It was after seven o'clock in the evening (em nearly 12 hours since the DOE-NARUC Second National Electricity Forum had gotten underway up in Providence, RI (em when it all finally hit home. This time the regulators were serious. People were paying attention. Stay with me for a moment.

Two high-level staffers from the Federal Energy Regulatory Commission (FERC) were up at the podium, giving a class on the FERC's Electric Giga-NOPR (the Notice of Proposed Rulemaking on open-access electric transmission and stranded investment, released on March 29). I and about 700 other conference attendees had been at it since early morning, grabbing an earful of numbing acronyms like PURPA and PUHCA.

There we were (em 700 eager students and two FERC professors, well into our second hour of NOPR college (em when up to the microphone stepped Elizabeth Anne Moler, Chair of the FERC, intent on ringing the school bell. After all, the NOPR was over 300 pages long; the hour was late; we were tired; she probably was too. So first she thanked us for our rapt attention, and then she pleaded with us to put it to bed for gosh sakes and go out to the hall where the bar was open and the hors d'oeuvres lay waiting (em both untouched for an hour.

Nothing like a good rulemaking to keep a body out of trouble. Or, as commissioner James Hoecker said of FERC's NOPR, "Belly up to the buzzsaw."

Dysfunctional

The FERC won't admit it, but it has started down the road to breaking up the investor-owned electric industry.

The March 29 NOPR will require electric utilities that own transmission facilities to "sell" transmission to themselves as if they were a separate, third-party customer. Of course, the FERC has been very careful so far to say that its March 29 NOPR requires only functional unbundling (em not structural or corporate unbundling. But identifying and segregating electric utility "functions" within today's companies won't likely produce a competitive industry. I suppose you could split the auto business into functions (em design, testing, assembly, parts, service, and so on (em but when customers walk into the showroom, they want to buy a car.

In a regulated world, the number of "functions" never falls below the number of competing regulatory jurisdictions. Such "functions" often prove artificial; usually they only serve the process of allocating costs among political jurisdictions. True corporate unbundling (… la AT&T) would avoid this mess.

Up in Providence I was struck by some comments from Jeff Tranen, vice president at New England Electric System (NEES). Tranen has been working with John W. Rowe, president and CEO of NEES, on the NEES working proposal, announced last November (at the first DOE-NARUC national electricity forum), to sell off the company's transmission system to a third party (em perhaps a pool or a regional transmission group (RTG) (em that would own no generation. NEES would use the proceeds to write down stranded assets, including above-cost contracts with independent power producers (IPPs) or qualifying cogeneration and small power production facilities (QFs).

Well, as Tranen explained, the FERC's Giga-NOPR seems to have made it less urgent (in the minds of IPPs and QFs) to isolate transmission from generation, but more urgent to disaggregate generation from distribution. Does Tranen's comment mean that the FERC's Giga-NOPR is off the mark? No. Nor does it settle the debate on a centralized "PoolCo" model versus a bilateral markets financial model. It's still important to separate competitive generation from any market power that utilities might wield in transmission markets. But Tranen's comments show that it won't end there. The accusation of "monopoly rents" will chase utilities around the clock until the past is put to rest.

Transition Forever

The view at DOE-NARUC was that the FERC's NOPR might actually delay the transition to a restructured competitive electric industry.

For instance, MIT visiting professor Paul Levy (and former chairman of the Massachusetts DPU) claimed that the FERC's NOPR might have slowed negotiations on an RTG in New England, since some of the parties "seem willing to live under the new FERC regime." Former FERC commissioner Charles Trabandt, now at Merrill Lynch, also chimed in: "The NOPR could slow the transition. It will impose a year of comments and litigation." Ohio PUC chairman Craig Glazer seemed to agree: "Utilities could lose their incentive [to settle] because the NOPR promises recovery of stranded costs."

And what about stranded investment? Should utilities accept the FERC's offer to recover "legitimate and verifiable" stranded costs, even at the risk of months of litigation?

Jerry Pfeffer, now energy industry advisor with the Skadden, Arps law firm, notes that stranded investment would remain a problem even if the FERC kept the transmission grid closed, because of competition from onsite and dispersed generation. At DOE-NARUC, Pfeffer suggested that Wall Street may have already marked off some assets as stranded, and advised utilities to consider negotiated settlements in place of litigation to get through the transition. "Utilities can mitigate stranded costs to a small degree by transferring costs to transmission," notes Pfeffer. "But that's only a drop in the bucket."

So just how deep is that bucket? If stranded costs are defined by some future open-market price for electricity, how can anyone figure out today what's stranded and what's not? Vermont PSB chairman Richard Cowart explained how you might need to look backward: "You can't say [today] that an above-cost QF is 100-percent stranded [when] in a past year, let's say 1985, the QF might have been cheaper than the utility."

Mike Yokell, president of Hagler Bailly, attempted to quantify stranded costs, presenting a very thorough analysis that included several

Letterman-style "top 10" lists: Top 10 plants most at risk (led by Comanche Peak); top 10 utilities in dollars of stranded costs (Texas Utilities, PECO Energy, SoCalEd, and so on); and the top 10 stranded states (Texas, Pennsylvania, California, Illinois, New York, and so on).

But Yokell then added, "If you have a long-term perspective, and you want to hold market share, you don't want to recover all your stranded investment. [Otherwise] you'll end up with a shrunken company." Yokell won agreement on that point from Michael Yackira, senior vice president for finance and CFO of Florida Power and Light Co. Yackira suggested that despite the FERC's promise of an opportunity for stranded-cost recovery, electric utilities will lose ground to competitors if they expend too much effort going after stranded costs.

Editor

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