[BETA] Fortnightly

The Heritage Foundation has released its second report in a series on electric deregulation, aimed at capturing the attention of lawmakers on Capitol Hill now holding hearings on proposed legislation to restructure the electric industry.

The new report, Electricity Deregulation: Separating Fact From Fiction in the Debate Over Stranded Cost Recovery, by Adam D. Thierer, concludes that lavish stranded cost recovery is not justified, and that the "sky will not fall" if stranded cost recovery is limited or denied.

Thierer said, "If policy makers demand that customers and competitors pay for the losses of inefficient utilities, it could mean the end of a competitive electric future."

Thierer cited a variety of studies, which estimate total stranded costs anywhere from $10 billion to $500 billion. He called attention to a Moody's Investors Service study that set stranded costs for 114 investor-owned utilities at $135 billion in 1995, and another by Data Resources Inc., which estimated such costs at $88 billion in 1995.

Just because an asset is deemed uneconomic today, Thierer explained, does not mean it has no future worth. For example, some utilities are experimenting with using their transmission and distribution lines to enter the communications business. Some are already offering telephone, cable television and Internet services over fiber-optic cables running alongside electric wires that monitor energy use.

If every new utility was forced to pay a high stranded cost fee, fewer firms would enter the competitive fray, the report said. Customers forced to pay an exit fee would be less likely to switch electric suppliers. Thierer cited a poll by Research/Strategy/

Management Inc. for the Sustainable Energy Coalition, which found that 70 percent of respondents believe utilities and shareholders should be responsible for inefficient investments.

Thierer said utilities developed an "entitlement mentality," because regulatory commissions have allowed utilities to amortize expenses by raising prices on their captive customers at will.

"The rate-of-return mindset leads utilities to the insupportable conclusion that they own their current customers ... that these customers are obliged to pay for their losses in the future," Thierer writes.

Furthermore, the claim of a "regulatory compact," is highly suspect, Thierer argued, noting that no utility can produce a document proving customers are forever captive. In fact, the terms "regulatory compact" and "stranded investment" were coined only recently (regulatory compact first appears in a 1983 legal decision, and stranded investment first appears in the trade press in 1990).

Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.