COMPETITIVE transition charges. Wires charges. Securitization payments. Every stranded cost recovery mechanism considered to date requires customers to pay for electric utility stranded costs through direct assessments on monthly bills. These charges will continue for many years after competition is introduced.

There is a real irony here: As we seek to introduce competition into the electric industry, we as regulators are forced to invoke all of the most heavy-handed tools to extract payments from citizens. Further, it is those utilities who decry the "shackles" of regulation that are the first to ask us for relief. They want regulators to issue orders to extract "nonbypassable" payments directly from the pockets of their customers.

Whatever one thinks of the merits of stranded costs, the time has come to devise a more market-driven alternative mechanism to recover these costs. It is time for us, as regulators, to promote alternative recovery mechanisms rather than stand by to be drafted by the companies we regulate to serve as the new revenue collectors for the electric industry.

I wish to outline one such proposal. At the outset, I would like to make clear that this proposal is a recovery mechanism only. It is not intended to address the idea of an entitlement to stranded costs or a quantification of such a right. Rather, I propose this alternative to stimulate thinking of alternatives to traditional regulatory tools for recovering those stranded dollars. My intention is to promote both equity and efficiency in moving to a fully competitive retail generation market - to "jump-start" competition during the transition period and introduce market forces to the recovery of stranded costs.

This proposal would assess stranded costs as entry fees on all market suppliers serving end users, including incumbent suppliers, rather than on customers directly. Of course, each of these suppliers will attempt to pass these costs along to customers. But in a market environment, sellers will be looking over their shoulders to see if their competitors are collecting stranded costs from their own customers before passing the entire amount through its price.

Just as one grocery chain today will discount its own overhead (taxes, insurance, workers comp premiums, etc.) to beat out the store down the street, so too will electricity suppliers under this model. Assessing stranded costs on marketers - not customers - should force a discounting of stranded costs and concomitant benefits to customers. In this way, competitive forces will be introduced into the recovery of stranded costs.

As an added benefit, this recovery mechanism will provide real incentives for incumbents to invite new players into the market rather to keep them out. This move also would promote competition and thus make the recovery of stranded costs a pro-competitive activity rather an activity that tends to stifle competition, as is currently the case.

Share the Market, Share the Cost

Initially, the incumbent holds a virtual 100-percent market share. As long as this is the case, the incumbent bears 100 percent of its stranded costs. Responsibility for stranded costs remains with the incumbents' customers, who are charged a price consistent with the existing tariffs, which, by definition, includes recovery of stranded costs today.

As end users migrate toward new suppliers, the utility's share of stranded cost responsibility is reduced; each alternative supplier takes on part of the utility's obligation, based on a percentage of its (the supplier's) total market share. The market share of each supplier would be determined annually and would be used to allocate stranded costs. As new suppliers emerge, they may attempt to gain market share by discounting the amount of the stranded cost charges they pass through to end users. This strategy would put pressure on all other participants to match those discounts - a result that would clearly benefit customers.

The availability of discounting introduces a measure of competition that otherwise would not take place in the recovery of stranded costs. To ensure the proverbial "level playing field," the portion of stranded costs associated with the incumbent's market share would be imputed to the incumbent utility annually.

In return for this assessment of stranded costs on all generators, the price of generation would be deregulated. The introduction of new entrants and "jump-starting" competition would ensure that this deregulation would not force prices higher for customers. Of course, limited regulatory review would still be needed, but its focus would change, guarding against undue market power by a particular generator or collusion by a group, which could harm customers. This "pay to play" proposal has the salutary effect of placing the appropriate incentives on incumbent utilities to open their systems and invite new entrants, rather than to resist competition. The utility that fights competition ends up with more stranded costs borne by shareholders because its market share remains high. On the other hand, since generation is deregulated at the outset, new entrants are enticed into the market, jump-starting a market that might otherwise be suppressed under the weight of other proposals less friendly to competition.

An Option in Return

With the obligation to pay assigned stranded costs, power marketers or customers would gain the right to use the capacity and energy they paid for during the transition period. This "call option" would permit customers or power marketers paying stranded costs the right to recall and resell some or all of the stranded capacity and energy they would be assigned during the transition period. In the instances in which the retail customers purchase directly in the generation market, customers would then be permitted to retain their call option rights, along with the stranded cost obligation, only through a clearly written election. Retail customers who elect the distribution utility as their agent in procuring generation, either by choice or default, would effectively transfer their call option rights and transition cost responsibilities to the distribution utility.

My approach also appears compatible with the FERC's Order 888, which gives certain rights to firms that pay transition costs (either marketers or wholesale use customers) to re-market the freed-up utility power. Such rights and obligations would be contracted for on a year-to-year basis for the duration of the transition period.

This proposal is a recovery mechanism only. It does not address how the total amount of transition costs is estimated. It does, however, introduce market forces into the recovery of stranded costs. It places incentives on the incumbents to welcome new players and clear disincentives on erecting barriers to entry. It also serves to jump-start competition immediately during the transition period - a point that can only work to benefit customers.

Craig A. Glazer is chairman of the Public Utilities Commission of Ohio.

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