Bloomberg's Bond Shift Could Cost Consumers $3B

Key Takeaway

• Bloomberg's reclassification of utility recovery bonds to asset-backed securities has led to higher borrowing costs for utilities, impacting millions with an estimated $3 billion in additional electricity bill charges over the bonds' life.
• The decision restricts potential buyers, forcing utilities to pay more interest on new debt issuances, a cost passed onto consumers as higher monthly bills.
• Critics argue the move is against public interest and ignores regulatory precedence, with calls for Bloomberg to reconsider and suggestions for increased regulation of index firms.

Impact of Index Reclassification on Utility Bonds

In the summer of 2022, Bloomberg made a pivotal decision to reclassify certain utility bonds from being categorized as corporate bonds to asset-backed securities. This reclassification has had a significant impact on the utility sector, particularly affecting the borrowing costs for utilities. These bonds, often issued by utilities to fund repairs after natural disasters, found themselves shifted in Bloomberg’s bond indexes, which in turn limited their appeal to a subset of investors. This limitation is due to restrictions placed on many institutional and individual investors against purchasing asset-backed instruments. As a result, utilities issuing these so-called recovery bonds now face higher interest rates on new debt issuances, a cost that is inevitably passed down to consumers in the form of increased monthly electricity bills. According to Joseph Fichera, CEO of Saber Partners, this change could collectively add approximately $3 billion in additional costs over the lifespan of the bonds, translating to about $150 million annually.

Regulatory and Market Response

The decision by Bloomberg has not gone without its critics, particularly from state electricity regulators and utility companies who argue that this reclassification forces customers to overpay for debt that is perceived to be safer and less complex than typical asset-backed offerings. Critics, including Andrew Maurey from the Florida Public Service Commission and Bob Boada, a former treasurer of Southern California Edison, have voiced concerns that this move overlooks regulatory precedence and is against public interest. Despite these criticisms and the filing of complaints, Bloomberg stands by its decision, asserting that it was made through a robust governance process and serves the public interest by ensuring a more accurate and transparent market.

Market Implications and Borrowing Costs

The reclassification has led to tangible increases in borrowing costs for utilities. For instance, Southern California Edison experienced a notable jump in the spread of its bonds to U.S. Treasurys, from about 0.6 percentage points to approximately 1.2 percentage points after Bloomberg’s change. This increase in spreads indicates a higher cost of borrowing for the utility, which ultimately affects the financial burden on consumers. PG&E’s bond offerings before and after the reclassification further illustrate the financial impact, with spreads widening significantly post-reclassification. This scenario underscores the broader implications of index reclassification on borrowing costs and the financial ecosystem within the utility sector.

Street Views

• Joseph Fichera, Saber Partners (Neutral on the impact of Bloomberg's decision):

  "This unexplained reversal and massive mispricing may be great for Wall Street but is not fair to electricity customers."

Management Quotes

• Andrew Maurey, Florida Public Service Commission:

  "This is against the public interest."

• Bob Boada, former treasurer of Southern California Edison:

  "The utilities’ concerns appeared to carry little weight in the decision."