And why policy on
stranded costs defies
a traditional legal or
economic analysis.
There are sound economic reasons why policymakers should allow electric utilities to recover stranded costs through a competitively neutral network access charge, or some similar fee. First, differences in the quality of utility management appear to have contributed little to differences in electricity rates among states.
While directing PNM Gas Services ( a division of Public Service Company of New Mexico) to reduce rates for gas service, the New Mexico Public Utility Commission has redesigned residential rates to reinstate the once-discredited notion of recovering fixed costs in the commodity charge.
In the same case, the commission also rejected recovery of discount costs and other fees the utility paid and a proposal by the utility to "rebundle" sales and transportation rates by end-use class.
The PUC ordered PNM to reduce gas service rates $6.958 million.
A simple formula method shows utilities exactly how much to discount prices. Electric utilities have drawn attention recently (and criticism from some quarters) for granting off-the-tariff discounts to customers deemed at risk for migration to lower-priced competitive alternatives. Typically, utilities have offered discounts to high-load customers in exchange for a long-term purchase commitment providing either more certain earnings, higher expected earnings, or both.
With the implementation of the Energy Policy Act and the FERC's Orders 888 and 889, competition has been introduced into wholesale power markets. It is limited in scope, however, as utilities are still able to recover their fixed generation costs and embedded cost of capital from their captive retail markets. This limited competition impedes progress towards the development of a more efficient generation system in the U.S. and provides only modest benefits to retail customers.
Currently, generators compete only in wholesale markets and not in retail power markets.
The Heritage Foundation has released its second report in a series on electric deregulation, aimed at capturing the attention of lawmakers on Capitol Hill now holding hearings on proposed legislation to restructure the electric industry.
The new report, Electricity Deregulation: Separating Fact From Fiction in the Debate Over Stranded Cost Recovery, by Adam D. Thierer, concludes that lavish stranded cost recovery is not justified, and that the "sky will not fall" if stranded cost recovery is limited or denied.
Moody's Investors Service has concluded that a properly structured securitization backed by the future cash flow from a utility's stranded investments can achieve a credit rating higher than the rating of the senior debt of the utility.
Moody's said this ability bodes well for the increasing number of investor-owned utilities expected to issue up to $75 billion of such securities by 2000 to recover uneconomic investments.
Some in Congress would link customer choice with a portfolio standard. How would that play in a wholesale power market where gas turbines rule the roost?
By Michael C. Brower and Brian Parsons
WHAT KINDS OF POWER PLANTS WILL
get built in a deregulated electric industry? If recent history offers any guide, utilities and independent power companies will succumb to the traditional wisdom and invest in gas-fired combustion turbines and combined-cycle plants. Sound reasons may exist for doing so. The plants are less expensive than conventional steam plants. They put less capital at risk.
While authorizing Nashville Gas Co. to increase rates by $4.417 million, the Tennessee Regulatory Authority has modified its existing policy on the treatment of advertising expenses in gas rate cases.
The authority abandoned a past policy limiting advertising recovery to 0.5 percent of the company's gross revenues. It also ordered a 50-50 sharing between ratepayers and shareholders. It granted, however, the LDC's request for full recovery of both payroll and nonpayroll "sales promotion" costs, rejecting allegations the costs should be treated as advertising expenses.
PUC endorses direct access, plant divestiture and limits on recovery of stranded costs. Says order will not interfere with 1990 bankruptcy plan for Northeast Utilities. The New Hampshire Public Utilities Commission has issued its final plan for restructuring the state's electric industry, at the same time announcing what is believed to be the first formal policy decision by a state utility commission that would deny full recovery of costs left "stranded" by the transition to competition.
Released on Feb.
Do electric utilities understand how to earn profits for shareholders in a competitive market?
Here's one way to look at the problem. Gather a group of financial experts and ask this question: If a company's long-term bonds are rated AA, and yield 8 percent, what minimum return would you require from dividend yield and price appreciation to induce you to buy that company's stock?
The typical expert will say 12 percent, indicating a 4-percent premium (or spread) above AA bond yields.