[BETA] Fortnightly

We stand on the threshold of a new era in the electric services industry. I deliberately avoid the term "electric utility industry," because the future is not limited to the vertically integrated monopoly utility. Many utilities may already perceive the first cracks in their armor: nonutility generators (NUGs), self-generators, and energy service companies.

Competition is not in the industry's future; it is here now. Further, competition and market forces are not going to magically disappear. Any prudent corporate manager eyeing construction of a new manufacturing plant can list a full array of electricity supply choices. Investor-owned utilities, municipal utilities, NUGs, demand-side management providers, self-generation, fuel cells, photovoltaics (em these options are all available now.

If we have our way in California, consumers will be empowered to a rare level. They will gain the ability, if they choose, to buy generation services from any number of NUGs and pay for transmission and distribution to their site of consumption. Brokers and marketers will develop and offer procurement services to interested consumers, perhaps even offering a bundled price tied to an exogenous index. A concrete manufacturer in California, for example, may be able to buy electricity at prices linked to the market price for concrete. Consumers interested in high-quality service will be able, independently or through brokers, to contract with several different backup and standby sources (em either generators or consumers willing to shut down.

California's "Transition Charge"

Nevertheless, certain impediments obscure this new vision. For many, the big question is "stranded costs" (em largely the embedded costs of existing utility generating assets that will be overvalued in a market-oriented system. But to my mind, the term "stranded cost" is not really accurate; a better term is "uneconomic cost." Nothing is really "stranded"; generating assets can continue to produce a commodity with value. What is happening is that the movement or transition from a regulated environment to a market environment compromises the "regulatory compact." We will no longer be able to guarantee that the amount a utility spends on an asset can be recovered through rates.

So, what do we do with these costs? One option is to continue to charge them to consumers that remain on the utility system, the so-called "captive" customers. Unfortunately, this option only exacerbates a utility's uncompetitive position. Another path is to ignore such costs by requiring utilities to write down their assets and, in more than a few cases, leaving them open to bankruptcy. Again, not an attractive option.

In California, we proposed a "competition transition charge" (CTC). Utility generating assets are divided into economic and uneconomic portions. The uneconomic portion is collected from direct- access customers leaving the system. The utility remains at risk for the economic portion, but can compete to serve potential direct-access customers. If it cannot compete, the shareholders must foot the bill. Calculating the uneconomic costs of utility generation is, of course, very complex. First, what mechanism separates economic from uneconomic costs? Ideally, an exogenously derived market price: Costs above market price are uneconomic; costs below are economic. Of course, we have yet to