Recovery

Flow-based pricing ends

subsidies inherent in grid-wide,

postage-stamp rates.

I

n Order 888, the Federal Energy Regulatory Commission suggested 11 principles for forming an independent system operator, or ISO. In its third principle, the FERC offered this guidance on transmission pricing:

An ISO should provide open access to the transmission system and all services under its control at non-pancaked rates pursuant to a single, unbundled, grid-wide tariff that applies to all eligible users in a non-discriminatory manner.

Illinois has yet to face the issue, but when it does, it may find the road blocked by jurisdictional rules at the FERC. According to estimates by Moody's Investor Service, the state of Illinois would face stranded costs of nearly $6 billion if it should mandate retail wheeling to allow the state's electric utility customers to choose their own supply of electricity.

As directed by the state legislature, the New Hampshire Public Utilities Commission (PUC) has issued a preliminary plan to restructure the state's electric industry.

The spectre of retail competition in electricity presents some difficult but solvable technical problems in creating new markets. It could lead to a new world of regulation. At the least, it will expose some currently protected utilities to potential losses that could prove substantial.

This prospect of losses has inspired some high-cost utilities to mount a formidable defense of the status quo, coupled with an aggressive offense to shape the transition.

Un-American Activities

I would like to comment on Joseph Paquette's letter ("Stranded-cost Recovery: It's Constitutional," Mailbag, Oct. 1, 1996) responding to Charles Studness (Stranded-cost Recovery: It's Un-American," Financial News, July 15, 1996, p. 43).

Mr. Paquette suggests that denying recovery of stranded costs amounts to an unconstitutional taking of private property.

Stranded-cost recovery plus incentives for renewable energy.A New England utility executive told a U.S.

Stranded-

Cost

Recovery: All FERC'ed Up

By Michael T. Maloney, Robert E.

McCormick, and Chad A. McGowan

The "lost-revenues" approach in Order 888 ignores the fact that cash flow drives

asset valuation . . .

. . . the key to measuring uneconomic investment.

Monopoly rents? Not in the short run. The real enemy is a price war, fueled by indifference to stranded costs. And when that happens, antitrust laws won't offer much help.Competition has formally begun in the electric service industry. The Federal Energy Regulatory Commission (FERC) has issued Order 888, giving generators access to wholesale loads throughout the nation.

The Maine Public Utilities Commission (PUC) has rejected a request by Central Maine Power Co. to suspend a proceeding to develop an interim competition transition charge.

Charles Studness is not the type of person I would like to loan money to. I say this because if interest rates dropped in the future he would believe he was now entitled to borrow at the lower rates and not pay me what was owed.

In his latest diatribe against stranded-cost recovery ("Stranded-cost Recovery: It's Un-American," Financial News, July 15, 1996, p. 43), Studness tells us that recovery of stranded costs will keep Americans from purchasing electricity at the competitive price.

It certainly will; however, first all debts must be paid.