Utility Revenue Bond

Last updated on 2023-09-26 13:59:02

A utility revenue bond, also known as an essential service bond, is a type of municipal bond issued to finance a public utility that repays bondholders directly from project revenues rather than a general tax fund.

Definition: Utility revenue bonds, also known as essential service bonds, are bonds issued by municipal governments to finance public utilities. Bondholders are repaid directly from the project's revenue rather than from general tax funds.

Origin: The concept of utility revenue bonds originated in the early 20th century when municipal governments needed to raise funds for large infrastructure projects such as water treatment plants and power stations. By issuing these bonds, municipalities could use future project revenues to repay the debt without relying on tax income.

Categories and Characteristics: Utility revenue bonds can be categorized into various types, mainly including water bonds, power bonds, and transportation bonds.

• Water Bonds: Used to finance water treatment and supply projects, with revenue sourced from water fees.
• Power Bonds: Used to finance power generation and distribution projects, with revenue sourced from electricity fees.
• Transportation Bonds: Used to finance public transportation systems, with revenue sourced from ticket sales.

The main characteristic of these bonds is their relatively low risk, as their revenue sources are typically stable and predictable.

Specific Cases:

1. New York City Water Bonds: New York City issues water bonds to finance its extensive water treatment and supply system. The repayment source is the water fees paid by residents, which are stable and predictable, ensuring the bond's security.
2. Los Angeles Power Bonds: Los Angeles issues power bonds to upgrade its power infrastructure. The repayment source is the electricity fees paid by residents, which are also stable, reducing investment risk.

Common Questions:

• Q: What are the main risks of utility revenue bonds?
  A: The main risk is that project revenues may be insufficient to repay the debt, such as water or electricity fees being lower than expected.
• Q: How do these bonds differ from general municipal bonds?
  A: Utility revenue bonds are repaid from specific project revenues, whereas general municipal bonds are repaid from the municipality's tax revenues.

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