A line-by-line case study of two high-priced portfolios, comparing fixed, variable and capital costs against forecasts of regional market prices.
A multi-billion-dollar wave of utility...
Charles Studness is not the type of person I would like to loan money to. I say this because if interest rates dropped in the future he would believe he was now entitled to borrow at the lower rates and not pay me what was owed.
In his latest diatribe against stranded-cost recovery ("Stranded-cost Recovery: It's Un-American," Financial News, July 15, 1996, p. 43), Studness tells us that recovery of stranded costs will keep Americans from purchasing electricity at the competitive price.
It certainly will; however, first all debts must be paid. This is common practice. The recovery of stranded costs did not thwart competition in telephones or gas pipelines, even though that recovery was substantial and continues through this day. What Studness wants is for people to escape their electric supplier's fixed costs. He wants this right because embedded costs are currently higher than marginal costs. In the past, when marginal costs exceeded embedded costs, neither Studness nor any of his ilk ever said "Let the utilities charge the higher marginal costs, because that is what the competitive market would charge." We didn't hear that argument when the shoe was on the other foot.
In 1978, when the Public Utility Regulatory Policies Act (PURPA (em which Studness never complained about and which cost American consumers tens of billions of dollars, enriching only a few) was enacted, utilities were told that gas was too premium a fuel to burn in boilers to generate electricity. Coal was too dirty unless you were from a coal producing state. Oil was already too expensive and going to cost much more in the future. Nuclear became the obvious option. Outside of a few environmentalists (who evince little concern as to how other people earn a living), no one told utilities, "Don't build nukes, we can do without power." Residential customers didn't say it. Business didn't say it. The regulators didn't say it.
Some plants were canceled in the 80's. Those that were completed took a very heavy hit from prudence reviews. Nevertheless, the shareholder is entitled to a fair return on that portion of the investment that regulators approved in rate base, as long as that plant is used and useful.
That was the deal. If someone tries to renege, shareholders should not sit idly by, like the shareholders of Niagara Mohawk Power Co. and Central Maine Power Co., and allow a few regulators or legislators wreck their life savings.
New Haven, CT
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