Oklahoma Supreme Court to rule on utilities' winter storm bonds

Bloomberg News

Five years after a fierce winter storm hit Oklahoma, the state Supreme Court is weighing the fate of $1.45 billion of bonds sold to recover extraordinary costs incurred by utilities to keep their customers' heat and lights on during the extreme weather event.

The final brief was filed with the high court last week in an appeal case targeting taxable ratepayer-backed bonds issued for Oklahoma Gas and Electric Company, which will be considered together with a similar appeal involving bonds sold for Public Service Company of Oklahoma, according to three Republican state lawmakers, who are challenging the debt and rate hikes. 

"We have asked the court for a lot," State Rep. Kevin West said in a statement. "We not only asked the justices to overturn the (Oklahoma Corporation Commission's) rate increases and orders authorizing OG&E and PSO's 2021 Winter Storm Uri bonds. We have asked the court to require the OCC to follow state ethics rules and to follow state laws that require audits to be conducted by licensed (certified public accountants)."

OCC and the utilities warned the court against impairing PSO's nearly $697 million of bonds and OG&E's $761.65 million of bonds that were sold through the Oklahoma Development Finance Authority in 2022. 

"It would be incomprehensible and unreasonable to allow appellants years later to come along and unwind a financing mechanism intended to remain in place for 20 or more years," OCC's Jan. 28 court brief said. "The consequences of such a reversal are unimaginable, especially when layering on the disruption that would be created in the bond market and for bondholders themselves." 

The debt issuance was based on the finality of OCC's securitization orders and consumers are paying rates based on "that settled financing structure," while utilities "structured their balance sheets accordingly," OG&E's said in its Jan. 23 brief.

"Allowing appellants to unsettle that order now — years after issuance, without having participated in the original proceeding — would not only harm those specific reliance interests but would fundamentally undermine the securitization mechanism for all future proceedings," the brief said.

During Winter Storm Uri, which pummeled Southwest states with snow, ice, and high winds amid record low temperatures in February 2021, utilities incurred huge costs as the natural gas spot market price spiked.

In order to ease the financial impact on ratepayers while allowing the utilities to pass the costs onto them, the Oklahoma Legislature passed a law in 2021 allowing OCC to authorize securitizations backed by a special monthly fuel cost charge collected by utilities over a longer time period.

The deals OCC authorized for PSO, OG&E, Summit Utilities Oklahoma, and Oklahoma Natural Gas Company resulted in total bond issuance of $2.89 billion in 2022 through the development finance authority. All of the bonds are non-callable and cannot be prepaid, according to their official statements, which also list dates in 2022 when the final OCC orders for the securitizations became non-appealable and not subject to OCC rehearings.

The bonds were rated triple-A based on an "irrevocable" ability to collect winter storm cost charges from the utilities' Oklahoma customers, as well as a "true-up" mechanism to ensure collections cover debt service. Two of the utilities have used that mechanism after tapping reserve funds to help make debt service payments.

Oklahoma Legislature

The lawmakers claim OCC orders for the securitizations and rate hikes should be overturned due to the agency's lack of compliance with the state's accountancy act, which requires audits to be conducted by independent and licensed CPAs and not by the utilities themselves or OCC employees who are not CPAs, as well as other issues. 

"The OCC's void orders must be vacated, the 2021 Winter Storm coverup must end, and lawful audits must be performed so the wrongs done to OG&E and PSO's customers can be properly remedied," their final brief filed Feb. 17 said.

Briefs filed in response to those claims point out the bonds were approved by Oklahoma's Council of Bond Oversight and validated by the state Supreme Court ahead of issuance, making them "incontestable." They also argue the lawmakers lack standing, their challenges are moot, and that the OCC compiled with the type of audits required under the state's securitization law. 

"The overinclusive reading of the audit requirements runs counter to the legislature's clear directive… that rate case audits are exclusively a reconciliation between: (1) 'all amounts [a utility] received from customers' through the ratepayer-backed bond scheme; and (2) 'the amounts paid by the utility to the Oklahoma Development Finance Authority,'" the Oklahoma attorney general's Jan. 27 brief said.

Controversy has dogged the securitizations for years.

The pricing of the first securitization, which was OG&E's deal through an underwriting team headed by RBC Capital Markets and Wells Fargo Securities, led to a call by then-OCC Commissioner Bob Anthony for an independent assessment. He cited a much higher than expected monthly cost to ratepayers to pay off the bonds that resulted from the pricing.

A 2024 OCC report on finalized costs for all of the securitizations said a delay in issuing the bonds cost ratepayers about $277.35 million due to a 75-basis point interest rate hike by the Federal Reserve that occurred before the debt was cleared for pricing. That delay was caused by unsuccessful challenges to the debt's validity before the Oklahoma Supreme Court that questioned its constitutionality and if it was properly authorized under state law. 

The effective annual weighted average interest rates for the four taxable deals, which carry final maturity dates for their various series from 2033 to 2052, ranged from 4.523% to 5.269%.

Debt issuance costs came in $1.4 million under approved estimates, according to OCC, which maintains a webpage dedicated to securitization reports. 

Anthony, whose OCC term ended in January 2025, questioned the commission's compliance with state law in producing required audits of the bond issues. 

The bonds were also drawn into Oklahoma Attorney General Gentner Drummond's probe of potential profiteering and other misdeeds stemming from the 2021 storm. A subpoena from his office in 2023 that directed OCC to produce internal and external communications directly or indirectly related to storm cost recovery included the securitizations.