[BETA] Fortnightly

THE POSSIBILITIES ARE ENDLESS," SO THE ADS SAY.

But what about a hostile bailout? I wouldn't have believed it myself until the news arrived, forcing me to rewrite this column at press time.

Imagine: Enron offering to reimburse PECO Energy for $5.4 billion in stranded costs, while taking on the role as the electricity provider of last resort for southeast Pennsylvania.

No doubt you have already read a half-dozen news stories about Enron's play for PECO. The details should sound familiar; the Philly papers were filled with lively quotes. On Oct. 8, Enron Energy Services Power Inc. filed a petition with the Pennsylvania Public Utility Commission with an alternative plan for retail choice. PECO had submitted a settlement agreement on Aug. 27, more than a month earlier. It had offered what it then believed to be the largest rate reduction promised by "any electric utility in the country." Enron, however, claimed that its plan would introduce competition more quickly. It alleged PECO's proposal would exert a "chilling effect," actually discouraging PECO customers from switching to new competitors.

The PECO settlement enjoyed the endorsement of state Sen. Vincent Fumo, AARP and others such as the Philadelphia Area Industrial Energy Users Group, known as PAIEUG, which included Allied Signal, Ford, Merck, Nabisco and affiliates of Boeing and USX. PECO's offer would open the entire market to customer choice a year earlier than promised in Pennsylvania's 1996 deregulation act, plus a 10-percent, across-the-board cut in retail electric rates through Dec. 31, 2000. PECO would recover all approved transmission and distribution wires charges and stranded costs on a staggered timetable through 2008, subject to a rate cap. The balance (cap minus charges) would be offered as a generation credit to any customer wishing to switch providers. (Credit equals the rate cap minus T&D charges minus the competitive transition charge, or CTC.)

By contrast, Enron would double PECO's rate cut, to 20 percent through 2000. To reduce the CTC (em and allow for the larger rate cut (em Enron would refinance PECO's $5.46 billion in stranded costs. PECO would securitize the full amount, then sell the bonds (at a discount of 9.66 percent) to Enron, which would refinance them and take over as the distribution and energy provider of last resort. The Enron plan would mean lower rates (and a smaller CTC) early on, plus a larger generation credit from 1999 through 2001 to encourage more PECO customers to switch suppliers. Later years would see both higher rates and a higher CTC for Enron, as compared with the PECO plan.

In essence, Enron's proposal rests on two key claims: (1) the alleged "chilling effect" of PECO's generation credit, and (2) a deeper cut in retail rates, made possible by a smaller overall CTC and cheaper financing for stranded costs.

A Chilling Effect?

Enron says PECO's generation credit is too small (em that it will discourage customers from switching to alternative power producers and delay real competition. Under the credit scheme, customers gain when a competitor comes along who will sell energy and capacity at a rate less