Stranded Cost Recovery: All FERC'ed Up

Fortnightly Magazine - November 15 1996
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Stranded-

Cost

Recovery: All FERC'ed Up

By Michael T. Maloney, Robert E.

McCormick, and Chad A. McGowan

The "lost-revenues" approach in Order 888 ignores the fact that cash flow drives

asset valuation . . .

. . . the key to measuring uneconomic investment.

Order 888, the new rule from the Federal Energy Regulatory Commission (FERC), is a sham (em for both consumers and producers. And it is probably illegal.

Order 888 grew out of the so-called mega-NOPR (Notice of Proposed Rulemaking), in which FERC sought rules for open access in electric transmission and, in particular, rules for the recovery of stranded costs. In turn, the mega-NOPR stemmed from the Cajun case,1 in which the Cajun Electric Cooperative had sought to buy its power from afar but use its local utility's transmission facilities for delivery, and had then sued the FERC after the Commission allowed Entergy to recover stranded-generation assets through its transmission tariff.

The D.C. Circuit Court agreed with Cajun that the FERC had not followed the proper procedure in setting the tariff, but the court went further. It gave its unsolicited opinion about what it thought the tariffs should look like (em it offered dicta that tariffs should not tie the recovery of stranded-generation assets to transmission charges. The court said such ties would violate antitrust law.2 In spite of that warning, that is exactly what the FERC did in Rule 888.3

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