(Updates with industry group’s comment in ninth paragraph.)
By Darrell Preston
Feb. 23 (Bloomberg) -- Houston
consumers were supposed to
get lower electricity rates from deregulation. Instead, they pay
some of the nation’s highest prices, partly because of bonds
Goldman Sachs Group Inc. recently sold for a local utility.
The Wall Street bank marketed $1.7 billion of securities
for Houston-based CenterPoint Energy Inc.
last month at higher
yields than most of the company’s similar long-term debt,
according to data compiled by Bloomberg. That raised costs borne
by 2.2 million Houston-area consumers by about $47 million.
The sale shows how deregulation in Texas backfired, driving
up costs for those promised savings. Texans paid some of the
lowest rates in the country before the changes, according to the
U.S. Energy Information Administration. Now they pay the fifth-
highest electricity prices. The policy shift toward competition
has also misfired in other states including California.
“This whole thing has been tragic for ratepayers,” said
Thomas Brocato, a lawyer in Austin for the Gulf Coast Coalition
of Cities, a group of 34 municipalities served by CenterPoint,
whose share price beat
the Standard & Poor’s utilities index by
about 2-to-1 in the past year. The bond issue’s cost “makes it
still worse,” he said.
Began in 2002
In Texas, the second most-populous U.S. state, deregulation
began with the market served by nongovernment power companies
starting in 2002, a move designed to foster competition. The
enabling law let utilities recover so-called stranded costs, or
investments made before deregulation, from customers. For
CenterPoint, that has led to $5.4 billion in bond sales.
The policy will produce at least one more deal, a sale
an American Electric Power Co.
unit, AEP Texas Central Co. in
Columbus, Ohio. The Texas Public Utility Commission on Jan. 12
said it could borrow $800 million to cover stranded costs,
according to a statement from the utility. AEP serves about 1
million people in southern and western parts of the state.
Even though the law permits the recovery of expenses made
before the market changes, the commission has a duty to keep the
effects on ratepayers, who cover such debt, at a minimum.
Consumers in areas of Texas touched by deregulation pay
higher electricity prices than those in other areas both in and
out of state that weren’t affected by changing laws, according
to the Texas Coalition for Affordable Power
, an advocacy group
in Austin. Their rates are also higher than in other states
where competition was brought to power markets, partly because
of the stranded-cost recovery system, the group says.
Deregulation has worked, according to the Association of
Electric Companies of Texas, an industry organization in Austin.
The policy lets consumers shop for a low-price supplier, while
rates are influenced by such items as the cost of power-plant
fuel and the amount of capital invested in the system, said John
Fainter, the group’s chief executive officer.
“We disagree that there has been no benefit to electric
consumers,” said Fainter. “It’s providing access to a needed
service at a reasonable price.”
In the decade before deregulation, Texans paid
less than the national average, according to the coalition. In
the 10 years since, they’ve paid 8.7 percent more.
“People in deregulated areas of Texas consistently pay
higher prices,” said Jake Dyer, a coalition policy analyst.
“The stranded costs have increased the cost of electricity.”
For most of the history of electric power, utilities
operated as monopolies with rates set by public authorities to
ensure that their costs were covered and they got a “fair”
return on invested capital, while protecting consumers from
price gouging. In the 1990s, states began trying to foster
competition, letting several suppliers contend for the business
with a goal of improving efficiency and lowering costs.
It hasn’t always worked. Some states have pulled back while
others haven’t moved forward with creating competitive markets.
Enron Corp., the Houston-based company that went bankrupt in
2001, manipulated power markets in California as consumers
endured blackouts in 2000 and 2001, with traders bragging
“stealing money from ‘Grandma Millie,’” according to the
California Justice Department.
Municipalities and local taxpayers haven’t always been
well-served when government officials put their financial fate
in the hands of Wall Street banks. In Jefferson County
home to Birmingham, the state’s biggest city, out-of-control
costs tied to sewer financing guided by JPMorgan Chase & Co.
to the largest U.S. municipal bankruptcy on record last year.
County residents have shouldered rising sanitation prices and
may take on more to cover the cost of related debt.
For more than five years, the U.S. Justice Department has
led a probe that has revealed Wall Street banks, during the same
years when they were sowing the seeds of the financial crisis,
were also cheating cities, states and school districts across
the U.S. and using the unregulated derivatives markets to hide
kickbacks paid in the schemes. About 100 municipalities in 36
states were victimized by just one of the participants, UBS AG
of Zurich, which has agreed
to reimburse the communities.
In Texas, the recent CenterPoint sale’s extra interest
expense adds to the $1.7 billion that the utility’s customers
must repay for the latest sale and the $3.7 billion of such debt
they already were covering. The Texas Supreme Court decided
year that the company would get to collect the extra amount,
overruling the state utility commission’s rejection of the cost.
Added to Rate
As a result, CenterPoint’s ratepayers will have $2.39 per
1,000 kilowatt-hours tacked on to their monthly bills from the
latest sale, the company said in a statement
. They already pay
$5.08 per 1,000 kilowatt-hours each month for the earlier deals.
“The real tragedy is that the ratepayers are going to have
to pay an extra $1.7 billion,” said Brocato of the Gulf Coast
The situation in Houston is an example of a policy that
forces consumers to cover the costs of facility investments that
can’t be recouped in a competitive market. About $40 billion of
such debt had been sold in 12 states by July 2009, according to
S&P. The state utility commission’s guarantee that ratepayers
will cover the costs underpins S&P’s AAA rating on the latest
CenterPoint debt issue.
The power company, with more than 5 million metered
customers around the U.S., operates a distribution utility in
Houston as well as natural-gas sales and distribution systems in
other parts of the U.S. Compared with earlier CenterPoint
stranded-cost debt, the yields set by bankers in the recent deal
were higher, relative to benchmarks.
CenterPoint offered the securities
Jan. 11 through banks
led by Goldman Sachs at rates averaging 2.5 percent, which was
the lowest ever for such a bond sale, according to the utility
commission. Still, the costs to be borne by consumers could have
been kept even lower than the 3.03 percent coupon on the bond
maturing in October 2025.
The top-rated issue’s relative yield compared with a
benchmark swap index
was triple that of most similar longer-term
issues from the company, according to data compiled by
Bloomberg. A bigger yield means higher electricity rates are
needed to repay the debt.
“Investors like this paper,” Weili Chen, an S&P analyst
in New York, said by telephone. “For the same rating you earn a
A Citigroup Inc.
analysis showed the market moved after the
deal, widening the spread, or difference, in yield for similar
10-year, AAA rated debt against swap indexes the bank uses by as
much as two-thirds -- a sign that the Houston-based utility’s
sale carried a higher interest rate than the market demanded.
The spread had barely moved during the previous year.
“They sold a AAA utility like a Baa deal,” Joseph
Fichera, chief executive officer of New York-based Saber
Partners LLC and a former Texas adviser on stranded-cost deals,
said by e-mail. Ten-year Commonwealth Edison Co. bonds rated
Baa1 by Moody’s Investors Service, seven steps below Aaa, priced
to yield 2.83 percent Jan. 18, or 0.93 percentage point over
benchmark U.S. Treasuries, Bloomberg Bond Trader prices show.
Tiffany Galvin, a spokeswoman for Goldman Sachs in New
York, declined to comment.
“There’s always going to be Monday-morning quarterbacking
by those not involved in the process,” said Terry Hadley, a
spokesman for the state utility agency. “The commission remains
pleased by the process and the results.”
As Texas began deregulating its electricity market in the
1990s, corporate-owned public utilities were split into separate
companies to generate, transport and sell power to consumers. To
level the playing field, the law lets utilities recover stranded
investments made when they engaged in all three businesses.
Securing debt with government-guaranteed surcharges may
become a model for “tens of billions” of financings in the
U.S. to pay for such things as environmental equipment, S&P’s
Chen said. They also may be used to pay some operating costs.
In Ohio, lawmakers passed a bill that would make it
possible for Columbus-based American Electric to borrow against
deferred fuel costs, said Tammy Ridout, a spokeswoman. The
company expects to complete its Texas stranded-cost sale next
month, according to Pat D. Hemlepp
, a spokesman in Columbus.
Houston-area consumers that use 1,000 kilowatt-hours of
electricity each month, enough for the average home, will pay
the additional $2.39 a month for about 13 years to retire the
CenterPoint debt sold Jan. 11, according to the company.
Jim Rourke, a lawyer in the state Public Utility Counsel
Office, said his agency, which represents consumer interests
before the utility commission, follows planning for stranded-
cost bond sales until the offerings are approved. After that, it
has no oversight role.
“We haven’t been following it,” Rourke said of the
CenterPoint deal. “Once the securities are issued, we don’t
have any role.”
The sale produced the highest spread to a generic 10-year
swap index among the company’s stranded-cost deals, according to
data compiled by Bloomberg. The 13-year maturity’s spread rose
64 basis points to 97 basis points compared with the swaps rate,
or triple the previous 32 basis-point unweighted average on
earlier deals. A basis point is 0.01 percentage point.
In light of the issue’s AAA rating, a higher-than-necessary
yield “is something we’d be concerned about,” the Gulf Coast
Coalition’s Brocato said. “They should be getting the best
Better for Investors
The wider spread
means investors who bought the bonds got a
higher return than if the company had borrowed at a price closer
to the average.
“The capital markets evaluate cost more by an interest-
rate spread to a benchmark than a coupon,” said Saber’s
Fichera, who also teaches finance at Princeton University in New
Jersey. “Given even the conservative research on securitization
bonds by Citigroup and others, this was an even better deal for
When he worked for the state on stranded-cost debt sales
earlier in the previous decade, Fichera typically compared
prospective yields to standard benchmarks such as swaps or
Treasuries to provide pricing advice, according to documents on
Even as the company and the utility commission took
advantage of near record-low market rates, the spread on 10-year
stranded-cost bonds moved to 90 basis points from 55 a week
earlier, according to Citigroup’s Jan. 19 Consumer ABS Weekly
report by analysts including Eugene Belostotsky
. He declined to
comment when reached by telephone.
Texas was advised on the January deal by First Southwest, a
unit of Dallas-based PlainsCapital Corp.
First Southwest was the
third-largest financial adviser in the municipal-bond market
last year, according to data from Thomson Reuters.
During the two-day pricing period, First Southwest’s
“input and feedback” were “invaluable,” according to a memo
sent last month to utility commissioners by Darryl Tietjen, the
agency’s rate regulation division director who went to New York
for the sale. Tietjen didn’t respond to written questions about
what he did to assure the lowest cost for ratepayers.
The utility commission didn’t call for proposals to find a
sale adviser, choosing instead to use First Southwest under an
arrangement between the bank and the Texas Public Finance
Authority, said Hadley, the utility commission spokesman. The
company advises the agency on state-level municipal-bond deals,
he said. The firm also has advised on prior issues, he said.
‘Comfortable’ With Deal
, First Southwest’s vice chairman,
described the firm as a “full-service investment banking firm
with active participation in both the taxable and tax-exempt
markets,” in an e-mail.
“First Southwest is comfortable with the resources and
methodology we employed,” Bartolotta said, while declining to
discuss the specifics of the deal. “We feel the pricing was
appropriate based on all relevant factors.”
Nothing changed in the credit quality of the CenterPoint
securities compared with those already on the market that would
have influenced the price, said Du Trieu, a Fitch Ratings
analyst. His Jan. 5 report
gave top AAA ratings to the
“From a risk standpoint, I don’t think it is any riskier
than it has been in the past,” Trieu said. “Our analysis was
identical to that on other deals.”
While leading the marketing of the debt, Goldman Sachs also
on how to structure the issue, according to
offering documents. Other banks were Citigroup, Morgan Stanley,
Bank of America Corp., Barclays Plc, JPMorgan Chase, Loop
Capital Markets LLC and Royal Bank of Scotland Group Plc. The
bonds were sold through CenterPoint Energy Transition Bond Co.
IV LLC, an entity set up for the stranded-cost debt issue.
The average interest rate on the deal was lower than for 11
previous sales, the utility commission said Jan. 12 in a
statement. The offering may have saved ratepayers $720 million
over 13 years because without it, the company would have faced a
7.7 percent interest rate and that would have translated to
higher consumer fees, according to the agency.
Under Texas rules, utilities can pass on the “carrying”
cost of such expenses. The 7.7 percent was estimated based on
staff research, Hadley of the utility commission said.
“We’re pleased to have been involved in the lowest-cost
securitization ever,” Floyd LeBlanc
, a CenterPoint spokesman,
said by telephone.
Stranded-cost bonds, including CenterPoint’s, were among
the few asset-backed securities to come through the financial
crisis and recession with top ratings intact, S&P’s Chen said.
“This asset class has always been AAA and has never been
downgraded,” said Chen. “It has performed extremely well.”
Meanwhile, ratepayers in Houston and other parts of Texas
are left to cover the cost, the Affordable Power coalition’s
Dyer said. “It’s something we’re stuck with.”
For Related News and Information:
Top muni-bond news: TOPM
For financial information on municipal issuers: SMUN
For news on asset-backed securities: NI ABS
--Editors: Ted Bunker, Jerry Hart
To contact the reporter on this story:
Darrell Preston in Dallas at +1-214-954-9454 or
To contact the editor responsible for this story:
William Glasgall at +1-212-617-3023 or