Colorado Governor Polis and Fellow Governors Call on SEC to Take Action to Save Americans Money on Electricity

Letter

Dear Chairman Gensler,
As a group of eight Governors, we urgently ask that the Securities and Exchange Commission (SEC)
address the problematic reclassification of utility recovery bonds by index providers such as
Bloomberg and now as suggested by SEC Division of Corporation Finance staff. These reclassifications
significantly increase utility borrowing costs, which in turn raises electric rates for millions of American
households. To date, the cumulative effect has already imposed substantial costs on electricity consumers—
the attached Wall Street Journal article dated March 28, 2024 contains analysis that the impact may be as
high as $3 billion in additional costs over the life of the bonds. This issue directly pertains to one of the
SEC’s core missions: to “maintain fair, orderly, and efficient markets.” We urge you to swiftly move to
provide that utility recovery bonds are, in fact, corporate bonds, not complex and therefore expensive asset-
backed securities.

Utility recovery bonds are authorized by specific state legislation. These bonds, also referred to as
“ratepayer-backed bonds”, “securitization bonds,” or “stranded cost bonds,” are essential financial tools
for regulated utilities to finance climate adaptation, asset retirements, and disaster recovery measures. Due
to specific state legislative and regulatory support, as well as federal constitutional protections, utility
recovery bonds achieve the highest possible credit ratings (AAA/Aaa), directly lowering the cost of capital
for regulated utilities, and therefore minimizing utility customer costs as compared to other forms of
financing.

Many of our state legislatures have passed enabling legislation for investor-owned utilities to use this type
of financing, or are actively contemplating it. In states where this kind of financing is permissible, and a
state-regulated utility proposes a recovery bond that is approved by their regulator, these bonds have
binding priority rights to certain utility revenues or surcharges and are thus much lower risk than other
utility debt offerings, let alone any asset-backed securities. By definition these bonds ensure that a specific
portion of customer rates – irrespective of the current or future owner/operator of the regulated utility– will
pay back the bond. This is just another form of utility finance regulated by the states, which provides
additional certainty for lenders, utilities, and their customers. Bloomberg and now the SEC staff's
interpretations hurt our state regulators' ability to protect consumers by raising the cost of capital through
reclassification.

Classification of utility recovery bonds as “asset-backed securities” defies common sense, harms millions
of electricity consumers, and provides no clear investor protection benefit. Utility recovery bonds are in no
way like asset-backed securities such as credit card bonds, collateralized debt obligations, or any asset-
backed security such as those that were problematic during the financial crisis. Any similarity to asset-
backed securities is superficial and not substantive for the purposes of the chosen SEC disclosure regime.
Sometimes taking a little from a lot of people doesn't get noticed and therefore no one may seem to care.
But governors and regulators do care.

It is important to note that the SEC has never made a formal rule or regulation on this issue and instead has
been directed through staff interpretations. The staff's unexpected July 31 announcement and its
interpretation about different definitions of asset-backed securities under the '34 Act and Regulation AB
did not offer notice or public comment period, as is standard for rules and regulations. Moreover, the
interpretation did not consider the effect on electricity consumers. It remains unclear why the announcement
was made or how utility recovery bonds meet any definition of asset-backed securities. Staff appears to
elevate, literally, SEC filing forms over substance without regard to the public interest.

With billions of dollars more recovery bonds being issued in the near future, affecting many millions of
Americans and their electricity bills, this issue is more important and pressing than ever. We believe that
accurate classification and regulatory clarity are essential to serving the public interest. This enables
markets to set interest rates on these bonds efficiently without paying the penalty associated with asset-
backed securities like mortgages, credit card and auto loan bonds. We urge you to have the SEC staff
provide that utility recovery bonds are, in fact, corporate bonds, not complex asset-backed securities.

We would like the opportunity to have our utility regulators and their experts discuss these issues with you.
More specifically, we have attached a list of questions that will help us understand whether additional
legislation is necessary at the state or federal level, as well as how SEC staff interpretations of SEC rules
and regulations serve the SEC mission for efficient capital markets and investor protection. We will contact
your office to arrange a meeting concerning these questions.

We hope you share our concern that mislabeling risks slowing down the pace of and raising the cost of
critical priorities, including supporting our utilities and communities in recovering from extreme weather,
lowering utility costs for all customers, and speeding up the deployment of new energy technologies.

Sincerely,

Source