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Fortnightly Magazine - September 1 1996

Six weeks ago I wrote a column ("$70,000 an Hour," July 15, 1996, p. 4) about nuclear waste, the Department of Energy (DOE), and the billions of dollars paid in by electric utilities that lie stranded in the federal nuclear waste fund.

On July 23 a federal appeals court ruled that DOE must establish a repository and begin accepting high-level nuclear waste for storage, beginning January 31, 1998. (See, Indiana-Michigan Power Co. v. DOE, D.C. Cir. Nos. 95-1279, et al.)

At one point, a federal district judge in the case reportedly told DOE's attorney, "If your client was a private corporation, it would be in jail by now."

The appeals court was no kinder. Referring to DOE's attempt to collect fees from utilities without solving the storage problem, the court invoked an old, off-color Yiddish proverb: "Here is air; give me money."

Changing Views

During the past several months you may have read about a study that found no net stranded investment for electric utilities in Massachusetts. In other words, the state's utilities could sell their plants at a price above net book cost, reaping a gain from restructuring. ("Estimation of Market Value, Stranded Investment, and Restructuring Gains for Major Massachusetts Utilities," Apr. 17, 1996, Resource Insight, Inc., Boston, Tel: 617-723-1774.)

Yet you may not be aware of another study on stranded costs, put together by Commissioner John Hanger of the Pennsylvania Public Utility Commission (PUC), and attached as an appendix to a separate analysis (over 100 pages, plus tables and charts) that he prepared to support the PUC's July report on electric deregulation. (Report and Recommendation to the Governor and General Assembly on Electric Competition, Docket No. I-940032, July 1996.)

To learn more, I spent some time on the phone talking with Commissioner Hanger as well as Jonathan Wallach, vice president of Resource Insight (RI) and one of the study's authors (along with Paul Chernick, Susan Geller, Rachel Brailove, and Adam Auster).

The RI study counters the predictions of stranded cost offered by the major Massachusetts electric utilities in restructuring documents they filed in February. "We don't care about the sunk costs," says Wallach. Once you've established that a plant can earn an operating profit, the next question is the magnitude of the profit as compared to book investment.

"It's one minus the other that gives you the net stranded investment or gain."

What makes the RI study unique is its recognition of the capacity value of reliability. It holds that a generating plant is worth more than just 2.5¢/Kwh in energy output. (The RI study assumes that energy value rises from 2.5¢ in 1995 to 4.75¢ in 2003.) Thus, RI adds in a capacity component, pegged in 1996 at $10.56/Kw (a depressed price due to excess capacity), but rising by 2003 to $51.75/Kw (the full cost in 1996 dollars of a peaking plant (em a combined-cycle, gas-combustion turbine). By 2003, Wallach presumes, New England will need new capacity.

In short, the RI study reinforces the idea that reliability has a cash value (em a point obscured by the current condition