More ruminations on the "stranded ratepayer."
In "Stranded Ratepayers? I Respectfully Disagree" (June 1, 2001, p. 14), Alfred Kahn observes: "The movement [to electricity deregulation] became powerful only during the period in the middle and late 1990s and only in those jurisdictions in which ... regulated rates, based on book costs, appeared to be far above competitive levels. At those times, and in those places, it was not the utility companies, but regulators and legislators who began to insist on deregulation." Kahn's observation is accurate, but in my view, requires a footnote.
The seeds of competition were sown, ironically, in the 1970sa period in which, as Kahn notes, "regulation held rates markedly below what would have been competitive levels." In that period, many utility commissions allocated costs, perhaps arbitrarily and at least novelly, to shift a disproportionate share of rate increases to large industrial users. By the mid 1980s, for many reasons, that game was exhausted.
Furthermore, the requested increases in the 1980s were so huge that industrial users were no longer content simply to advocate for fair cost allocation. In the hearing rooms, they began to oppose utilities on rate base and cost-of-service issues, most prominently cost of equity and construction cost prudence. Outside the hearing rooms, they began to emphasize the links between job growth, industrial development, and energy costs. No longer able to shift costs disproportionately to industrial users, commissions began shifting them to shareholdersi.e., disallowing them.
Then another thing happened. The supply of relatively cheap natural gas became plentiful again. Combined with state-of-the-art technology that made the new nuclear plants uneconomic in a hypothetical competitive market, even after the cost disallowances for so-called imprudence. Large industrial users, individually and together, began to push for a competitive electricity market. The new gas plants combined the great advantage of flexibility (greater efficiency over a wide range of sizes, easier permitting, fast construction, shorter payback), with the ultimate advantage of superior economics. Competition, always theoretically possible, became practical in the real world. Now large industrial users were joined by entrepreneurs in the rush to advocate a competitive electricity market. That, in my opinion, accounts for many regulators and legislators during the middle and late 1990s succumbing to the song of competition.
The $64,000 question: What happens if natural gas prices remain at levels which keep the all-in cost of gas-generated electricity above the all-in cost of electricity generated by coal or uranium? Will entrepreneurs, without the relatively certain revenue stream of a regulated monopoly, build coal and nuclear plants? Is a competitive electricity market in the real world dependent upon relatively cheap gas?
Will states that have chosen not to deregulate and which have been blessed with a balanced supply of coal and nuclear resources, as well as gas-fired generation, have an insurmountable edge in the quest to win the jobs and increased tax bases which come with industrial development?
President and CEO
El Paso Electric Company
I am flattered that an authority such as Professor Kahn should have thought my not-entirely-serious ruminations on the plight of the California ratepayer worthy of response. In any event, the carefully footnoted balance of Fred's comments show why he is certainly exempt from any tongue-in-cheek 'anathema" aimed at his profession.
There are several points, however, where Fred has drawn implications from my piece ("The Stranded Ratepayer," March 15, 2001, p. 26) that were unintended and which I would like to clarify for the record.
First, I have never been opposed in principle to utilities recovering their stranded investments. My article merely suggested that ratepayers sometimes have very much the same problems in the transition to a deregulatory regime.
Second, I am certainly not unaware of the financial straits of California's utilities. I was only trying to point out that electric generation has now become immensely profitable in contrast to its relatively unrewarding state in the hands of the regulated monopolies.
I am looking forward to renewing this exchange with Fred at the Annual Meeting of the American Bar Association on August 6, in Chicago, where I will be moderating a roundtable on California's lessons, with Fred as a highly prized participant.
Richard D. Cudahy
U. S. Court of Appeals for the Seventh Circuit
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