Who will pay true cost of deregulation? Md. power companies want to bill customers for plant depreciation

$2 billion in 'stranded costs'

Critics say the cost amounts to bailout of corporate blunders

July 26, 1998|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Suppose you own a business regulated by a government that protected you from competition in a system in which your customers and shareholders paid for your plants.

Now suppose the government decides to end your monopoly and open your business to competition, making you liable for plants that haven't been fully depreciated on your books.

What would you do?

If you are Maryland's four investor-owned electric utilities, you would want customers to pay for more than $2 billion in plant depreciation -- "the stranded costs" of the government's decision to deregulate the power industry.

"The regulatory equation that has been in place for 90 years will not balance in a competitive market," complained Christian H. Poindexter, Baltimore Gas and Electric Co.'s chairman and chief executive, as the utility filed its stranded cost recovery plan with state regulators earlier this month.

For residential customers, stranded costs -- defined as the difference between a plant's book value and market value -- will likely take the form of additional fees, especially for those who switch to cheaper providers of electricity.

If the fees, termed "competitive transition costs," are adopted in Maryland as they have been elsewhere, they could add $4 to $10 per month to theaverage utility bill for as long as 10 years.

Critics argue stranded costs are little more than a public bailout of a utility's bad investment decisions, and that they effectively could wipe out any savings from deregulation's cheaper utility rates -- at least in the short term.

"It's a robbing-Peter-to-pay-Paul type of transaction," said Adam Thierer, an economic policy fellow at the Heritage Foundation, the Washington think tank. "What the utilities are saying is that ratepayers are little more than slaves or hostages, captive until they pay off past debts."

Opponents also argue that giving utilities millions of dollars in stranded costs will only perpetuate the monopolistic system, because it would give the companies receiving the money an unfair advantage.

"Stranded costs are bad for competition," said John Golinger, a consumer advocate for California Public Interest Research Group CalPIRG), which is fighting lawmakers' decision to allow California utilities $28.5 billion in stranded costs.

"Of the 250 small energy providers that registered [in California] to compete in the opened market, only 25 are left. The rest realized they couldn't keep up because of the sweet deal the utilities received as a result of stranded costs," Golinger said. "With stranded costs, they're just not able to offer competitive rates, and so they're gone."

Groups such as CalPIRG have succeeded in getting an initiative on the November ballot that would repeal a majority of the stranded cost allotments and give residential ratepayers other protections.

Battle looms in Md.

If the fight in California -- and the growing resentment nationwide -- is any indication, Maryland could be in for a huge battle over stranded costs.

The Maryland General Assembly is poised to take up the issue in January, part of a package of bills likely to be proposed to alter the laws under which utilities operate.

L Some agencies aren't waiting for the winter session, though.

The state people's counsel, whose office is charged with protecting residential consumers, is planning a full-scale assault the stranded cost issue.

"We're going to litigate the hell out of this," pledged People's Counsel Michael J. Travieso. "We don't believe utilities are entitled to any stranded costs."

Travieso and other opponents of stranded costs believe that utilities should either take write-downs for stranded costs, or get shareholders to absorb them, especially since the utilities will continue to own and profit from the plants.

Utilities, not surprisingly, disagree and intend to fight to be reimbursed for their power plant investments, which they claim they were forced to build as part of their "regulatory compact."

"Assessing stranded costs to customers who choose to switch suppliers is proper, because they are paying only fixed costs incurred on their behalf," said the Edison Electric Institute, an industry trade association.

"Shifting these costs to others would be unfair as well as inefficient to the whole economy."

The utilities have managed to persuade a powerful ally to be on their side -- the federal government.

In April 1996 the Federal Energy Regulatory Commission, the agency principally charged with overseeing and monitoring utility concerns, determined that utilities are entitled to recoup "reasonable" stranded costs.

But FERC has largely left it up to the states to define reasonable -- a fact that has fueled the debate from California to Pennsylvania.

Recovering stranded costs is critical to competing effectively in the deregulated future, say BGE executives, who contend stranded costs are a way of "leveling the competitive playing field."

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