July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
COMPETITIVE transition charges. Wires charges. Securitization payments. Every stranded cost recovery mechanism considered to date requires customers to pay for electric utility stranded costs through direct assessments on monthly bills. These charges will continue for many years after competition is introduced.
There is a real irony here: As we seek to introduce competition into the electric industry, we as regulators are forced to invoke all of the most heavy-handed tools to extract payments from citizens. Further, it is those utilities who decry the "shackles" of regulation that are the first to ask us for relief. They want regulators to issue orders to extract "nonbypassable" payments directly from the pockets of their customers.
Whatever one thinks of the merits of stranded costs, the time has come to devise a more market-driven alternative mechanism to recover these costs. It is time for us, as regulators, to promote alternative recovery mechanisms rather than stand by to be drafted by the companies we regulate to serve as the new revenue collectors for the electric industry.
I wish to outline one such proposal. At the outset, I would like to make clear that this proposal is a recovery mechanism only. It is not intended to address the idea of an entitlement to stranded costs or a quantification of such a right. Rather, I propose this alternative to stimulate thinking of alternatives to traditional regulatory tools for recovering those stranded dollars. My intention is to promote both equity and efficiency in moving to a fully competitive retail generation market - to "jump-start" competition during the transition period and introduce market forces to the recovery of stranded costs.
This proposal would assess stranded costs as entry fees on all market suppliers serving end users, including incumbent suppliers, rather than on customers directly. Of course, each of these suppliers will attempt to pass these costs along to customers. But in a market environment, sellers will be looking over their shoulders to see if their competitors are collecting stranded costs from their own customers before passing the entire amount through its price.
Just as one grocery chain today will discount its own overhead (taxes, insurance, workers comp premiums, etc.) to beat out the store down the street, so too will electricity suppliers under this model. Assessing stranded costs on marketers - not customers - should force a discounting of stranded costs and concomitant benefits to customers. In this way, competitive forces will be introduced into the recovery of stranded costs.
As an added benefit, this recovery mechanism will provide real incentives for incumbents to invite new players into the market rather to keep them out. This move also would promote competition and thus make the recovery of stranded costs a pro-competitive activity rather an activity that tends to stifle competition, as is currently the case.
Share the Market, Share the Cost
Initially, the incumbent holds a virtual 100-percent market share. As long as this is the case, the incumbent bears 100 percent of its stranded costs. Responsibility for stranded costs remains with the incumbents' customers, who are charged a price consistent