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How Stranded Will Electric Utiliites Be?

Fortnightly Magazine - February 15 1995

the net present value of this revenue loss, and the combined federal-state income tax rate.

We compared the two sets of market electricity prices for each of the nine NERC regions with the values of industrial electricity price for each of the 160 major IOUs in our database. If the utility's price exceeded the market price, we computed the annual revenue loss and assumed that the loss (in real dollars) would persist for 10 years. We computed the net present value of this annual loss over the 10-year period using a real discount rate of 8 percent. This discount rate is equivalent to a return on equity of 11 to 12 percent and an annual inflation rate of 3 to 4 percent. Finally, we reduced the total loss by 35 percent to account for the amount that taxpayers would contribute through federal and state income taxes.

Who Stands to Lose?

Among individual utilities, industrial prices in 1993 ranged from less than 2 cents per kilowatt-hour (›/Kwh) to over 10›/Kwh. Across the nine NERC regions, CCCT prices ranged from 3.6›/Kwh in ECAR to 4.6›/Kwh in MAAC. And the capacity-adjusted price ranged from 2.4›/Kwh in ERCOT, MAAC, NPCC, and WSCC (where capacity margins are all above 20 percent) to

3.6›/Kwh in MAIN and SERC (where capacity margins are only about 16 percent). Because of these large price differences, both across individual utilities and across regions, a substantial amount of revenue could be "lost" for utilities that charge prices above the regional market price.

Consider, first, the industrial sector alone. As the assumed market price of power declines from the CCCT price to the capacity-adjusted price, the amount of SC increases (see Table 1), ranging from 19 to 38 percent of the equity held by all the major U.S. IOUs. To use what we consider a reasonable example, imagine that industrial customers can obtain electricity at the capacity-adjusted price. Overall, 77 percent of IOU industrial sales would be affected, leading to an annual revenue loss of $15.8 billion. The net present value of the associated after-tax earnings loss is $68.8 billion, which represents 38 percent of IOU equity.

If all retail customers (residential, commercial, and industrial) are able to obtain electricity at market prices, the amounts of SC are even larger, ranging from 54 to 115 percent of utility equity (see Table 1). However, it is unrealistic to match a large demand with a very low price (or vice versa). Thus, competition that allows only the industrial class to access competitive generation markets will yield low market prices, but if industry restructuring allows all retail customers to obtain market-priced power, that price will be higher.

For the industrial-only/capacity-adjusted price case (colored bars in Figure 2), losses are highest in MAAC (54 percent of IOU equity would be stranded with these assumptions) and lowest in SERC (16 percent). Altogether, 153 of the 160 IOUs examined face some SC in this case. Of these, 17 have SC that exceed 100 percent of their equity; another 120 have SC between 10 and 100 percent of equity. Twenty utilities