On February 2, 2021, ILSR’s John Farrell testified in favor of a securitization bill advancing in the Minnesota House. Farrell’s testimony at the informational hearing largely supported the bill (with a few tweaks) that is undergoing review by the House Climate and Energy Finance and Policy committee.
Securitization essentially allows utilities to refinance their debt owed on aging power plants. It is a tool that saves money in the retirement and decommission of old fossil fuel power plants, since customer-backed loans offer lower interest rates. Securitization eliminates the need for rate hikes to cover the cost of stranded assets — saving customers money as well.
Critics of securitization worry it may socialize the risks of ill-informed investment. Utilities have known the gravity of climate change, watched as the cost of alternative energy sources dropped, and yet still invested in fossil fuels. A white paper by Clean Energy Action explores how many tools, including securitization, can be properly implemented to “retire coal plants and fossil fuel assets early and more equitably.”
Hear John Farrell and Clean Energy Action’s Leslie Glustrom discuss how we can equitably transition to a clean energy future in episode 117 of Building Local Power.
Colorado, Montana, and New Mexico have already passed legislation allowing securitization. New Mexico’s bill, the Energy Transition Act, handed too much power to the utility and did not secure the best deal deal for customers. Colorado’s securitization policy, on the other hand, arrived at a compromise between the utility and regulators. The bill also set aside some savings to transition the coal and gas-dependent economies surrounding retired plants. These considerations are crucial as more and more coal plants are retiring due to cost and “90 percent of proposed combined-cycle gas plants, if built, will face stranded investment risk by 2035.”
Minnesota is the latest state to consider securitization policy. Considering Xcel Energy and Minnesota Power’s coal plant closures and carbon-free commitments, an examination of securitization is well-timed.
Read Farrell’s testimony to the Minnesota House Climate and Energy Finance and Policy committee below.
Thanks for this opportunity to testify about a very promising policy to make electricity cleaner and more affordable.
My name is John Farrell, and I direct the Energy Democracy Initiative at the Institute for Local Self-Reliance, where we provide energy policy analysis and technical assistance for state and local governments across the country. In May 2019, I wrote a summary of securitization policy (provided as a handout) that provides a simplified overview. Much like refinancing a home mortgage, securitization can reduce the financing costs of a power plant even as it is used to retire highly polluting and higher cost power sources.
This legislation does an excellent job of outlining the structure of securitization for use in Minnesota, including detailed steps for the utility and Commission and directing a portion of the savings to help with workforce transition. ILSR sees no issue with the basic structure of the proposal for securitization, but we do have three suggestions for improvement (some that have come up in earlier discussion).
- The first suggestion is to use the worker transition fund or a separate portion of the refinancing savings to support the tax base of affected communities. In discussions over retirement of Xcel Energy’s Sherco coal plant, it’s been clear that the implications for Becker, its school district, and the county’s tax base are severe. While the legislature acted to help Becker by overriding parts of the typical regulatory review, this type of action is not feasible nor prudent management of the electricity system. As well, It may perversely increase costs and environmental harm for electric customers as well as costing more than a straightforward package of tax base transition funding. A Minnesota securitization model should address tax base implications of plant closures aided by refinancing, whether in Becker, Cohasset, or Prairie Island.
- The second suggestion is to modify Subd. 2 to make it clear that the Commission has the authority to approve less than the submitted amount for securitization, requiring utility shareholders to write off some of the expense. Most American businesses are in the position of having to write off poor decisions from time to time, having misjudged the market. Utilities should not get a free pass. The second ILSR handout, a report from electric market expert Leslie Glustrom, explains the importance of regulatory review (and the ability to limit cost recovery) to protect captive utility customers from refinancing the poor decisions of utility management.
- Finally, at the end of Subd.1, the policy should leave room for non-utility assets to provide replacement power, including customer-sited and customed-owned solar, storage, and aggregated demand response. Similarly, the transition funds in Subd 3, should allow the utility to provide incentives to encourage such customer-owned systems, if they are the more cost-effective.
With these amendments, this securitization policy can ensure a smoother economic transition for host communities of refinanced power plants, properly align risks and rewards for shareholders and customers, and ensure that the replacement power comes from the most cost-effective sources.
Thank you again for the opportunity to testify and for this policy discussion.
This article originally posted at ilsr.org. For timely updates, follow John Farrell on Twitter, our energy work on Facebook, or sign up to get the Energy Democracy weekly update.
Featured photo credit: MPCA Photos via Flickr (CC BY-NC 2.0)
