Fortnightly Magazine - May 15 1995

Detroit Edison Sole Supplier for "big Three"

Detroit Edison Co. (DE) has received approval from the Michigan Public Service Commission for

10-year sole-supplier contracts for electric power and related services with Chrysler, Ford, and General Motors. (Case No.

U-10646). DE is believed to be the first utility in the nation to secure such agreements for an entire industry in its service territory

The almost identical contracts involve a

1,000-megawatt combination of firm and interruptible power, giving rate discounts to the automakers.

West Va. Reduces Rate Recovery for Emissions Control

The West Virginia Public Service Commission (PSC), on rehearing of an earlier rate order, has reduced the level of emissions control investment in rates for two electric operating subsidiaries of Allegheny Power System, Inc., Potomac Edison Co. and Monongahela Power Co. The PSC excluded one-half of the difference between amounts actually spent and those budgeted for emissions plant needed to comply with the Clean Air Act Amendments (CAAA), finding that the budget was nearly a year old and did not qualify as a "known and measurable" change in rate base.

5th Cir. Upholds Fed. Preemption of State Condemnation

The U.S. Court of Appeals for the Fifth Circuit has denied a petition for rehearing filed by the City of Morgan City, LA, contesting the ability of the Rural Utilities Service (RUS), formerly the Rural Electrification Administration (REA), to interfere in the city's condemnation of the service territory of a rural electric cooperative (Case No. 93-4295).

Maine to Match Water Rates to Costs

The Maine Public Utilities Commission (PUC) has decided to investigate the need for changes in existing regulations for water rates as a result of "drastically increased" water treatment, filtration, and supply costs. While rejecting calls for immediate changes in rate design, a shift to volumetric interclass cost allocation, and special low-income rate schedules, the PUC decided to open two separate inquiries to determine whether formal rulemakings were required.

Stranded Cost Recovery: Fair and Reasonable

Stranded costs are those costs that electric utilities are currently permitted to recover through their rates but whose recovery may be impeded or prevented by the advent of competition in the industry. Estimates of these costs run from the tens to the hundreds of billions of dollars. Should regulators permit utilities to recover stranded costs while they take steps to promote competition in the electric power industry?

"Goodwill" Has Value to Minnegasco

The Minnesota Court of Appeals has upheld a Minnesota Public Utilities Commission (PUC) ruling that Minnegasco's appliance sales and service business should be charged for the value of goodwill related to Minnegasco's name, reputation, and image. The court also ruled that the cost of responding to emergency gas leak calls should be shared by the utility and its appliance service businesses (Docket Nos. C5-94-1820 and C7-94-1821).

Michigan Requires Dialing Parity

The Michigan Public Service Commission (PSC) has directed telecommunications local exchange carriers (LECs) to begin converting facilities to provide intraLATA dialing parity. An earlier PSC order found that the capability of dialing a single digit to initiate an intraLATA long-distance call necessary for effective competition, whether the service is provided by an LEC or an interexchange carrier (IXC).

Stranded Investment Surcharges: Inequitable and Inefficient

Retail competition will render a substantial fraction of existing electric utility plant worthless. Some estimates are so large that the question of compensation for these so-called "stranded investments" overshadows debate on the value of retail competition. Advocates of compensation frequently appeal to a "regulatory compact." They claim that this compact justifies compensation for utilities on grounds of fairness. The case for fairness, however, is badly flawed. Moreover, compensation may adversely affect the efficiency of markets in which competition is emerging.

SoCalEd Plans 25-percent Cut

Southern California Edison (SoCalEd) has unveiled a plan to slash its electric rates 25 percent by 2000, in anticipation of increased competition. The goal is a "real" price decrease (that is, adjusted for inflation), which translates into a system average price reduction from the present 10.7 cents per kilowatt-hour to below 10 cents. SoCalEd will consider a broad range of initiatives, most of which will require the approval of the California Public Utilites Commission. Included is an immediate rate freeze for residential and small business customers through 1996.

It Ain't in There: The Cost of Capital Does Not Compensate for Stranded-cost Risk

Electric utilities now face the risk that existing assets, costs, or contract commitments may be "stranded" by increased competition, leaving shareholders rather than customers to bear the costs. Have shareholders already been compensated for this risk?

Some argue that shareholders have automatically been compensated for this risk by an allowed rate of return equal to the cost of equity capital determined in efficient capital markets.1 If so, forcing shareholders to bear stranded costs may seem fair.