U.S. customers in several states will be repaying for years – and in some cases for decades – the extraordinary costs their energy provides have incurred for repairs and gas and electricity delivery during storms.
After extreme weather events, such as the Winter Storm Uri in February 2021, utilities recover part of the extra costs by issuing low-interest debt which is being repaid by customers through a line item fee reflected in their bills. This way of recovering costs is cheaper for utilities than the usual financing mechanism, while spreading the charge to customers over years, or even decades, spares consumers from one large hike in their energy bill.
The aerage customer bill in states such as Louisiana, Kansas, Oklahoma, Texas, Florida, or New Hampshire has additional line items coming from the so-called cost recovery charge. That fee accounts for between 1% and 13% of current average customer bills, according to the low-interest rate bonds rated by Moody’s, The Wall Street Journal reports.
Utility Cost Recovery Charge (UCRC) Securitization On The Rise
The practice of charging customers with a fee spread over several years began with utility deregulation in many states in the 1990s. Since then, utilities have been allowed to issue bonds, the so-called utility cost recovery charge (UCRC) securitization. This debt the companies take on is being backed by special charges imposed by utilities on their customers. The charge is spread through fees in multiple monthly bills, instead of utilities passing it on to customers in one large spike in one bill.
The fees are certainly not the biggest item on a bill, but they will be felt by customers more, considering the squeeze that the high inflation has on consumers’ purchasing power. Customers will also be on the hook for much larger debt the utilities have taken over the past year, especially after the Winter Storm Uri which crippled grids and energy systems from Texas to the Midwest in February 2021.
Over the past year, U.S. utilities have issued some $12.4 billion of low-interest debt to recover storm-related costs, per data from advisory firm Saber Partners cited by the Journal. That’s much more than the $7 billion in cost-recovery bonds that states and utilities issued between 2007 and 2021.
Winter Storm Uri Drives Surge In Cost Recovery Bond Issues
According to data compiled by Bloomberg, a record $17 billion in recovery bonds had been sold in 2022 as of September, with estimates that the 2022 total could exceed $20 billion. Winter Storm Uri was the main driver of record cost-recovery bond issuance as utilities seek to recoup their losses.
More frequent and more severe storms in recent years have led to a boom in the issuance of such bonds, and customers will be repaying that debt for years or decades.
The charges to customers as a share of an average residential bill range from 2.5% for Duke Energy Florida to as high as 12.6% for customers of Long Island Power Authority, according to data from Moody’s Investors Service compiled by the Journal.
In rating a Texas state finance corporation, which was created with the sole purpose of issuing customer rate relief bonds (CRRBs), Moody’s said in October that the issuer estimates the securitization, related to Winter Storm Uri, to represent less than 6.7% of the total average natural gas bill, based on May 2022 average bills. The estimated initial charge is higher than the 5% average across the electric securitizations Moody’s rates.
In Texas, the Railroad Commission of Texas approved in February a financing order which authorized Atmos Energy, CenterPoint, Texas Gas Service, and five smaller Texas gas utilities to issue customer rate-relief bonds, to spread out charges for customers over an extended period of time.
“The financing order allows natural gas utilities to spread the high cost of gas incurred during last year’s winter storm across multiple monthly bills rather than having customers face a large spike in one bill. This order is not a windfall for natural gas utilities and is for the benefit of Texas consumers,” the Commission said earlier this year.
In August, the Kansas Corporation Commission authorized Kansas Gas Service (KGS) to issue securitized bonds to recover $328 million in deferred costs and associated carrying costs resulting from the 2021 winter storm. According to the Kansas regulator, it’s estimated that the monthly charge, to be labeled “Winter Event Securitized Cost” on customer bills, will range from $4.87 to $6.42 over seven to ten years.
“Without securitized bonds, ratepayers would see charges of $9.04 per month over five years or $13.90 per month over three years using traditional ratemaking,” the Commission said.
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In Oklahoma, Bob Anthony, Oklahoma Corporation Commissioner, said in an August 2022 dissenting opinion that the interest expenses of the cost-recovery bond for the 2021 winter storms of Oklahoma Natural Gas had jumped to $898 million, exceeding expectations by $483 million, according to The Journal Record.
“The ‘low’ 2.35% bond interest rate misleadingly advertised by the two commissioners who approved the bond financing order for ONG (Oklahoma Natural Gas) actually came in at more than twice their expectations – specifically, 4.714% near the end of the bonds’ absurdly-long 25-year term,” Anthony wrote in his dissenting opinion.
By Tsvetana Paraskova for Oilprice.com
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