July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
Senate panel lobs shots at FERC's slow merger approvals.
Wall Street analysts and shareholder reps are urging Congress to help electric utilities recover stranded costs during nationwide deregulation to prevent a "cratering" of energy stocks.
One analyst recently testified that investors never expected 100-percent recovery. Another suggested that federal legislators should let states hammer out their own solutions.
But determining fair compensation state by state won't be easy, as witnesses and lawmakers conceded at recent hearings on Capitol Hill.
In fact, the testimony at the U.S. Senate Committee on Energy and Natural Resources occurred the same day Pennsylvania regulators braved a raucous hearing and approved a $1.1-billion stranded cost package. Texas legislators, meanwhile, nixed a bill that would have allowed utilities to use excess profits to pay down stranded costs.
Lastly, a governor-appointed mediator is trying to resolve differences between New Hampshire regulators and Northeast Utilities, according to Steven M. Fetter of Fitch Investors Service L.P., who testified at the Senate committee hearing.
"I would expect some combination could be worked out," Fetter observed. "If it is not, it would move New Hampshire from the front of the pack on competition to ... [the] back of the pack."
New Hampshire's deregulation plan called for about 60-percent recovery of stranded assets, but Northeast Utilities affiliates claimed they would go bankrupt under the formula.
Committee Chair Frank H. Murkowski (R-Alaska) asked what would happen on Wall Street if no utility's stranded costs were recovered (em as promoted in a bill introduced by Thomas D. DeLay (R-Texas).
"The market for these stocks would ... crater," said Kit Konolidge, a principal at Morgan Stanley & Co.
Earlier, he cited two cases in California and Texas where utility stocks suffered huge setbacks. The first came six months after the April 21, 1994, "Blue Book," when stocks at three California utilities lost just less than $5 billion in market value.
"Only a few months ago, however, in Texas, comments were made by a single member of the Texas Public Utility Commission, followed by some sharp rate reductions," he said. "[That] took off nearly $4 billion in market value from three large company stocks in Texas."
To prevent similar shocks, investors should not be arbitrarily deprived of their capital or a chance to earn a "fair return," Konolidge said.
Sen. Murkowski asked what would mark a "reasonable opportunity" to recover stranded costs.
A negotiated restructuring pact, such as California's, the analyst answered. "The fact that utilities signed on to that agreement means that it's reasonable from their viewpoint."
Fetter, in calling for state solutions to stranded cost problems, said state regulators "know where certain bodies are buried," when it comes to past policy and they will know where to head. The former Michigan Public Service Commission chair said he would expect stranded cost recovery to come from a competitive, secured transition charge, as regulators are doing in Pennsylvania and in California.
Sen. Murkowski asked if state recovery plans were in the public interest.
Fetter said most states, like California, were working through their deregulation process, and are ending up