Having now passed a rule that takes very few chances, the FERC must decide what's in store for investors.

Whatever happened to the Sunshine Act - the law that tells government officials to hold their meetings in the open?

That's what all of us in the trade press wanted to know on Dec. 15, when Chairman James Hoecker kept us waiting all morning and well into the afternoon, while he and his cohorts at the Federal Energy Regulatory Commission debated in secret on the ninth floor over the future of the electric utility industry. Any fight over policy (they must have been fighting) was kept hidden. Tired of waiting, I wandered across the hall to try out the salad bar in the FERC's "Sunshine Cafe," and sat down with a reporter from Energy Daily. By the time the commissioners came downstairs at 1:30 p.m. to convene their 10 a.m. meeting, they had ironed out their differences. The deal was done. The stage set. A media event.

The anticlimax saw the FERC vote 4-0 to approve Order 2000. That's the moniker for the final rule issued officially on Dec. 20 to govern regional transmission organizations, or "RTOs." Commissioner Vicky Bailey recused herself from the case (and from the Alliance order of the same date in Docket ER99-3144), which may explain why it took so long for Hoecker to get his ducks in a row.

Yet the day was not wasted. On the plus side, the long wait gave us some time to reminisce on press row. We recalled the days of Commissioners Charles Stalon and Charles Trabandt - when you could go to a FERC meeting and actually see policy being made. But no more. Now the chairman builds his consensus behind closed doors. We in the press feel cheated. How did the group reach a decision? What ideas got left on the cutting room floor?

IT WAS CHARLES STALON, BACK IN 1989, who urged a closed-door collegial process for the FERC. He believed that some due process rules actually "distorted" thoughtful analysis and synthesis:

"Sunshine laws ¼ can be and are effective instruments for rendering the desired form of debate practically impossible," wrote Stalon in January 1989, in the newsletter of the American Bar Association's Section of Public Utility Law. He added:

"Sunshine meetings do not facilitate the type of semi-structured discussions whereby the philosophies of individual commissioners are honed by staff analysts and other commissioners so that substantive objectives find majorities."

Stalon thought that Sunshine Law procedure was deficient because it encouraged commissions "to be passive." He explained further that the adversarial system of due process encouraged regulators "to limit their decisionmaking knowledge to the official record of the case."

Some might see in that a good thing, but Stalon demurred:

"[C]ommissioners ¼ are increasingly told by the courts that they may not impart that general awareness or expertise into particular cases unless some basis for it has been put there by the lawyers. In short, a commissioner must not merely use the record, he or she must deliberately cultivate ignorance of material off the record.

"It takes a real genius," he added, "to cultivate ignorance without cultivating incompetence."

STALON'S POINT WAS REAL: Should the commissioners at the FERC cultivate ignorance of what investors will think about the new RTOs? Or should they anticipate investor reaction and devise incentives to play to that audience?

That's the question the commission now faces in Docket ER97-2355, in which it must set an allowed rate of return on common equity (ROE) for electric transmission services provided for the California Independent System Operator (ISO) by the transmission owner, Southern California Edison Co.

That case has attracted interest from trade associations, the Midwest ISO and even some members of Congress. Last March, administrative law judge Michel Levant denied Edison's proposed 11.7 percent ROE and instead set an ROE of 9.68 percent, rejecting calls to use interstate gas pipelines as a proxy group for comparison purposes, or to counterbalance the conservative discounted cash flow (DCF) method with a risk premium analysis. Defending Levant are the California Public Utilities Commission, the state's Electricity Oversight Board, Enron Power Marketing, the Sacramento Municipal Utility District and others. On Dec. 1, Edison reiterated its claim for an ROE of at least 11.6 percent, but some company affidavits urged a rate as high as 12.6 percent. Earlier, on Nov. 1, FERC staff witness Tim Kinsey updated his DCF testimony, appearing to support a rate as high as 10.31 percent.

The case is peculiar. In theory, it's an adversarial rate case, to be decided strictly on the evidence. How has Edison fared since it transferred grid assets to the ISO? Has it suffered financial injury? Is Edison in danger of not recovering its stranded costs? Did Levant's order lead Wall Street to downgrade credit ratings or recommend against buying stock in Edison International (EIX), the utility's parent company? Yet on Sept. 17, the FERC invited the electric industry to think outside the box and offer additional theories through a "paper" hearing outside of trial-type evidentiary hearing procedures:

"In light of the possible risks associated with the transfer of operational control of facilities to the California ISO, and the potential increase ¼ in the number of public utilities that face similar risks ¼ we will ¼ consider additional evidence and arguments." 88 FERC ¶61,254.

Edison (with defenders) claims that by transferring grid assets to the control of the non-profit ISO, which lacks a motive to seek a financial return, its transmission operation has become more risky - so unstable a business that it would be wrong to use the DCF method to set ROE, according to witnesses Lawrence Kolbe, of the Brattle Group, and Dr. James H. Vander Weide, of Duke University. Kolbe emphasizes further that when telecommunications and similar network industries were unbundled, risk actually rose for the segments (Bell carriers, etc.) that remained regulated. Investors abhor any enterprise in which the equitable owner does not exercise day-to-day control, directly or indirectly, these witnesses say. This argument seems intuitive. Yet Edison has no concrete evidence. The FERC staff counters that Kolbe, Vander Weide and other witnesses are dealing in mere speculation.

In fact, the hard evidence argues that markets love Edison. On Oct. 14, 1999, the Wall Street Journal ran a favorable story: "Edison International Reports 21 percent Rise in Earnings and Predicts Solid Growth." That followed a series of favorable financial reports from EIX CEO John Bryson. Two weeks earlier, on Oct. 1, Lehman Bros. had upgraded EIX stock to a "buy." Further, in late September, Duff & Phelps Credit Rating Co. had assigned an "A+" rating for certain EIX debt.

This case should provide a litmus test for Curt Hébert's argument that a utility faces higher investment risk when it retreats to a wires-only franchise. It offers the chance to make real policy - the sort of commitment that was missing from Order 2000. But it also revives Commissioner Stalon's old dilemma. Should a regulator sit as a trier of fact or make policy based on his presumed expertise? The reply briefs came in on the first of December. If the argument is valid that RTOs deserve a financial inventive, then here in this case it must carry the day. To prevail, Hébert must convince his colleagues to move beyond the evidence and make policy by intuition.

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