The potential for a federal renewable energy standard (RES) and carbon regulation, considered with the effect of state-imposed renewable energy standards, is fueling a strong, but challenging,...
Recovering Stranded Costs: Not "If," But "How"
Illinois has yet to face the issue, but when it does, it may find the road blocked by jurisdictional rules at the FERC. According to estimates by Moody's Investor Service, the state of Illinois would face stranded costs of nearly $6 billion if it should mandate retail wheeling to allow the state's electric utility customers to choose their own supply of electricity.
And, if this prediction should hold true, and if utilities should be made to forfeit some of those costs, then the Illinois Commerce Commission (ICC) and the other state public utility commissions (PUCs) will likely assume the job of calculating the stranded cost to be recovered (em one that could prove daunting.
Nevertheless, with all that has been written about the various methods for calculating stranded costs, the choice of method is not the critical issue. The more difficult task comes later: How can stranded costs be legally recovered in practice? That is the primary question that should concern legislators, regulators and financial analysts. Unlike the wealth of discussion about estimating strandable costs, not much has been written about recovery mechanisms. In fact, it always seems to be assumed that if stranded cost recovery is allowed, then such costs can be recovered. However, this assumption may prove overconfident.
So far, neither the ICC nor the state legislature has had occasion to address formally the question of utility recovery of stranded costs, but the issue has never strayed far from view.
Last year, for instance, the Illinois Commerce Commission approved retail wheeling experiments proposed by Illinois Power Company and Central Illinois Light Company (see sidebar), but was not called upon to issue an opinion on strandable costs, since neither company had sought recovery for any costs that might be left stranded by the experiments.
Meanwhile, in the legislature, the Illinois General Assembly had began work in 1995 on a comprehensive electric industry reform bill, and a Joint Committee on Electric Utility Regulatory Reform (formed by Senate Joint Resolution 21), was set up to prepare a final legislative proposal by November 8, 1996, with assistance from a Technical Advisory Group (TAG) designed to gather information, review the various restructuring proposals, and report back to the Joint Committee.
Unfortunately, although not unexpectedly, the TAG was not able to achieve a consensus on any particular plan. However, before turning the matter back to the Joint Committee, the TAG did issue a report in May 1996. That report indicated general agreement among the utilities and other parties on allowing retail direct access and on the recovery of at least some of the utilities' strandable costs. This agreement seems consistent with the guiding principles that the TAG agreed to in November, 1995. These principles call for competition, "a structured and rational transition period," and flexibility. The ability of the TAG to reach agreement on direct access illustrates the industry's acceptance that government sanctioned competition is inevitable.
Turning back to Illinois Power and CILCO, and their retail wheeling experiments, the authors cannot say how the stranded costs, if any, would have been treated by the ICC had