[BETA] Fortnightly

Un-American Activities

I would like to comment on Joseph Paquette's letter ("Stranded-cost Recovery: It's Constitutional," Mailbag, Oct. 1, 1996) responding to Charles Studness (Stranded-cost Recovery: It's Un-American," Financial News, July 15, 1996, p. 43).

Mr. Paquette suggests that denying recovery of stranded costs amounts to an unconstitutional taking of private property. His logic holds that investors acted in anticipation of a continuing, regulated monopoly franchise, and are therefore guaranteed a return of and on that investment, even though the rules may change. Understandably, Mr. Paquette takes a self-serving view to defend the so-called Constitutional rights of his investors. But his view is clearly flawed.

Utility investors take on a certain degree of risk, as do those who invest in any other business, or in government securities, for that matter. They may view that risk as relatively low, but it exists nonetheless. If utility investment carried no risk, the authorized rate of return would track the level earned by insured bank accounts or money market funds. If Mr. Paquette wants his guarantee of stranded-cost recovery, then let the Pennsylvania Public Utility Commission reduce PECO's rate of return to somewhere between 2.5 and 5 percent, as the trade-off.

The "rules of the road" have changed for many other industries over the years, forcing investors to pay the price. Until the last 25 to 30 years or so, environmental laws scarcely existed. The cost of waste disposal was nil. Investors could have argued that they had assumed these laws would remain forever unchanged, but that assumption obviously would have proven incorrect. Industries that operated under those old rules also suffered stranded costs-we call them "Superfund Sites." Investors today must bear those costs.

Arthur M. Malatzky, Energy Purchasing & Policy

Olin Chemicals, Norwalk, CT

The Public's Desire

While I understand that as chairman of the board of PECO, Joseph Paquette must support whatever view he believes best protects his shareholders, I believe his position does a disservice to shareholders and the industry as a whole.

Neither the Constitution nor rate regulation guarantees a return of or on invested capital. Regulators grant only the opportunity to profit on investment. Investors take that risk when they buy stock (in any company, regulated or unregulated). That risk will only grow as the electric industry accepts competition. A deregulated competitive structure should allow recovery of stranded costs only as the market dictates.

Look closely. The "public policy" that Mr. Paquette cites is in fact an electric industry policy-not the public's desire. To the extent the industry wants deregulation, it should be willing to operate under the same competitive rules followed by all unregulated industries.

Randy M. Allen, CPA

RMA Utility Consulting

Columbia, MD

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