the use of the RRBs. The Department finds that securitizing at an all-in
cost of less than 10.85% results in an immediate reduction in revenue
requirements and allows the Company a quicker recovery of stranded costs.
The Department concludes in this Decision that there will be a direct savings
to ratepayers as a result of securitization and issuance of RRBs.
The Department will allow CL&P to use the proceeds from the RRBs chiefly
to pay Independent Purchase Power (IPP) contracts at negotiated buyout rates
including approved lump sum buyout payments. In addition the proceeds can be
used to pay transaction costs and refinancing costs associated with capital
reduction.
B. BACKGROUND
By Application dated May 31, 2000 (Application), filed pursuant Conn.
Gen. Stat. Sections 16-245e to 16-245k, CL&P requests the issuance of a
financing order from the Department approving the issuance of RRBs for the
recovery of certain stranded costs and related transactions (Financing
Order). The Company also requests that the Financing Order include a
transaction description, findings, orders and approvals substantially similar
in language to those contained in the Application, Exhibit 4.
By Decision dated July 7, 1999 in Docket No. 99-02-05, Application of
The Connecticut Light and Power Company for Calculation of Stranded Costs
(Stranded Cost Decision), the Department approved approximately $3.6 billion
as the total amount of CL&P's stranded costs. At the time of the Stranded
Cost Decision, the costs of certain mitigation efforts, such as the
buyout/buydown of independent power producer contracts, as well as the cost
of retiring capital, were not yet quantifiable and, therefore, were not
considered in that Decision.
By Decision dated October 1, 1999 in Docket No. 99-09-36, DPUC
Determination of The Connecticut Light and Power Company's Standard Offer
(Standard Offer Decision), the Department determined that certain eligible
stranded costs of CL&P qualify for recovery through the issuance of RRBs.
C. Conduct of the Proceeding
Pursuant to a Notice of Hearing dated August 22, 2000, the Department
held a public hearing in this matter in its offices, Ten Franklin Square, New
Britain, Connecticut 06051, on September 21, and 22, 2000 and October 5,
2000, at which time it was closed.
The Department issued a draft Decision in this matter on October 27,
2000. All parties and intervenors were provided an opportunity to file
written exceptions to and give oral argument on the draft Decision.
D. Parties and Intervenors
The Department designated The Connecticut Light and Power Company, P.O.
Box 270, Hartford, Connecticut 06141-0270; and the Office of Consumer Counsel
(OCC), Ten Franklin Square, New Britain, Connecticut 06051, as parties to
this proceeding.
II. ANALYSIS
A. The Proposed RRB Transaction
Sections 8 to 14, inclusive, of Public Act 98-28, An Act Concerning
Electric Industry Restructuring (Act), codified as Conn. Gen. Stat. Sections
16-245e to 16-245k (Securitization Statute), allows for the use of
securitization for only certain stranded costs, such as generation-related
regulatory assets, purchased power contracts that have been reduced to a
fixed present value, and mitigation efforts as calculated pursuant to Section
8(c) of the Act. Such securitization requires prior approval by the
Department in the form of a financing order and is further subject to the
full review and prior approval of the State of Connecticut, acting through
the office of the State Treasurer (Finance Authority or State). The
Securitization Statute grants the Department the authority to review a
securitization application and issue a Financing Order for the recovery of
such eligible stranded costs. No stranded costs shall be funded with the
proceeds of RRBs unless the Company demonstrates that the resulting savings
will be passed on to customers. The Department can only approve
securitization if it finds that this will not give the Company or its
generation affiliates an unfair advantage.
The Securitization Statute authorizes the Department to issue a
Financing Order that creates an irrevocable property right (Transition
Property) to bill and collect a non-bypassable charge (RRB Charge), which
will be a component of the CTA, in amounts sufficient to recover the
principal, interest, credit enhancement, and fees and expenses associated
with RRBs. Pursuant to Conn. Gen. Stat. Section 16-245j(b), the State
pledges and agrees with the owners of the Transition Property and holders of
RRBs that the State shall neither limit nor alter the RRB Charge, the
Transition Property, this Financing Order, and all rights thereunder until
RRBs, together with interest thereon, are fully met and discharged, unless
adequate provision is made for the protection of the owners or holders. The
Securitization Statute also provides that Transition Property may be sold in
a true sale transaction to a special purpose entity (SPE) to facilitate the
issuance of RRBs and related notes (SPE Debt Securities).
In the instant docket, CL&P is applying to the Department for a
Financing Order approving the issuance of RRBs in the aggregate principal
amount of approximately $1.55 billion and related transactions pursuant to
the terms of the Securitization Statute. Late Filed Exhibits No. 2 and
7HS01. This proposed structure is subject to modification, depending on (i)
negotiations with rating agencies selected by CL&P, subject to the approval
of the Finance Authority, to assign credit ratings to the RRBs and the SPE
Debt Securities, (ii) requirements of tax authorities, and (iii) market
conditions at the time the RRBs and SPE Debt Securities are issued. CL&P
states that the proposed structure is intended to minimize debt service
costs, maximize ratepayer savings and create a substantially level RRB Charge
over the life of the RRBs while obtaining the highest possible rating for the
RRBs. The final structure, pricing, terms, and conditions will be determined
by CL&P at the time the RRBs are priced, subject to the approval of the
Finance Authority as provided herein, and after input from the rating
agencies, tax authorities, and the underwriters.
The Department authorizes CL&P to securitize approved eligible stranded
costs and recover such amount, together with the transaction costs of issuing
the RRBs and SPE Debt Securities, from its retail customers through the RRB
Charge, as discussed below. CL&P's right to collect the RRB Charge is
irrevocable pursuant to Conn. Gen. Stat. Section 16-245i(b)(1), and the
charge itself is non-bypassable to CL&P's customers pursuant to Conn. Gen.
Stat. Section 16-245e(a)(2). The Transition Property is the principal asset
underlying the RRBs and represents a continuously existing property right
created pursuant to Conn. Gen. Stat. Section 16-245h(a).
B. Transition Property
CL&P proposes that the Department, among other things, establish the
Transition Property. Application, Exhibit 4. The Application identifies all
items that are currently eligible for securitization as identified in the
Standard Offer Decision. Tr. 9/21/00, p. 52. CL&P anticipates securitizing
the approved amounts over 10 years. Tr. 10/5/00, p. 368. Originally, CL&P
calculated balances for each item as of July 1, 2000. Soderman PFT, Exhibit
RAS2. CL&P then revised the amounts to reflect the balances for each item as
of January 1, 2001. Late Filed Exhibit Nos. 2 and 7-HS01. The amounts
requested are as follows:
Amount
Requested
(000)
FAS 109 Regulatory Asset $ 211,076
Unamortized Loss on Reacquired Debt 15,253
Connecticut Yankee Regulatory Asset 103,495
Maine Yankee Regulatory Asset 71,277
Cost of Retiring Debt and Preferred Stock 10,396
PPA Buyout/Buydown Payments 1,036,469
PPA Entitlement Auction 102,276
TOTAL $ 1,550,242
Source: Late Filed Exhibits No. 2 and 7-HS01
CL&P provided exhibits that show that securitization of regulatory
assets, PPA Buyouts/Buydowns and call premiums brings about savings to
customers when compared to total revenue requirements based on current
amortization schedules and revenue streams. The exhibits also show that
securitization brings about savings when compared to total revenue
requirements if all items are recovered over 10 years without securitization.
Soderman PFT, Exhibit RAS2; Late Filed Exhibit No. 7.
For the regulatory assets, the Company started with the December 31,
1999, balances and reflected actual amortizations for 2000 based on the
levels approved in the Standard Offer Decision. In addition, the Maine
Yankee (MY) balance was adjusted to reflect a revised estimate of the total
owed and the Connecticut Yankee (CY) balance was adjusted to reflect the
settlement in 2000. Tr. 10/5/00, pp. 355, 356, 364 and 367.
The Department has reviewed many exhibits, including Soderman PFT,
Exhibit RAS2 and Late Filed Exhibit No. 7. The Company has clearly shown
that securitization of the eligible regulatory assets brings about savings to
ratepayers when compared to recovering those assets at the Company's cost of
capital.
The purchased power agreement (PPA) buyouts (PPA Buyouts/Buydowns)
balances as of January 1, 2001, are based on the Company's best estimate of
what the payments would be if it received extensions of the original
contracts. Some contracts do not have an agreed upon amount if the payment
is not made until 2001. Some of them have clauses regarding interest, others
are silent. Late Filed Exhibit No. 2; Tr. 10/5/00, pp. 367 and 368.
Therefore, the Company requests that the Department approve securitization of
PPA Buyouts/Buydowns in an amount up to, but not exceeding, the amounts set
forth in Late Filed Exhibit No. 2. CL&P Brief, p. 17. The Company also
requests to securitize PPA Buyouts/Buydowns for which it has contracts that
have not been approved by the Department. Tr. 9/21/00, p. 53.
In addition, CL&P requests that the Financing Order provide that if a
delay in closing one or more of the IPP transactions beyond December 31, 2000
results in a different buyout or buydown arrangement that must be approved by
the Department, securitization of the new buyout or buydown arrangement shall
be allowed in the amount as determined by the Department in any such IPP
docket. CL&P Brief, p. 17.
OCC believes that the PPA Buyouts/Buydowns should not be securitized
because such securitization would not benefit ratepayers. The savings
presented in this proceeding are less than the savings calculated in the
individual PPA Buyout/Buydown dockets. OCC Brief, pp. 22 and 23 (Protected).
In the Standard Offer Decision, the Department did not approve
securitization of the PPA Buyouts/Buydowns since none had been approved at
that time. The Department further stated that in the securitization
proceeding, it would ensure that benefits from securitization of PPA
agreements exist and are passed on to ratepayers. Standard Offer Decision,
p. 54. Late Filed Exhibit No. 6 presented calculations of PPA
Buyouts/Buydowns under various discount scenarios. In each case, savings,
while they may be less than anticipated in prior dockets, were greater under
securitization. Therefore, the Department disagrees with OCC that the PPA
Buyouts/Buydowns should not be eligible Transition Property. CL&P may
securitize each PPA Buyout/Buydown in an amount up to, but not exceeding, the
individual amounts set forth in Late Filed Exhibit No. 2. Currently, the
only PPA Buyout/Buydown that has not been approved is the escrow account from
the PPA Entitlement Auction. If the PPA Entitlement Auction is approved,
then CL&P may include the escrow amount in its securitization financing.
At this time, the Department denies CL&P's request to securitize in this
Financing Order new PPA Buyouts/Buydowns that result from the delay in
securitization financing that must be approved by the Department. The new
PPA Buyouts/Buydowns will be reviewed by the Department in a future
proceeding. The Department cannot determine if securitization is appropriate
until the new PPA Buyout/Buydown terms and conditions are examined to
determine if they are cost effective based on the discount rates and
financing costs in effect at that time.
The Company's estimate of the call premiums include those associated
with the debt to be retired with the proceeds from securitization as well as
the debt that was retired with the fossil/hydro asset proceeds. Late Filed
Exhibit No. 2. OCC believes that call premiums associated with the
fossil/hydro asset sale are not securitizable under the provisions of the
restructuring act. OCC Brief, pp. 2 and 17. OCC believes the premiums
should not become an obligation of ratepayers because, among other things,
ratepayers paid the cost of the underlying assets and have given those
proceeds to the Company. OCC Brief, p. 21.
The Department disagrees with OCC that call premiums associated with the
fossil/hydro asset sale are not securitizable. The call premiums incurred in
the process of divesting generating assets are legitimate mitigation costs
and therefore they may be securitized.
OCC requests that the Department direct CL&P to apply the net present
value (NPV) adjustment to all assets it seeks to securitize. OCC Brief, p.
2. CL&P and OCC's witness Rothschild presented exhibits that quantified the
effects from securitizing the NPV of the regulatory assets. The difference
in the results comes about from the value each calculation placed on the
associated regulatory liability. OCC's exhibit showed a lower offsetting
regulatory liability resulting in fewer savings than the Company's
calculation using the NPV approach. However, both exhibits show fewer
savings from securitizing the NPV then from securitizing the current balance
of the regulatory asset, which is CL&P's preferred methodology and the one
previously approved by the Department. Soderman PFT, Exhibit RAS5;
Rothschild PFT, Exhibit JAR 2; Tr. 9/22/00, p. 441; CL&P Brief, p. 13.
The Department has ruled in the Stranded Cost Docket that it is proper
for the Company to calculate the amount to be securitized as the current book
value, not the NPV of future recoveries. OCC has not provided evidence that
propels the Department to reverse that Decision. In fact, the Department
notes that OCC analysis shows that CL&P's methodology provides greater
savings. Therefore, the Company shall securitize the book value of the
regulatory assets at the time of the financing.
Securitization of the proposed Transition Property results in clear
benefits to ratepayers. Therefore, the Department approves the requested
amount of Transition Property. However, as discussed above, CL&P shall not
securitize new PPA Buyouts/Buydowns that require future Department approval.
C. Formation/Capitalization of SPE and Sale of Transition Property
CL&P states it will create one or more bankruptcy-remote SPEs, each of
which is expected to be a Delaware limited liability company wholly-owned by
CL&P and authorized to acquire Transition Property and to issue SPE Debt
Securities. Each SPE will consitute a "financing entity" for purposes of the
Securitization Statute. Englander PFT, p. 12. For purposes of attaining the
desired rating on the RRBs, the Transition Property must be bankruptcy-remote
from CL&P. This will be achieved through the sale of the Transition Property
to the SPE. For each SPE to remain bankruptcy-remote from CL&P, the
fundamental organizational documents of each SPE will impose significant
limitations on its activities and the ability of CL&P to take actions as the
holder of the equity interest therein. Each SPE will be formed for the
limited purpose of acquiring the Transition Property and issuing and selling
the SPE Debt Securities. It will not be permitted to engage in any other
activities, and will have no assets other than the Transition Property and
other SPE collateral.
CL&P will provide the intial capitalization of each SPE in an amount
anticipated to be at least 0.50% of the initial principal balance of RRBs
issued with respect to such SPE, which capitalization amount will be
deposited into the Capital Subaccount (discussed later). The adequate
capitalization of the SPE supports the claim that it is a viable entity with
a separate legal status for the bankruptcy remoteness and tax analysis. This
capitalization is required so that CL&P may treat the SPE Debt Securities
issuance by the SPE as debt for tax purposes.
Each SPE will be managed by a management committee, which will have
rights and authority similar to that of a board of directors for a
corporation. As long as the SPE Debt Securities and the RRBs remain
outstanding, CL&P shall be required to cause each SPE to have at least two
independent directors or managers (i.e., directors or managers not affiliated
with CL&P). Without the consent of these independent directors or managers,
each SPE will be unable (a) to amend provisions of fundamental organizational
documents which ensure the bankruptcy-remoteness of such SPE, (b) to
institute bankruptcy or insolvency proceedings or to consent to the
institution of bankruptcy or insolvency proceedings against it, or (c) to
dissolve, liquidate or wind up the SPE. Other provisions may also be
included to support the bankruptcy-remote character of each SPE as required
by the rating agencies. Englander PFT, pp. 12-13; Tr. 9/21/00, pp. 87-89.
Because each SPE will be a special-purpose entity with limited business
activities and no staffing, it is anticipated that each SPE will enter into
an administration agreement (Administration Agreement) with CL&P pursuant to
which CL&P shall perform administrative services and provide facilities for
each SPE to ensure that it is able to perform such day-to-day operations as
are necessary to maintain its existence and perform its obligations under the
RRB Transaction documents. The Administration Agreement incorporates
provisions to ensure that CL&P will be paid a market-based fee
(Administration Fee) in an amount commensurate with its costs of performing
such services and providing such facilities. Id.
CL&P will sell all of its rights in the Transition Property to one or
more SPE in transactions each of which under Conn. Gen. Stat. Section 16-
245k(h) will be treated as a legal true sale and absolute transfer to such
SPE. Because of such true sale treatment, the Transition Property owned by
an SPE would not, should there arise a CL&P bankruptcy, become part of the
CL&P bankruptcy estate and CL&P creditors would have no recourse to the
Transition Property or the RRB Charge.
The Department recognizes that there are additional applications
currently in process that may be eligible for securitization, consequently,
the potential exists for issuing additional securitization bonds through a
separate SPE in the future. CL&P states that it would establish a separate
SPE to issue those additional securitization bonds and transfer its
Transition Property to the SPE in order to be treated as a legal true sale.
Response to Interrogatory EL-5; Tr, 9/21/00, p. 57. The Department approves
the formation of more than one SPE to allow CL&P the flexibility to issue
securitization bonds in more than one transaction. In accordance with all
applicable Connecticut law, rules and regulations, the Department also
approves the initial capitalization of each SPE by CL&P, subject to
prevailing market conditions at the time of RRB pricing.
D. Issuance of SPE Debt Securities and RRBs
To raise the funds to pay the purchase price of the Transition Property
to CL&P, an SPE will issue and sell SPE Debt Securities to a special purpose
trust established by the Finance Authority. The special purpose trust,
which, like the SPE, will constitute a "financing entity" under the
Securitization Statute, will sell interests in the SPE Debt Securities by
issuing and selling RRBs, the proceeds of which, net of transaction expenses,
will be remitted to such SPE and ultimately to CL&P. The terms of the RRBs
will mirror substantially the terms of the SPE Debt Securities unless an
interest rate exchange agreement or other hedging arrangement is implemented.
Englander PFT, p. 15; Tr. 9/21/00, pp. 110-112.
All of the assets of such SPE, including, without limitation, the
Transition Property and the other collateral of the SPE (Other SPE
Collateral), will be pledged as collateral to secure the SPE Debt Securities.
The Other SPE Collateral will include (i) the rights of each SPE under all
RRB Transaction documents, including, the sale agreement by which each SPE
acquires all rights in the Transition Property, the servicing agreement by
which CL&P or any successor in that capacity acts as servicer (Servicer) of
the Transition Property, and the Administration Agreement, (ii) the rights of
each SPE in and to the collection account and any subaccounts established
therein including the general subaccount, the overcollateralization
subaccount, the Capital Subaccount, and the reserve subaccount, and (iii) any
investment earnings on amounts held by such SPE. Investment income earned in
the collection account and any subaccounts may be used to satisfy scheduled
interest and principal payments and to replenish the SPE's equity and the
scheduled overcollateralization amount as needed. Any earnings in excess of
required amounts in such collection accounts (other than the Capital
Subaccount) will reduce the RRB Charge through the true-up mechanism.
RRBs sold to investors will take the form of pass-through certificates
representing undivided beneficial interests in the SPE Debt Securities and
any hedging agreement entered into in connection with the transaction. SPE
Debt Securities will take the form of promissory notes secured by a first
priority statutory lien on all Transition Property as provided in Conn. Gen.
Stat. Section 16-245k(g), together with a pledge of the Other SPE Collateral.
Englander PFT, p. 17.
It is anticipated that the RRBs will be issued and sold in multiple
classes to capital market investors in one or more series, each having a
distinct principal amount, term, interest rate and amortization schedule.
The form, interest rate (whether fixed or variable), repayment schedule,
classes, number and determination of credit ratings, and other
characteristics of the RRBs and SPE Debt Securities will be determined at the
time of pricing based on then-current market conditions, with the objective
to achieve the lowest all-in financing cost possible. Under certain
circumstances determined by the Finance Authority, the RRBs and SPE Debt
Securities may be subject to call provisions and may be refinanced through a
subsequent issuance of SPE Debt Securities and RRBs to the extent such
refinancing would result in a lower interest cost associated with the RRBs
and the SPE Debt Securities refinanced. Englander PFT, pp. 15 and 18;
Response to Interrogatory EL-2; Tr. 9/21/00, pp. 106-108.
The RRBs and the SPE Debt Securities are expected to be sold at or near
par value and will not in any event be sold for more than par value. All
accrued interest on the SPE Debt Securities and the RRBs will be paid not
less frequently than semiannually. The SPE Debt Securities and the RRBs will
not be subordinated to the claims of any creditors or the equity owner of the
SPE, other than for payments of trustee, servicing fees, and other specified
transaction-related fees.
The RRBs and SPE Debt Securities will, by their terms, be nonrecourse to
CL&P and its assets, and, in accordance with Conn. Gen. Stat. Section 16-
245j(c)(1), will not be secured by a pledge of the general credit, full faith
or taxing power of the State or any agency or subdivision of the State (other
than the special purpose trust). Instead, the SPE Debt Securities and RRBs
will be secured by a pledge of all of the right, title, and interest of each
SPE in the Transition Property and the Other SPE Collateral. The final terms
and conditions of the SPE Debt Securities and the RRBs shall be subject to
the approval of the Finance Authority. Englander PFT, pp. 15-18.
The targeted ratings on the RRBs will be triple-A. Because principal
payments will likely be made at different times on each class of RRBs and SPE
Debt Securities, each class will have different expected and legal final
maturity dates. The RRBs and SPE Debt Securities will have final maturities
not later than December 31, 2011, in accordance with Conn. Gen. Stat. Section
16-245j(c)(6). Id; Response to Interrogatory EL-18.
The RRBs and the SPE Debt Securities will be repaid from charges to all
retail customers through the collection of the RRB Charge, discussed below,
by CL&P or any successor to the CL&P distribution system, any other successor
Servicer from which the customer has chosen to receive electric service.
Application, Exhibit 4, p. A-9.
CL&P anticipates that the RRBs will be fixed rate instruments, and will
only issue variable RRBs if such issuance, as determined by CL&P, subject to
the approval of the Finance Authority, will result in a lower net interest
cost on the RRBs. Response to Interrogatory EL-11. If variable rate RRBs are
issued, the special purpose trust will enter into a hedging agreement whereby
the special purpose trust would make fixed payments to a counterparty, and
the counterparty would make variable rate payments to RRB holders. These
fixed rate payments would be taken into account in calculating the RRB
Charge. This protects the special purpose trust and ratepayers against the
risk that interest rate fluctuations would cause variable rates to exceed the
fixed rates that were used to calculate the RRB Charge. Id.; Tr. 9/21/00,
pp. 108-110.
E. The RRB Charge
Pursuant to the Standard Offer Decision, the Company will recover
securitized stranded costs and RRB costs from customers through a mechanism
called RRB Charge. The RRB Charge is a monthly usage-based component of the
CTA charge on customer bills and will be footnoted as such. Soderman PFT, p.
15.
The Company states that the name of the SPE, as owner of the RRBs, will
also be indicated in the footnote. The CTA Charge would be noted with an
asterisk accompanied by the footnote in the Account Messages section of the
bill. The Company believes that identifying the RRB ownership in this manner
would be one of the components necessary to demonstrate the legal true sale
character of the transition property. The Company submitted a copy of the
proposed RRB footnote. However, the Company stated that it would consult
with the Department in formulating acceptable language for the footnote.
Soderman PFT, p. 15; Application, Exhibit 4, p. A-12; Tr.9/22/00, pp. 303-
309; Tr. 10/5/00, pp. 290-293; Late Filed Exhibit No. 9.
The RRB Charge will be calculated and set at a level intended to result
in customer cash collections that are sufficient to pay the principal and
interest of the RRBs in accordance with the expected amortization schedule,
costs of servicing the RRBs, operating expenses and funding of credit
enhancements. The RRB Charge calculation incorporates the following: (1)
outstanding principal amount of the RRBs; (2) annual ongoing costs associated
with RRBs; (3) generally level debt service payments; (4) payments of
principal and interest; (5) projected kWh sales; (6) estimated collection
curves; (7) interest rates on RRBs and any hedge payment; (8) the period over
which the RRB Charge is being calculated and billed; and (9)
overcollaterization and other subaccount funding. Soderman PFT, pp. 15-16.
The RRB Charge may be higher or lower depending on the actual coupon and
initial principal amount, actual ongoing transaction costs, actual issue
date,changes in factors as determined at the time of the RRB pricing and
changes in forecasted kWh sales. In order to ensure that the RRB Charge
collections are sufficient to cover the periodic rate reduction bond payment
requirement, CL&P proposes to file annual true-ups with the Department called
Routine True-Up Letters. The filing would be made fifteen days prior to
January 1 each year. The Company proposes to file more frequently if
necessary. The resulting adjustments to the RRB Charge will be automatically
effective January 1 each year as specified in the routine true-up letter. In
addition, CL&P proposes to file non-routine true-up advice letters. The non-
routine true-up letter would be subject to review and would be effective
within 60 days after such filing. Soderman PFT, pp. 20-21.
As a component of the CTA, any increase in the RRB Charge would result
in a reduction of the amount being collected for non-securitized stranded
costs, and probable deferral unless the level of the CTA is increased. If,
as a result of a true-up calculation, the RRB Charge were to increase above
the CTA then in effect, the CTA on the effective date of the RRB Charge
adjustment must be increased to the amount of the RRB Charge. If the
adjustments to the CTA necessary to meet required RRB funding threaten the
rate cap in effect through December 31, 2003, CL&P requests that the
Department instead, effective as of the time of the RRB Charge adjustment,
adjust the components of CL&P's standard offer rates and charges, other than
the RRB Charge, as necessary to stay within the rate cap. Additionally, CL&P
further requests that if, as such adjustment is needed, CL&P is not allowed
to collect on a current basis any rate or charge that it would be allowed to
collect but the adjustment to maintain the RRB Charge, the portion of the
rate or charge that is not collected on a current basis will be deferred
along with the applicable carrying charge. This deferral of uncollected
rates or charges will apply solely to adjustments required to maintain the
RRB and will not affect the Department's legal authority to make a separate
determination to adjust CL&P's rates and charges on any other basis.
Soderman PFT, pp. 23-24.
If the RRB Charge collections exceed the amount necessary to amortize
the RRBs at the level set forth in the expected amortization schedule and to
provide for the payment of all ongoing costs associated with the RRB
transaction, including interest, credit enhancement and fees, such excess
will be held in a reserve subaccount. The amounts in the reserve subaccount
and earnings in the account will serve to cover shortfalls and reduce the RRB
Charge and related collections in the subsequent period. If the available
RRB Charge collections are less than the amount necessary to pay fees,
expenses, interest, credit enhancement and to amortize the RRBs to level set
forth in the expected amortization schedule, then the RRB Charge and the
related collections in the subsequent period will be increased to reflect the
shortfall. Soderman PFT, p. 28.
The initial RRB Charge is estimated to be approximately 0.915 cents/kWh.
Soderman PFT, p. 27. The RRB Charge collections will be remitted to the
Collection account which is comprised of four subaccounts. If RRB Charge
collections in any period are insufficient to satisfy the SPE's payment
obligations, then amounts in the reserve subaccount, the
overcollateralization subaccount, and the Capital Subaccount are used to
satisfy scheduled principal and interest payments, respectively. To the
extent the funds in the overcollateralization subaccount or the Captial
Subaccount are used to satisfy principal and interest payments, future RRB
Charges will be adjusted to replenish such funds through the true-up
mechanism. Englander PFT, p. 32.
The Department recognizes that RRB Charge collections variances could
occur and true-up adjustments may be necessary. Adjustments may occur as a
result of updated servicer forecasts, charge-offs, payment rates, energy sale
forecasts, etc. Additionally, variances may be the result of changes in the
weighted average interest rates as earlier-maturing classes are repaid,
principal amortization for the following period is less than or greater than
the prior period and expenses of the SPE change. As a result of these
variances, the SPE may be unable to meet the period RRB Payment Requirement.
As proposed, CL&P would file routine true-up letters. The Department accepts
this method and realizes these adjustments may affect other components of the
CTA charge. The Department encourages the Company to minimize the true-up
adjustment letters in an attempt to truncate the annual CTA filing. At the
time of the annual CTA proceeding, the Department will review the calculation
of RRB revenues collected by the Company and to ensure that revenues match
the costs associated with the RRBs for the past year. As part of the annual
CTA proceeding, the Company shall submit information to indicate the actual
CTA collected and the accounts it is being applied to.
1. Exit Fees
The Company requests that the Financing Order state that the RRB charge
may in the future include a pro rata component of any exit fee collected from
any retail customer. Soderman PFT, p. 21. Currently, there are no approved
exit fees for CL&P and the Company is not allowed to impose such fees on its
own. The Department notes that collection of a portion of the RRB as an exit
fee from customers leaving the system is not necessary to ensure that the
Financing Authority receives full compensation for the bonds. The Department
will consider including the RRB Charges as a component to the exit fee if and
when exit fees are determined to be appropriate.
2. Reduction in Overall Cost of Capital
The record reasonably demonstrates that issuance of the SPE Debt
Securities and use of the proceeds as proposed by CL&P will result in an
overall reduction of its cost of capital, taking into account the cost of
financing. CL&P will use a portion of the proceeds from the RRBs to retire
long-term debt which is higher-cost than the SPE Debt Securities and may also
retire short-term debt if the alternative would be to refinance such debt at
a higher cost than the SPE Debt Securities. CL&P will determine which of its
retirable debt issues are higher-cost than the SPE Debt Securities.
Nonetheless, if proceeds from the SPE Debt Securities are used to finance
and/or retire debt, its cost of debt would decrease.
To date, CL&P's average embedded cost of debt is 6.97%. Response to
Interrogatory OCC-010. If, as CL&P contemplates, $ 452,012,000 of total debt
is retired, the effect of refinancings made possible by the securitization
proceeds will reduce the average embedded cost of debt from 6.97% to 6.61%.
Id. OCC's witness, Mr. Rothschild, estimates that this reduction in the
embedded cost of debt results in approximately $4.4 million in annual
interest cost savings. OCC argues that the $4.4 million is a direct savings
made possible only by the issuance of securitization financing, therefore,
part of the savings that should be passed on to ratepayers as part of the
overall cost/benefit computations. Rothschild PFT, pp. 8-10.
The Department cannot selectively update the Company's capital structure
or consider adjustments that are more appropriately considered in the context
of a full rate case. In fairness, all components of the distribution
company's revenue requirements must be looked at in a general ratecase, where
the Department would apply the ratemaking principles contained in Conn. Gen.
Stat. Section 16-19e. Therefore, the Department declines to consider
adjustments to CL&P's capital structure until CL&P's next ratecase
proceeding.
3. Working Capital Allowance
CL&P has included a working capital allowance for ratemaking purposes in
its calculations to reflect the servicing of RRBs on a cash basis. CL&P
states that bondholders require that the actual RRB Charge, which is used to
determine how much cash from a customer's bill is remitted to the SPE for
future remittance to bondholders, be greater than the ratemaking RRB Charge.
In this way, the actual amount of cash that is received by the Company and
remitted to the SPE is sufficient to pay the required amount to the
bondholders every six months. Bondholders are aware that customers
traditionally pay their bills on a 45 day lag. In order to guarantee that a
sufficient amount of cash be available and remitted to them every six months
after the issuance of the RRBs, the CTA must collect an additional 45 days
worth of cash. CL&P has included a working capital allowance in its revenue
requirement calculations to compensate the company for the additional costs
due to the estimated 45 day lag period. Soderman PFT, pp. 37-43; Response to
Interrogatory EL-44; Late Filed Exhibit No. 4; Tr. 9/21/00 pp. 117-119; Tr.
10/5/00 pp. 336-352.
In this proceeding, the Company has limited the focus of its working
capital adjustment to the specifics of funding the RRBs while ignoring the
working capital allowance relative to all other CTA components. The
Department finds it more appropriate to weigh the various leads and lags as
it relates to all CTA revenue and expense components found reasonable for
ratemaking purposes, as this better matches the allowance with the period for
which rates are being set and is consistent with the total RRB Charge level
that is being accomodated. The Department declines to consider adjustments
to the working capital allowance in this proceeding, therefore, CL&P's
working capital proposal must await the annual CTA review proceeding.
4. CTA Shortfalls
The Company testified that although it does not charge special contract
customers any new charges for the CTA, it does apportion certain special
contract revenues to CTA costs. Tr. 9/21/00, p.124. Consistant with that,
the RRB charge would be a component of the CTA. When asked whether the
Company calculates the full CTA charge as being collected from special
contract customers, the Company's witness responded, "I believe that is what
we are intending to do, yes. And any shortfall in revenues associated with
those customers, we are attributing to the distribution business." Tr.
9/21/00, p.125. The Company explained that it may be possible in some cases
where more dollars are allocated to the first six rate components than were
billed. Soderman PFT, pp. 31-32. In this case, the distribution component
would be allocated as negative revenues. If this occurs, the Company
requests that, to the extent necessary, allocation of special contract
revenue to one of the other five rate components (other than the distribution
and CTA components) be deferred along with the applicable carrying charge.
During the hearing, the Company testified that they wanted to avoid the
concept of CL&P's shareholders, in effect, subsidizing the rate reduction
bonds. Tr. 9/21/00, p.125.
Section 16-245d-2(a) of the Regulations of Connecticut State Agencies
requires that any partial bill payments first be applied to the CTA,
transmission, distribution, SBC, conservation and renewable energy before
generation services. Since rates from all customers, including special
contract customers, will exceed the non-generation components of rates, in no
case will shareholders subsidize the RRB. The Department therefore rejects
the Company's proposal.
5. Ongoing Transaction Costs
CL&P provided a list of the estimated Ongoing Transaction Costs that
would be recovered annually through the RRB Charge amounting to approximately
$1.66 million. Late Filed Exhibit No. 1. The primary Ongoing Transaction
Costs are the servicing fee paid to CL&P as the servicer, and the
overcollateralization fee, both are .05% of the initial principal amount of
the RRBs. The additional ongoing transaction costs associated with the RRB
Transaction include the administration fee, rating agency fees, legal and
accounting fees, trustee fees and other miscellaneous costs of operating the
SPE, if any. The current estimate for these additional costs totals $220,000
and are expected to vary each year. The Company requests that these costs be
approved now and in the future without Department review. According to CL&P,
the Finance Authority will review these expenses for reasonableness. While
the Department will allow all reasonable ongoing transaction costs to be
recovered annually through the RRB Charge, the Department cannot transfer its
responsibilities of ensuring that rates are just and reasonable entirely to
another agency. The Department will allow recovery of the ongoing
transaction costs as estimated, but reserves its right to review the
additional ongoing costs in the future if the annual combined total at any
time exceeds $500,000.
F. Servicing of RRBs
CL&P will enter into a servicing agreement with one or more SPEs to
perform servicing functions on behalf of each SPE, including billing and
collecting the RRB Charge from CL&P's retail customers (Servicing Agreement).
Pursuant to the Servicing Agreement, CL&P will act as Servicer of the
Transition Property and will be responsible for calculating, billing,
collecting, and remitting the RRB Charges. The Servicing Agreement will
provide that CL&P, as initial Servicer, may not voluntarily resign its duties
as Servicer or transfer its servicing obligations without obtaining the prior
approval of the Department. As Servicer, CL&P will also be obligated to
retain all books and records regarding the RRB Charge, subject to the right
of each SPE to inspect those records. Englander PFT, p. 33.
As consideration for its servicing responsibilities, CL&P or any
successor Servicer will receive a periodic servicing fee (Servicing Fee),
which will be recovered through the RRB Charge. In order to support each
SPE's legal status separate and apart from CL&P, the Servicing Fee paid to
CL&P must be market-based. The annual Servicing Fee, payable semiannually or
more frequently, will be equal to 0.05% per annum of the initial principal
balance of RRBs. The Servicing Fee represents a reasonable good faith
estimate of an arm's-length, market-based fee for servicing RRBs. The
Servicing Fee paid to CL&P will be lower than the Servicing Fee paid to a
successor Servicer that does not concurrently bill the RRB Charge with
charges for other services. Englander PFT, p. 34-35.
CL&P or any successor Servicer will periodically remit (as frequently as
required by the rating agencies and in all events within one calendar month
of collection) collections of RRB Charges to the SPE. To the extent
estimation of such collections is required, CL&P will design a methodology
that will be satisfactory to the rating agencies and that will approximate
most closely actual collections. On each payment date for the RRBs, the
trustee for the SPE Debt Securities will release money from the Collection
Account to the trustee for the RRBs, which in turn will pay (or cause to be
paid) interest and principal on the RRBs to RRB holders. The SPE will also
use the RRB Charge remittances to pay fees and expenses on the RRBs and to
fund certain credit enhancement reserves.
CL&P proposes that in the event of default by itself or any successor
Servicer in payment of the RRB Charges to an SPE, the Department will, upon
application by (1) the trustee or holders of the RRBs, (2) the trustee for
the special purpose trust, (3) such SPE or its assignees, or (4) pledgees or
transferees of the Transition Property and Other SPE Collateral, order the
sequestration and payment to or for the benefit of such SPE or such other
party of revenues arising with respect to the Transition Property and Other
SPE Collateral. This will provide additional certainty that the RRB Charges
will benefit the owner of the Transition Property and should serve to enhance
the credit quality of the RRBs. Id.
In accordance with Conn. Gen. Stat. Section 16-245g(e), amounts
collected from a retail customer shall be allocated on a pro rata basis among
(i) the RRB Charge, (ii) any remaining portion of the CTA not the subject of
this Financing Order, and (iii) CL&P's other charges.
While the Department recognizes that such arms-length servicing fee is
required to satisfy the true sale opinions and to establish bankruptcy-
remoteness, the Department does not find that this servicing function is an
incremental out-of pocket cost over and above what CL&P is already collecting
in rates. CL&P testified that the servicing function will be performed using
existing internal labor and these employees will be reimbursed through the
servicing agreement. Tr. 9/21/00, pp. 98-106. The cost of these employees
is already collected through the Company's approved distribution rates. So to
fund them again would mean that the Company would collect this cost twice.
Tr. 9/21/00, pp. 137-145. The Department will allow CL&P to recover the
servicing fee as a cost of securitization; however, the Department will apply
an amount equal to the servicing fee to the CTA, annually at the time of the
CTA True-up, and reconcile actual costs of servicing by reducing CL&P's
distribution rates for the internal labor costs in the next rate proceeding.
CL&P also estimated a servicing start-up fee of $450,000 to get the
computer systems in place to handle the billing and reporting of the RRB
Charge and to train employees. Tr. 10/5/00, pp. 311-318 and 322-335. The
Financing Authority has expressed concern whether the estimated servicing
start-up fee of $450,000 represents an actual incremental cost to CL&P, but
will be reviewing the reasonableness of this expense in the coming months.
Late Filed Exhibit No. 1. The Department would deny recovery, to the extent
that CL&P is training existing employees and using internal sources. The
Department encourages the Company to keep actual costs to a minimum and to
continue to work closely with the Financing Authority in their review of the
reasonableness of these transaction cost estimates.
G. Third Party Suppliers
CL&P states that the potential billing, collecting and remittance of RRB
Charges by a third party supplier (TPS) may pose a credit concern in that it
introduces the risk of shortfalls in RRB Charge collection by exposing the
cash flow to potential interruption due to default, bankruptcy or insolvency
of the TPS. CL&P notes that this risk of interruption will increase risks to
investors and ratepayers, potentially increasing the required credit
enhancement or reducing the credit rating and increasing the rate of interest
on RRBs. This may pose a real risk because many TPS will likely be unrated,
start-up companies. CL&P concludes that such TPS billing may increase the RRB
Charge resulting from interruption or delay in payment.
In order to mitigate against these risks, satisfy rating agency concerns
and reduce the cost to ratepayers, CL&P requests that any TPS should be
required to comply with certain billing, collection and remittance procedures
and information access requirements described in the Application and
comparable to those in effect in other states in which stranded cost
securitizations have been effected. CL&P indicates that these requirements
are largely derived from rating agencies' criteria, as described in Exhibit 4
to the Application. Englander PFT, pp. 35-37.
In accordance with the risk presented and corresponding potentially
higher interest rate for the bonds, the Department will not authorize a TPS
to bill and collect the RRB Charge for remittance to CL&P as Servicer (or any
successor Servicer) unless such TPS meets specified creditworthiness criteria
and complies with specified billing, collection, and remittance procedures
and information access requirements. The Department will require
creditworthiness standards and other procedures and requirements that are
consistent with maintaining triple-A ratings on the RRBs. Such authorization
must be consistent with the following minimum criteria, procedures, and
requirements:
o The TPS must agree to remit the full amount of RRB Charge it bills
to retail customers, regardless of whether payments are received from such
customers, within 15 days after CL&P's (or any successor Servicer's) bill
for such charges.
O The TPS must provide CL&P (or any successor Servicer) with total
monthly kWh usage information in a timely manner for the Servicer to
fulfill its obligations, as such information is the basis of such
remittance.
O CL&P (or any successor Servicer) will be entitled, within seven days
after a default by the TPS in remitting any RRB Charges billed, to assume
responsibility for billing all charges for services provided by CL&P (or
any successor Servicer), including the RRB Charges, or to switch
responsibility to a third party.
O If and so long as a TPS does not maintain at least a triple-B long
term unsecured credit rating from Moody's Investors Service or Standard &
Poor's Rating Services, such TPS shall maintain, with the Servicer or as
directed by the Servicer, a cash deposit or comparable security equal to
one month's maximum estimated collections of RRB Charges, as agreed upon
by CL&P (or any successor Servicer) and the TPS.
H. Credit Enhancement
In order for RRB's to receive triple A-ratings, it is necessary to
minimize the exposure to losses as a result, among other items, of shortfalls
in sales of energy, delays in bill collections, and higher than expected
uncollectible accounts. This will be accomplished with various forms of
credit enhancement, including the various components of the Collection
Account and the True-up Mechanism. Englander PFT, pp. 21-32.
RRB Charges will be deposited in the Collection Account. This Account
is comprised of four subaccounts which include: 1) The General Subaccount
which will hold the RRB Charge Collections before each payment date. 2) The
Overcollateralization Subaccount which will hold the overcollateralization
discussed below. 3) The Capital Subaccount which will hold the initial
capital contribution to the SPE. 4) The Reserve Subaccount which will hold
any excess collections of RRB charges. Id.
Overcollateralization constitutes an amount in excess of debt service on
the SPE Debt Securities and the RRBs, and servicing and administrative
expenses and any amount necessary to restore the capital contribution to the
Capital Subaccount minimum balance. The overcollateralization amount
required to achieve the highest credit rating will be finalized prior to the
issuance of the SPE Debt Securities and the RRBs. It will depend primarily
on rating agency requirements and tax considerations, subject to the approval
of the Finance Authority, but is currently expected to be at least 0.50% of
the initial prinicpal amount of the SPE Debt Securities and the RRBs.
CL&P will adjust the RRB Charge, up or down, pursuant to a true-up
mechanism established in accordance with Conn. Gen. Stat. Section 16-245i(c).
The true-up mechanism is a periodic adjustment to the RRB Charge which
accounts for any previous or projected over-or-under-collection of the RRB
Charge. CL&P, as initial Servicer will account for, and ultimately credit to
ratepayers, any amounts remaining in the Collection Account (other than the
Capital subaccount and an amount equal to interest earning thereon) after the
RRBs are paid in full. Such amounts include any overcollateralization
amounts, including interest earnings thereon, or RRB Charge collections that
remain after the Total RRB Payment Requirements have been discharged. Such
amounts will be released to the SPE, in accordance with Conn. Gen. Stat.
245h(b), upon retirement of the RRBs and discharge of the Total RRB Payment
Requirements. These benefits will inure to ratepayers through a credit to
their CTA or, if there is no CTA, through a credit to other rates.
CL&P may be required to obtain a letter of credit or other credit
enhancement to protect against any cash collection losses resulting from the
temporary commingling of funds. If such credit enhancement is required, the
RRB Charge will be adjusted accordingly to cover the cost of such enhancement
(other than credit enhancement obtained because CL&P is making RRB Charge
remittances less frequently than daily).
The type and actual cost of each form of credit enhancement will be
included in the Company's Issuance Advice Letter that CL&P provides to the
Department after closing of the issuance of the bonds. The Department finds
that these forms of credit enhancement and the estimated fees are consistent
with other state utilities that have applied for securitization financings.
The Department recognizes the Company will be filing annual Routine/Non-
routine True-up Letters that may adjust some components as originally filed
in its Issuance Advice Letter. Therefore, the Department finds these
estimates to be reasonable and will review the level of actual fees at the
time the Company files its Issuance Advice Letter and will evaluate such
adjustments in its annual CTA filing.
I. Tax Considerations
A key component of the Financing Order is that the SPE Debt Securities
be treated for federal income tax purposes as debt of CL&P and not as a sale
of assets. The economic benefits of the transaction could be eliminated
effectively if the issuance of the RRBs and the SPE Debt Securities resulted
in current income to CL&P upon receipt of the initial proceeds of the RRBs,
or if CL&P were unable to deduct the interest payments on the RRBs from
taxable income. Accordingly, CL&P has requested a private letter ruling from
the Internal Revenue Service (IRS) seeking confirmation that the issuance of
the RRBs and the SPE Debt Securities and transfer of the proceeds to CL&P for
the recovery of eligible stranded costs will not result in gross income to
CL&P or special purpose trust, and that the SPE Debt Securities will
constitute obligations of CL&P for federal income tax purposes. Should the
IRS not provide such a ruling, or rule adversely, CL&P will reassess the RRB
Transaction and, if possible, modify it to eliminate the risk of current
taxation. If any such modifications would cause the structure to be outside
the bounds described in the Application, or otherwise approved by the
Department, CL&P shall take appropriate steps to seek additional Department
approval. Based upon favorable IRS rulings previously issued in respect of
RRB Transactions in California, Illinois, Pennsylvania, New Jersey, and
Massachusetts, CL&P anticipates a favorable ruling. Application, Exhibit 4,
p. A-20; Tr. 9/21/00, pp. 89-94 and 113-115.
The interest paid to holders of RRBs will be exempt from income taxes
imposed in the State under Conn. Gen. Stat. Section 16-245j(c)(3), but will
not be exempt from federal income taxes or taxes imposed by other states.
J. Accounting and Financial Reporting
The amount financed through the RRB Transaction is expected to be
recorded in accordance with generally accepted accounting principles (GAAP)
as long-term debt on the balance sheet of the SPE for financial reporting
purposes. CL&P, each SPE, each special purpose trust, and the holders of
RRBs will expressly agree pursuant to the terms of the applicable documents
to treat the SPE Debt Securities as debt of such SPE secured by, among other
things, the Transition Property and the Other SPE Collateral for this
purpose. Because each SPE will be wholly-owned by CL&P, it is required that
such SPE be consolidated with CL&P for financial reporting purposes under
GAAP. Therefore, the SPE's debt will appear on the consolidated balance
sheet of CL&P in its annual and quarterly financial filings to the Securities
and Exchange Commission. For purposes of financial reporting to the
Department, CL&P will exclude the SPE's debt from its capital structure. The
RRB Transaction is not expected to impact CL&P's credit ratings, as it is
expected that the rating agencies will determine that the RRBs, which are not
supported by CL&P's general revenue stream, and not collateralized by the
assets of CL&P, do not affect CL&P's creditworthiness. Therefore, it is
anticipated that the rating agencies will exclude the RRBs as debt for
purposes of calculating financial ratios.
K. True-Sale Opinion and Collection Shortfalls
Rating agencies will require acceptable opinions of bankruptcy counsel,
at the time the SPE Debt Securities and the RRBs are issued, to the effect
that the transfer of the Transition Property from CL&P to an SPE constitutes
a legal true sale such that if CL&P were to become the subject of a
bankruptcy or insolvency case, the Transition Property would not be part of
CL&P's bankruptcy estate and therefore would not be subject to the claims of
CL&P's creditors.
Conn. Gen. Stat. 245k(h) expressly provides that transfers of
Transition Property, as described in that section and as approved in a
financing order, shall be so treated for all purposes as an absolute transfer
and true sale. In addition, the SPE Debt Securities and the RRBs will be
nonrecourse to CL&P and its assets, other than the Transition Property sold
to an SPE and the Other SPE Collateral.
Another element of the bankruptcy analysis focuses on the separate legal
status of CL&P and each SPE. Although each SPE will be wholly-owned by CL&P,
the RRB Transaction will be structured so that, in the event of a bankruptcy
of CL&P, each SPE's separate legal existence would be respected and the
assets and liabilities of each SPE would remain separate from the estate of
CL&P. The structural elements supporting such separate existence include,
but are not limited to, requirements that each SPE be adequately capitalized,
that CL&P be adequately compensated on an arm's-length basis for the
servicing functions it performs in billing, collecting, and remitting the RRB
Charges, that each SPE has at least two independent directors or managers,
and that CL&P and each SPE take certain steps to ensure that creditors are
not mislead as to their separate existence. These structural protections are
very important because, without such protections, a bankruptcy court might
invoke the doctrine of substantive consolidation and disregard each SPE's
separate existence. Substantive consolidation is an equitable doctrine in
bankruptcy cases that allows courts to disregard the separate existence of
two or more affiliated entities to ensure the equitable treatment of all
creditors and to maximize creditor recoveries. When entities are
substantively consolidated in a bankruptcy proceeding, their assets and
liabilities are pooled, thereby eliminating intercompany claims, and claims
of third-party creditors against any of those entities are generally treated
as claims against the common pool of assets created by consolidation.
In order to preserve the bankruptcy-remote status of each SPE and the
true-sale nature of the Transition Property and Other SPE Collateral once it
is transferred to each SPE, CL&P cannot have any claim on the RRB Charges.
In its capacity as Servicer, CL&P will bill RRB Charges along with other
charges for services rendered to retail customers obligated to pay such
charges. If CL&P collects less than the full amount that is billed to such
customers, it is not permitted to favor itself over each SPE, as owner of the
Transition Property. In accordance with Conn. Gen. Stat. Section 16-245g(e),
amounts collected from a Retail Customer obligated to pay the RRB Charge
shall be allocated on a pro rata basis among (i) the RRB Charge, (ii) any
remaining portion of the CTA not the subject of this Financing Order, and
(iii) CL&P's other charges.
L. Savings/Benefits to Ratepayers
Before approving a financing order, the Department must find that
savings to ratepayers will result from securitization. No stranded costs
shall be funded with the proceeds of rate reduction bonds (RRBs) unless the
Company demonstrates that the resulting savings will be passed on to
customers. Under CL&P's current cost of capital set by the Department,
ratepayers pay a carrying charge of 10.85% on all outstanding regulatory
assets. Soderman PFT, p. 43. CL&P argues that its ratepayers will benefit
from securitization if the effective all-in cost of the approved transition
costs is lower than the current rate of return of 10.85%. Based on current
market conditions, CL&P anticipates that the carrying charge of 10.85% will
be reduced to approximately 7.91% through the RRB Transaction resulting in
lower carrying charges to be paid by ratepayers. CL&P estimates that the
total net present value of savings to its ratepayers, as a result of
securitization, will be $180 million. Soderman PFT, p. 44.
Based upon the structure, methodology and assumptions as set forth in
Exhibits RAS-2 through RAS-4 of the Application, CL&P represents that the RRB
Transaction will result in net present value savings over the term of the
RRBs and greater rate reductions than would be required to recover the
eligible stranded costs if RRBs were not issued. CL&P states that the actual
net present value savings and rate reductions resulting from the RRB
Transaction will depend upon the actual amount of RRBs issued, market
conditions at the time of the pricing of the RRBs, and the actual amount of
eligible stranded costs to be securitized as discussed in Section II.B. The
structure, pricing, terms and conditions of the RRBs will be subject to
approval by the Financing Authority.
Because securitizing at an all-in cost of less than 10.85% produces an
immediate reduction in revenue requirements, allowing the Company quicker
recovery of stranded costs, the Department finds that savings to ratepayers
will result from securitization. While CL&P anticipates that securitization
will result in savings to ratepayers of approximately $180 million, the
Department notes that the amount of ratepayer savings is predicated on the
final amount of Transition Property and on market conditions at the time of
bond issuance. Upon issuance, a financing order is irrevocable and may not
be altered by the Department. The Department must, therefore, rely on the
Financing Authority to ensure that the maximum possible level of ratepayer
savings is obtained.
The Department also notes that although securitization will provide
benefits to ratepayers, total savings are not large relative to overall
stranded costs. This occurs for several reasons. First, the legislation
limits the assets that can be securitized, specifically prohibiting nuclear
assets. Second, interest rates for securitization bonds have increased over
the past year reducing the spread between the company's cost of capital and
the securitization rate. Finally, the Company now calculates savings
associated with independent power contract buydowns and buyouts to be less
than when the Company calculated the savings when the buyout/buydowns were
first proposed. The Company could not explain why different methodologies
and assumptions were used. Tr. 10/5/00, pp. 429-443 (Protected).
The Department believes that the revenue requirement methodology used in
this proceeding is appropriate. Although the savings are less than expected,
they are still positive and ratepayers are better off with securitization
than funding the buyouts using the Company's cost of capital. In the future,
the Company should develop buyout/buydown payments and estimate savings
consistent with this methodology.
K. Use of Proceeds
As set forth in the Application, CL&P proposes to use RRB proceeds to
pay for transaction costs, reduce capitalization, pay call and tender
premiums and refinancing costs associated with such capital reduction, and
pay IPP buyout/buyout payments approved by the Department and as discussed in
Section II.B.
CL&P will seek to deploy the total proceeds received related to
restructuring, including those arising from asset sales, in a manner that
maximize the net economic benefit to ratepayers. In carrying out any
strategy relating to the use of proceeds, CL&P shall remain in compliance
with its charter, loan agreement(s), bond indenture(s), this Financing Order
and the Securitization Statute.
III. FINDINGS OF FACT
1. Pursuant to Conn. Gen. Stat. Section 16-245j(b), the State pledges and
agrees with the owners of the Transition Property and holders of RRBs that
the State shall neither limit nor alter the RRB Charge, the Transition
Property, this Financing Order, and all rights thereunder until RRBs,
together with interest thereon, are fully met and discharged, unless adequate
provision is made for the protection of the owners or holders.
2. The Securitization Statute also provides that Transition Property may be
sold in a true sale transaction to a SPE to facilitate the issuance of RRBs
and SPE Debt Securities.
3. The proposed structure is intended to minimize debt service costs,
maximize ratepayer savings and create a substantially level RRB Charge over
the life of the RRBs while obtaining the highest possible rating for the
RRBs.
4. The final structure, pricing, terms, and conditions will be determined
by CL&P at the time the RRBs are priced, subject to the approval of the
Finance Authority as provided herein, and after input from the rating
agencies, tax authorities, and the underwriters.
5. CL&P will securitize approved eligible stranded costs and will recover
such amount, together with the transaction costs of issuing the RRBs and SPE
Debt Securities, from its retail customers through the RRB Charge.
6. CL&P's right to collect the RRB Charge is irrevocable pursuant to Conn.
Gen. Stat. Section 16-245i(b)(1), and the charge itself is non-bypassable to
CL&P's customers pursuant to Conn. Gen. Stat. Section 16-245e(a)(2).
7. The Transition Property is the principal asset underlying the RRBs and
represents a continuously existing property right created pursuant to Conn.
Gen. Stat. Section 16-245h(a).
8. Total stranded cost permitted to be securitized as of January 1, 2001 is
estimated to be $1.55 billion.
9. Call premiums incurred in the process of divesting generating assets are
legitimate mitigation costs.
10. Greater savings result from securitizing the current balance of the
regulatory asset than from securitizing the NPV of the regulatory asset.
11. Securitization of the proposed Transition Property results in clear
benefits to ratepayers.
12. Each SPE will be formed for the limited purpose of acquiring the
Transition Property and issuing and selling the SPE Debt Securities. It will
not be permitted to engage in any other activities, and will have no assets
other than the Transition Property and Other SPE Collateral.
13. CL&P will provide the intial capitalization of each SPE in an amount
anticipated to be at least 0.50% of the initial principal balance of RRBs
issued with respect to such SPE.
14. Each SPE will be managed by a management committee, which will have
rights and authority similar to that of a board of directors for a
corporation.
15. Because each SPE will be a special-purpose entity with limited business
activities and no staffing, it is anticipated that each SPE will enter into
an Administration Agreement with CL&P pursuant to which CL&P shall perform
administrative services and provide facilities for each SPE to ensure that it
is able to perform such day-to-day operations as are necessary to maintain
its existence and perform its obligations under the RRB Transaction
documents.
16. CL&P will sell all of its rights in the Transition Property to one or
more SPE in transactions each of which under Conn. Gen. Stat. Section 16-
245k(h) will be treated as a legal true sale and absolute transfer to such
SPE.
17. To raise the funds to pay the purchase price of the Transition Property
to CL&P, an SPE will issue and sell SPE Debt Securities to a special purpose
trust established by the Finance Authority.
18. All of the assets of such SPE, including, without limitation, the
Transition Property and the other collateral of the SPE (Other SPE
Collateral), will be pledged as collateral to secure the SPE Debt Securities.
19. Investment income earned in the collection account and any subaccounts
may be used to satisfy scheduled interest and principal payments and to
replenish the SPE's equity and the scheduled overcollateralization amount as
needed.
20. Any earnings in excess of required amounts in such collection accounts
(other than the Capital Subaccount) will reduce the RRB Charge through the
true-up mechanism.
21. SPE Debt Securities will take the form of promissory notes, the SPE
Debt Securities, secured by a first priority statutory lien on all Transition
Property as provided in Conn. Gen. Stat. 16-245k(g), together with a pledge
of the Other SPE Collateral.
22. The form, interest rate, repayment schedule, classes, number and
determination of credit ratings, and other characteristics of the RRBs and
SPE Debt Securities will be determined at the time of pricing based on then-
current market conditions, with the objective to achieve the lowest all-in
financing cost possible.
23. The SPE Debt Securities and the RRBs will not be subordinated to the
claims of any creditors or the equity owner of the SPE, other than for
payments of trustee, servicing fees, and other specified transaction-related
fees.
24. The RRBs and SPE Debt Securities will, by their terms, be nonrecourse
to CL&P and its assets, and, in accordance with Conn. Gen. Stat. Section 16-
245j(c)(1), will not be secured by a pledge of the general credit, full faith
or taxing power of the State or any agency or subdivision of the State (other
than the special purpose trust).
25. The SPE Debt Securities and RRBs will be secured by a pledge of all of
the right, title, and interest of each SPE in the Transition Property and the
Other SPE Collateral. The final terms and conditions of the SPE Debt
Securities and the RRBs shall be subject to the approval of the Finance
Authority.
26. The RRBs and SPE Debt Securities will have final maturities not later
than December 31, 2011, in accordance with Conn. Gen. Stat. Section 16-
245j(c)(6).
27. The RRBs and the SPE Debt Securities will be repaid from charges to all
retail customers through the collection of the RRB Charge by CL&P or any
successor to the CL&P distribution system, any other successor Servicer or
any TPS from which the customer has chosen to receive electric service.
28. Pursuant to the Standard Offer Decision, the Company will recover
securitized stranded costs and RRB costs from customers through a mechanism
called RRB Charge.
29. The Company intends to designate ownership of the RRBs as a footnote to
the CTA line item charge in the Account Messages section on customers' bills.
The Company also indicated that it would work with the Department in
formulating the language for the footnote.
30. The RRB Charge will be calculated and set at a level intended to result
in customer cash collections that are sufficient to pay the principal and
interest of the RRBs in accordance with the expected amortization schedule,
costs of servicing the RRB's, operating expenses and funding of credit
enhancements.
31. The RRB Charge calculation incorporates the following: (1) outstanding
principal amount of the RRBs; (2) annual ongoing costs associated with RRBs;
(3) generally level debt service payments; (4) payments of principal and
interest; (5) projected kWh sales; (6) estimated collection curves; (7)
interest rates on RRB's and any hedge payment; (8) the period over which the
RRB Charge being calculated and billed; and (9) overcollaterization and other
subaccount funding.
32. The annual Servicing Fee, payable semiannually or more frequently, will
be equal to 0.05% per annum of the initial principal balance of RRBs. The
Servicing Fee represents a reasonable good faith estimate of an arm's-length,
market-based fee for servicing RRBs.
33. Although each SPE will be wholly-owned by CL&P, the RRB Transaction
will be structured so that, in the event of a bankruptcy of CL&P, each SPE's
separate legal existence would be respected and the assets and liabilities of
each SPE would remain separate from the estate of CL&P.
34. The servicing function is not an incremental out-of pocket cost over and
above what CL&P is already collecting in rates.
35. There are no approved exit fees for CL&P and the Company is not allowed
to impose such fees on its own.
36. Since rates from all customers, including special contract customers,
will exceed the non-generation components of rates, in no case will
shareholders subsidize the RRB.
37. While the Department will allow all reasonable ongoing transaction
costs to be recovered annually through the RRB Charge, the Department cannot
transfer its responsibilities of ensuring that rates are just and reasonable
entirely to another agency.
38. It is the distribution company that is the only legally authorized
entity allowed to engage in billing, collecting and remittance of RRB
Charges.
39. RRB Charges will be deposited in the Collection Account. This Account
is comprised of four subaccounts which include: 1) The General Subaccount
which will hold the RRB Charge Collections before each payment date. 2) The
Overcollateralization Subaccount which will hold the overcollateralization.
3) The Capital Subaccount which will hold the initial capital contribution to
the SPE. 4) The Reserve Subaccount which will hold any excess collections of
RRB charges.
40. The true-up mechanism is a periodic adjustment to the RRB Charge which
accounts for any previous or projected over-or-under-collection of the RRB
Charge.
41. The type and actual cost of each form of credit enhancement will be
included in the Company's Issuance Advice Letter that CL&P provides to the
Department after closing of the issuance of the bonds.
42. A key component of the Financing Order is that the SPE Debt Securities
be treated for federal income tax purposes as debt of CL&P and not as a sale
of assets.
43. The SPE Debt Securities and the RRBs will be nonrecourse to CL&P and
its assets, other than the Transition Property sold to an SPE and the Other
SPE Collateral.
44. Based upon the structure, methodology and assumptions as set forth in
Exhibits RAS-2 through RAS-4 of the Application, the RRB Transaction will
result in net present value savings over the term of the RRBs and greater
rate reductions than would be required to recover the eligible stranded costs
if RRBs were not issued.
45. The structure, pricing, terms and conditions of the RRBs will be
subject to approval by the Financing Authority.
III. CONCLUSION, AUTHORIZATIONS AND ORDERS
A. CONCLUSION
The Department finds that this Financing Order is in the public interest
and will not give CL&P an unfair competitive advantage as a result of the
issuance of this Financing Order. The Department also finds that the
issuance of RRBs and related transactions will result in direct savings to
ratepayers. CL&P will be directed to submit a conforming Financing Order as
modified by this Decision.
B. AUTHORIZATIONS
1. The Company is authorized to securitize approved eligible stranded costs
through the issuance of the RRBs and SPE Debt Securities.
2. The Company is authorized to issue RRBs in an amount no greater than
$1.55 billion.
3. The Company is authorized to recover the amount equal to the proceeds of
the RRBs as well as estimated up-front transactions costs, ongoing servicing
and administrative expenses, costs of credit enhancements (other than credit
enhancement obtained because CL&P is making RRB Charge remittances less
frequently than daily) associated with the RRB Transactions, costs to
mitigate expenditures and any other fee, cost or expense with respect to the
RRBs as described in the Transaction Description.
4. The Company is authorized to assess and collect the eligible Stranded
Costs related to the proceeds of the RRBs as well as the other associated
costs referred to above in the RRB Charge.
5. The Company is authorized to assess and collect the RRB Charge from all
of its retail customers in a manner that is applied equally to customers of
the same class in accordance with methods of allocation in effect on July 1,
1998, and as further described in the Transaction Description. Such charge
is irrevocable and non-passable and is to be assessed and collected by CL&P
or any successor to the CL&P distribution system. The RRB Charge will be a
monthly usage-based charge and may in the future include a pro rata component
of any "exit fee" collected from any Retail Customer pursuant to Conn. Gen.
Stat. 16-245w.
6. CL&P is authorized to form and to capitalize one or more SPEs with an
amount currently expected to equal approximately 0.50% of the initial
principal balance of the RRBs. Each SPE will be formed for the limited
purpose of acquiring the Transition Property and issuing and selling the SPE
Debt Securities
7. CL&P is authorized to sell the Transition Property to an SPE in a manner
consistent with an absolute transfer of all of CL&P's right, title, and
interest, as in a legal true sale, of the Transition Property, in each case.
8. The Company is authorized to enter into a Sale Agreement, Servicing
Agreement, and Administration Agreement, and other agreements and
transactions with each SPE.
9. The Company is authorized to designate ownership of the RRB as a
footnote to the CTA line item charge in the Account Messages section on
customers' bills.
10. The Company is authorized to set the RRB Charge at a level intended to
result in customer cash collections that are sufficient to pay the principal
and interest of the RRBs in accordance with the expected amortization
schedule, costs of servicing the RRB's, operating expenses and funding of
credit enhancements.
11. The Company is authorized to include the following items in the RRB
Charge: (1) outstanding principal amount of the RRBs; (2) annual ongoing
costs associated with RRBs; (3) generally level debt service payments; (4)
payments of principal and interest; (5) projected kWh sales; (6) estimated
collection curves; (7) interest rates on RRB's and any hedge payment; (8) the
period over which the RRB Charge is being calculated and billed; and (9)
overcollaterization and other subaccount funding.
12. The Company is authorized to designate the Transition Property, which
is a current irrevocable vested property right including, without limitation,
the right, title, and interest of a public utility or a financing entity (i)
in and to the RRB Charge established pursuant to this Financing Order, as
adjusted periodically pursuant to Conn. Gen. Stat. Section 16-245i(b)(2) and
this Financing Order, in an amount sufficient to pay the Total RRB Payment
Requirements, (ii) in and to all revenues, collections, claims, payments,
money or proceeds of or arising from the RRB Charge authorized pursuant to
this Financing Order, and (iii) in and to all rights to obtain adjustments to
the RRB Charge pursuant to the terms of Conn. Gen. Stat. 16-245i(b)(2) and
this Financing Order.
13. The Company is authorized to implement the methodology used to
calculate the RRB Charge associated with the RRB Transaction (including,
without limitation, the RRB Charge included in special contract customer
rates as described in the CL&P Testimony) and the periodic adjustments
thereto as described in the CL&P Testimony.
C. Orders
For the following Orders, submit an original and 8 copies of any
requested material to the Executive Secretary, identified by Docket Number,
Title and Order Number.
1. Within 10 days prior to the securitization financing request, CL&P shall
submit a listing of the final securitized stranded cost amount.
2. After conferring with the Department and prior to utilization on
customer's bills, the Company shall submit, for approval, the language for
the RRB footnote.
3. At least two business days in advance of the RRB issuance, CL&P shall
file with the Department, for informational purposes, an Issuance Advice
Letter, subject to the approval of the Finance Authority, setting forth the
final structural details of the SPE Debt Securities and the RRBs, including
the repayment terms (in accordance with the expected amortization schedule),
the initial RRB Charge, the amount necessary for credit enhancement, the
identification of each SPE and special purpose trust, and the transaction
costs of issuance, ongoing transaction expenses and a calculation confirming
net savings to ratepayers as a result of the RRB Transaction. Such filing
shall not be a condition to the effectiveness of this Financing Order or the
issuance of the SPE Debt Securities and the RRBs and shall be automatically
effective upon filing.
4. Within 90 days following the closing of the RRB Transaction, and within
60 days of the end of each fiscal quarter thereafter until the proceeds have
been applied in full, CL&P shall file with the Department a report showing
the use of RRB proceeds in compliance with this Financing Order. Such filing
shall not be a condition to the effectiveness of this Financing Order or the
issuance of SPE Debt Securities and the RRBs.
5. At least fifteen days prior to January 1 each year, CL&P as Servicer (or
any successor Servicer) will file with the Department a Routine True-Up
Letter. The resulting adjustments to the RRB Charge, up or down, shall be
effective automatically on January 1 each year or on such other date as
specified in the Routine True-Up Letter, notwithstanding the fact that the
adjustment to the other components of the CTA occur simultaneously and may
not become effective immediately. CL&P may also file quarterly or, in the
last year the RRBs are outstanding, monthly Routine True-Up Letters in
addition to the Routine True-Up Letter filed at least fifteen days prior to
January 1 each year. Any such adjustments will be effective 15 days after
the filing of the applicable Routine True-Up Letter. Beginning in the year
prior to the expected final maturity date, quarterly or monthly adjustments
may be performed.
6. In the event that CL&P, as Servicer, determines that the methodology
used to calculate the RRB Charge requires adjustment to more accurately
project and generate adequate RRB Charge collections, a Non-Routine True-Up
Letter may be filed, with the resulting RRB Charge adjustment (reflecting
such modification to the methodology or model) to be effective upon review
and approval by the Department within 60 days after such filing.
7. Any amounts accounted for in the Reserve Subaccount, which represent
collections in excess of the fully funded credit enhancement reserves, at the
time that CL&P calculates a periodic RRB Charge adjustment, shall be
incorporated in such adjustment in accordance with Conn. Gen. Stat. 16-
245i(b)(2) and (c). CL&P, as initial Servicer (or any successor Servicer),
shall account for and ultimately credit to ratepayers any amounts remaining
in the Collection Account (other than the Capital Subaccount and an amount
equal to interest earnings thereon) after the RRBs are paid in full. Such
amounts include any overcollateralization amounts, including interest
earnings thereon, or RRB Charge collections that remain after the Total RRB
Payment Requirements have been discharged. Such amounts will be released to
the SPE upon retirement of the RRBs and discharge of the Total RRB Payment
Requirements. These benefits will inure to the benefit of ratepayers through
a credit to their CTA or, if there is no CTA, through a credit to other
rates.
8. At the time of the annual CTA filing, the Company shall provide the
calculation of the total revenues collected through the non-securitized
portion of the CTA based on any changes to the RRB Charge during the year.
9. The Company shall submit a conforming Financing Order reflecting
modifications to the proposed Financing Order (Exhibit 4) no later than 7
days after the date of this Decision.
DOCKET NO. 00-05-01 APPLICATION OF THE CONNECTICUT LIGHT AND
POWER COMPANY FOR APPROVAL OF ISSUANCE
OF RATE REDUCTION BONDS AND RELATED
TRANSACTIONS
This Decision is adopted by the following Commissioners:
Glenn Arthur
Linda Kelly Arnold
Jack R. Goldberg
CERTIFICATE OF SERVICE
The foregoing is a true and correct copy of the Decision issued by the
Department of Public Utility Control, State of Connecticut, and was forwarded
by Certified Mail to all parties of record in this proceeding on the date
indicated.
Date
Nov. 8, 2000
Louise E. Rickard
Acting Executive Secretary
Department of Public Utility Control
