File No. 617

Senate, April 22, 2010

The Committee on Finance, Revenue and Bonding reported through SEN. DAILY of the 33rd Dist., Chairperson of the Committee on the part of the Senate, that the substitute bill ought to pass.

AN ACT CONCERNING SECURITIZATION.

Be it enacted by the Senate and House of Representatives in General Assembly convened:

Section 1. Subsection (a) of section 16-245e of the general statutes is repealed and the following is substituted in lieu thereof (Effective from passage):

(a) As used in this section and sections 16-245f to 16-245k, inclusive, as amended by this act:

(1) "Rate reduction bonds" means bonds, notes, certificates of participation or beneficial interest, or other evidences of indebtedness or ownership, issued pursuant to an executed indenture or other agreement of a financing entity, in accordance with this section and sections 16-245f to 16-245k, inclusive, as amended by this act, the proceeds of which are used, directly or indirectly, to provide, recover, finance, or refinance stranded costs or economic recovery transfer, or to sustain funding of conservation and load management and renewable energy investment programs by substituting for disbursements to the General Fund from the Energy Conservation and Load Management Fund established by section 16-245m and from the Renewable Energy Investment Fund established by section 16-245n, and which, directly or indirectly, are secured by, evidence ownership interests in, or are payable from, transition property;

(2) "Competitive transition assessment" means those non-bypassable rates and other charges, that are authorized by the department (A) in a financing order in respect to the economic recovery transfer, or in a financing order, to sustain funding of conservation and load management and renewable energy investment programs by substituting disbursements to the General Fund from proceeds of rate reduction bonds for such disbursements from the Energy Conservation and Load Management Fund established by section 16-245m and from the Renewable Energy Investment Fund established by section 16-245n, or to recover those stranded costs that are eligible to be funded with the proceeds of rate reduction bonds pursuant to section 16-245f, as amended by this act, and the costs of providing, recovering, financing, or refinancing the economic recovery transfer or such substitution of disbursements to the General Fund or such stranded costs through a plan approved by the department in the financing order, including the costs of issuing, servicing, and retiring rate reduction bonds, (B) to recover those stranded costs determined under this section but not eligible to be funded with the proceeds of rate reduction bonds pursuant to section 16-245f, as amended by this act, or (C) to recover costs determined under subdivision (1) of subsection (e) of section 16-244g. If requested by the electric company or electric distribution company, the department shall include in the competitive transition assessment non-bypassable rates and other charges to recover federal and state taxes whose recovery period is modified by the transactions contemplated in this section and sections 16-245f to 16-245k, inclusive, as amended by this act;

(3) "Customer" means any individual, business, firm, corporation, association, tax-exempt organization, joint stock association, trust, partnership, limited liability company, the United States or its agencies, this state, any political subdivision thereof or state agency that purchases electric generation or distribution services as a retail end user in the state from any electric supplier, electric company or electric distribution company;

(4) "Finance authority" means the state, acting through the office of the State Treasurer;

(5) "Net proceeds" means "net proceeds" as defined in section 16-244f;

(6) "Stranded costs" means that portion of generation assets, generation-related regulatory assets or long-term contract costs determined by the department in accordance with the provisions of subsections (e), (f), (g) and (h) of this section;

(7) "Generation assets" means the total construction and other capital asset costs of generation facilities approved for inclusion in rates before July 1, 1997, but does not include any costs relating to the decommissioning of any such facility or any costs which the department found during a proceeding initiated before July 1, 1998, were incurred because of imprudent management;

(8) "Generation-related regulatory assets" means generation-related costs authorized or mandated before July 1, 1998, by the Department of Public Utility Control, approved for inclusion in the rates, and include, but are not limited to, costs incurred for deferred taxes, conservation programs, environmental protection programs, public policy costs and research and development costs, net of any applicable credits payable to customers, but does not include any costs which the department found during a proceeding initiated before July 1, 1998, were incurred because of imprudent management;

(9) "Long-term contract costs" mean the above-market portion of the costs of contractual obligations approved for inclusion in the rates that were entered into before January 1, 2000, arising from independent power producer contracts required by law or purchased power contracts approved by the Federal Energy Regulatory Commission;

(10) "Department" means the Department of Public Utility Control;

(11) "Financing entity" means the finance authority or any special purpose trust or other entity that is authorized by the finance authority to issue rate reduction bonds or acquire transition property pursuant to such terms and conditions as the finance authority may specify, or both;

(12) "Financing order" means an order of the department adopted in accordance with this section and sections 16-245f to 16-245k, inclusive, as amended by this act;

(13) "Transition property" means the property right created pursuant to this section and sections 16-245f to 16-245k, inclusive, as amended by this act, in respect to the economic recovery transfer or in respect of disbursements to the General Fund to sustain funding of conservation and load management and renewable energy investment programs or those stranded costs that are eligible to be funded with the proceeds of rate reduction bonds pursuant to section 16-245f, as amended by this act, including, without limitation, the right, title, and interest of an electric company or electric distribution company or its transferee or the financing entity (A) in and to the rates and charges established pursuant to a financing order, as adjusted from time to time in accordance with subdivision (2) of subsection (b) of section 16-245i, as amended by this act, and the financing order, (B) to be paid the amount that is determined in a financing order to be the amount that the electric company or electric distribution company or its transferee or the financing entity is lawfully entitled to receive pursuant to the provisions of this section and sections 16-245f to 16-245k, inclusive, as amended by this act, and the proceeds thereof, and in and to all revenues, collections, claims, payments, money, or proceeds of or arising from the rates and charges or constituting the competitive transition assessment that is the subject of a financing order including those non-bypassable rates and other charges referred to in subdivision (2) of this subsection, and (C) in and to all rights to obtain adjustments to the rates and charges pursuant to the terms of subdivision (2) of subsection (b) of section 16-245i, as amended by this act, and the financing order. "Transition property" shall constitute a current property right notwithstanding the fact that the value of the property right will depend on consumers using electricity or, in those instances where consumers are customers of a particular electric company or electric distribution company, the electric company or electric distribution company performing certain services;

(14) "State rate reduction bonds" means the rate reduction bonds issued on June 23, 2004, by the state to sustain funding of conservation and load management and renewable energy investment programs by substituting for disbursements to the General Fund from the Energy Conservation and Load Management Fund, established by section 16-245m, and from the Renewable Energy Investment Fund, established by section 16-245n. The state rate reduction bonds for the purposes of section 4-30a shall be deemed to be outstanding indebtedness of the state;

(15) "Operating expenses" means, with respect to state rate reduction bonds or rate replacement bonds, (A) all expenses, costs and liabilities of the state or the trustee incurred in connection with the administration or payment of the state rate reduction bonds or rate replacement bonds, or in discharge of its obligations and duties under the state rate reduction bonds or rate replacement bonds, or bond documents, expenses and other costs and expenses arising in connection with the state rate reduction bonds or rate replacement bonds, or pursuant to the financing order providing for the issuance of such bonds including any arbitrage rebate and penalties payable under the code in connection with such bonds, and (B) all fees and expenses payable or disbursable to the servicers or others under the bond documents;

(16) "Bond documents" means, with respect to state rate reduction bonds or rate replacement bonds, the following documents: The servicing agreements, the tax compliance agreement and certificate, and the continuing disclosure agreement and indenture entered into in connection with the state rate reduction bonds [and the indenture] or the rate replacement bonds;

(17) "Indenture" means the indenture executed in connection with the state rate reduction bonds or the rate replacement bonds, or, with respect to state rate reduction bonds, the RRB Indenture, dated as of June 23, 2004, by and between the state and the trustee, as amended from time to time; [and]

(18) "Trustee" means, with respect to state rate reduction bonds, the trustee appointed under the indenture;

(19) "Economic recovery transfer" means the disbursement to the General Fund of one billion two hundred ninety million dollars from proceeds of the issuance of the rate replacement bonds; and

(20) "Rate replacement bonds" means rate reduction bonds issued to fund the economic recovery transfer, the costs of issuance, credit enhancements and such other costs as the finance authority deems necessary or advisable, and which shall be payable from competitive transition assessment charges replacing the competitive transition assessment charges funding stranded costs.

Sec. 2. Section 16-245f of the general statutes is repealed and the following is substituted in lieu thereof (Effective from passage):

(a) An electric company or electric distribution company shall submit to the department an application for a financing order with respect to any proposal to sustain funding of conservation and load management and renewable energy investment programs by substituting disbursements to the General Fund from proceeds of rate reduction bonds for such disbursements from the Energy Conservation and Load Management Fund established by section 16-245m and from the Renewable Energy Investment Fund established by section 16-245n, and may submit to the department an application for a financing order with respect to the following stranded costs: (1) The cost of mitigation efforts, as calculated pursuant to subsection (c) of section 16-245e; (2) generation-related regulatory assets, as calculated pursuant to subsection (e) of section 16-245e; and (3) those long-term contract costs that have been reduced to a fixed present value through the buyout, buydown, or renegotiation of such contracts, as calculated pursuant to subsection (f) of section 16-245e. No stranded costs shall be funded with the proceeds of rate reduction bonds unless (A) the electric company or electric distribution company proves to the satisfaction of the department that the savings attributable to such funding will be directly passed on to customers through lower rates, and (B) the department determines such funding will not result in giving the electric distribution company or any generation entities or affiliates an unfair competitive advantage. The department shall hold a hearing for each such electric distribution company to determine the amount of disbursements to the General Fund from proceeds of rate reduction bonds that may be substituted for such disbursements from the Energy Conservation and Load Management Fund established by section 16-245m and from the Renewable Energy Investment Fund established by section 16-245n, and thereby constitute transition property and the portion of stranded costs that may be included in such funding and thereby constitute transition property. Any hearing shall be conducted as a contested case in accordance with chapter 54, except that any hearing with respect to a financing order or other order to sustain funding for conservation and load management and renewable energy investment programs by substituting the disbursement to the General Fund from the Energy Conservation and Load Management Fund established by section 16-245m and from the Renewable Energy Investment Fund established by section 16-245n shall not be a contested case, as defined in section 4-166. The department shall not include any rate reduction bonds as debt of an electric distribution company in determining the capital structure of the company in a rate-making proceeding, for calculating the company's return on equity or in any manner that would impact the electric distribution company for rate-making purposes, and shall not approve such rate reduction bonds that include covenants that have provisions prohibiting any change to their appointment of an administrator of the Energy Conservation and Load Management Fund. Nothing in this subsection shall be deemed to affect the terms of subsection (b) of section 16-245m.

(b) Prior to September 1, 2010, each electric distribution company shall submit to the department an application for a financing order with respect to funding the economic recovery transfer through the issuance of rate replacement bonds. The department shall hold a hearing for each such electric distribution company to determine the amount necessary to fund the economic recovery transfer, the payment of rate replacement bonds, costs of issuance, credit enhancements and operating costs for the rate replacement bonds. Such amount as determined by the department shall constitute transition property. The department shall allocate the responsibility for the funding of the economic recovery transfer and the expenses of the rate replacement bonds equitably between the electric distribution companies, after taking into account any remaining charges for stranded costs. Such allocation may provide that the respective charges payable by the customers of each electric distribution company may commence on difference dates and that such rates may vary over the period the rate replacement bonds and the related operating expenses are being paid, provided (1) such charges are equitably allocated to the customers of each electric distribution company, and (2) the department determines that, over such period, and taking into account the timing of charges, the charges on a kilowatt basis assessed to the customers of the respective electric distribution companies have substantially the same present value. Any hearing with respect to a financing order in respect to the economic recovery transfer and the issuance of rate replacement bonds shall not be a contested case, as defined in section 4-166. The department shall issue a financing order in respect to the rate replacement bonds for each electric distribution company on or before October 1, 2010.

(c) In the event that the rate replacement bonds are not issued prior to January 1, 2011, the department, on and after January 1, 2011, shall assess or cause to be assessed a charge of 617 mills per kilowatt hour of electricity sold to each end use customer of an electric distribution company and shall cause such assessments to be deposited in the General Fund.

Sec. 3. Subsections (c) and (d) of section 16-245g of the general statutes are repealed and the following is substituted in lieu thereof (Effective from passage):

(c) The competitive transition assessment shall be determined by the department in a general and equitable manner and, in accordance with the provisions of subsection (b) of section 16-245f, as amended by this act, shall be imposed on all customers at a rate that is applied equally to all customers of the same class in accordance with methods of allocation in effect on July 1, 1998, provided the competitive transition assessment shall not be imposed on customers receiving services under a special contract which is in effect on July 1, 1998, until such special contract expires. The competitive transition assessment shall be imposed beginning on January 1, 2000, on all customers receiving services under a special contract which is entered into or renewed after July 1, 1998. The competitive transition assessment shall have a generally applicable manner of determination that may be measured on the basis of percentages of total costs of retail sales of electric generation services. [The] Subject to the provisions of subsection (b) of section 16-245f, as amended by this act, the competitive transition assessment shall be payable by customers on an equal basis on the same payment terms and shall be eligible or subject to prepayment on an equal basis. Any exemption of the competitive transition assessment by customers under a special contract shall not result in an increase in rates to any customer.

(d) The department shall establish, fix and revise the competitive transition assessment in an amount sufficient at all times to: (1) Pay the principal of and the interest on rate reduction bonds and rate replacement bonds as the same shall become due and payable; (2) to pay all reasonable and necessary expenses relating to the financing; and (3) to pay an electric company stranded costs that are not funded with the proceeds of rate reduction bonds and interim capital costs determined under subdivision (1) of subsection (e) of section 16-244g.

Sec. 4. Subsections (a) and (b) of section 16-245h of the general statutes are repealed and the following is substituted in lieu thereof (Effective from passage):

(a) The competitive transition assessment described in subparagraph (A) of subdivision (2) of subsection (a) of section 16-245e, as amended by this act, shall constitute transition property when, and to the extent that, a financing order authorizing such portion of the competitive transition assessment has become effective in accordance with sections 16-245e to 16-245k, inclusive, as amended by this act, and the transition property shall thereafter continuously exist as property for all purposes with all of the rights and privileges of sections 16-245e to 16-245k, inclusive, as amended by this act, for the period and to the extent provided in the financing order, but in any event until the rate reduction bonds, including the rate replacement bonds, are paid in full, including all principal, interest, premium, costs, and arrearages on such bonds. Prior to its sale or other transfer by the electric company or electric distribution company pursuant to sections 16-245e to 16-245k, inclusive, as amended by this act, transition property, other than transition property in respect of the economic recovery transfer or in respect to disbursements to the General Fund to sustain funding of conservation and load management and renewable energy investment programs, shall be a vested contract right of the electric company or electric distribution company, notwithstanding any contrary treatment thereof for accounting, tax, or other purpose. Transition property in respect of disbursements to the General Fund to sustain funding of conservation and load management and renewable energy investment programs shall immediately upon its creation vest solely in the financing entity. Transition property in respect to the economic recovery transfer shall immediately upon its creation vest solely in the financing entity. The electric company or electric distribution company shall have no right, title or interest in transition property in respect to the economic recovery transfer or in respect of disbursements to the General Fund to sustain funding of conservation and load management and renewable energy investment programs, and in respect of such transition property shall be only a collection agent on behalf of the financing entity.

(b) Any surplus competitive transition assessment described in subparagraph (A) of subdivision (2) of subsection (a) of section 16-245e, as amended by this act, in excess of the amounts necessary to pay principal, premium, if any, interest and expenses of the issuance of the rate reduction bonds issued prior to January 1, 2002, shall be remitted to the financing entity who will apply them to the payment of rate replacement bonds and credit them against the payment obligation in respect to the rate replacement bonds of the customers making such excess payments. If no rate replacement bonds are outstanding, the Treasurer shall transfer such excess charges to the General Fund. Any surplus competitive transition assessment described in subparagraph (A) of subdivision (2) of subsection (a) of section 16-245e, as amended by this act, in excess of the amounts necessary to pay principal, premium, if any, interest and expenses of the issuance of the rate reduction bonds issued on or after January 1, 2002, shall be remitted to the financing entity and may be used to benefit customers if this would not result in a recharacterization of the tax, accounting, and other intended characteristics of the financing, including, but not limited to, the following:

(1) Avoiding the recognition of debt on the electric company's or the electric distribution company's balance sheet for financial accounting and regulatory purposes;

(2) Treating the rate reduction bonds as debt of the electric company or electric distribution company or its affiliates for federal income tax purposes;

(3) Treating the transfer of the transition property by the electric company or electric distribution company as a true sale for bankruptcy purposes; or

(4) Avoiding any adverse impact of the financing on the credit rating of the rate reduction bonds or the electric company or electric distribution company.

Sec. 5. Subsections (a) and (b) of section 16-245i of the general statutes are repealed and the following is substituted in lieu thereof (Effective from passage):

(a) The department may issue financing orders in accordance with sections 16-245e to 16-245k, inclusive, as amended by this act, to fund the economic recovery transfer, to sustain funding of conservation and load management and renewable energy investment programs by substituting disbursements to the General Fund from proceeds of rate reduction bonds for such disbursements from the Energy Conservation and Load Management Fund established by section 16-245m and from the Renewable Energy Investment Fund established by section 16-245n, and to facilitate the provision, recovery, financing, or refinancing of stranded costs. [A] Except for a financing order in respect to the rate replacement bonds, a financing order may be adopted only upon the application of an electric company or electric distribution company, pursuant to section 16-245f, as amended by this act, and shall become effective in accordance with its terms only after the electric company or electric distribution company files with the department the electric company's or the electric distribution company's written consent to all terms and conditions of the financing order. Any financing order in respect to the rate replacement bonds shall be effective on issuance.

(b) (1) Notwithstanding any general or special law, rule, or regulation to the contrary, except as otherwise provided in this subsection with respect to transition property that has been made the basis for the issuance of rate reduction bonds or rate replacement bonds, the financing orders and the competitive transition assessment shall be irrevocable and the department shall not have authority either by rescinding, altering, or amending the financing order or otherwise, to revalue or revise for rate-making purposes the stranded costs, or the costs of providing, recovering, financing, or refinancing the stranded costs, the amount of the economic recovery transfer or the amount of disbursements to the General Fund from proceeds of rate reduction bonds substituted for such disbursements from the Energy Conservation and Load Management Fund established by section 16-245m and from the Renewable Energy Investment Fund established by section 16-245n, determine that the competitive transition assessment is unjust or unreasonable, or in any way reduce or impair the value of transition property either directly or indirectly by taking the competitive transition assessment into account when setting other rates for the electric company or electric distribution company; nor shall the amount of revenues arising with respect thereto be subject to reduction, impairment, postponement, or termination.

(2) Notwithstanding any other provision of this section, the department shall approve the adjustments to the competitive transition assessment as may be necessary to ensure timely recovery of all stranded costs that are the subject of the pertinent financing order, and the costs of capital associated with the provision, recovery, financing, or refinancing thereof, including the costs of issuing, servicing, and retiring the rate reduction bonds issued to recover stranded costs contemplated by the financing order and to ensure timely recovery of the costs of issuing, servicing, and retiring the rate reduction bonds issued to sustain funding of conservation and load management and renewable energy investment programs contemplated by the financing order.

(3) Notwithstanding any general or special law, rule, or regulation to the contrary, any requirement under sections 16-245e to 16-245k, inclusive, as amended by this act, or a financing order that the department take action with respect to the subject matter of a financing order shall be binding upon the department, as it may be constituted from time to time, and any successor agency exercising functions similar to the department and the department shall have no authority to rescind, alter, or amend that requirement in a financing order. Section 16-43 shall not apply to any sale, assignment, or other transfer of or grant of a security interest in any transition property or the issuance of rate reduction bonds under sections 16-245e to 16-245k, inclusive, as amended by this act.

Sec. 6. Subsection (a) of section 16-245j of the general statutes is repealed and the following is substituted in lieu thereof (Effective from passage):

(a) A financing entity may issue rate reduction bonds upon approval by the department in the pertinent financing order. Rate reduction bonds shall be nonrecourse to the credit or any assets of the electric company, [or] electric distribution company or the finance authority, other than the transition property as specified in the pertinent financing order.

Sec. 7. Subdivision (6) of subsection (c) of section 16-245j of the general statutes is repealed and the following is substituted in lieu thereof (Effective from passage):

(6) Rate reduction bonds, other than rate replacement bonds, shall mature at such time or times approved by the department in the financing order; provided that such maturity shall not be later than December 31, 2011. Rate replacement bonds shall mature at such time or times approved by the department in the financing order, provided such maturity shall not be later than December 31, 2025.

Sec. 8. Subsection (e) of section 16-245j of the general statutes is repealed and the following is substituted in lieu thereof (Effective from passage):

(e) [When the state is the authorized financing entity] In conjunction with the issuance of rate replacement bonds or state rate reduction bonds: (1) The Treasurer may enter into a trust indenture for the benefit of holders of the rate reduction bonds with a corporate trustee, which may be any trust company or commercial bank qualified to do business within or without the state; such trust indenture shall be consistent with the financing order and may contain such other provisions as may be appropriate including those regulating the investment of funds and the remedies of bondholders; (2) the Treasurer may make representations and agreements for the benefit of the holders of rate reduction bonds to make secondary market disclosures; (3) the Treasurer may enter into interest rate swap agreements and other agreements for the purpose of moderating interest rate risk on rate reduction bonds as permitted elsewhere within sections 16-245e to 16-245k, inclusive, as amended by this act, provided the obligations under such agreements are payable from the transition property; (4) the Treasurer may enter into such other agreements and instruments to secure the rate reduction bonds as provided in sections 16-245f to 16-245k, inclusive, as amended by this act; and (5) the Treasurer may take such other actions as necessary or appropriate for the issuance and distribution of the rate reduction bonds pursuant to the financing order and the Treasurer and the Secretary of the Office of Policy and Management may make representations and agreements for the benefit of the holders of the rate reduction bonds which are necessary or appropriate to ensure exclusion of the interest payable on the rate reduction bonds from gross income under the Internal Revenue Code of 1986, or any subsequent corresponding internal revenue code of the United States, as from time to time amended.

Sec. 9. Subsection (l) of section 16-245k of the general statutes is repealed and the following is substituted in lieu thereof (Effective from passage):

(l) The authority of the department to issue financing orders pursuant to sections 16-245e to 16-245k, inclusive, as amended by this act, shall expire on December 31, 2008, with respect to bonds other than rate replacement bonds. The authority of the department to issue financing orders pursuant to sections 16-245e to 16-245k, inclusive, as amended by this act, with respect to rate replacement bonds shall expire on December 31, 2012. The expiration of the authority shall have no effect upon financing orders adopted by the department pursuant to sections 16-245e to 16-245k, inclusive, as amended by this act, or any transition property arising therefrom, or upon the charges authorized to be levied thereunder, or the rights, interests, and obligations of the electric company or electric distribution company or a financing entity or holders of rate reduction bonds pursuant to the financing order, or the authority of the department to monitor, supervise, or take further action with respect to the financing order in accordance with the terms of sections 16-245e to 16-245k, inclusive, as amended by this act, and of the financing order.

The following Fiscal Impact Statement and Bill Analysis are prepared for the benefit of the members of the General Assembly, solely for purposes of information, summarization and explanation and do not represent the intent of the General Assembly or either chamber thereof for any purpose. In general, fiscal impacts are based upon a variety of informational sources, including the analyst's professional knowledge. Whenever applicable, agency data is consulted as part of the analysis, however final products do not necessarily reflect an assessment from any specific department.

OFA Fiscal Note

State Impact:

Note: GF=General Fund; TF=Transportation Fund

Municipal Impact:

Explanation

Securitizing the revenue stream from two charges currently imposed on electric company bills will result in a $1.3 billion revenue gain to the General Fund in FY 11.

Between FY 12 and FY 21, the bill will also result in: (1) a General Fund revenue gain to the Public Service Companies Gross Earnings Tax of between $11.5 million and $13.9 million per year beginning in FY 12 and (2) a cost to all rate payers, including the state and all municipalities.

Source of Funding

Table 1 shows the total annual revenue currently generated by two charges currently imposed on electrical company bills. Assuming that $1.443 billion¹ in 2010 Rate Reduction Bonds (2010 RRBs) are to be issued over a ten year term at a 4% interest rate, an average of about $180 million would be needed for annual debt service payments, which represents about 56% of the total annual amount of revenue generated by the charges.

Annual Debt Service Payments

Table 2 shows the estimated amount of annual debt service (principal and interest) that would be due on the bonds assuming a 4% interest rate and a 10 year term of issuance. The figures are lower in FY 12 and 13 because the UI CTA Charge will not end until the end of FY 13.

The figures in Column F show the net amount of annual debt service due on the bonds after the annual release of interest on the 10% reserve account. The FY 21 figure reflects the release of the reserve account to pay debt service.

General Fund Revenue Gain

Table 3 shows the estimated revenue gain to the General Fund from the Public Service Companies Gross Earnings Tax, assuming an average tax rate of 7.6%⁵.

State and Municipal Cost

All rate payers currently pay approximately $0.010 per kilowatt hour through the CL&P or UI stranded cost charge on their electric bill. This legislation continues a portion of this charge between FY 12 and FY 21 so there will be a cost to all rate payers, including the state and municipalities.

The Out Years

The estimated General Fund revenue gain is presented in the table above. The cost to the state and municipalities will continue for the life of the bonds (FY 12 to FY 21).

OLR Bill Analysis

sSB 484

AN ACT CONCERNING SECURITIZATION.

SUMMARY:

This bill authorizes the state to issue bonds backed by a charge currently imposed on electric company bills (the competitive transition assessment) to provide a $1.29 billion transfer to the General Fund. Under current law and at current rates of electricity consumption, customers of Connecticut Light and Power will stop paying this charge at the end of 2010 and customers of United Illuminating will stop paying it in 2013. The bill instead extends the charge through the term of the bonds. The bonds must mature at the time or times approved by the Department of Public Utility Control (DPUC) in a financing order it must issue under the bill. The maturity date can be no later than December 31, 2025.

The bill requires each electric company to submit an application for a financing order to DPUC, which must issue an order for each company by October 1, 2010.

Under the bill, the bond proceeds must be used to provide revenue for the General Fund as well as cover the costs of bond issuance, credit enhancements, and other costs as the treasurer considers necessary or advisable.

The law already authorized the issuance of securitization bonds in connection with the electric companies' stranded costs arising out of the legislation that partially deregulated the electric industry. Under current law, the existing securitization bonds are not backed by any electric company assets other than those specified in the financing order. The bill extends this provision to the assets of the financing authority (the treasurer), apparently with regard to both the existing bonds and those issued under the bill.

The bill also makes conforming and technical changes.

EFFECTIVE DATE: Upon passage

CURRENT LAW ON ELECTRIC COMPANY SECURITIZATION

Under current law, electric company customers pay the competitive transition assessment (CTA) to cover “stranded” costs. These are costs the companies incurred, with DPUC approval, whose continued recovery was jeopardized by the law that allowed customers to choose their electric supplier. The CTA is charged to customers, whether they buy power from the company or a competitive supplier. Under current law, the CTA will end when the stranded costs are paid off, which is the end of 2010 for Connecticut Light and Power and in 2013 for United Illuminating.

The law allowed the use of securitization for certain stranded costs. Securitization is process under which the state sells bonds backed by a fixture revenue stream in exchange for an immediate lump sum cash payment. Under current law, the right to the CTA used to cover the costs eligible for securitization is called “transition property,” which belongs to the electric company. The company or its affiliate can sell this interest to a “financing entity” (the state acting through the treasurer's office or any special purpose trust or other entity the treasurer authorizes), to be used to back the securitization bonds.

The law allowed DPUC to issue a financing order authorizing the issuance of securitization bonds to facilitate the recovery and financing of stranded costs. DPUC cannot (1) revise the order, (2) revalue the stranded costs for ratemaking purposes, (3) determine that the CTA is unjust or unreasonable, or (4) do anything to reduce the value of the transition property.

The state treasurer or an entity she designates was allowed to issue securitization bonds after DPUC approved the financing order. The bond proceeds must be used for DPUC-approved purposes as specified in the financing order. The bonds and the financing order are not state debt, and the bonds must say this on their face. They do not count towards the state's debt limit. Neither the state nor its municipalities bear any contingent liability for them. The state pledges that it will not alter the CTA, transition property, and financing orders until the bonds are paid off. The parties involved in the securitization process are exempt from taxes on the relevant property or revenue. The bonds are treated for state income tax purposes as though a public body had issued them.

SECURITIZATION OF FUTURE CTA REVENUE

The bill largely extends the above provisions to the new bonds it authorizes to raise revenue for transfer to the General Fund. Specifically, it allows the CTA to be used both to repay the bonds and for related finance costs. It makes conforming changes to the definitions of transition property, bond documents, and indentures, among other things. It extends to the new bonds the treasurer's ability under current law to enter into trust indentures and interest rate swaps and take other steps regarding the bonds.

Electric Company Plans and Transition Property

Current law allows the electric companies to apply to DPUC for a financing order regarding their stranded costs. The bill requires each company, by September 1, 2010, to submit a plan to DPUC for a financing order for funding the transfer to the General Fund through the issuance of the new bonds.

DPUC must hold a hearing for each company to determine the amount needed to fund the transfer and pay for the new bonds, the costs of bond issuance, credit enhancements, and operating costs for the bonds. The latter includes (1) all expenses, costs, and liabilities of the state or the trustee incurred in connection with (a) administering or paying off the bonds, (b) discharging its obligations and duties under the bonds or bond documents, (c) financing order expenses and other costs for issuing the bonds including any arbitrage rebate and penalties payable in connection with them, and (2) all fees and expenses payable or disbursable to the servicers or others under the bond documents. The total of all of these costs as determined by DPUC constitutes transition property.

Under current law, the transition property associated with the electric companies' stranded costs belongs to the companies until they sell or transfer it. The bill specifies that the electric companies have no right, title, or interest in the transition property associated with the transfer to the General Fund. Instead, they merely serve as a collection agent for the financing entity. It specifies that transition property with respect to the transfer vests solely in the financing entity immediately upon the creation of the property.

Under current law, the transition property associated with the existing bonds remains in existence until they are paid off. The bill instead provides that the transition property associated with the existing and new bonds remains in existence until the new bonds are paid off.

Allocation of Costs

Under the bill, DPUC must allocate the responsibility for funding the transfer and paying the expenses of the bonds equitably between the electric companies, after taking into account any remaining charges for stranded costs. The allocation may provide that each company's customers may start paying the charges on different dates and the charges may vary while the bonds and the related operating expenses are being paid. However, the charges must be equitably allocated to the customers of each company. DPUC must determine that, over the bond repayment period and taking into account the timing of charges, the charges on a kilowatt basis assessed to each company's customers has substantially the same present value. The CTA is currently charged on the basis of kilowatt-hours of consumption. It appears that the bill requires that the way the CTA is charged to customers be modified. Any hearing with respect to a financing order regarding the transfer and the issuance of the new bonds is not a contested case.

DPUC must issue a financing order for each company by October 1, 2010. The financing order becomes effective on issuance. The bill ends DPUC's authority to issue financing orders with respect to the new bonds as of December 31, 2012.

Assessment If Bonds Are Not Issued

Under the bill, if the new bonds are not issued before January 1, 2011, DPUC must assess an unspecified charge per kilowatt hour of electricity sold starting on that date to each end use customer of the electric companies, with the money going to the General Fund.

Setting and Adjusting the CTA

Under current law, DPUC must set the CTA at a level sufficient at all times to pay (1) the principal of and the interest on the existing bonds as they become due and payable, (2) all reasonable and necessary expenses relating to the financing, and (3) electric company stranded costs that are not funded with the bond proceeds and certain interim capital costs. The bill additionally requires DPUC to set the CTA at a level sufficient to cover the principal and interest on the new bonds and their financing expenses.

Under current law, DPUC must adjust the CTA as needed to ensure timely recovery of the stranded costs covered by the existing bonds and certain associated costs such as bond servicing. The bill does not have a parallel requirement with regard to the new bonds it authorizes.

Allocation of Excess CTA Revenue

Under current law, any CTA revenue beyond that needed to pay the principal, premium, interest, and issuance expenses of the existing bonds must be remitted to the financing entity. The financing entity may use these revenues to benefit electric company customers if it would not change the tax, accounting, and other intended characteristics of the financing order. The bill instead requires that any excess revenues associated with bonds issued before January 1, 2002 be remitted to the financing entity. It must apply these revenues to pay for the new bonds and credit them against the customers' payment obligation for these bonds.

The bill requires that any CTA revenue beyond that needed to pay principal, premium, interest, and issuance expenses of bonds issued on or after January 1, 2002 be remitted to the financing entity which must use it in the same way as provided under current law. If no bonds are outstanding, the excess revenue must be transferred to the General Fund.

BACKGROUND

Related Law

The 2009 budget act (PA 09-3, June Special Session) required the state treasurer and the Office of Policy and Management secretary to jointly develop a financing plan to yield up to $1.3 billion in net proceeds for the General Fund for FY 11 (reduced to $1.2907 billion by PA 09-7, September Special Session). Under the budget act, the financing plan can include (1) securitizing revenue from the state lottery; (2) issuing bonds and other debt instruments or placing them privately; or (3) Connecticut's public pension and trust funds, such as the state, municipal employees', and teachers' retirement funds, purchasing state debt instruments. It required that the treasurer and secretary submit the plan to the chairpersons of the Appropriations and Finance, Revenue and Bonding committees by February 3, 2010. Securitizing the CTA revenue was an option included in the plan.

COMMITTEE ACTION

Finance, Revenue and Bonding Committee

Joint Favorable Substitute

¹ The $1.442 billion is composed of $1.3 billion in principal, a 10% reserve account of $144.2 million and issuance costs.

² This portion of the charge will end when the CL&P RRBs paid off and UI CTA expires.

³ Connecticut Light and Power (CL&P) issued Rate Reduction Bonds (RRBs) in 2001 to recover stranded costs associated with electric deregulation. The current charge on CL&P bills generates about $234 million per year and is scheduled to sunset in December 2010.

⁴ United Illuminating (UI) used a Competitive Transaction Assessment (CTA), rather than issuing bonds as CP&L did, to amortize and recover its stranded costs. The current charge generates about $85 million per year and is due to expire in 2013.

⁵ The Public Service Companies Gross Earnings Tax is imposed at the rate of 6.8% on residential customers and 8.5% on non-residential customers. The figures presented in the table assume that an average tax rate of 7.6%.