Retail wheeling in Kansas: Stranded costs could bewitch customer choice.

With the advent of retail wheeling, some customers will see their electricity prices fall while others will see them rise. And stranded costs may have a lot to do with it (em at least according to a report by the Docking Institute of Public Affairs at Fort Hays State University in Kansas.

"Like all expansion of trade opportunities, some customers will benefit, while others will be adversely affected," says the report, funded by four of the state's rural electric cooperatives (em Kansas Electric Cooperatives, Kansas Electric Power Cooperative, and Sunflower Electric Power Corp.

"Our models show that rates for rural residential customers under retail wheeling will rise, at least in the first few years of retail wheeling," according to the report.

How stranded costs are handled will likely prove critical in determining who wins and who loses under retail wheeling. For instance, according to the report, an average residential electric bill could drop 2 to 6 percent over the next 10 years or so (em but only if no stranded costs are passed on to the customers (see chart). However, once stranded costs are factored in, the same bill could climb anywhere from 24 to 31 percent over the same period.

Besides stranded costs, the report anticipates higher overall electric rates for most residents and small businesses due to increasing prices of delivered electricity. It's unlikely these additional costs will be levied on large customers, the report states. It assumes that smaller customers will bear most of the cost burden.

"In the long run, competition may force economies, and distribution costs may decline, so that co-op customers see their prices decrease," the report says. "But they will never be as low as urban, commercial, industrial rates ... in Kansas, definitely in the western part of the state. The distances are too long, the weather too immoderate, the population too dispersed to allow it."

Residents who stand to benefit from retail wheeling, the report claims, are those who live in high-cost states and urban areas at the expense of those in lower-cost states and rural regions.

The study analyzed the possible effects of retail wheeling on customers served by co-ops and G&Ts in Kansas. Each of the four co-ops chosen for the study represents part of the state: CMS Electric Cooperative in the southwest; Norton-Decatur Cooperative Electric Co. in the northwest; Kew Valley Electric Cooperative in the northeast; and Butler Rural Electric Cooperative Association in the southeast. t

A Preview of Competition-Simulated Changes in a Typical Monthly Residential Bill*

(C

omparing four in-state rural co-ops)

CMS Norton-Decatur Kew Valley Butler

stranded costs stranded costs stranded costs stranded costs

w/o with w/o with w/o with w/o with

Current usage (kWh) 800 800 800 800

Current bill $69.72 $68.91 $66.87 $82.56

USAGE: 1ST 2 YRS. 850 875 786 879

Bill: 1st 2 yrs. 88.32 106.74 87.08 111.95 70.03 70.03 105.56 132.10

USAGE: LONG RUN 850 875 786 879

Bill: Long run 68.36 86.78 65.15 90.02 67.02 67.02 77.77 104.31

* Retail wheeling is assumed in place for the first two years and in the long run. The figures were based on the following assumptions: current tariff structures are retained; a long-run price elasticity of demand of between 0.4 and 0.6; changes in electricity costs are passed on to customers; electricity consumption changes as prices change; and a post-wheeling price of electricity of 4¢/kWh.

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