RRBs: Rate Reduction Bonds
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RRBs or Rate Reduction Bonds are backed by the right to receive Competitive Transition Charges or CTCs collected by various electric utility commissions from their electricity customers. Like any other asset backed security, RRBs are issued by utility commissions or companies to improve their capital structure and cash flows.[br]
CTCs are collected from customers through their regular electricity bills and can be based on kilowatt usage or a flat fee or a specific percentage of the customer’s bill. These charges are aimed at recovering the costs incurred by a utility on the construction of nuclear and alternative energy production facilities. These facilities became uneconomic with the transition of various regulated electricity utility monopolies into competitive market based entities. The introduction of CTCs enabled these utilities to have a constant long term source of cash flows and the issuance of RRBs backed by CTCs allowed these utilities to have an improved capital structure.
The Process of Issuance of RRBs: Rate Reduction Bonds
Like all other asset backed securities, Rate Reduction Bonds are issued through the creation of a Special Purpose Entity or SPE. The SPE issues RRBs backed by the right to receive CTC payments from the customers of a utility. The proceeds of the issue are used by the respective utility to retire debt or equity.
Under the securitization process, a utility’s right to the CTC is transferred to the SPE via a sale of the asset. The asset sale ensures bankruptcy remoteness to the SPE from any deterioration in the credit quality of the utility. The sale in this case is only of that portion of the customer billings that relates to CTC and not the base rate charges. The CTC receivables are allocated for the amortization of principal and payment of interest on the RRBs.[br]
Advantages of RRBs: Rate Reduction Bonds
Rate Reduction Bonds offer several advantages over other types of asset backed securities.
Ø Since the RRBs are backed by receivables that have been mandated by state legislations, they offer cash flow stability that is better than other types of asset backed securities.
Ø The risk of prepayment is also very low in the case of CTCs.
Ø The inelastic demand for electricity results in a stable pool of receivables for a utility.
