STATE OF VERMONT
PUBLIC SERVICE BOARD
Docket No. 6140-A
Investigation into the Reform of Vermont’s
Electric Power Supply
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STATEMENT OF HYPOTHETICAL FINANCING TRANSACTIONS
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I. INTRODUCTION
At the Prehearing conference held February 2, 1999 in this proceeding, the Public Service
Board (“the Board” or “PSB”) directed Central Vermont Public Service Corporation (“CVPS”)
and Green Mountain Power Corporation (“GMP”)(together the “Companies”) to file a brief
statement describing a hypothetical financing transaction or transactions based upon the strategies
being contemplated by the Companies to reform their power supply portfolios. This filing sets
forth a hypothetical financing transaction and an alternative in accordance with the Board’s
direction. The Companies are prepared to describe these hypothetical transactions as necessary at
the technical workshop to be convened in this proceeding on March 12, 1999 in accordance with
the Prehearing Conference Report and Order dated February 17, 1999.
II. OVERVIEW
In order to mitigate their power supply portfolios for the benefit of their customers, the
Companies propose to buy-down or buy-out their power supply contract with Hydro-Quebec and
their portion of the above-market contracts entered into by and between the Board’s purchasing
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agent and the independent power producers (“IPPs”) pursuant to PSB Rule 4.100. This effort
will necessarily involve the issuance of debt in order to raise the capital necessary to fund the upfront payments for the transactions contemplated. The Companies anticipate that the revisions to
the power supply agreements will be contingent upon approval of all elements of their
restructuring proposals which will include: (i) the issuance of debt to be utilized in this effort; (ii)
the new customers rates to be implemented as a result of the buy-downs or buy-outs; (iii) the
amended power supply arrangements; and (iv) the other terms and conditions of the Companies’
restructuring plans.
In this filing, the Companies set forth a refinancing hypothetical that is predicated on the
type of financing that they intend to utilize to reform their power supplies and restructure their
electric utility businesses. This hypothetical is modeled on the financing methods developed and
used by Niagara Mohawk Power Corporation (“NIMO”). In addition, we include in this filing a
hypothetical that describes a “securitization” financing. While the Companies do not propose at
this time to utilize this financing mechanism, our restructuring plans leave open this option. If the
Vermont legislature or the Board wishes to achieve cost reductions in addition to those produced
using the Companies’ financing methods, the legislature or the Board might authorize
“securitization” of certain costs in a way that would further reduce the borrowing cost. As such,
in accordance with the Board’s Prehearing Conference Report and Order, we include a
securitization hypothetical.
III. UTILITY RESTRUCTURING SECURITIES
A. New Restructuring Debt. In order to finance the buy-down or buy-out of their power
supply portfolios using utility credit, the Companies would petition the Board for approval,
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pursuant to 30 Vermont Statutes Annotated (“V.S.A.”) § 108, to issue new restructuring debt
(the “Restructuring Debt”).
The Restructuring Debt would be unsecured utility bonds and other similar evidences of
indebtedness. This new Restructuring Debt would be issued directly by each of the Companies.
As described in the Company’s Working Plan to restructure their electric utility businesses as filed
in Docket No. 6140 on even date herewith, the use of securitization is not the cornerstone of the
Companies refinancing strategy.1
B. The Durable Rate Path. The Board will be asked to consent to the issuance of the new
Restructuring Debt at the same time that it approves new customer rates reflecting the power contract
buy-outs, buy-downs and other restructuring impacts (“the Durable Rate Path”) because one depends
upon the other. To approve the Durable Rate Path, the Companies would file petitions to open a
proceeding or proceedings under 30 V.S.A. § 218.
The basic elements of the Durable Rate Path would include, at least, the following:
1. The renegotiated power supply agreements must be found to be prudent, used and useful,
and recoverable in rates to the extent provided in the Durable Rate Path.
2. The Companies must recover the amount of the remaining costs associated with their
implementation of their restructuring plans, including their implementation and transition costs, as well
as all costs of the contracts to be executed as part of these efforts.
3. The creation of a regulatory asset and associated amortization schedule (tied to the term of
the new Restructuring Debt) that would equal the principal amount of the new Restructuring Debt.
4. Certain events that can be identified as having an impact on the Durable Rate Path will
permit adjustments to the Durable Rate Path, if they occur.
1. The Working Plan recognizes that there may be lower cost ways to finance a portion of the contract buy-downs and buyouts necessary to reform Vermont’s committed power supply portfolio, particularly in the context of IPP power where both the
Vermont Public Power Supply Authority (“VPPSA”) and the Board’s Purchasing Agent, the Vermont Electric Power
Producers, Inc. (“VEPPI”), may serve as the financing agent. The Working Plan leaves open the opportunity to utilize these
alternative financing mechanisms but recognizes that the Companies may have to finance their customer’s share of these
contract buy-downs and/or buy-outs in order to facilitate the goals and objectives of the Plan in the most expeditious manner.
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5. The Board would be asked to make clear that after implementation of their restructuring
plans, the Board will regulate the emerging distribution companies in a way that will allow the
Companies to continue to be operated consistent with the principals of SFAS No. 71.
The Companies maintain that this refinancing approach can be accomplished utilizing the existing
Vermont and federal legislative regime that governs the regulation of electric utilities and that no new
legislation is required.
IV. ALTERNATIVE FINANCING “SECURITIZATION”
As an alternative to the Companies refinancing plan, this section describes a “securitization”
financing method where the utilities are not the obligor on the refinancing securities. While not a part
of the Company’s primary financing approach, this hypothetical is provided in accordance with the
Board’s Prehearing Conference Report and Order. However, if this financing method were available
for use in the refinancing of utility reform and restructuring proposals, it would likely reduce borrowing
costs for customers.
In its most simple form, a securitization financing involves the issuance of debt instruments by
a special purpose entity or trust created for this purpose, that is backed by a “true sale” or assignment
of the right to a defined portion of future customer cash flows. If this form of financing is authorized,
the cost of the debt would be lower since the debt service would be via a direct assignment of a portion
of revenues flows from the utility’s customers (and not based on the creditworthiness of the utility).
This could result in the issuance of AAA rated debt with a savings of as much as 150 basis points over
the debt cost that would likely be otherwise available to the Companies. The proceeds of the financing
would be used to buy-down and buy-out power supply arrangements just as described above.
To implement a securitization financing, a utility would apply to the Board for appropriate
orders to establish the following:
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1.
The creation of a trust or similar special purpose entity (the “SPE”).
2.
The “true sale” or assignment to the SPE by the utility of its right to a defined portion of future
customer revenues in an amount sufficient to service the SPE’s principal, interest and other
costs and expenses arising in connection with the SPE’s debt securities (the “Rate Reduction
Bonds”). This assignment of revenue flow, designed to service the SPE’s debt securities
would be non-bypassable and irrevocable (the “Rate Reduction Bond Charge”).
3.
The issuance of the Rate Reduction Bonds by the SPE would be secured by the property right
(e.g. the order authorizing the charge, billing and collection of revenues) assigned to it by the
utility. Such order would also approve the proposed application by the utility of the proceeds
of the sale of the Rate Reduction Bonds to implement power supply buy-outs and buy-downs.
4.
A declaration by the Board that the Order or Orders approving the foregoing (and, in particular,
the right to charge, bill and collect the defined portion of future customer revenues, and the
assignment of such right to the SPE) are intended to be irrevocable until the SPE’s Rate
Reduction Bonds are paid in full.
Attached as Exhibit 1 is a Securitization Flowchart that describes the relationship between the utility
and the SPE and depicts the flow of Rate Reduction Bond Proceeds and Charges discussed above.
Under the securitization approach, the Board Orders would provide explicit acknowledgment
to investors that their investments are low risk and secure. In reliance on these representations the
purchasers of the SPE’s Rate Reduction Bonds would reasonably be expected to require lower interest
rates than otherwise would be the case. Given the magnitude of the debt, these lower rates could yield
significant savings to Vermont consumers.
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V. CONCLUSION
In summary, to achieve a buy-down or buy-out of existing power supply contracts in a manner
that reduces costs for the Companies’ customers, CVPS and GMP must issue securities in the financial
markets and the financial markets must have confidence that the Companies are secure in having a rate
path that will be able to service those securities.
DATED at MONTPELIER, VERMONT this 3rd day of March, 1999.
Respectfully Submitted,
CENTRAL VERMONT PUBLIC
SERVICE CORPORATION
By:___________________________
Morris L. Silver, Esq.
77 Grove Street
Rutland, Vermont 05701
GREEN MOUNTAIN POWER
CORPORATION
By:___________________________
Michael Lipson, Esq.
25 Green Mountain Drive
Post Office Box 850
South Burlington, Vermont 05402
cc: Parties of Record
EXHIBIT 1
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