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Electric Restructuring: An Urgent Proposal

Fortnightly Magazine - November 1 1995

required to offer them to marketers on the same basis they offer basic T&D services. Marketers would be free to acquire these services from utilities or third parties, or to produce them themselves.

A Concrete Proposal

My proposed restructuring plan incorporates 1) immediate customer choice, with market-driven pricing; 2) an opportunity to recover stranded costs; and 3) flexibility that does not forestall any particular future industry structure.

1. Utilities file unbundled rates for generation, transmission, distribution, metering, billing, and ancillary services effective January 1, 1997. T&D rates contain no adders above cost of service, but include the cost of coordination, dispatch, and reliability.

2. Price caps begin for each customer class on January 1, 1997, continuing for five years through December 31, 2001, at which time they are reset for another five years. The price caps are set at current rate

levels and are equal to the sum of the unbundled rates. The price caps decline in real terms by an "X" factor each year, adjusting for unforeseen exogenous factors. Utilities may offer discounts below the price cap without authorization.

3. Utilities retain pretax earnings above the amount required to earn their allowed return on equity, as compensation for potential stranded costs. Recovery of stranded costs is limited to this mechanism.

4. Any customers may elect open access effective January 1, 1997, purchasing electric services from their local utility or from any power marketer. Customers that so desire may obtain an all-requirements service from their utility.

5. Utilities unbundle all services (em transmission, distribution, metering, billing, and ancillary services (em on a common-carrier basis. T&D services include dispatch, coordination, and reliability.

6. Power marketers buy unbundled services from utilities and third parties, or produce the services themselves.

7. Utilities may compete as power marketers under the conditions that apply to other power marketers. Utilities enjoy the same freedom as power marketers in constructing new innovative services, which they may offer in addition to all-requirements services provided of last resort.

8. The duty to serve continues if the customer remains on the utility's system. The obligation terminates once a customer leaves the system. All obligations to serve end once competition is fully effective.

At the Heart of It All

The heart of the plan lies in Point 3: The provision for recovery of potential stranded costs. No other issue in restructuring is so divisive. The plan defers any decision on vertical disintegration, or the formation of pools, until regulators and utilities are better equipped to make more informed decisions.

The plan intends to provide utilities with the same incentive that unregulated companies have to cut costs and improve productivity. Price caps are central to this objective. Since utilities will be able to retain all earnings in excess of their allowed return, they will have far more incentive to cut costs and improve productivity than in the past. By retaining any pretax earnings surplus, utilities may receive compensation for potential stranded costs, offsetting undepreciated plant investment and regulatory assets over the next five years. The benefits do not come at the expense of customers,