If the new rules of electric industry competition don't permit stranded-cost recovery, the credibility of the U.S. government would be seriously undermined. Or so an executive of one of the country's largest utilities told a Senate energy panel."We just have to keep in mind we incurred these costs based under what the rules were," said Jerry Jackson of Entergy Corp. "If the government is going to change those rules . . . but not [make] sure the past commitments were honored, we'd have a very serious issue in respect to the credibility of the United States."
Jackson was one of nine witnesses to testify before the Senate Committee on Energy and Natural Resources on March 28. Witnesses represented small business, independent power, public power, cooperatives, and medium and large utilities. The hearing was the second in a series of oversight hearings on competitive change in the electric power industry.
Although witnesses were asked to respond to
S. 1526 - a bill introduced by Sen. J. Bennett Johnston (D-LA), ranking Democrat on the committee - and
10 related questions, most of the debate focused on retail wheeling and stranded costs.
Like Jackson, Daniel Waters of the Southern California Public Power Authority said Congress must assume some responsibility for stranded costs. The 1989 Energy Policy Act prohibited the burning of natural gas in utility boilers, pushing utilities toward nuclear solutions, now stranded investment. Ironically, the low-cost competition today is natural gas-fired turbines.
"I can assure you we will all make mistakes, as we unravel the historic regulatory compact," Waters said. "Let's let those few states that have the most serious cost problems lead the way."
The panel raised no objections when Sen. Johnston asked whether decommissioning costs should be handled through legislation. But when he suggested that decommissioning become a federal requirement, witnesses protested loudly.
Sen. Frank H. Murkowski (R-AK), committee chairman, polled the panel on the need for comprehensive legislation on electric industry restructuring. Four witnesses said "yes," although two added "not immediately"; three said no; two abstained. Witnesses said legislative priorities should include stranded assets, reciprocity, federal-state rights, and well-developed competition.
One of the most outspoken opponents of full stranded-cost recovery was Peter Mehra of Ford Motor Co., representing large industrial users.
"We're not up here seeking the bankruptcy of the large utilities," he said. "We're trying to get our manufacturing plants efficient. Efficient so they can compete. As you are aware, the transplanted Japanese companies have all built plants in Tennessee, Kentucky, and those parts of Ohio where power is about half the cost of what we're paying in Michigan and other parts of Ohio - a distinct competitive advantage.
"Unfortunately, the efficient utilities, or the utilities who made the right choices, they're not represented at this panel today," Mehra added. "In fact, if there is stranded-cost recovery, they would be bankrupted because the utilities who would receive stranded [payments] would use that money to bid below the variable costs of the other utilities."
"Not if it's really stranded costs," Sen. Johnston countered. "Not if it's mitigated stranded costs and net stranded costs."
Johnston suggested that large industrial users meet with utilities to define stranded costs. Without a definition, there will never be competitive benefits, he said. "If we knew what the rules of the road were, in a lot of instances, you wouldn't even need retail wheeling because you'd know what your obligation is. You could go make the deal with your utility and be able to do it without going through the PUC... much as they did with natural gas."
Johnston, who seems to favor utility and stockholder interests, noted that stockholders "invested in utilities because they were safe stocks - not so much upside potential. But they bargained away the upside potential in order to get the solidity, the predictability, the conservative nature of utility investments."
The panel's retail wheeling debate also offered little consensus.
"In the United States, consumers can shop for almost anything, but you can't shop for electricity," said Roger F. Naill of AES Corp. and the National Independent Energy Producers. "If you give consumers information and choices, they won't need a lot of this regulation to protect their interests. They will be able to protect themselves."
But Glenn English of the National Rural Electric Cooperative Association argued that the wholesale power provisions of the 1992 Energy Policy Act were still being played out. He questioned whether retail wheeling should be allowed to short-circuit the Act.
"Different states are coming up with different approaches," he said. "They have their own definitions as to what retail wheeling may be. And fortunately, that's exactly what the 1992 Act intended.... It recognized the fact that not all the good ideas come from Washington, DC." English pointed out that cooperatives in Oklahoma supported a wheeling bill in their legislature; those in Colorado opposed a similar bill.
Despite panel efforts to take on other issues, the three-way dance between Johnston, Jackson, and Mehra seemed to dominate. One (edited) exchange:
Johnston: "Where do you find fault with [Jackson's] assertion that Entergy had no choice in the kind of generating capacity that they put on line?"
Mehra: "Mr. Jackson said in fact they had a choice between coal and nuclear. They could have taken coal, yes, even together with the Clean Air Act requirements, the costs would still have been substantially below."
Johnston: "But having made the choice, before [Three Mile Island], would you argue with the 'projective' cost, which is the information on which they had to make the decision?"
Mehra: "Senator, we all have to make decisions on information that we have. And we as managers have to live with the decision we make."
Johnston: "Mr. Jackson, did you have the ability to go all coal-fired at that time?"
Jackson: "I think the Clean Air Act would have been a serious limitation. Not only that, I'd like to point out that at that time, we were also looking at projections in terms of 70, 80 dollars for barrels of oil. ... Our industrial customers were coming to us at that point in time, saying 'find us the lowest-cost generation in respect to energy costs.' And a lot of nuclear plants today were constructed to benefit those that were big energy users.... At the time, the nuclear option was the best option for our customers."
Johnston: "The way to get Mr. Mehra to come to your state is to reduce rates. And the way to reduce rates is to disallow those stranded costs, bankrupt the utility... and then you can get to that competitive market a lot faster. Rather than have the ebbs and pulls of different elections... you're going to find that with PUCs from now on. California will have the pro-stranded costs for four years, then four years later they'll come in with the other. There'll be no predictability."
Joseph F. Schuler, Jr. is associate editor of Public Utilities Fortnightly. E-mail: firstname.lastname@example.org
The Senator Wants to Know
Sen. Frank H. Murkowski (R-AK), chairman of the House Committee on Energy and Natural Resources, asks the electric utility industry:
. Is there a need for restructuring legislation?
. What are the benefits and consequences of retail wheeling?
. Who should have the authority to order retail wheeling?
. Should the FERC's jurisdiction be expanded to include nonregulated utilities?
. Where should the bright line be drawn to protect federal and state jurisdiction?
. Should utilities be allowed to recover stranded investment?
. Should federal utilities be privatized?
. Should Congress address the differential tax and other treatment of private and public power?
. Should PUCHA be repealed?
. Should PURPA be repealed?
Economist Urges Stranded-cost Formula
A California economics professor believes most claims for stranded-cost recovery are flawed.
"Discussion of how to fairly allocate strandings between investors and electricity users are taking place in a vacuum," according to Robert J. Michaels of California State University and the Cato Institute. "While numerous estimates of future stranding payoutsexist, we have no estimates of what users have already paid in excess of prices that would have prevailed in a competitive market."
Michaels was one of a panel of 13 witnesses testifying before the House Commerce Committee on March 28. Other witnesses included J. Gregory Sidak of the American Enterprise Institute, and Michael T. Maloney and Robert E. McCormick of Clenson University.
Sidak argued in favor of stranded-cost recovery. Denying recovery, he warned, could create inefficiencies, diverting business to more efficient suppliers and causing capital costs to balloon. These capital costs, inturn, would discourage future investment. "Regulators should permitrival firms to succeed only on the basis of relative efficiency, undistorted by asymmetrical obligations inherited from the past, "Sidak urged.
Maloney and McCormick, economics professors, viewed stranded-cost recovery an "income redistribution issue" that would not affect efficient utility use or production. They noted that efficient recovery will depend on lump-sum payments, derived through access charges or tax subsidies.
Michaels, by contrast, contended that "no one ... can recommend any stranding policy at all with confidence on the basis of information that is currently available.
"To draw conclusions about the equity of stranding compensation, we must look both backward and forward. Every hour of every day, America's electricity users are paying millions of dollars to their utilities that they would not be paying if competition already prevailed."
This report is based on the text of testimony submitted by witnesses to the House Committee on Commerce, Subcommittee on Energy and Power. Copies of the testimony may be ordered from (202) 225-2927.
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