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Fortnightly Magazine - November 1 1995

equity by assigning two figures for cost of capital: one for the utility generation function, and one for utility transmission and distribution (T&D) plant.

The proposal came from rate-of-return witness Susan Morse, who testified on behalf of California Independent Energy Producers, Inc. According to IEP, most perceived and actual risk for electric utilities lies with the generation function. Thus, it proposed: "It is appropriate that a separate generation ROE should be adopted, and the generation ROE should be higher than the T&D ROE." The association claimed that unbundling would "help open electric services to competitive markets, while continuing regulation of natural monopoly services."

The CPUC was impressed, but not enough to make a change: "We decline to unbundle costs of capital now because it is premature, not because it is economically unsound."

Partial credit given for 1(a), 1(b), or 1(c).

Competition or Efficiency?

Another interesting case arose in Ohio this past summer. Responding to a complaint filed back in 1993 by a small company called Youngstown Thermal, L.P., which sought to serve cooling load at the Mahoning County Jail, the Ohio PUC issued a finding of fact that Ohio Edison Co. was "furnishing service to the jail's cooling load at below actual cost for the purpose of destroying competition." (Case No. 93-1408-EL-CSS, Aug. 31, 1995).

The PUC stopped short of deciding whether Youngstown Thermal had proven a claim under Ohio Revised Code, sec. 4901.61, for "destroying competition." Lacking jurisdiction to grant a compensatory remedy for damages, the PUC left that matter for the courts. But it did comment briefly on how it reached its factual conclusion that Edison was charging

prices below costs "for the purpose of" inhibiting competition.

The issue did not differ much from that posed by the IEP in the CPUC cost-of-capital case. When comparing costs, how do you isolate the specific elements of service in which both competitors actually compete? In Ohio, the PUC concluded: "If one component of the total consideration provided by the utility is a jurisdictional service, i.e., electricity, then all other considerations provided by the utility as inducements for securing the sale must be fully recognized."

A few weeks ago, on October 2, The Washington Post published a financial column by Rudolph A. Pyatt, Jr., entitled, "Utility Mergers Should Generate More than Management Power." In that piece he took a moment to examine the latest (at this writing) big merger announcement (em Potomac Electric Power Co. and Baltimore Gas and Electric Co.

Pyatt quoted former Virginia Power executive William Berry as having said, back in 1986, that "The real goal isn't competition. It's economic efficiency in a structure that will provide for adequate electric service over the long term." Those words remind me of a comment made by Wisconsin PSC chairman Scott Neitzel at the MAPP conference in Minneapolis.

"The trick," he said, "is whether we can merge the 'engineering' paradigm of regulation with a financial view of utilities to create a hybrid.

"As regulators, we have to make a decision. Are we going to regulate, or are we going to market?"