Senate panel lobs shots at FERC's slow merger approvals.

Wall Street analysts and shareholder reps are urging Congress to help electric utilities recover stranded costs during nationwide deregulation to prevent a "cratering" of energy stocks.

One analyst recently testified that investors never expected 100-percent recovery. Another suggested that federal legislators should let states hammer out their own solutions.

But determining fair compensation state by state won't be easy, as witnesses and lawmakers conceded at recent hearings on Capitol Hill.

In fact, the testimony at the U.S. Senate Committee on Energy and Natural Resources occurred the same day Pennsylvania regulators braved a raucous hearing and approved a $1.1-billion stranded cost package. Texas legislators, meanwhile, nixed a bill that would have allowed utilities to use excess profits to pay down stranded costs.

Lastly, a governor-appointed mediator is trying to resolve differences between New Hampshire regulators and Northeast Utilities, according to Steven M. Fetter of Fitch Investors Service L.P., who testified at the Senate committee hearing.

"I would expect some combination could be worked out," Fetter observed. "If it is not, it would move New Hampshire from the front of the pack on competition to ... [the] back of the pack."

New Hampshire's deregulation plan called for about 60-percent recovery of stranded assets, but Northeast Utilities affiliates claimed they would go bankrupt under the formula.

Committee Chair Frank H. Murkowski (R-Alaska) asked what would happen on Wall Street if no utility's stranded costs were recovered (em as promoted in a bill introduced by Thomas D. DeLay (R-Texas).

"The market for these stocks would ... crater," said Kit Konolidge, a principal at Morgan Stanley & Co.

Earlier, he cited two cases in California and Texas where utility stocks suffered huge setbacks. The first came six months after the April 21, 1994, "Blue Book," when stocks at three California utilities lost just less than $5 billion in market value.

"Only a few months ago, however, in Texas, comments were made by a single member of the Texas Public Utility Commission, followed by some sharp rate reductions," he said. "[That] took off nearly $4 billion in market value from three large company stocks in Texas."

To prevent similar shocks, investors should not be arbitrarily deprived of their capital or a chance to earn a "fair return," Konolidge said.

Sen. Murkowski asked what would mark a "reasonable opportunity" to recover stranded costs.

A negotiated restructuring pact, such as California's, the analyst answered. "The fact that utilities signed on to that agreement means that it's reasonable from their viewpoint."

Fetter, in calling for state solutions to stranded cost problems, said state regulators "know where certain bodies are buried," when it comes to past policy and they will know where to head. The former Michigan Public Service Commission chair said he would expect stranded cost recovery to come from a competitive, secured transition charge, as regulators are doing in Pennsylvania and in California.

Sen. Murkowski asked if state recovery plans were in the public interest.

Fetter said most states, like California, were working through their deregulation process, and are ending up "in a place called acting in the public interest." In New Hampshire, the mediator may try to yank the decision back under that premise, he said.

Sen. Murkowski also asked the panel for Wall Street's reaction to the FERC's merger approval process.

Douglas W. Kimmelman, managing director of Goldman, Sachs & Co., observed there have been about 20 merger announcements, with no electric-to-electric combinations closed.

"We have all sorts of industries in this country where mergers impact consumers," he said. "I can't understand [taking] two years to think through the issues involved here."

"It may be worth noting that when United States companies bought British companies, the process closed in 90 days," Konolidge said.

"We are losing investment dollars out of this country," Kimmelman said. "Over the last three years [there have been] 27 utility investments overseas for $35 billion in financial closings made in the U.K. and Australia.

"In the U.S., over the same period, only $800 million of combinations have been actually closed. Utilities are saying, 'This market makes no sense. We don't know the rules. We need to go elsewhere.'"

"On the other hand, FERC justifies it by saying it has to do a thorough investigation to be satisfied," Sen. Murkowski added. "It's responsibility. And [it needs to] insulate itself from litigation."

"Maybe it's to prove their worth and existence (em the FERC that is," said Sen. Larry E. Craig (R-Idaho).

Sen. Dale Bumpers (D-Ark.) reviewed his bill with the panel and said it called for "prudently incurred and verifiable" stranded cost recovery. He questioned whether leaving the stranded debate to the states was wise. "It seems to me we are asking for utter chaos in an area where we're trying to bring some semblance of sanity to a really complicated issue."

But Fetter insisted that if the federal government ordered 100-percent recovery, commissions could then expect reactive litigation which would put utilities in court demanding that amount.

"We call it 'full' in the bill," Bumpers said. "It doesn't say '100 percent.'"

"Well, 'full' sounds like a lot," Fetter countered.

"If I were you gentlemen from Wall Street, where you worry about the stockholders and the bondholders and so on, I would think you'd be dancing in the streets over this provision in my bill," Sen. Bumpers said.

But Kimmelman asked: Who would determine the details of 'full' or '100-percent' recovery?

Bumpers said he wasn't suggesting that utility commissions not determine stranded costs, but that they needed guidelines to give the process some degree of certainty. "So that people know that when they go in and ask for stranded costs, they're going to have a set of criteria that the commission is going to have to follow instead of just being off on an ad hoc venture," he said.

But Kimmelman said regulators could interpret the broad language differently.

Ronald L. McMahan, president of Resource Data International Inc., testified that the industry has $202 billion in stranded costs. Of that figure, 10 states in the country (em just 43 percent of the market (em carry 86 percent of the problem.

Power purchase contracts make up $42 billion of the total with utility purchases, many made well above market, topping $53 billion. Of that amount, cooperatives purchase $20 billion.

McMahan says utilities want a regulatory system designed for administrative simplicity. "I was just speaking to someone from Pacific Gas & Electric who told me since the California law was passed, he now has 10 people dedicated full time to the stranded cost issue and they're making on the order of one filing a day."

Small shareholders own 62 percent of electric utility stock, according to the testimony. In addition, some 81 percent of utility investors are retired, 75 percent have owned the stock for at least 10 years and more than 40 percent have annual incomes of less than $40,000.

Joseph F. Schuler is associate editor of PUBLIC UTILITIES FORTNIGHTLY. E-mail: schuler@pur.com.

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