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Perspective

Fortnightly Magazine - June 15 1998

with the existing tariffs, which, by definition, includes recovery of stranded costs today.

As end users migrate toward new suppliers, the utility's share of stranded cost responsibility is reduced; each alternative supplier takes on part of the utility's obligation, based on a percentage of its (the supplier's) total market share. The market share of each supplier would be determined annually and would be used to allocate stranded costs. As new suppliers emerge, they may attempt to gain market share by discounting the amount of the stranded cost charges they pass through to end users. This strategy would put pressure on all other participants to match those discounts - a result that would clearly benefit customers.

The availability of discounting introduces a measure of competition that otherwise would not take place in the recovery of stranded costs. To ensure the proverbial "level playing field," the portion of stranded costs associated with the incumbent's market share would be imputed to the incumbent utility annually.

In return for this assessment of stranded costs on all generators, the price of generation would be deregulated. The introduction of new entrants and "jump-starting" competition would ensure that this deregulation would not force prices higher for customers. Of course, limited regulatory review would still be needed, but its focus would change, guarding against undue market power by a particular generator or collusion by a group, which could harm customers. This "pay to play" proposal has the salutary effect of placing the appropriate incentives on incumbent utilities to open their systems and invite new entrants, rather than to resist competition. The utility that fights competition ends up with more stranded costs borne by shareholders because its market share remains high. On the other hand, since generation is deregulated at the outset, new entrants are enticed into the market, jump-starting a market that might otherwise be suppressed under the weight of other proposals less friendly to competition.

An Option in Return

With the obligation to pay assigned stranded costs, power marketers or customers would gain the right to use the capacity and energy they paid for during the transition period. This "call option" would permit customers or power marketers paying stranded costs the right to recall and resell some or all of the stranded capacity and energy they would be assigned during the transition period. In the instances in which the retail customers purchase directly in the generation market, customers would then be permitted to retain their call option rights, along with the stranded cost obligation, only through a clearly written election. Retail customers who elect the distribution utility as their agent in procuring generation, either by choice or default, would effectively transfer their call option rights and transition cost responsibilities to the distribution utility.

My approach also appears compatible with the FERC's Order 888, which gives certain rights to firms that pay transition costs (either marketers or wholesale use customers) to re-market the freed-up utility power. Such rights and obligations would be contracted for on a year-to-year basis for the duration of the transition period.

This proposal is a recovery