Brattle Group

RECENT CONFERENCE on independent system operators held by the Federal Energy Regulatory Commission was, in many respects, a tremendous achievement. It is a testimony to this Commission that its members can muster the stamina to listen to one-and-a-half days of mind-numbing technical discussion of power technology and regulation.

Nevertheless, there is inevitably a misstep or two in these massive "hearing-thons." In this case, the discussion nearly went awry when it turned to comparisons between transcos and ISOs.

"People are starting to talk about ISOs on the gas side." So says Jerry Pfeffer, lay advisor on energy industries for Skadden, Arps, Meagher & Flom, the New York law firm well known for its work in mergers and acquisitions.

Pfeffer's comment alludes to events now unfolding in Southern California, that fount of fashion, where each round of "deregulation" only doubles the ante in billable hours. This time it's natural gas pipelines. Do they have market power too?

"It Would Not Surprise Me"

Southern California Edison Co. has now alleged that Southern California Gas Co.

Valuation, optimization and settlement strategies

oth gas and electric utilities face a variety of environmental issues arising from more than 1,500 former manufactured gas plant (MGP) sites, which supplied a major source of energy in the United States from the early 1800s to the mid-1900s. Using the standard operating procedures of the day, MGPs created and often disposed of byproducts such as coal and oil tars, tar/water emulsions, sludges, spent oxides (including cyanides), lampblack, ash and clinker.

The electric industry hasn't seen so much upheaval since Thomas Edison threw the switch at the Pearl Street Station. Full retail access to competitive markets in generation and supply will challenge traditional ways of doing business. But no change will prove more dramatic for electric utilities than setting a competitive price (em that most fundamental of business decisions.

In anticipation of competition, utilities have been experimenting to discern what forms of the "product" (em electric power (em customers might want, and at what prices. One such experiment is real-time pricing.

Is Too! Is Not!

In the August 1995 Mailbag, Mr. Michael Yokell claims our May 15, 1995, article ("It Ain't in There: The Cost of Capital Does Not Compensate for Stranded-cost Risk") "is simply wrong" and "nonsensical on its face" because we fail to distinguish between the cost of capital before and after the stranded-cost issue arose.

In fact, it is Mr.

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.