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Fashionably Retro

Why rate base is back in style.

Fortnightly Magazine - November 15 2002

what if anything was safe anymore at a vertical energy firm? Last but not least, I ran into a hedge fund analyst who told me he had bought up some distressed debt from Aquila on hopes the company would recover. But he said that after hearing the CEO speak, he was still concerned about recovering his investment. Like many involved in merchant generation fire sales, he worried whether enough buyers would emerge for those properties. And whether Aquila could raise the money fast enough to improve its credit profile.

Certainly, the mood was rather grim. One banker likened the scene to 1987, when the one-day drop of 500-plus points on a then-much lower Dow had occurred right during the middle of that year's EEI Finance meeting. Now, 15 years later, three different companies had approached him about exploring reorganization or bankruptcy plans as an option. Or so he told me.

The only company that seemed to be a bright star at the conference was Southern Company, due to its stable earnings. (Not to mention its earlier and well-timed merchant gen spinoff to Mirant.)

Even the Palm Springs taxi drivers joined with the experts in praise of the old-fashioned rate base utility.

On the way back to the airport, I shared a cab and split the fare with a CEO from a midwestern utility. Hearing that we had come back from an energy conference, our driver piped in to join our conversation about competitive energy markets. Why had she paid nearly $3,600 per year to Southern California Edison (SCE) for electricity, she wanted to know, when the Imperial Irrigation District, a municipal utility that served a region less than five miles from where she lived, charged 50 percent less.

"What could possibly explain the difference?" she asked.

We could have told her about how competitive markets in California weren't designed properly, but she would not have listened. In her mind, the game was rigged. It seems that when she had phoned SCE to ask about her bill, the company had assured her situation was not all that much different from that of other SCE customers, especially those living in the desert. During the California crisis, an SCE spokesman had explained, a tiered rate structure was developed to reward conservation. Those that used the most power would pay the most. And more than that, said SCE, the California experiment with competition had forced costs up for everyone-everyone, it seems, but those lucky enough to live among the irrigated citrus groves and vegetable farms of the Imperial Valley.

But turning SCE into a municipal utility district-as some California politicians and regulators have called for-would not be the answer either, said the spokesman. That would not change prices, he said, because it has become more costly today to create a municipality than it was half a century ago, when the state's irrigation districts were formed.

But what's all that to a taxi driver in Palm Springs? To us, sitting in the cab, on the way to the airport, it was painfully clear: California's energy experts failed