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Pennsylvania Electric Restructuring Continues

Fortnightly Magazine - August 1997

The Pennsylvania Public Utility Commission has taken new steps in its ongoing effort to restructure the state's electric industry, proposing regulations to govern customer choice of energy suppliers and securitization of stranded costs.

The PUC's new actions on retail choice and stranded costs were designed to comply with state legislation passed last December, known as the Electricity Generation Customer Choice and Competition Act. See, 66 Pa.C.S. secs. 2801 et seq.

In fact, the PUC began last January to implement the new state legislation. At that time, it issued an order adopting guidelines requiring electric utilities to conduct pilot programs for retail competition. See, Re Elec. Gen. Customer Choice and Competition Act (em Retail Access Pilot Programs, Dkt. No. M-00960890, Jan. 16, 1997, 176 PUR4th 1 (Pa.P.U.C.). (Meanwhile, on June 17, DuPont Power Marketing Inc. announced that it had been granted a license by the PUC and would participate in the state's pilot programs, providing evidence that power marketers will test the Pennsylvania market.)

Securitization. The new state law requires utilities to supply at least three items to the PUC to justify recovery of stranded costs through a nonbypassable charge: 1) a complete accounting of stranded costs; 2) a detailed plan for sale or intangible transition property or issuance of transition bonds; and 3) information regarding the planned use of proceeds from such a sale.

In issuing its proposed regulations on securitization of stranded costs, to carry out the new law, the PUC suggested that perfecting the security interest would prove critical to the bond closing that precedes any sale of transition bonds. It added that any delay in the issuance or marketing of transition bonds could cause the utility to lose opportunities to reduce stranded costs, or to incur higher interest rates. According to the PUC, those higher costs could "frustrate" the intent of the state's restructuring legislation, with "adverse economic consequences for Pennsylvania." See, Re Perfection of Security Interests in Intangible Transition Property, Docket No. L-00970122, April 10, 1997 (Pa.P.U.C.).

The PECO Order. In May, with the proposed securitization rules still open for comment, the PUC issued a "qualified rate order" authorizing PECO Energy Co. to securitize nearly $1.1 billion in transition costs. It allowed the utility to recover the sum through a nonbypassable surcharge assessed on all customers that use the company's regulated transmission and distribution network. (See, "PECO Gets $1.1 Billion, PUC Gets Earful," Headlines, July 15, p. 19.)

PECO had sought authority to securitize $2.4 billion out of an estimated $3.56 billion in generation plant assets that it claimed would be left stranded as power markets opened to competition. To establish the stranded plant figure, the company had relied on estimates of market price forecasts developed by EDS, ICF Resources, and Putnam, Hayes and Bartlett.

Nevertheless, the commission ruled that PECO had been able to support only 16 percent of its claim for stranded generation assets. The PUC ordered several adjustments to PECO's market studies: 1) use actual data (1992-96) to estimate nuclear capacity, 2) apply a 7.77-percent after-tax discount rate, 3) estimate long-run marginal cost of generation