The Wires Charge: Risk and Rates for the Regulated Distributor

Fortnightly Magazine - September 1 1997
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Open-access tariffs hold the key to capturing the gains promised by electric restructuring.

In a restructured electric industry, unbundling the cost of the wires from power generation may well prove more important than dealing with stranded costs. In fact, stranded costs eventually will take care of themselves, whether by direct recovery, indirect recovery or no recovery. Without proper unbundling, however, a restructured industry could force competitors to pay inflated access fees to the distribution utility.

The matter has drawn a lot of attention. For example, the National Association of Regulatory Utility Commissioners has commissioned a study of using performance-based ratemaking for the functionally separated activities of transmission and distribution. Indeed, most restructuring legislation pays at least lip service to PBR. Nevertheless, more traditional regulation (based on a rate of return) generally provides the benchmark from which other, more progressive methods are developed. Thus, public utility commissions will likely face two key tasks in setting open-access fees: 1) identifying and separating the costs of the wires from generation; and 2) allocating the wires costs among distribution customers.

Separating wires and generation costs implies another key step: unbundling the return and capital structure assigned to wires. What was formerly an implicit return assigned to the wires business must now become part of the formula for determining the open-access fee. Here, the wires business should carry a much lower risk than generation, both today and in the future. Thus, the rate of return required for capital invested in wires should be much lower than it has been overall for the traditional, vertically integrated, investor-owned utility.

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