The other day I heard a short news item on National Public Radio that made me stop and think. The item ran something like this: "Maxwell House has announced it will cut the price of its loose ground coffee to reflect a drop in the coffee futures market several months out."
Wasn't that easy? Call it integrated resource planning in the espresso lane. Note what Maxwell House did not do. It did not solicit a demand forecast or run the PROMOD computer model. I bet the company didn't pay for an interest rate analysis or an avoided cost study, either. Or figure out the correlation between coffee consumption and economic growth.
Maxwell House inhabits a commodity market. Natural gas companies (pipelines, distributors, marketers) live there too. They're learning all about hedging (em the long and short of it. Eventually the electric industry will have to face the music. Caffeine all around.
Not Worth a Dime
With all the holiday rush at the end of last year, you may not have noticed: In mid-December the Federal Energy Regulatory Commission (FERC) issued its long-awaited policy statement on the decommissioning of hydroelectric dams. See, Project Decommissioning at Relicensing, Dkt. No. RM93-23-000, Dec. 14, 1994, 69 FERC 61,336. But they didn't fail to notice over at the American Public Power Association (APPA) or the National Hydropower Association (NHA), which both oppose the FERC action.
Hydroelectric plant decommissioning is a little like the stranded investment problem. But the origin is different. In the hydroelectric case, environmental factors threaten utility investment. Fish and wildlife are weighed against agriculture; ocean shipping vies against pleasure boating; stream flow battles flood control. The FERC must balance these interests under Federal Power Act section 10(a). Licenses must go to those projects "best adapted" to interstate commerce, water power development, protection and enhancement of fish and wildlife (including spawning grounds and habitat), and other uses, including irrigation, flood control, water supply, and recreation.
In its policy statement, the FERC asserted authority to require decommissioning if it decides a project should not be relicensed. That may entail simply shutting down the power operations or "tearing out all parts of the project, including the dam, and restoring the site to its pre-project condition."
The APPA has asked for a rehearing, alluding to a sort of regulatory compact not unlike the one said to justify cost recovery for nuclear stranded investment:
[B]y removing the certainty and security in the licensees' existing hydro investments . . . the Commission has committed a preemptory taking. No longer can a licensee be assured of recovering its net investment or its fair market value.
* * * *
This security was the cornerstone relied on by Congress to provide the incentives that would encourage licensees to construct and maintain their projects.
On January 13 the NHA sent a letter to the FERC stating its opposition. "The very assertion of this [decommissioning] authority raises serious concerns for the economic viability of all hydropower projects," says the NHA, which points to "the surprising conclusion . . . that the Commission's balancing mandate under 10(a) does not preclude . . . license conditions that render a project uneconomic."
Or, as APPA puts it, "Licensees are in never-never land. . . . [T]hey have no assurance that their licenses are worth a dime."
Walking Around Money
Suppose one of the newly independent Soviet states hires you to come up with a plan for restructuring and privatization of the state-run electric utility? What do you do? If you are RCG/Hagler Bailly, Inc., an international consulting firm, you agree to take on the job and brace yourself for surprises. Here's an example. Your client, an executive at a Ukraine electric generating plant, in all sincerity asks this innocent question: "How can we arrange it so the government will buy us out?"
Obviously, the word "privatization" has lost something in translation during its migration eastward.
The consultant in this case was Alain Streicher, senior vice president at Hagler Bailly. Last month I heard him give a talk at a late evening "dinner/ symposium" at a downtown hotel in Washington, DC. Streicher can tell a story. And he's heard a raft of them after working a while overseas, trying to deliver Ukraine's electric generation industry into the 21st century. (Assuming, of course, that Streicher can first rescue Ukraine's electric industry from the brink of total collapse, where it now rests.)
Streicher observed that back in the old days, the central government used to allow 30 days' grace before forwarding any bill collections to Moscow after payment for electric service was first received in Kiev. So, what to do with all that money? According to Streicher, rumor has it that various officials at the local Ukraine utility occasionally earned a little walking around money by playing the float, personally lending out utility cash at distinctly non-Socialist interest rates, and then calling back the debts just in time to repay the Kremlin. At that time, notes Streicher, the Soviets actually designed and built the Chernobyl nuclear plant specifically to earn hard currency by exporting power to the West.
What about the future for Ukraine? Well, in case you're curious, Streicher notes that Ukraine has issued a Presidential Decree mandating the complete restructuring of the nation's electric utility industry within a single calendar year.
Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.