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Fortnightly Magazine - June 1 1995

Tranen explained, the FERC's Giga-NOPR seems to have made it less urgent (in the minds of IPPs and QFs) to isolate transmission from generation, but more urgent to disaggregate generation from distribution. Does Tranen's comment mean that the FERC's Giga-NOPR is off the mark? No. Nor does it settle the debate on a centralized "PoolCo" model versus a bilateral markets financial model. It's still important to separate competitive generation from any market power that utilities might wield in transmission markets. But Tranen's comments show that it won't end there. The accusation of "monopoly rents" will chase utilities around the clock until the past is put to rest.

Transition Forever

The view at DOE-NARUC was that the FERC's NOPR might actually delay the transition to a restructured competitive electric industry.

For instance, MIT visiting professor Paul Levy (and former chairman of the Massachusetts DPU) claimed that the FERC's NOPR might have slowed negotiations on an RTG in New England, since some of the parties "seem willing to live under the new FERC regime." Former FERC commissioner Charles Trabandt, now at Merrill Lynch, also chimed in: "The NOPR could slow the transition. It will impose a year of comments and litigation." Ohio PUC chairman Craig Glazer seemed to agree: "Utilities could lose their incentive [to settle] because the NOPR promises recovery of stranded costs."

And what about stranded investment? Should utilities accept the FERC's offer to recover "legitimate and verifiable" stranded costs, even at the risk of months of litigation?

Jerry Pfeffer, now energy industry advisor with the Skadden, Arps law firm, notes that stranded investment would remain a problem even if the FERC kept the transmission grid closed, because of competition from onsite and dispersed generation. At DOE-NARUC, Pfeffer suggested that Wall Street may have already marked off some assets as stranded, and advised utilities to consider negotiated settlements in place of litigation to get through the transition. "Utilities can mitigate stranded costs to a small degree by transferring costs to transmission," notes Pfeffer. "But that's only a drop in the bucket."

So just how deep is that bucket? If stranded costs are defined by some future open-market price for electricity, how can anyone figure out today what's stranded and what's not? Vermont PSB chairman Richard Cowart explained how you might need to look backward: "You can't say [today] that an above-cost QF is 100-percent stranded [when] in a past year, let's say 1985, the QF might have been cheaper than the utility."

Mike Yokell, president of Hagler Bailly, attempted to quantify stranded costs, presenting a very thorough analysis that included several

Letterman-style "top 10" lists: Top 10 plants most at risk (led by Comanche Peak); top 10 utilities in dollars of stranded costs (Texas Utilities, PECO Energy, SoCalEd, and so on); and the top 10 stranded states (Texas, Pennsylvania, California, Illinois, New York, and so on).

But Yokell then added, "If you have a long-term perspective, and you want to hold market share, you don't want to recover all your stranded investment. [Otherwise] you'll end up with a shrunken company." Yokell won