Fortnightly Magazine - January 15 1995

Vermont Approves Telco Price-cap Plan

The Vermont Public Service Board (PSB) has approved an alternative price regulation plan (PRP) for New England Telephone Co. (NET), while reducing its rates by 9.56 percent (about $15 million) per year, and ordering a $11.5-million rate refund. (Under state law, NET is not required to accept the price regulation plan.

Mailbag

Ratings Reveal Risk

In an interesting article (Oct. 15, 1994), Professor Brooks Marshall suggests that bond ratings are a poor predictor of equity risk, based on a regression of utility risk measures on measures of utility bond ratings. For utility variables, he used 1) stock beta and 2) risk premiums based on analysts' expected forecasts. For bond rating measures, he used 1) average yields for various classes of bonds and 2) a numerical ranking.

FERC Clarifies Gas Gathering Policy

The Federal Energy Regulatory Commission (FERC) has clarified the terms and conditions for default contracts designed for use on an interim basis when disputes arise over the sale or spinoff of pipeline-affiliated gas gathering systems.

Electric Utility Penalized for Power-Supply Strategy

Citing an excessive commitment to increasingly expensive purchased-power contracts, the Vermont Public Service Board (PSB) has reduced allowed rate of return on equity by 75 basis points. In setting rates for Central Vermont Public Service Corp., the PSB explained that ratepayers should not bear all of the costs associated with 1) excessive power commitments; 2) a failure to fully explore return sales opportunities; and 3) inefficient energy-efficiency programs.

Trends

A competitive market for electric power raises the point that some utility investments might be overvalued, giving rise to "stranded investment." Nevertheless, actual utility exposure to stranded investment may prove less severe than reported, according to a recent study we conducted at Resource Data International, Inc. (RDI), Retail Power Markets in the U.S., (em perhaps the first detailed analysis of stranded investment from generating assets, performed on a unit-by-unit basis for all power plants in the United States.

Court Rejects EPA's Nox Plan

The U.S. Court of Appeals for the District of Columbia Circuit has vacated the Clean Air Act (CAA) compliance rules for reducing NOx emissions from coal-burning electric facilities (Alabama Power Co. v. EPA, No. 94-1170, 94-1329, Nov. 29, 1994). The ruling suspends any obligation to comply with the NOx standards pending further rulemaking by the Environmental Protection Agency (EPA).

Michigan Orders Release of Info on Electric Competition

The Michigan Public Service Commission (PSC) will require Energy Michigan (em a nonprofit corporation whose members promote expanded use of cogeneration, IPPs, and waste-to-energy projects (em to provide Consumers Power Co. with information concerning the extent of existing and proposed self-generation projects that pose a competitive threat. The PSC directed Energy Michigan to answer interrogatories served by Consumers after Energy Michigan intervened in a proceeding concerning a new "competitive tariff" proposed by the utility.

PG&E, Destec Enter Transmission Agreement

Pacific Gas and Electric Co. (PG&E) and Destec Energy Inc. have entered into the nation's first comprehensive transmission and services agreement between a utility and a power marketer. The deal will allow Destec's power marketing subsidiary, Destec Power Services Inc. (DPS), to pool electricity and wholesale it directly using PG&E's transmission lines. A request for plan approval was filed at the Federal Energy Regulatory Commission on December 6.

FERC Denies Market Rates for Kentucky

The Federal Energy Regulatory Commission (FERC) has denied a request by Kentucky Utilities Co. (KU) to charge market-based rates for bulk-power sales. In a related action, the FERC called for a public hearing on KU's accompanying transmission tariff, which would establish point-to-point rather than network service.

California to Reconsider PBOP Rulings

The California Public Utilities Commission (CPUC) has reaffirmed an earlier ruling permitting telecommunications utilities subject to price-cap regulation to use accrual accounting for post-retirement benefits other than pensions (PBOPs) under SFAS 106. It also warned that it may change its existing policy, which allows recovery of the costs of the accounting change as an exogenous cost under the price-cap form of regulation. The CPUC explained that "strong arguments can be made" that PBOP costs are within the utilities' control and simply normal costs of doing business.

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