[BETA] Fortnightly

A new law could help New York utilities reduce electric rates

and improve their balance sheets.

Legislation recommended by Gov. Pataki on June 1, 1996, seeks to provide the New York Public Service Commission (PSC) with a new financial tool to address possible stranded costs as the state moves toward a competitive retail electric market.

The proposed legislation, the Electric Ratepayers Relief Act of 1996, would allow electric utilities to obtain highly secure, lower-cost financing for intangible expenditures using a statutory credit mechanism similar to that used by Puget Sound Power and Light Co. (Puget Power) in June 1995 (see sidebar). After successfully lobbying for specific legislation in Washington State, Puget Power was able to "securitize" over $200 million in expenditures for demand-side management (DSM) at a triple-A rating (as compared to an underlying utility rating of A-A3).

While the New York bill has gained approval from a broad range of constituents (see sidebar) and has passed the state Senate by an overwhelming margin, the state Assembly did not act on it before summer recess. The Governor hopes the Assembly will pass the bill when it returns later this year, as many expect it will. As a transition tool, the Act would "sunset" by December 31, 2000.

Policy Issues for the PSC

Over the past 24 months, the PSC has pursued its Competitive Opportunities Proceeding as a collaborative forum for industry participants to discuss and shape the roadmap for the deregulation of New York State's electric markets. It issued its major policy decision in May 1996.1 In that order, the PSC laid out a timetable for the state's utilities to file plans, which must include details on:

s Setting protocols for a statewide independent system operator

s Separating generation from transmission and distribution

s Mitigating and resolving strandable costs.

As the PSC reviews these issues with each utility on a case-by-case basis, the negotiations on measuring, mitigating, and allocating the burden of strandable costs will prove thorny at best. The financing and recovery of intangible expenditures are particularly sensitive in the transition to a competitive market, because they are not backed by free-standing productive tangible assets.

The Act has been crafted as a policy tool that effectively "enlarges the pie" of an otherwise zero-sum stranded-cost game, and could be used by the PSC as part of the broader negotiations that will ensue in this area. Specifically, by giving the PSC the ability to confer "irrevocability" on a portion of a utility's intangible expenditures recovery (which may otherwise prove uncertain, and financeable only at higher cost), the PSC gains a basis for exchanging utility (and, potentially, third-party) adjustments or concessions (e.g., write-downs, cash settlements, and multiyear rate reductions) for the benefits made available by the financing.

Statutory Details

The Act creates a number of new technical features:

s Qualified Expenses. A new category of expenditures ("qualified intangibles expenditures"), defined by statute, representing costs incurred by an electric utility, for which it does not acquire any physical property (em i.e., buy-outs of independent power producer (IPP) contracts, DSM expenditures, environmental remediation expenditures, and expenditures