Securitization: in Depth: State Legislation and Legislative Process

Introduction

Overview

Often as part of a comprehensive electric industry restructuring framework, state enabling statutes authorize the imposition on electric customers of a charge to permit the recovery over time of certain "stranded" costs incurred by the electric company.

The charge, being "irrevocable" and "non-bypassable" (as discussed below), has all the traditional elements that permit securitization--it has a high likelihood of being collected and it is payable by a broad base of diverse obligors/customers.

In addition to authorizing the imposition of the charge, the statutes contain provisions with respect to the periodic adjustment of the charge, the "sale" of the charge and related rights to a financing entity, the issuance of the related securities, and a wide range of necessary and helpful related matters.

While there has been discussion in the industry and in some jurisdictions of securitizing a stranded cost charge without the benefit of enabling legislation, the host of issues related to these transactions and the complexity of the analysis even with helpful legislation seem to make this difficult at best, and in most jurisdictions impossible.

The Process

With its early adoption of enabling legislation (AB1890 (Cal. 1996 Reg. Sess.)), its subsequent fine tuning with a so-called "clean-up" bill (SB477 (Cal. 1997-98 Reg. Sess.)), and the completion at the end of 1997 of three transactions (PG&E, SDG&E, and SoCal Edison), California is certain to be viewed as the model to be followed as other states adopt legislation and other utilities move toward the issuance of rate reduction bonds.

Inevitably, other legislative initiatives and rate reduction bond transactions will be measured against the "successful" transactions that have already been completed.

However, the "California experience" may be difficult to duplicate in other jurisdictions, where political forces may lead to other formulations and the interests of investor owned utilities may not be as aligned as those of the three investor-owned utilities in California.

In any event, "cloning" of one state's statute for another jurisdiction can be a risky, problem-plagued process, as the myriad of players in the legislative process attempt to fully appreciate the nuances of the "model" state's provisions.

Compare for example the following Massachusetts and California provisions:

1. Except as otherwise provided in this paragraph, the commonwealth does hereby pledge and agree with the owners of transition property and holders of electric rate reduction bonds that the commonwealth shall not (i) alter the provisions of this chapter which make the transition charges imposed by the financing order irrevocable and binding or (ii) limit or alter the reimbursable transition costs amounts, transition property, financing orders, and all rights thereunder until the electric rate reduction bonds, together with the interest thereon, are fully met and discharged. 1997 Mass. Acts 164, Sec. 193, §1H.(b)(3) (to be codified at Mass. Gen. Laws ch. 164, §1H. [hereinafter Mass. §1H.] (b)(3)).

2. Except as otherwise provided in this subdivision, the State of California does hereby pledge and agree with the owners of transition property and holders of rate reduction bonds that the state shall neither limit nor alter the fixed transition amounts, transition property, financing orders, and all rights thereunder until the obligations, together with the interest thereon, are fully met and discharged, provided that nothing contained in this section shall preclude the limitation or alteration if and when adequate provision shall be made by law for the protection of the owners and holders. Cal. Pub. Util. Code §841(c) (emphasis added).

The Massachusetts provision was modeled after the California provision, but note the omission in the Massachusetts version of the highlighted language from the California version. This deletion, perhaps intended to remove a provision viewed as overly "friendly" to utilities and investors, not only rendered the opening phrase of the sentence meaningless, but also has caused discussion of the very validity of the provision without its "saving" language.

No matter how the legislative process develops, electric companies and their advisors (investment bankers, accountants, lawyers, etc.) must devote sufficient time and resources to "educate" the many constituencies that inevitably must "buy into" securitization for effective legislation to be adopted--legislators, legislative staff, state public utility commissions and their staff, consumer groups and advocates, business leaders, the press, etc. While the "experts" on the utility's team--particularly those that have otherwise been involved with securitization for many years--may understand the proposed transaction to such a degree that it seems almost simple, getting the other players sufficiently up the learning curve can be difficult and time-consuming. Unfortunately, the inevitable "distrust" that may characterize important relationships doesn't serve to make this important process any easier.

Statutory progress across the country

Attachment A hereto summarizes the status of legislative efforts across the country with respect to securitization.

Principal Definitions

Each statute contains its own set of important definitions. The California statute has served as the model for many of the statutes that have been proposed and/or adopted. Presented below are several of the key terms that are critical to the interpretation of the statute's substantive provisions.

"Rate reduction bonds" (or "electric rate reduction bonds" or "transition bonds")

1. The definition of the securities to be issued.

2. Definition must be broad enough to permit the wide variety of structures that may ultimately be adopted and used by the issuing entity(ies).

Sample definition:

"Rate reduction bonds" means bonds, notes, certificates of participation or beneficial interest, or other evidences of indebtedness or ownership, issued pursuant an executed indenture or other agreement of a financing entity, the proceeds of which are used, directly or indirectly, to provide, recover, finance or refinance transition costs, and that are directly or indirectly secured by, or payable from, transition property. Cal. Pub. Util. Code §840(e).

Key elements:

Nature of securities very broad--bonds, notes, certificates, etc.--i.e., indebtedness or ownership/equity interest.

1. Issuance document very broad--indenture or other agreement, so could include traditional pooling and servicing agreement, trust agreement, etc.

2. Flexible concerning use of proceeds-- "secured by" (i.e., pledged to secure indebtedness) or "payable from" (i.e., evidencing an ownership interest).

3. Some statutes prescribe other important requirements or limitations, such as a maximum maturity. See 66 Pa. Cons. Stat. §2812(G) (ten years). Note that rating agencies have expressed their preference for relatively short maturities (in the ten-year range) due to concerns associated with political uncertainty and technological advances.

"Financing entity"

1. The entity issuing or causing the issuance of the rate reduction bonds.

2. Again, definition must be broad enough to permit the wide variety of structures.

Sample definition:

"Financing entity", (i) the [statutorily-designated state agency or agencies], (ii) any special purpose trust, or (iii) any financing entity which is authorized by the [public utilities commission] pursuant to a financing order to issue electric rate reduction bonds or acquire transition property in accordance with the provisions of this section. Mass. §1H.(a).

Key elements:

1. Allows for involvement of state agency (see below).

2. Allows for special purpose trust.

3. Allows for other flexibility approved by the state public utilities commission or, in some cases, the other designated state agency--i.e., in a transaction not involving a state-related issuing entity, by the special purpose entity formed by the utility.

"Financing order" (or "qualified rate order")

1. The order or decision issued by the applicable state regulatory authority (typically, the public utilities commission) approving the issuance of the rate reduction bonds in accordance with the state statute.

2. Important component of the overall financing regime, because statutes by necessity typically leave many important aspects of securitization transactions to regulatory determination/discretion. Parties often seek to cure "legislative deficiencies" in the financing order, for rating agency and other purposes.

Sample definition:

"Financing order", an order of the department adopted in accordance with this section approving a plan, which shall include, without limitation, a procedure to review and approve periodic adjustments to transition charges to include recovery of principal and interest and the costs of issuing, servicing, and retiring electric rate reduction bonds contemplated by the financing order. Mass. §1H.(a).

"Transition costs" (or "qualified transition expenses" or other variations)

1. The "stranded" costs that the utility is permitted to recover under the statute.

2. States' definitions vary widely, typically referring to other statutory sections containing detailed discussions/requirements with respect to different stranded assets.

3. Statutes often grant substantial responsibility for determination to public utility commissions.

4. Stranded costs often receiving explicit treatment:

a. Costs for generation-related assets, both nuclear and non-nuclear.

b. Unrecovered amounts of "regulatory assets."

c. Cost associated with purchased power contracts.

d. Employee-related transition costs.

e. Payments in lieu of taxes.

f. Cost associated with the issuance of rate reduction bonds.

"Transition charges" (or "fixed transition amounts" or "intangible transition charges" or "reimbursable transition charges amounts" or other variations)

1. The "non-bypassable" charge authorized by the statute and/or the financing order to be charged to and collected from customers in order to permit the recovery of transition costs.

2. "Non-bypassable"--important feature that permits/requires imposition of charge on customer regardless of which company or companies are currently providing generation, transmission, and/or distribution service.

3. Company providing transmission and/or distribution service to the customer typically required to collect the charge.

4. Statutes vary considerably, but typically provide explicitly for the recovery of transitions costs and the costs associated with the issuance of the rate reduction bonds.

"Transition property" (or "intangible transition property" or other variations)

1. The property right created under the statute, including the right to collect the transition charges.

2. The basic right that will support the issuance of the rate reduction bonds and that will be "securitized"--i.e., transferred and assigned to the financing entity to support the issuance of the rate reduction bonds.

3. Statutes vary considerably but typically contain language equivalent to the following:

The property right created pursuant to this [section], including, without limitation, the right, title and interest of an electric company or financing entity to all revenue, collections, claims, payments, money, or proceeds of or arising from or constituting [transition charges] . . . .

4. Language explicitly confirming that the transition property is a current property right has also been included in some statutes and is deemed supportive of analysis that the electric company can make a current transfer thereof.

Sample language:

"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 electrical corporation, the electrical corporation performing certain services. Cal. Pub. Util. Code §840(g)(2).

State Agency Involvement

As will be discussed under "Deal Structure," the securities sold to the public in the California transactions were issued by trusts established by the California Infrastructure and Economic Development Bank (the "Infrastructure Bank").

Although the involvement of a governmental entity, such as the Infrastructure Bank, is not, strictly speaking, necessary for the securitization of transition charges, several factors--including the California precedent, states' desire to play an active, "supervising" role, and other reasons that will be discussed under "State Regulatory Issues"--suggest that future transactions will include state players.

As noted above, the definition of "financing entity" often contains enough flexibility to permit the involvement of one or more governmental entities. See Cal. Pub. Util. Code §840(b); Mass. §1H.(a).

Going further, the Massachusetts statute includes a definition of "special purpose trust" clearly contemplating the involvement of one or more governmental entities.

Sample language:

"Special purpose trust", any trust, partnership, limited partnership, association, corporation, nonprofit corporation, limited liability company, or other entity established and authorized by the agency and the authority to acquire transition property or to issue rate reduction bonds, or both, subject to approvals by the agency and the authority and the powers of the agency and the authority as provided by the agency and the authority in their resolutions authorizing the entities to issue rate reduction bonds. Mass. §1H.(a) (emphasis added). Note that in all places where the definition uses "agency" it refers to the Massachusetts Industrial Finance Agency and in all places that it uses "authority" it refers to the Massachusetts Health and Educational Facilities Authority.

Note, also, that the use of a governmental entity may still be "optional," even under a statutory framework that explicitly contemplates such involvement.

Sample language:

An electric company may, upon the department's written determination of substantial and documentable relative rate reduction, utilize a financing entity other than the state-designated financing entity or special purpose trust. Mass. §1H.(b)(2).

Finally, notwithstanding involvement of one or more state entities in the securitization transaction, the statutes typically make it very clear that the involvement is quite limited.

Sample language:

(d)(1) Financing orders issued under this article do not constitute a debt or liability of the state or of any political subdivision thereof, other than the financing entity, and do not constitute a pledge of the full faith and credit of the state or any of its political subdivisions, other than the financing entity, but are payable solely from the funds provided therefor under this article . . . . All the bonds shall contain on the face thereof a statement to the following effect: "Neither the full faith and credit nor the taxing power of the State of California is pledged to the payment of the principal of, or interest on, this bond."

(2) The issuance of bonds under this article shall not directly, indirectly, or contingently obligate the state or any political subdivision thereof to levy or to pledge any form of taxation therefor or to make any appropriation for their payment. . . . . Cal. Pub. Util. Code §841(d)(1), (2) (emphasis added); see also Mass. §1H.(b)(4)(i), (ii) for substantial identical provisions.

Irrevocability and State Pledge

Given the importance, as discussed, of the state statutory scheme to the overall securitization transaction, it should not be surprising that its validity and continued validity during the life of the transaction is viewed as important by the rating agencies and investors.

To support each state's commitment to the validity of the statutory scheme, the statutes all contain language specifically making irrevocable financing orders adopted thereunder and the transition charges imposed thereby.

Sample language:

(c) Notwithstanding [other specified statutory provisions], or any other provision of law, except as otherwise provided in this subdivision with respect to transition property that has been made the basis for the issuance of rate reduction bonds, the financing orders and the fixed transition amounts shall be irrevocable and the commission shall not have authority either by rescinding, altering, or amending the financing order or otherwise, to revalue or revise for ratemaking purposes the transition costs, or the costs of providing, recovering, financing, or refinancing the transition costs, determine that the fixed transition amounts or rates are unjust or unreasonable, or in any way reduce or impair the value of transition property either directly or indirectly by taking fixed transition amounts into account when setting other rates for the electrical corporation; nor shall the amount of revenues arising with respect thereto be subject to reduction, impairment, postponement, or termination. Cal. Pub. Util. Code §841(c) (emphasis added); see also Mass. §1H.(b)(3).

Going hand in hand with the "irrevocability" language in the statutes is the "state pledge" language, pursuant to which the state pledges and agrees with the owners of transition property and the holders of rate reduction bonds that it will not alter or limit financing orders, transition property, or related rights so long as the rate reduction bonds remain outstanding. The relevant provisions of the California and Massachusetts statutes are set forth in part I.B.4. above. See also 66 Pa. Cons. Stat. §2812(C)(2).

The "True-Up" Mechanism

Because transition charges will be included in customers' regular utility bills, amounts collected by the utility as transition charges will inevitably depend on electric usage, delinquency rates, and write-offs. A variety of factors, including weather and local economic conditions, may cause transition charges collected during a given period to be greater or less than anticipated at the time that a particular series of rate reduction bonds are issued.

Recognition of these uncertainties and the effect that they would have on rate reduction bond credit ratings have led legislatures to include what are referred to as "true-up mechanisms" in the enabling statutes. These provisions permit the utility periodically to apply to the public utility commission for an adjustment to the transition charge so that it will always be sufficient (and, indeed, not greater than necessary) to pay debt service on the rate reduction bonds.

Although the statutory provisions allowing true-up vary from state to state, most provide for at least annual review by the public utility commission and some provide that the commission must act upon the utility's application for adjustment within a prescribed period of time.

Sample provision:

(5) A financing order shall also include a procedure whereby the department shall periodically review the rate of transition charges authorized therein on each anniversary of the date of such order and at such additional intervals as may be provided for in such order, and shall approve adjustments, if required, within 60 days of each such anniversary and of each such additional interval date, [to] such rate of transition charges if and to the extent necessary to ensure the timely recovery of revenues sufficient to provide for the payment of all principal, interest, premium, if any, and other charges in respect of the electric rate reduction bonds approved by the department pursuant to such financing order. Mass. §1H.(b)(5) (emphasis added); see also Cal. Pub. Util. Code § 841(e); 66 Pa. Cons. Stat. §2812(B)(5).

Transfer of Transition Property

As discussed below under "True Sale" and also under "Deal Structure," in rate reduction bond transactions and in traditional securitizations, the originator or deal sponsor (the bank that originates the securitized mortgage or automobile loans or, in these transactions, the utility) insulates the securitized assets from its credit risk by transferring the assets to a bankruptcy remote, special purpose entity. The utility must, therefore, have the power and authority to so transfer the new, statutorily-created transition property to its special purpose entity, which in turn must be able to similarly transfer such property to subsequent entities involved in the transaction.

This power and authority is typically specifically granted in the enabling legislation. The California provision has been followed by other states and serves as a useful sample.

Sample language:

(b) Electrical corporations may sell and assign all or portions of their interest in transition property to an affiliate. Electrical corporations or their affiliates may sell or assign their interests to one or more financing entities that make that property the basis for issuance of rate reduction bonds to the extent approved in the pertinent financing orders. Electrical corporations, their affiliates, or financing entities may pledge transition property as collateral, directly or indirectly, for rate reduction bonds to the extent approved in the pertinent financing orders providing for a security interest in the transition property, in the manner as set forth in Section 843. In addition, transition property may be sold or assigned by (1) the financing entity or a trustee for the holders of rate reduction bonds in connection with the exercise of remedies upon a default, or (2) any person acquiring the transition property after a sale or assignment pursuant to this subdivision. Cal. Pub. Util. Code §842(b); see also Mass. §1H.(c)(2); 66 Pa. Cons. Stat. §2812(B)(6).

The legislation also typically provides that, notwithstanding such transfer, the utility will continue to operate its system to provide service to its customers and to collect and account for the transition charges for the account of the holders of the rate reduction bonds and other transaction parties. The California statute again provides a representative sample.

Sample language:

(c) To the extent that any interest in transition property is so sold or assigned, or is so pledged as collateral, the commission shall authorize the electrical corporation to contract with the financing entity that it will continue to operate its system to provide service to its customers, will collect amounts in respect of the fixed transition amounts for the benefit and account of the financing entity, and will account for and remit these amounts to or for the account of the financing entity. Contracting with the financing entity in accordance with that authorization shall not impair or negate the characterization of the sale, assignment, or pledge as an absolute transfer, a true sale, or security interest, as applicable. Cal. Pub. Util. Code §842(c) (emphasis added); see also Mass. §1H.(c)(3).

Security Interests in Transition Property

Securitization transactions often involve the granting of a security interest in the securitized financial assets and related rights (including rights in underlying transfer agreements, sale agreements, etc.). Perfection of, and other matters relating to, security interests in most financial assets are governed by the Uniform Commercial Code of the relevant jurisdiction or jurisdictions (the "UCC"). The financial assets and related rights typically constitute instruments (i.e., promissory notes), accounts (i.e., credit card balances, trade accounts receivable), chattel paper (i.e., auto loans), or general intangibles (i.e., contract rights) under the UCC, or a combination thereof. The rules relating to each of these types of assets are clear under the UCC and are dealt with routinely in securitization transactions.

Statutorily "created" transition property can be viewed as something of a new challenge for securitization practitioners. Even without legislative guidance, it would clearly appear not to be an instrument or chattel paper under the UCC, but might well be viewed as an account or a general intangible. Given transition property's novelty, however, the industry has not been content to "speculate" as to its proper characterization, and legislative guidance has been forthcoming, albeit in different forms, such as:

1. California has seen fit to confirm that security interests in transition property are indeed governed by the California UCC. See Cal. Pub. Util. Code §843. Generally, the rules of the UCC apply to transition property, subject to certain special rules with respect to, for example, commingling.

2. Massachusetts has adopted provisions substantially similar to California's, see Mass. §1H.(d), with one exception. Although Massachusetts confirms the applicability of the UCC, it requires the Secretary of State to establish and maintain a separate system of records for filings to perfect security interests in transition property (and to effect the transfer of any interest in a financing order). See Mass. §1H.(d)(6). Thus, presumably, any prior blanket UCC filings against all of the assets of a utility would not operate to perfect a security interest in the newly created transition property--any such interest would have to be perfected by filing pursuant to a newly-created filing system.

3. Pennsylvania has gone in a different direction, choosing instead to explicitly provide that granting, perfection, and enforcement of security interests in transition property are governed by the transition property securitization statute and not the UCC. See Pa. Cons. Stat. §2812(D).

Finally, some jurisdictions have attempted to provide additional protection to the holders of rate reduction bonds by creating a so-called "statutory lien" in their favor on transition property. Such lien arises by operation of law upon the effective date of the related financing order. See Cal. Pub. Util. Code §843(g); Mass. §1H.(e).

Service Shut-off and Treatment of Partial Payments by Customer

Traditional utility securitizations of accounts receivable (i.e., of customer bills for electric service) are viewed as having a feature not present in other accounts receivable transactions--the utility/servicer has the profound ability to terminate an essential, otherwise unavailable service if the customer fails to make payment (subject, of course, to applicable hardship limitations). Utilities' ability to terminate service positively influences any evaluation of the ultimate likelihood of customer payment.

Absent statutory treatment, it may not be clear whether the normal service termination provisions would apply in the case of failure to pay transition charges. Although in some cases, such failure may arise out of a customer's purposeful refusal to pay the transition charge (i.e., while timely paying all other charges set forth in the monthly bill), this is not expected to be commonplace. Instead, the issue will arise when a customer makes a partial payment of his or her utility bill and the question will be how such partial payment should be allocated among or between the transition charge and all other amounts set forth in the monthly bill.

California Treatment

1. The California statute assigns treatment of partial payments to the financing order.

Sample language:

A financing order may specify how amounts collected from a customer shall be allocated between fixed transition amounts and other charges. Cal. Pub. Util. Code §841(b).

The California commission has in turn treated the subject in financing orders.

Sample language:

In order to preserve the bankruptcy-remote status of the transition property once it is transferred to the [special purpose entity], [the company] cannot have any claim on the [transition] charges. In particular, if [the company] collects less than the full amount that is billed to residential and small commercial customers, it cannot favor itself over the owner of the transition property. It must allocate that shortfall appropriately between [transition] charges and other charges. Such shortfalls shall be allocated between [transition] charges and other [company] charges in the same proportion as the amount of [transition] charges billed bears to the aggregate amount of [company] charges billed. In re Application of Southern Cal. Edison Co., No. 97-09-056, 1997 Cal. PUC LEXIS 862, at *36 (Cal. PUC Sept. 3, 1997) (emphasis added).

Thus, the failure to pay any portion of the monthly bill results in the deemed failure to pay both the transition charge and all other charges, on a pro rata basis. Such treatment not only would permit the regular service shut-off provisions to operate in such situation, but also bolsters the "true sale" treatment of the transition property (which is discussed in detail below).

Massachusetts Treatment

The Massachusetts statute takes a different approach.

Sample language:

A financing order shall specify that amounts collected from a customer shall be allocated first to current and past due transition charges and then [to] other charges and that, upon the issuance of electric rate reduction bonds, transition charges collected shall be allocated first to transition property and second to transition charges, if any, that are not subject to a financing order. Mass. §1H.(b)(1) (emphasis added).

Although it is possible to view this ordering by the Massachusetts legislature as merely a decision of administrative convenience, some have viewed this "priority" provision as subordinating the utility's right to collections, thereby possibly negatively impacting the ultimate true sale analysis.

"True Sale" of Transition Property

a. A fundamental feature of all securitization transactions is isolating the securities that are issued from the credit risk of the originator of the financial asset or deal sponsor.

b. In a typical securitization, we are dealing with, for example, a bank or mortgage company that originated a mortgage loan or a bank or other credit issuer that allows a customer to purchase goods and services using the credit card.

c. In transactions like this, the sponsor that owns the financial asset must transfer and convey the asset to a so-called bankruptcy remote special purpose entity. The transfer and conveyance must be such that the transferred financial asset will no longer be considered to be an asset of the sponsor and will not be considered part of its estate in the event that it becomes subject to a bankruptcy proceeding.

d. A transfer of this sort is generally referred to as a "true sale." The rating agencies require the sponsor's counsel to render its legal opinion that the transfer and assignment/conveyance will be treated as a "true sale" for such purposes--i.e., that the securitized assets will not be considered part of the sponsor's estate in the event that it becomes subject to a bankruptcy proceeding.

e. The question of whether a particular transfer is a true sale depends on the facts and circumstances of the particular transaction. Generally, however, the determination involves an analysis of whether the risks and benefits of the particular financial asset have passed from the deal sponsor to the special purpose entity. This determination is generally considered to be a matter of state law, and bankruptcy courts will look to applicable and analogous state law--including decisions of courts applying and interpreting such law--to make such determination.

f. In traditional securitizations, legal opinions that address these issues are usually long, reasoned opinions that reach their conclusions based on analysis of case law that is analogous but not directly on point.

g. As discussed throughout this section, stranded cost securitization "requires" legislative authorization in a number of areas. This need has presented deal participants with a special opportunity to obtain explicit statutory support for the "true sale" treatment of these transactions and, happily, legislators have provided this support.

h. The Massachusetts statute is a good example of the type of legislative support that has been provided.

Sample language:

(f)(1) A transfer of transition property by an electric company to an affiliate or to a financing entity, or by an affiliate of an electric company or a financing entity to another financing entity, which the parties have in the governing documentation expressly stated to be a sale or other absolute transfer, in a transaction approved in a financing order, shall be treated as an absolute transfer of all of the transferor's right, title, and interest, as in a true sale, and not as a pledge or other financing, of the transition property, other than for federal and state income purposes. Granting to holders of electric rate reduction bonds a preferred right to revenues of the electric company, or the provision by the company of other credit enhancement with respect to electric rate reduction bonds, shall not impair or negate the characterization of any transfer as a true sale, other than for federal and state income purposes. Mass. §1H.(f)(1) (emphasis added); see also Cal. Pub. Util. Code §844(a); 66 Pa. Cons. Stat. §2812(E).

i. As can be seen, under the statute, the stated intent of the parties controls and any transfer that purports to be a sale shall be so treated.

j. Needless to say, the inclusion of this language in the enabling statues should help the true sale analysis and give comfort not only to the lawyers giving the opinions, but also to the rating agencies and investors that are relying on the opinions.

k. However, it is important to emphasize that here we are dealing in an area of some uncertainty. Although state law should control and a legislature's clear statement should be given great weight, this issue would likely will be tested in a proceeding under the federal bankruptcy code where the court's broad power, including equitable power, can sometimes produce unexpected results.

l. Consequently, expect deal structures to look very much like traditional securitization transactions from a true sale perspective and not to become overly aggressive just because helpful statutory language is in place. Opinions will likely refer to the statutory provisions in the first instance, but then proceed through normal true sale analysis in case a federal bankruptcy court ultimately concludes that the statute is not dispositive.

m. Finally, note that the second sentence of the sample Massachusetts language quoted above may prove useful in dealing with the "priority" issue discussed above under "Service Shut-off and Treatment of Partial Payments by Customer."

n. See further discussion of "true sale" issues below under "Deal Structure."

Attachment A

STATUS OF

LEGISLATION AUTHORIZING THE SECURITIZATION

OF STRANDED COSTS

As of February 10, 1998

• State
• Status
• Comments
• California
• Enacted
• A.B. 1890, 1995-1996 Reg. Sess. (Cal. 1996).
• Connecticut
• Under Consideration
• 1998 legislation pending. H.B. 6774 failed in 1997 session.
• Illinois
• Enacted
• 1997 Ill. Laws 561.
• Kansas
• Under Consideration
• Currently, legislation is pending which delegates broad authority, to the state corporation commission, to mitigate transition costs through the refinancing of existing debt. H.B. 2316, 77th Leg. (Kan. 1997).
• Maine
• Under Consideration
• The legislature passed "An Act to Restructure the State's Electric Industry" last year, however, securitization was not authorized and is expected to be taken up at a later date. 1997 Me. Laws 316. See also "Electric Competition Plan Makes Strong Compromise," Central Maine Morning Sentinel, May 18. 1997.
• Massachusetts
• Enacted
• H.B. 5117 (Mass. 1997).
• Michigan
• Under Consideration
• The legislature is expected to take up the issue soon.
• Montana
• Enacted
• S.B. 390, 55th Leg. (Mont. 1997).
• Nevada
• Under Consideration
• Nevada Power supported securitization legislation, but the bill was not introduced in the 1997 session.
• New Hampshire
• Under Consideration
• H.B. 651 (N.H. 1997).
• New Jersey
• Under Consideration
• The Board of Public Utilities has issued a formal order setting deadlines for restructuring; however, the board's decisions are considered recommendations only and must be approved by the State Legislature to become law.
• New Mexico
• Under Consideration
• The "Electric Industry Restructuring Planning Act" was introduced on January 22, 1998. H.B. 51, 43rd Leg., 2d Sess. (N.M. 1998). Among other things, this legislation proposes "to provide for continuing study and to prepare comprehensive implementing legislation" for the next legislative session. The bill also creates four advisory panels, one of which is to address financial and tax issues, including the possible securitization of stranded costs. Id. at §16(A)(2)(c).
• New York
• Enacted
• H.B. 7942, 220th Leg. (N.Y. 1997).
• Ohio
• Under Consideration
• Legislation has been introduced and is currently pending. H.B. 625, 122nd Leg., 1997-1998 Sess. (Ohio 1997).
• Oregon
• Under Consideration
• H.B. 2803 and H.B. 3677 failed in the 1997 session.
• Pennsylvania
• Enacted
• H.B. 1509 180th Leg., 1995-1996 Sess. (Pa. 1995).
• Rhode Island
• Enacted
• H.B. 7003, 1997-1998 Sess. (R.I. 1997).
• Texas
• Under Consideration
• In 1999, the Legislature is expected to pass legislation that will permit securitization of stranded generating plant costs when retail competition is implemented.
• Utah
• Under Consideration
• House Joint Resolution 7, "Resolution on Restructuring of Electrical Industry," was introduced this past January. The resolution directs the Electrical Deregulation and Customer Choice Task Force to prepare legislation for the restructuring plan to be introduced in the 1999 General Session, as well as adopt a study plan for the 1998 interim session which, among other things, invites interested groups or individuals to submit draft legislation on the securitization of stranded costs. H.R.J. 7 §(2)(c)(ii)(D), 52nd Leg. (Utah 1998).
• Vermont
• Under Consideration
• The legislature is currently considering a bill, introduced this past January, authorizing securitization. H.B. 663, 65th Sess. (Vt. 1997).