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A
Where
the
members
take
their
seats,
please
before
I
call
the
roll.
This
is
the
last
meeting
of
I
guess
this
interim
as
well
as
this
term
of
the
legislature.
We
have
some
members
that
have
are
not
running
again
and
I
just
wanted
to
recognize
those
members.
Of
course,
Senator
Matt
caslin
is
not
not
running
again.
A
Representative
Burch,
Tom
Birch
has
been
here
ever
since
I
came
here,
I
think
he's
the
dean
of
the
house
he's
probably
the
longest
serving
member
in
the
history
of
the
general
assembly,
and
certainly
representative
Birch
has
always
represented
his
constituents
very
well.
A
So
we
commend
him
for
that
and
we
honor
his
service
to
the
general
assembly
and
the
committee
as
all
the
other
members
that
I'm
going
to
mention
representative
Cantrell
McKenzie
Cantrell
is
also
not
running
again,
representing
Jim,
the
Plessy
representing
Norma
Kirk
McCormick,
his
not
not
running
representative
Mary,
Lou,
marzian,
representative
Melinda,
Gibbons,
prunty
and
I.
Think
representative
Attica
Scott,
so
I
want
to
thank
all
of
you
for
your
service
and
we
certainly
will
miss
having
you
on
this
committee.
A
A
We
we,
we
really
have
kind
of
a
short
agenda
today
we're
going
to
have
a
discussion
on
issues
related
to
the
Public
Service
Commission,
specifically
an
explanation
of
legislation
and
I'm,
not
sure
there
is
any
legislation
yet,
but
there
have
been
some
talk
about
securitization
of
utility
regulatory
regulatory
assets
and
then
energy
price
volatility
and
its
impact
on
the
utility
customers
cost
and
with
that
I
will
introduce
with
from
the
Public
Service
Commission
Kent
Chandler,
who
is
the
chairman
and
Kent?
C
I
think
chairman
Gooch
I
appreciate
it
so
I
just
first
want
to
apologize.
I
I
certainly
didn't
provide
this.
This
presentation
with
much
much
Advance
I.
You
all
asked
me
last
week
and
I've
thrown
something
together.
I,
don't
want
to
indicate
that
throwing
something
together
is
any
disrespect
of
the
committee,
but
on
short
notice.
These
are
at
least
the
initial
part
of
the
presentation,
so
some
pretty
complicated
subject
matter.
C
So
this
is
I
think
maybe
the
fourth
time
I've
presented
to
either
the
ijc
or
either
the
house
or
the
Senate
committees
and
so
I'm
going
to
again
give
our
just
our
quick
background,
because
most
of
you
all
have
heard
it
a
handful
of
times
this
year
and
then
get
to
the
meat
of
the
situation.
C
So
initially
I
just
want
to
say
again:
my
name
is
Kent
Chandler
I'm,
chairman
of
the
Kentucky
Public
Service
Commission,
been
a
commissioner
for
about
two
and
a
half
years
prior
to
that
I
worked
at
the
commission
and
I
was
a
consumer
advocate
in
the
Attorney
General's
office.
Practicing
in
front
of
the
commission.
C
Importantly
I
can
only
speak
for
myself.
Nothing
I
say
today
is
should
be
taken
on
behalf
of
the
Public
Service
Commission.
The
commission
can
only
speak
through
its
administrative
orders
and
I.
Certainly
what
I
say
today
doesn't
reflect
upon
the
other
Public
Service,
commissioner,
so
the
Public
Service
Commission
is
a
independent
regulatory
agency.
That's
connected
to
the
energy
and
environment
cabinet
for
administrative
purposes.
Only
it's
a
three-seat
commission
that
carries
out
the
legislative
function
of
rate
making
through
quasi-judicial
quasi-judicial
proceeding.
So
if
that's
not
a
mouthful
I,
don't
know
what
is
so.
C
We
technically
have
more
than
a
thousand
utilities
that
we
regulate.
The
majority
of
those
are
Utilities
in
name
only.
They
are
entities
that
we
don't
actively
regulate,
such
as
certain
certain
telecommunications
providers.
We
actively
regulate
the
way.
I
would
that's
my
description.
It's
not
a
technical
term
about
200
utilities.
Those
utilities
provide
water,
sewer,
gas,
electric
and
telephonic
services.
C
We've
got
investor
owned
and
Cooperative
member-owned
Cooperative,
Electric
utilities
we
regulate,
Rural,
Water
districts,
Rural,
Water
associations,
investor
on
water
utilities
and
Natural
Gas,
Distribution
Systems.
Two
things
to
point
out
to
everybody.
I
think
the
that
are
important
for
these
conversations
is
we
we
don't
regulate
Municipal
Utilities
at
all.
If
it's
a
city
owned
utility
or
a
city
city,
Affiliated
utility,
we
don't
regulate
them,
except
that
we
do
regulate
the
safety
of
their
Natural
Gas
Distribution
Systems.
C
If
they
have
them,
we
also
do
not
regulate
the
rates
or
service
of
electric
cooperatives
that
receive
their
power
from
the
Tennessee
Valley
Authority,
the
they
they
that's
something
about
the
supremacy
clause.
They
look
down
on
us
trying
to
tell
them
what
to
do
so.
The
Public
Service
Commission
was
created
by
the
general
assembly
in
the
1930s.
C
Everything
we
do
for
the
most
part,
at
least
with
regards
to
utilities,
relates
to
rates
and
service.
The
statute
says
that
rates
have
to
be
fair,
just
and
reasonable
and
that
the
utility
has
to
provide
service
that
is
adequate,
efficient
and
reasonable.
C
So,
in
talking
about
this
idea
of,
what's
called
securitization,
I
felt
it
was
probably
it's
probably
impossible
to
understand
in
a
30-minute
presentation.
It's
taken
me
probably
about
two
and
a
half
years
to
have
an
appreciation
for
the
complications,
but
it
is
certainly
impossible.
If
you
don't
have
an
appreciation
for
how
the
commission
regulates
utilities
rates
so
quickly,
I'll
just
do
some
background
and
talk
about
the
the
parts
of
rate
making
that
are
relevant
to
this
idea
of
what's
called
securitization.
C
Hopefully,
I
can
give
an
example
of
of
how
it
can
work
in
other
states
that
have
this
and
then
I'll
stop
and
pause
for
questions,
but
I'll
certainly
take
any
questions
throughout
the
proceedings.
So
Utilities
in
Kentucky
are
not
competitive
businesses.
C
Instead,
the
general
assembly
says
that
their
rights
and
service
need
to
be
regulated
by
a
state
entity,
the
Public
Service
Commission.
So
the
reason
for
that,
or
at
least
the
initial
concern
for
that-
was
around
the
around
the
risk
of
wasteful
duplication
of
the
same
types
of
investment
in
service.
So
you
all
have
probably
seen
pictures
of
the
cities
in
the
early
1900s,
where
you
had
telephone
and
electric
poles
that
had
a
hundred
different
wires
of
all
these
different
competitors
running
across
it
right.
C
The
concern
was
that
that
was
not
a
particularly
efficient
use
of
capital,
so
specifically
for
electric
utilities.
The
general
assembly
has
provided
all
electric
utilities
to
find
service
territories
so
municipalities,
electric
co-ops
investor,
owned
utilities,
have
defined
service
territories
down
to
the
foot
EV.
They
are
the
only
entities
allowed
to
provide
electric
service
to
anybody.
That's
an
electric
consumer
in
that
territory,
and
there
is
no
competition
with
that,
though.
C
They
have
an
obligation
to
serve
every
single
entity
that
demands
service
in
that
service
territory,
so,
whether
it's
a
home,
whether
it's
a
factory
whatever
it
is,
if
you
are
located
smack
dab
in
the
middle
of
that
service
territory,
that
utility
As
Long
as
You
Follow,
their
commission
approved
rules.
They
have
to
provide
you
electric
service
at
defined
rates,
but
a
Great
Estate
granted
Monopoly,
which
is
exactly
what
the
defined
service
territories
are,
creates
two
primary
problems.
C
The
first
is
that
once
an
entity
gets
a
monopoly
that
they're
going
to
provide
really
terrible
service
to
people.
The
second
is
that
the
Monopoly,
as
we
all
know
about
monopolies,
would
like
to
have
profits
that
are
well
in
excess
of
the
cost
that
they
incur.
So
the
solution
to
those
issues
is
to
regulate
the
utilities,
rates
and
service.
C
So
again,
and
I'm
going
to
say
this
two
or
three
times
but
rate
regulation
of
monopolies,
especially
investor
own
monopolies,
is
a
function
of
costs
so
and
the
ideal
I'm
going
to
take
a
big
step
back
and
talk
about
economics
for
about
10
seconds.
So
in
an
ideal
version
of
of
competition
and
in
particular
a
quote
perfect
Market
short
run,
prices
will
reflect
or
should
reflect
the
marginal
cost
of
a
particular
product.
The
introduction
of
monopolies
leads
to
an
exception
that
the
firm
will
charge
prices
or
an
expectations.
Sorry
monopolies.
C
The
concern
is
that
they're
going
to
charge
prices
in
excess
of
their
costs,
leading
to
a
sell
of
less
Goods,
since
things
are
more
expensive
than
they
ought
to
be
and
resulting
in
what's
called
deadweight
loss.
So
this
goes
back
to
this
is
primarily
economics
from
the
early
1900s.
A
concern
around
well
I.
Just
think
that
this
thing
called
the
marginal
Revolution.
It's
kind
of
been
disproved
since,
but
this
idea
of
when
Supply
meets
demand,
there's
a
perfect
price
right.
C
So,
under
a
scenario
of
having
Monopoly
prices,
the
producer
makes
more
has
more
Surplus
than
they
would
have
originally
under
competitive
system.
The
consumer
has
less
Surplus
than
they
would
have
under
competitive
scenario,
but
there's
also
this
amount
of
quote
Surplus
that
accrues
to
neither
the
producer
or
the
consumer
right.
So
all
of
The
Producers,
better
off
everyone
all
of
the
world
would
have
been
better
off.
Had
there
been
competition
right
and
what
doesn't
get
realized
is
called
Dead
weight
loss,
and
so
just
here's
just
a
little
map
where.
C
Getting
in
early
yeah,
all
right
he's
outside
of
the
theme
park,
waiting
waiting
for
the
gates
to
open
so
just
quickly
in
the
competitive
market
is
where
PC
the
competitive
price
meets.
Qc
the
competitive
quantity
right,
the
amount
of
quantity
that
would
be
purchased
in
a
competitive
market,
so
M,
qm
and
PM
are
the
result
of
a
monopoly.
So
the
price
is
higher
and
the
quantity
that
was
sold
is
less
the
yellow.
There
is
dead
weight
loss.
C
We
are
all
worse
off
if
a
monopoly
is
able
to
charge
prices
in
excess
of
the
of
the
perfect
price
or
the
competitive
price.
So
this
is
this
is
mostly
Theory,
but
it
it.
It
is
the
primary
concern
with
non-regulated
monopolies,
so
with
that
again
going
back
to
cost.
Since
we
have
concerns
about
the
prices
that
a
monopoly
would
charge,
particularly
charging
rates
in
excess
of
their
own
costs
rates
are
are
created
by
public
utility
commissions
based
on
the
cost
incurred
or
the
expected
cost
to
be
incurred
by
a
utility.
C
So
when
we
have
rate
cases
that
are
filed
with
us,
the
very
first
thing
you
do
in
rate
making
is
to
determine
all
of
the
cost
of
a
utility
that
they've
either
incurred
if
you're
looking
backwards
or
expect
them
to
incur
in
a
particular
year
that
you
think
and
I'm
saying.
The
fictional
public
utility
commissioner
should
think
that
a
utility
should
incur
right.
So
if
the
utility
paid
ever
all
of
their
Executives,
an
extra
million
dollar
bonus.
C
So
all
of
these
different
costs
are
taken
into
account
and
these
costs
can
include
operations
and
maintenance
expenses
Investments
that
the
utility
has
made
and
also
includes
a
return
on
the
capital
that
those
Investments
are
underpinned
or
underpinned
by.
C
So
here's
a
just
how
we
create
What's
called
the
revenue
requirement.
The
revenue
requirement
is
the
determination
of
the
utilities,
annual
expenses
that
the
Public
Utilities
Commission
says,
should
be
recovered
from
customers,
and
it's
calculated
as
follows.
You
take
all
the
operations
and
maintenance
expenses
which
some
of
kind
of
makes
sense
as
repairs,
depreciation,
expense
on
assets,
labor
costs,
salaries,
fuel,
Insurance
taxes,
I
already
said
taxes,
taxes
always
feel
like
twice
so
I'll
just
say
it
twice.
C
You
take
all
those
operations
and
maintenance
expenses,
and
then
you
add
it
to
this
other
number,
and
the
other
number
is
a
return
on
your
investment,
a
return
on
your
net
investment
and
that's
calculated
as
being
your
original
investment
reduced
by
the
amount
of
that
investment,
you've
already
recovered
times,
a
rate
of
return.
C
So
the
rate
of
return-
and
this
is
where
we're
getting
down
to
Brass
tax
when
it
comes
to
securitization.
The
rate
of
return
that
is
used
to
calculate
a
utilities
rates
is
the
cost
of
debt
and
the
cost
of
equity
Capital
that
underpins
their
investment.
Now.
This
is
the
part
of
this
that
I'll
stop
and
make
very
clear
that
when
I'm
talking
about
all
of
this,
this
is
the
calculation
and
the
beginning
step
for
regulating
investor
owned
utilities.
C
This
is
not
the
calculation
you
use
to
determine
the
revenue
requirement
or
to
make
rates
for
member-owned.
Electric
cooperatives
and
the
reason
for
that
is
they're,
not
investor
owned,
so
the
return
on
investments
is
not
the
primary
reason
or
not
a
primary
calculation
for
setting
their
rates.
Their
rates
are
set
differently
and
their
rates
are
just
about
being
able
to
repay
their
lenders
and
having
a
little
bit
of
cushion
left
over
in
case
things.
Don't
go
right,
that's
the
simplest
way.
C
I
can
describe
how
you
set
rates
for
electric
co-ops,
so
here's
an
example
of
what
that
rate
of
return
and
that's
the
rate
of
return
and
the
level
of
investment
is
all
that
securitization
deals
with
with
utilities.
So
the
rate
of
return
in
that
in
that
calculation
is
the
cost
and
the
type
of
capital
that
was
used
to
fund
the
utilities
investment.
C
C
After
that,
Equity
investors
get
whatever
is
the
remainder
at
the
very
end
of
the
day,
so
Equity
investors
have
a
higher
risk
of
a
return
on
their
investment
than
debt
and
debt
holders,
and
lenders
do
so
if
a
utilities
Investments
were
funded
by
both
debt
and
equity,
and
this
is
this
is
fairly
representative.
It's
about
half
for
most
utilities,
half
their
Investments
are
funded
by
debt
and
the
other
half
is
funded
by
equity.
C
C
If
you
had
originally
invested
in
your
utility,
a
hundred
dollars
and
you've
already
over
the
last
few
years,
recovered
half
of
that
fifty
dollars
when
you're
calculating
your
rates
as
a
utility
in
this
year.
That
seven
percent
is
calculated
based
off
your
current
net
investment,
which
is
the
remaining
fifty
dollars,
and
so
your
return
is
three
dollars
and
fifty
cents.
Now,
three
three
dollars
and
fifty
cents
in
this.
In
this.
D
C
Know
scenario
is
not
the
utilities
profit
three
dollars
and
fifty
cents
is
the
rate
of
return.
Part
of
that
rate
of
return
is
the
amount
that
you
have
to
pay
back
each
year
to
your
lenders.
That's
a
dollar,
so
that
is
the
half
of
the
fifty
dollars.
The
remaining
fifty
dollars
is
split:
twenty
five,
twenty
five
debt
and
equity,
and
of
that
twenty
five
dollars,
your
debt
rate
was
four
percent,
which
is
a
dollar
so
two
dollars
and
fifty
cents
that
year
is
the
utilities
return
on
Equity
right.
C
That's
the
amount
of
profit
that
the
utility
made
for
shareholders
in
this
given
scenario,
so
it
should
be
clear
by
now,
if
I
did
any
did
my
job
at
all.
To
this
point,
the
presentation
utilities
make
more
profit
the
more
they
invest
right.
That
is
that's
what
the
whole
scheme
is
set
up
to
do
right.
C
The
idea
was
that
legislatures
decided
that
electricity
and
water
and
gas
is
good.
We
want
our
people
to
have
it,
and
how
do
we
get
private
Capital
to
go
out
and
put
Steel
on
the
ground
and
pipes
in
the
ground
to
provide
those
services
to
people?
They
the
legislatures,
decided
to
incent
investment
in
those
Services
right,
so
the
more
Steel
on
the
ground,
the
more
investment
a
utility
makes,
and
you
apply
the
exact
same
amount
of
return,
the
more
money
that
utility
makes
right.
C
B
A
A
question:
yes,
sir,
along
those
lines,
does
the
Public
Service
Commission
limit
what
a
particular
utility
May
invest?
And
if
you
do,
is
that?
Because
you're
concerned
that
that,
if
they're
investing
more,
the
rate
is
passed
on
to
the.
C
Consumer,
so
the
answer
to
the
first
question
is
the
the
in
rate:
making
the
Public
Service
Commission
explicitly
sets
the
amount
of
investment
that
should
be
recovered.
So
the
answer
is
yes:
now,
just
a
Nuance
that
I
answer,
the
PSC
tells
you
how
much
you
can
recover
from
customers,
not
how
much
you
can
invest.
So
if
you
decide
to
go
off,
Hog,
Wild,
I,
guess
I'd
say
and
spend
to
invest
a
bunch
of
money
that
you
that,
maybe
the
commission
had
previously
told
you
not
to
invest.
C
I
I
would
I'll
I'll
say
this
differently.
I
would
say
that
in
any
situation,
where
you're
rate
regulated
like
this,
that
you
would
most
likely
invest
money
that
you
believe
to
be
recoverable
and,
and
so
that
goes
back
to
one
of
our
our
primary
statutes.
It's
the
it's
originally
the
second
section
in
in
chapter
278,
the
section
we
operate
under
it
and
it
basically
says
before
utility
can
build
something.
C
It
has
to
come
to
the
Public
Service
Commission,
to
get
a
certificate
that
that
expansion
or
that
building
is
necessary
right,
and
that
was
a
way
of
getting
basically
pre-approval
I'm
oversimplifying
it
and
that's
not
technically
legally
correct,
but
it
basically
getting
pre-approval
before
the
utility
goes
out
and
spends
a
bunch
of
money
and
invest
a
bunch
of
money.
They
would
come
to
the
commission
and
make
sure
that
that
investment
is
needed,
and
that
does
two
things
one.
C
It
makes
sure
that
the
utility
is
that
the
commission
is
making
sure
that
the
utility
is
making
the
right
kind
of
Investments,
but
it
also
protects
the
utility
to
a
certain
degree,
because
they've
already
had
the
commission
pass
judgment
on
their
proposal.
That
that
investment
was
needed
so
that
really
reduces
the
risk
that
in
the
long
term,
the
commission
won't
deny
recovery
of
those
Investments.
A
Okay,
so,
but
in
some
cases
you're
talking
about
that,
Utah
is
trying
to
expand,
but
another
situation
may
be
that
that
utility
is
wanting
to
upgrade
like
existing
infrastructure,
whether
it
be
pipelines
or
you
know,
utility,
the
Grid
or
whatever,
but
it
will
still
be
the
same.
Your
your
you
in
some
instance
limit
how
much
Investments
a
utility
can
make
per
year
in
a
in
in
their
service
area.
That's.
C
Right,
that's
right
and
I
think
that
I,
don't
I'm
I'm
racking
my
brain
for
an
order
in
the
last
two
and
a
half
years,
where
we've
said
something
explicit
around
that,
but
at
least
in
the
last
five
or
six
years
there
have
been
orders
where
the
commission
said.
Look,
we
think
you're,
making
Investments
way
too
fast,
we're
worried
about
the
cumulative
impact
on
customers
of
those
Investments,
and
we
would
like
to
limit
the
amount
of
investment
you
make
to
x
amount
of
dollars
the
utility
at
any.
C
Given
time
is
every
time
they
file
a
rate
case
they're.
Certainly
they
have
a
right
and
every
one
of
those
cases
that
to
ask
to
say
look.
We
have
a
need
for
I'm.
Just
making
up
numbers.
Commission
said
you
can
only
spend
10
million
dollars
on
this
per
year,
because
we're
worried
at
spending,
15
or
20
might
be
too
much.
If
utility
comes
back
in
every
single
rate
case,
they
can
say
we
want
it
to
be
12
next
year.
C
We
want
it
to
be
29,
you
know
we
need
it
to
be
X,
because
we
have
all
these
needs
and
not
letting
us
do
that.
Results
in
why
the
reality
of
rate
making
is
the
utility
can
file
an
application
to
do
something
each
and
every
single
day
after
the
utility
after
the
commission
has
denied
it
right.
There's
nothing
is
ever
permanent
in
terms
of
the
commission's
denial,
the
utility
always
has
a
right
to
come
back
and
ask
to
do
something
different
foreign,
so
the
utility
just
because
I
don't
want
to
miss
something.
D
Yeah
just
briefly
so
they
they,
so
the
utility
can
ask
for
a
raise,
but
they
can
also
apply
for
through
increases
also
through
different
federal
agencies.
Right
is
that
another
appeal
for
them
to
go
around,
maybe
ask
for
increase
passive
costs
who,
like
ferc
or
miso
or
yeah,
so.
C
It
would
depend
on
what
the
type
of
cost
is
so
foreign
utilities.
That
may
not
necessarily
be
the
case,
at
least
not
with
the
facilities
that
are
jurisdictional
to
us,
but
with
electric
utilities
there
are
far
more
of
their
costs
or
their
facilities
that
are
in
which
federal
agencies
also
have
concurrent
jurisdiction,
and
the
reality
is
that
we
can't
reprice
a
federal
determination
of
rates.
So
if,
if
a,
how
do
I
say
this?
If
a
if
ferc,
for
instance,
says
a
transmission
expenses
X,
the
their
transmission
rate
is
X?
C
C
A
utility
can
only
incur
so
many
costs
that
don't
get
passed
on
to
customers
until
their
starts
becoming
a
problem
of
them
being
able
to
run
that
utility.
If
utility
is
incurring
costs
every
single
year
and
recovering
none
of
it
from
customers,
for
instance,
the
extreme.
The
utility
is
not
going
to
be
able
to
provide
service.
C
E
You
know
I
come
from
Martin,
County
and
I
represent
the
constituents
there
and
we've
had
a
long
long
problem
with
our
water.
Can
you
give
me
a
brief
status
of
what
is
going
on
with
the
water.
E
And
a
second
question
I
have
is
air
base
base
rate.
This
is
without
sewage.
Is
now
fifty
dollars
a
month
for
base
rate,
how
many,
how
many
gallon
of
water
is
permitted
or
is
covered
under
that
base
rate.
C
A
C
E
Exact
rate
give
me
that
number,
because
I
have
so
many
people
that
are
struggling
with
their
utility
bill
with
their
water
that
water's
off
half
the
time
it
was
off
yesterday.
E
You
know
it's
just
one
break
after
another,
and
you
know
I've,
hustled
and
lobbied
for
money
down
here
for
our
water
and
I
know
that
we've
gotten
millions
of
dollars
to
put
into
our
water
system
and
we're
still
continuing
to
have
large
price
increases
and
we're
still
having
to
be
with
without
water,
for
you
know,
sometimes
as
much
as
24
hours,
sometimes
as
much
as
two
and
three
days
so
I
wanted
to
bring
that
to
your
attention.
C
Is
this
is
all
I
do
every
day?
So
please
any
other
questions.
Any
question
I'll
be
here
all
day
and
then
I'll
I'll
be
here
for
the
next
year
and
a
half,
so
so
the
the
foreign
you
make
the
exact
same
amount
per
dollar
invested
right,
the
more
you
invest,
the
more
money
you
make,
so
the
PSE
determines
that
cost
of
equity
capital
in
each
case
and
when
doing
figuring
out
what
investors
need.
C
It's
not
like
debt,
where
you've
got
a
document
that
says
what
the
lender
requires,
as
the
debt
cost
Equity
is,
is
much
more
it's
much
harder
to
determine
what
investors
are
demanding
to
be
paid
on
their
Investments.
C
So
that's
the
preface
for
securitization,
so
the
top
line
is
the
a
very
legalese
way
of
saying
what
securitization
is,
but
the
simplest
way
is
in
the
first
bullet
for
the
second
bullet
point
there
that
securitization
is
a
process
that
would
be
set
out
by
Statute,
so
that
customers
of
a
utility
can
effectively
buy
an
asset
from
the
utility
using
money
provided
by
bonds
financed
by
lenders
so
effectively,
since
the
utility
earns
an
equity
investment
or
an
equity
return
and
a
debt
return
on
their
own
Investments,
replacing
that
investment
with
a
only
using
only
debt
Capital
reduces
the
financing
cost
of
that
equity.
C
So
the
best
way
to
think
about
this
is
that
you're
not
reducing
the
principle
of
the
loan,
but
you're,
effectively
refinancing
it
and
you're
refinancing
it,
and
it's
not
necessarily
in
the
utilities
name.
It's
certainly
I'll
get
to
a
second,
it's
not
in
the
state's
name.
It
is
backed
by
captive
rate
payers.
C
So
sometimes
these
bonds
that
are
used
to
buy
out
the
utility
Investments
are
referred
to
colloquially
as
rate
payer
backed
bonds,
because
they're
financed
on
the
premise
that
a
utilities
customers
pursuant
to
a
statute,
have
guaranteed
the
repayment
of
the
bond
according
to
predetermined
rates
and
schedules.
C
So
here's
a
scenario
and
I
picked
up
fairly
extreme
scenario
in
the
sense
of
the
numbers
make
the
decision
obvious.
But
regretfully
this
is
something
that
plenty
of
states
have
dealt
with
and
at
least
to
a
certain
degree,
the
folks
in
in
the
eastern
part
of
the
state.
Will
this
will
sound
halfway
familiar
so
the
scenario
is
a
utility
has
a
power
plant
that
has
200
million
dollars
left
of
investment
on
it,
that
the
utilities
yet
recovered.
C
So
the
utility
figures
out,
they
ask
you,
know,
contractors
and
and
ask
folks
what
it's
going
to
cost
and
they
figure
out.
They
do
rfps
and
they
figure
out
that,
in
order
to
comply
with
the
law
that
200
million
dollar
power
plant
is
going
to
have
to
be,
increa
have
to
have
Investments
made
to
it
to
get
into
compliance
and
that
those
Investments
are
going
to
cost
an
extra
500
million
dollars.
C
However,
replacing
retiring
and
replacing
that
generator
with
another
generator
or
group
of
generators
would
cost
175
million
dollars,
and
the
Assumption
for
this
scenario,
is
that
the
replacement
generator
would
last
exactly
as
long
and
be
the
cost
of
which
would
be
recovered
over
the
exact
same
life
as
what
that
new
generator
would
run
after
it
gets
reinvested.
So
the
utility
sits
down
talks
to
their
accountants
and
says
it
is
the
least
cost
most
reasonable
thing
for
customers
to
retire.
C
At
the
same
time,
the
utility
request
PSC
approval
for
the
deferral
and
subsequent
recovery
of
the
remaining
value
of
the
retiring
power
plant
as
a
quote
regulatory
asset.
So
you
all
I'm
sure
you
all
heard
German
Gooch,
say
regulatory
asset
at
the
beginning
of
this,
for
anybody
in
here
that
pays
a
bill
to
Kentucky
Power,
what
used
to
be
the
Big
Sandy
retirement
Rider,
which
is
now
that
I
think
the
Big
Sandy
decommissioning
Rider
is
a
regulatory
asset.
C
So
a
regulatory
asset
is
a
paper
asset
that
reflects
a
cost
that
otherwise
would
have
to
have
been
incurred
in
a
single
year
like
a
ordinary
expense,
but
it's
treated
like
an
asset
and
instead
it's
recovered
over
a
number
of
years.
Generally,
since
it's
a
long-term
investment
and
ties
up,
Capital
regulatory
assets
earns
a
return
like
other
Investments,
including
a
return
on
the
equity
Capital
portion.
C
C
So
the
retirement
and
replacement
of
the
generator
is
an
economically
is
economically
better
for
customers,
because
one
of
them
is
going
to
cost
500
million.
The
other
one
is
going
to
cost
175
million
dollars.
If
the
utility
did
not
expect
to
get
deferral,
accounting
for
that
200
million
dollars
and
instead
knew
they
would
have
to
eat
that
200
million
dollars.
They
wouldn't
do
it
and
that
would
be
terrible
for
customers,
because
they
would
keep
running
that
200
million
dollar
plant
and
come
to
the
Public
Utilities
Commission
and
propose
the
500
million
dollar
upgrade.
C
So
assuming
that
the
PSA
agrees
that
the
replacement
generator
is
the
least
cost
best
option
to
serve
customers,
here's
where
the
scenario
stands,
the
old
power
plant
gets
retired.
The
value
of
the
old
plant
is
200
million
dollars,
the
new
generator
costs,
175
million
dollars
and
the
utility
earns
a
return
and
charges
customers
a
return
on
that
375
million
dollars
if
it
didn't
retire
in
secret
reg
asset.
C
C
So
here's
the
benefit.
This
is
where
we
get
to
how
how
it
seeks
and
I
don't
have
slides
on
this
part,
but
the
benefit
is
that
through
securitization,
which
I'll
explain
the
process
here
in
a
second
that
200
million
dollars
that
represents
a
regulatory
asset,
a
paper
asset
for
an
for
a
power
plant.
That's
now
on
the
ground
and
retired
that,
if
it's
stuck
with
a
utility
under
that
the
the
what
I
was
talking
about
earlier,
it
would
earn
a
seven
percent
return
for
the
utility
each
year.
C
If
customers,
if
securitization
occurred
and
customers
through
rate
payer
back
bonds
effectively,
were
on
the
hook
for
that
200
million
dollars
and
sent
a
200
million
dollar
check
to
the
utility,
then
the
cost
to
customers.
The
financing
costs
would
only
be
four
percent
if
it
was
debt
only
there
lies
the
benefit
that
some
states
have
determined
is
derived
from
securitization
that
you
effectively
refinance
regulatory
assets
for
assets
that
are
no
longer
in
productive
service.
C
So
the
process
and
I'm
going
to
move
quickly
here,
because
you
all
have
these
slides,
you
can
look
back
at
it,
but
the
process
would
be
that
the
utility
comes
to
the,
and
this
is
in
other
states
that
have
this
utility
comes
to
the
Public
Utilities
Commission
and
says
we
want
to
do
securitization
for
this
regulatory
asset
that
we
have.
C
We
want
to
go
out
and
find
bondholders
who
will
lend
the
money
to
customers,
and
here
are
the
costs
and
charges
that
we're
going
to
charge
customers
in
order
to
make
sure
that
the
bondholders
get
repaid
and
the
utility
isn't
those
aren't
the
utilities
dollars.
The
utility
is
just
they
just
so
happen
to
have
captive
customers
who
pay
bills,
and
so
the
utility
will
be
recovering
that
cost
on
behalf
of
lenders,
so
the
application
would
include
what
the
costs
that
are
represented
by
the
regulatory
asset
are
so
a
retired
power
plant.
C
That's
now
you
know
on
the
ground
is
hopefully
some
something
else
could
be
put
there
for
goodness
sakes
a
testimony
describing
what
the
proposal
would
be,
what
the
transaction
would
look
like,
what
the
customer
impact
would
be,
what
the
expected
savings
would
be,
what
the
cost
of
financing
would
be.
What
is
that
debt
rate?
Do
you
expect
it
to
be
three
percent
four
percent
five
percent,
and
what?
What
is
your
proposal
to
ensure
that
those
costs
are
non-by-passable
so
that
customers
have
to
pay
them
every
month?
C
Because
that's
why
you
get
such
a
low
cost
of
debt
for
these,
for
these
charges?
I'll
talk
about
it
in
a
second
but
securitization
bonds.
Up
to
this
point,
there
have
been
62
billion
dollars
across
the
United
States
of
securitization
bonds
issued
by
utilities.
C
Almost
every
single
one
of
those
gets
AAA
ratings
on
those
bonds,
and
the
reason
is
because
bondholders
feel
very
sure
that
they
are
going
to
be
repaid
their
costs
and
the
reason
for
that
is
because
of
how
strict
the
statutes
are
and
how
sure
they
are
that
those
customers
aren't
going
to
get
out
of
those
paying
those
costs.
C
So
the
PSE
would
review
and
other
states
review
the
application
to
make
sure
that
in
totality
The
Proposal
is
good
for
customers.
That
would
probably
look
like
a
Net
Present
Value
benefit
to
customers
over
whether
it's
10
or
20
years
as
compared
to
what
would
happen,
but
for
the
securitization
make
sure
that
securitization
doesn't
unnecessarily
impair
the
health
of
the
utility.
There
is
a
some
credit
rating
agencies
or
more
reasonable
than
others.
C
Some
perceive
this
to
be
debt
for
the
utility,
even
though
the
utility
doesn't
hold
the
debt,
some
don't,
but
certainly
that's
something
to
take
into
account,
because
you
don't
want
to
make
the
utility
so
worse
off
that
customers
are
in
totality
worse
often,
they
would
be
if
they
didn't
securitize
this,
and
then
some
states
allow
for
the
Public
Utilities
Commission,
since
this
is
what
they
they
don't
do
this
every
day
to
employ
either
Financial
or
legal
professionals.
C
So
the
PSC
would
look
at
whether
it's
a
net
benefit,
whether
customers
are
going
to
pay
the
bond
until
it's
it's
fully
paid
off
and
what
the
result
of
of
the
securitization
would
look
like.
So
why
do
you
securitize?
Well?
I've
talked
about
most
of
it,
you
replace
high
cost
high
cost
utility
investment
with
low-cost
debt
utilities,
make
investment
in
Assets
in
order
to
provide
services
they're,
not
financing
entities
right.
C
So
this
is
a
way
to
make
sure
that
they
get
their
money
back
so
that
they
can
then
take
that
money
once
something
is
securitized
and
reinvest
it
into
the
assets
that
are
needed
to
provide
service.
So
a
great
example
of
this
in
Most
states
that
have
used
this
for
retired
generators,
the
utility
will
take
that
money
that
was
securitized
after
they
get
that
check
and
they'll
go
and
invest
in
the
replacement
generation.
C
About
half
the
states
have
securitization
legislation.
Some
are
more
broad
than
others.
Some
are
very
particular
about
what
can
and
can't
be
securitized
a
couple
of
things.
Couple
of
of
items
that
are
allowed
to
be
stationed.
A
couple
midwest
states
who
had
during
winter
storm
Yuri
their
utilities
incurred
billions
and
billions
with
a
B
billions
of
dollars
in
gas
costs
over
just
a
couple
of
days
period
when
otherwise
they
would
have
just
incurred
me.