SECTION 2. BACKGROUND

In general, State public utility commissions set rates for public utility companies that are calculated to allow for the recovery of prudently incurred costs. In the case of capital expenditures, rates are set to allow recovery of costs over an extended period of time. With the advent of restructuring and a competitive marketplace, these rates are no longer guaranteed. Thus, the recovery of previously incurred costs associated with generation facilities that have market values below their book value, as well as costs associated with contracts to purchase electricity at above-market prices, have become uncertain. Some States have enacted legislation to allow the recovery of these costs through a non-bypassable surcharge to customers upon their consumption of electricity within the utility’s historic service area. These statutes, which also

authorize securitization of the surcharge, are unique to the regulated utility industry. Accordingly, the law and analysis applied to these transactions is peculiar to this situation.