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Mailbag

Fortnightly Magazine - September 15 1996

not only winners and losers among sellers but winners and losers among buyers, due to current inter- and intraclass subsidies. That happened in the phone industry between long-distance and local service; it's happening now in the gas industry.

I would like to call my broker, place my order, and pay the same commission per share as Fidelity. Sorry fellas, it just doesn't work that way.

Jim Lundrigan

New Haven, CT

A Term Limit on "Luck"

"The Lucky Few" (Frontlines, 7/1/96, p. 4) profiles the recent actions of the major Michigan utilities to lock up their major industrial customers. Their actions reinforce the observation that no monopolist readily gives up market share. While few aspiring competitors would expect anything different from these utilities, it is gratifying to see that some state regulators see through the ploy of long-term special contracts as an appropriate response to the "threat" of competition.

In a recent decision (Docket No. DR95-114), the New Hampshire Public Utilities Commission (PUC) approved a discount contract for an industrial customer of Public Service Co. of New Hampshire only after adding an early termination clause. That clause allows the customer to terminate the contract upon the date the PUC approves retail competition, and removes a provision preventing the installation of additional generation on site.

The PUC explained: "As we make the transition to retail competition, we cannot afford to allow incumbent monopoly providers of electricity to enter into contractual arrangements that could undermine both the advent and level of competition in the state."

The PUC sees its actions as "ensuring that special contracts are not used to impede or circumvent future competition." One can only hope that other regulators will follow New Hampshire's lead and place similar term limits on contracts designed to meet the competitive "threat."

John Stauffacher

Director, Public Affairs

Destec Energy, Inc.

AFUDC: Not "Unearned"

Patrick Keenan's claim that allowance for funds used during construction (AFUDC) might represent "unwarranted economic rents" for nuclear construction is not economically defensible.

[See, "Drawn on the Back of a Napkin," Off Peak, 4/15/96, p. 54, in which Keenan suggested offsetting stranded investment with accrued AFUDC.]

Private companies that have no access to AFUDC must take a flyer on raising cash for large capital facilities, and hope for a high (say, 20 percent or more) return on investment to cover the costs of capital, provide for risk, and provide a return for themselves and their shareholders. By contrast, utilities are limited to a regulated return on equity just high enough to entice the purchase of their stock, but inadequate to cover the costs of capital formation. Without AFUDC, utilities would be economically unable to capitalize facilities.

AFUDC (which Keenan said was "built up to such high levels back in the 1970s") is not "unearned." Instead, Mr. Keenan's proffered position, based on politics rather than microeconomics, is unwarranted.

Kenneth J. Weatherwax

Associate Engineer

Sierra Consulting Corp.

Roseville, CA

Reliability: What's Missing in New England

In spite of our earthquakes, reading "A Summer of Shortage" (Perspective, 7/15/96, p. 16) made me glad I live in California. How