[BETA] Fortnightly

Moody's Investors Service has released a report that finds the most significant long-term implication of Order 888 for investors is for potential divestiture of transmission assets by investor-owned utilities.

The Moody's study, FERC Order 888 and Wholesale Competition: Catalyst for a New Market Model, also finds that divestiture by a vertically integrated utility may leave bondholders secured by a lien on relatively risky generating assets of often questionable market value, as opposed to the presently more diverse and balanced asset portfolio.

Moody's finds that Order 888 eliminates many advantages traditionally associated with vertical integration across generation, transmission and distribution. This elimination reduces the incentive for some utilities to retain their relatively lower return transmission assets. Second, it makes clear the FERC's commitment to eliminate potential abuses of vertical market power, which may lead to forced divestiture if independent system operators are unable to address such issues adequately. Reducing such risk to the bondholder are obstacles to divestiture inherent in many utility indentures (em the desire of some more conservative managements to remain diversified, possible success by the independent system operators in addressing market power concerns and possible legal hurdles to FERC-mandated divestiture.

According to Moody's, Order 888 will ease evolution of a new market structure as the electric utility industry deregulates, and so should be viewed as a point of departure rather than arrival. But while the FERC has authority to require comparable terms and tariffs on wholesale power sales, it faces more complex legal issues in mandating divestiture. Therefore, it is attempting to address transmission control issues through its authority over merger approvals, such as in the case of Public Service Company of Colorado and Southwestern Public Service Co., and through the formation of ISOs. ISOs are forming, but at a slow and uneven pace reflecting regional market differences. Regulatory prodding will be needed to overcome many conflicting positions in formation and operation of ISOs. t

Lori A. Burkhart is an associate legal editor with PUBLIC UTILITIES FORTNIGHTLY.

The American Arbitration Association, in response to a growing level of interest by the electric and natural gas industries, has established the "National Energy Panel" to resolve disputes through mediation and arbitration.

The new panel is composed of 33 of the nation's leading energy industry experts and will resolve a range of disputes involving production, contracts, finance and marketing. Also included are nuclear power; environmental issues associated with hydroelectric power generation; the production, transportation and marketing of natural gas and oil; and utility plant design, contracting, construction and decommissioning.

AAA pointed out that the Federal Energy Regulatory Commission has been a leader in seeking nontraditional methods to resolve pending cases. "The growing acceptance and application of mediation and other forms of dispute resolution to resolve energy-related disputes are driven, in large part, by the ongoing restructuring or 'deregulation' of the electric power industry and the areas of national gas transportation and sale," said James H. Bailey, a member of the law firm, Lobel, Novins, and Lamont, and chair of the Advisory Council for the National Energy Panel.

AAA points to successful arbitration of