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Fortnightly Magazine - October 15 1997

Let me tell a story. A consultant I know works as the lead negotiator for a Native American tribe that sells fuel to electric generating plants. On occasion he visits the reservation to discuss business plans with the tribe, exploring various scenarios for utility restructuring.

Recently, this consultant said he found himself in the ceremonial council lodge, instructing tribal leaders on decision trees and discounted cash flows. When he finished, the younger members conferred briefly in their native language. Then they turned to the eldest member of the tribe, sitting quietly in a corner. The elder stood, spoke a few words, and sat again.

After a polite pause, the consultant asked, "What did he say?"

The answer came back. "The elder does not understand your figures, but he says he has seen a vision (em that you will help us prosper. And so, we accept your plan."

My consultant friend holds great respect for the traditions of Native Americans. He recounts this story only to show the astonishing range of issues involved in utility restructuring.

Later, the consultant repeated his story to a lawyer working with him on another case. The lawyer thought for a moment: "That sounds just like the jury system," he said.

Savings Prove Illusive

Writing last month in the Wall Street Journal, Benjamin Holden reported that electric customers in California won't likely see that entire 10-percent rate cut promised last year in the state's landmark deregulation law. ("Electricity Savings to Be Short-Circuited," Sept. 24, p. A2.) Says Holden, "[M]any experts estimate rate cuts for medium-size customers, such as grocery stores or office buildings, at no more than seven percent."

Hey, 7 percent ain't so bad. That figure falls in line with estimates by the Illinois Commerce Commission in its report on proposed state Senate Bill 55.

The ICC report (which levels a scathing attack at the senate bill), predicts savings (net present value) for Illinois' four major electric utilities over the 1998-2008 transition period: Commonwealth Edison (9.2 percent), Illinois Power (10.6 percent), Central Illinois Public Service Co. (4.5 percent), and Central Illinois Light (4.2 percent). Commercial customers might save only 2.8 percent, statewide. The ICC projects rates for ComEd and IP "will remain above the current Midwest average [Illinois excluded] for much, if not all, of the transition period."

Few customers, said the commission, will find it advantageous to switch suppliers. In Illinois, the bill would also impose a transition cost surcharge (different from the "instrument funding charge" to cover securitization bonds). Customers switching suppliers would receive a credit against transition charges, known as the "mitigation factor," to mimic savings achieved from alternative suppliers.

The bill sets the initial mitigation factor at 6 percent for residential customers, worth only about 0.5 cents per kilowatt-hour, assuming a residential rate of 8.4 cents per kWh. When all is said and done, notes the ICC, there's little incentive to switch: "While some customers may achieve more savings than allowed by the mitigation factor, through their ability to 'beat the market,' other customers may find that transition charges to the incumbent utility,