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Fortnightly Magazine - November 1 1997

than the credit. PECO's credit would start at only 2.8 cents per kilowatt-hour in 1999 (vs. 3.4 cents for Enron), rising to 3.7 cents (vs. 3.72) by 2002 and 5.57 cents (vs. 4.16) by 2008.

Enron alleges that "several of PECO's own expert witnesses" predict higher power prices for 1999 and 2000. "Moreover," says the company, "the Commission's recently issued order on the pilot programs¼ found that the market price for power in PECO's service territory presently is at least 3 cents per kWh." (Enron petition, p. 15.)

True enough, but Enron ignores a key point. The PUC took great pains in its pilot program order to make the generation credit large enough to tempt consumers to switch. The pilot was designed to encouraging switching, to test the process. The PUC even approved a CPC, or "customer participation credit," over and above the generation credit. As the commission explained, in affirming a preliminary 3-cent rate in its pilot order: "This rate was set as a matter of policy for the Pilot Programs only and did not reflect any determination of a market rate over the longer time frame that will be used in the restructuring proceedings." (Docket p-00971170, Aug. 21, 1997, p. 54.)

In fact, in its May 22 decision, issuing a qualifying rate order for $1.098 billion in securitized stranded costs, the PUC had relied on several lower energy price estimates for 1999, ranging from 2.92 cents (EDS) to 2.77 cents (ICF Kaiser) to 2.42 cents (Putnam, Hayes and Bartlett). The PUC saw those estimates as crucial, yet problematic:

"The key to the resolution of this issue lies in the credibility of the market studies¼ The question is, do we know enough, at this point in time, to conclude that these market value studies or models produce accurate results?" (Docket No. r-00973877, 177 PUR4th at 434.)

Here's another interesting sidebar: It was PAIEUG that convinced the PUC to trim back PECO's securitization request in May, and yet the same group signed on with the proposed PECO settlement in August, despite the alleged chilling effect of the 2.8-cent generation credit.

Cheaper Financing?

Enron offers to buy all of PECO's securitization bonds, but at a sky-high discount rate of 9.66 percent, implying a price way below market. The 9.66 rate nearly equals PECO's current, authorized return on equity of 10 percent, as estimated in the May QRO case. At that time, in fact, the PUC accepted a much lower discount rate of 7.53 percent for PECO's first billion dollars of securitization bonds. (177 PUR4th at 444.) Of course, that's the whole idea (em that securitization lowers risk. Enron's discount offer, more than 2 percentage points higher, would appear to allow it immediately to flip the $5 billion in bonds at an immense profit. It is that profit, plus what is essentially a backloaded schedule to collect the CTC, that would allow Enron to minimize the stranded cost charge in the early years, doubling PECO's proposed rate cut.

Nevertheless, the question remains: Even if Enron's offer is a bad deal for PECO, should the