[BETA] Fortnightly

With benefits unclear, PUCs will "go slow."

California, New Hampshire, Massachusetts, Nevada, Pennsylvania, Rhode Island, and Vermont have given customers the right to choose their electric providers.

Other states are considering similar legislation.

In Congress, U.S. representatives Schaefer (R-Colo.), Markey (D-Mass.), DeLay (R-Tex.), and U.S. Sen. Bumpers (D-Ark.) and others have slapped bills on the table that would give choice to electric customers on a national scale. In a recent article, The Wall Street Journal confirmed evidence of looming competition: "The rapidly unfolding deregulation and consolidation of the utility industry is spawning a profusion of takeover deals among retail, wholesale, regional and national power providers." (Mar. 20, 1997).

Yet, despite all this hubbub, competition is less likely today than it was a year ago.

Two factors underlie this paradox. First, any government that contemplates competition will face the near insurmountable task of dealing with the stranded costs and benefits that will follow. Second, these costs and benefits are likely grossly understated or simply unrecognized.

What assets and benefits will lie stranded? How should the write-offs be accomplished? Who should pay? These problems will pit electric customers (em business, residential and commercial (em against their utilities, and even against each other.

Moreover, the costs and benefits of competition will spread unevenly across the country, making some states winners while others lose out. Customers will not gain from competition until we can answer "what," "how" and "who."

The Numbers Are Daunting

Stranded costs, representing the uneconomic generation assets of electric utilities (i.e., generation assets valued below their book value because of their high capital and/or operating costs), are estimated at between $100 billion and $550 billion. Moody's Investors Service, for example, estimates stranded costs for all electric utilities to exceed $100 billion. Others have put the total as high as $550 billion, which exceeds the $500-billion bailout of the savings and loan industry.

In some states, however, the electric utilities (and consumers) enjoy low-cost production. This enviable position gives them the opposite problem (em how to deal with stranded benefits. In these states, generation assets are valued above book value because of their low capital and/or operating costs. Because state public service commissions set rates based on book value, the surplus in value becomes stranded just as certainly as a surplus in cost. Benefits are stranded in the sense that local electric utilities are required to provide the lowest-cost electric service in their territories, even though there are potential open-market opportunities at higher prices than the prices set by the state commissions.

The precise value of these costs and benefits is crucial, but unknown. It will likely fall to the Federal Energy Regulatory Commission and the state public utility commissions to come up with estimates, since it appears safe to say that no legislation authorizing customer choice will include actual calculations of who pays, who gets paid, how much, when and for how long.

How will regulators respond?

Decisions at the FERC and the PUCs will hinge on such data as the estimates of the values of generation assets within a given region. Significantly,