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Fortnightly Magazine - April 1 1998

least-cost planning commitments, obligations and opportunities. %n5%n

Point: Utilities with uneconomic costs, and their shareholders and potential underwriters, are the only ones that stand to benefit from securitization. Counterpoint: All stakeholders (em including ratepayers through rate decreases (em may benefit from use of securitization, since the goal of electric restructuring is to achieve workable competition over time.

Point: A competitive market exists when there are few, if any barriers to entry. The single greatest failing of the securitization concept is that it does not allow, and in fact impedes, competition. Counterpoint: Securitization does not impede competition. It provides a transitional mechanism partly to offset the competitive advantage of a new electric supplier.

Point: Securitization¼ bypasses the regulatory process. Counterpoint: Regulators are involved at every step.

Point: Securitization converts the utility's opportunity to recover its costs and earn a return into a guarantee protected by legislation. Counterpoint: Through securitization and stranded costs recovery, society makes good on its commitments to allow cost recovery with the emergence of competition. These methods allow a utility to recover costs through the regulated setting deemed proper without competition.

Point: An additional drawback to issuance of bonds under a securitization program is that the estimate of stranded costs to be recovered by the bonds is made at the point in time when the bonds are issued, and the amount of stranded cost recovery under the bonds is thus fixed for the duration of the bond. Counterpoint: A securitized bond that matures over a fixed period is not a drawback. Instead, it results in a smaller debt requirement. No utility would expect to securitize 100 percent of its stranded costs in any event. Consequently, no over-recovery problem exists.

Point: There is nothing inconsistent with introducing competition to control costs and value utility assets. The U.S. Supreme Court on several occasions [e.g., Duquesne v. Barasch] has upheld the right of a state to change the manner in which utility assets are valued and costs are recovered. Counterpoint: Investment cost methods support inclusion of stranded costs in rates. Citing Duquesne %n6%n is particularly puzzling. As the court therein observed, a utility's property is its capital. A utility's operating capital and ability to attract future capital are thus evaluated:

"The risks a utility faces are large in part defined by the rate methodology because utilities are virtually always public monopolies dealing in an essential service, and so relatively immune to the usual market risks. Consequently, a state's decision to arbitrarily switch back and forth between methods in a way which required investors to bear the risk of bad investments at some times while denying them the benefit of good investments at others would raise serious constitutional questions." %n7%n

The rationale in Duquesne is clear. If regulators are going to apply cost-plus-based regulation to good investments but market-based pricing to bad investments, serious constitutional questions arise. Stranded cost recovery is necessary to avoid these questions.

Point: A utility's transfer of its billion-dollar rights to stranded cost recovery in return for up-front securitization bond proceeds amounts to a clear-cut transfer of rights in return