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Rate Cut Depend on Stranded Costs, Time

Fortnightly Magazine - October 15 1997

A new report from the Department of Energy may confirm what many in the electric industry have said all along: That while stranded costs could dissolve some short-term gains from competition, in the long term, consumers will still come out ahead.

"I'm surprised and delighted that the same EIA, which once wrongly predicted price hikes from natural gas deregulation, now confirms what we've been saying all along," said Rep. Tom Bliley (R-Va.).

In its report, "Electricity Prices in a Competitive Environment: Marginal Cost Pricing of Generation Services and Financial Status of Electric Utilities; A Preliminary Analysis Through 2015," the Energy Information Administration found that prices should fall 8 percent to 15 percent over the short term. However, with a 100-percent recovery of stranded costs, the EIA predicts that competitive prices would differ little from regulated prices.

In the long term, prices could fall from efficiency improvements or other cost reductions that follow from competitive pressures. The EIA found that reductions in non-fuel operation and maintenance costs, coupled with lower construction costs, could reduce competitive electric prices by 16 percent by 2015 compared with regulated prices.

The report said that on average, the move to competition without any stranded cost recovery would cause prices to fall by about 6 to 13 percent. Utility profits and the associated taxes make up about 20 percent of revenues. The revenue reductions caused by a 10-percent decrease in prices would result in substantial profit and tax reductions. Common stock dividends and common stock prices would fall, but the industry as a whole would remain solvent.

Bliley disagreed with the study that allowances for stranded cost recovery could eat up short-term savings. He also disagreed with the conclusion that the Pacific Northwest and parts of the Midwest, where electric prices are low, could experience price hikes due to competition. "State utility regulators and new competitors in those states will be the best defense against allowing existing monopolies to raise prices," Bliley said.


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