A somewhat complex financing process used by utilities to generate capital or pay down debt.

Any utility with an existing customer base can prove its ability to generate revenue over time. It uses this ability to secure a bond or other form of security, which is then sold to raise capital. The capital is then used to retire debts, rebuild infrastructure or perform some other needed function. Before the security can be sold, a legislative body usually has to approve its issue. This is because there will be added costs incurred as a consequence of issuing the security, and those costs will have to be passed on to the consumer in some fashion. Eventually this security must be paid off. For example, if it's a bond, the principal and interest will have to be paid to investors when the bond becomes due for payment. Utilities are frequently allowed to add a nonbypassable charge to their customers' bills to cover the costs of the bond's principal and interest.

This type of financing is most commonly used to recover stranded costs resulting from deregulation, but it can be used for virtually any funding purpose. When it works well, it actually saves the consumer money over the long term. Securitized debt allows utilities to issue bonds at relatively low interest rates because investors know that existing customers will provide the utility with revenue to pay off the debt. When it doesn't work well, it can end up costing consumers more than if the security had never been issued. This is why securitization must so frequently jump through regulatory hurdles before a utility can use it to raise money.

See also: