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Financial News

Fortnightly Magazine - March 15 1995

rates, tailor utility services to customer preferences, and accelerate technological progress. The public and shareholders thus have a mutual interest in promoting utility competition.

By contrast, managements and regulators have incentive to maintain the status quo and stifle competition. Competition would end the shelters that managements enjoy as monopolists and put them under more shareholder pressure and scrutiny. Competition would similarly curtail the power of regulators.

The transition to competition will undoubtedly involve writeoffs for stranded investment, since the forces generating competitive pressures are unlikely to tolerate any substantial recovery of stranded investment through rate surcharges. As with book value dilution in the late 1970s and early 1980s and imprudence disallowances in the late 1980s, writeoffs for stranded investment will represent a cost that excess capacity has imposed on shareholders, since the plant being written down was built in the face of excess capacity. In a sense, these writeoffs will be the third and final installment of the costs of excess capacity, and of about the same size as the two earlier hits.

The overriding objective for shareholders should be to reduce regulation to the absolute minimal level to ensure higher earned returns in the future. It would be a mistake to compromise this objective in an attempt to reduce the hit of stranded investment. Paper writeoffs for stranded investment are probably inevitable, and a small price to pay for freedom from the financial burdens imposed on shareholders by the present system. Similarly, it is in shareholders' interest to resist government involvement in the creation of a spot market through a PoolCo, which would enable regulators to continue their control of the industry. Such measures will only prolong substandard earned shareholder returns. t

Charles M. Studness is a contributing editor of PUBLIC UTILITIES FORTNIGHTLY. Dr. Studness has a PhD in economics from Columbia University, and specializes in economics and financial research on electric utilities.


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