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Enron's Battle with PECO: An Inside View from Outside the Industry

Fortnightly Magazine - March 1 1998

the company to take the write-off "unless we could tell the accountants we had a high probability we would prevail" on appeals of the PUC order. %n11%n The write-off anticipates losses that might not occur, given the uncertainty of future electricity prices.

The stock market suggests the effect of the PUC's decision on the company was not severe.

The overall impact of the PUC's decisions was to leave the utility's stock slightly higher than after the announcement of the Partial Settlement (see Table 2, "Average Price of PECO Common Stock"). Once investors had time to consider the decision, they saw that the company had suffered little injury.

The bond markets generally did not consider the PUC's decision a disaster. The day after the PUC's decision, and again on Jan. 28, Standard & Poor's affirmed its ratings and positive outlook on PECO. The second rating was in response to the company's announcement of a $1.8 billion after-tax charge to fourth quarter 1997 earnings and a 44-percent reduction in the annual common dividend. Duff and Phelps Credit Rating believed that PECO should be able to offset the pressure on credit quality from the potentially higher rate reductions and reduced stranded cost recovery. Fitch Investors Service did declare a negative ratings watch on PECO's credit because of the potential loss of customers to competition. %n12%n

To Consumers and Utilities:

No Guarantees

The central lesson of this case is mandated rate reductions are unnecessary in the transition to a competitive market.

Such mandates tend to reward higher cost utilities. The higher-cost company has leeway to cut costs and meet a mandated target, while a lower-cost company may have to work much harder to achieve a set level of savings.

States that have mandated rate reductions may find these savings illusionary. Massachusetts has effectively committed to subsidize utilities that cannot cover a 15-percent rate cut. In California, the bulk of stranded costs are due to contracts signed under the Public Utility Regulatory Policies Act; these costs will persist indefinitely. Consider this irony: The "wires" company remaining after divestiture will have a strong argument to evade mandatory rate reductions. It may prove difficult to force such companies to sell power below the cost of purchasing energy on the market. The PUC solution circumvents this problem and the corresponding threat of legal entanglements.

We understand that utility commissions are subject to intense political pressure to demonstrate up-front savings from restructuring efforts. As the PECO case showed, some participants in the regulatory process may prefer continued regulation over the uncertainties of competition.

Several consumer groups were willing to trade the possible benefits of competition for a ceiling on electricity rates. The State Consumer Advocate said: "The tradeoff is between the certainty of rate reductions for 100 percent of customers on Sept. 1, 1998 for the early years for the opportunity perhaps to get larger rate reductions, if in fact competition does produce lower prices." %n13%n Other groups agreed to the Partial Settlement because they had little faith the PUC would protect their interests (as it ultimately did).

This commission's decision