Power producers fear being stranded

There are high stakes as utilities, consumers, regulators and lawmakers struggle to shape the deregulation of the nation's $210 billion electric industry. So says a new study by Resource Data International (RDI), a Boulder-based energy information consulting firm. This study of each of the nation's 3,050 electric utilities includes a careful calculation of a key stumbling block, what industry experts call "stranded costs."

A stranded cost occurs when an existing utility loses its government-created monopoly and can't compete with new competitors. That happens when new entrants or existing low-cost power providers come into its market and win customers by offering lower prices or better service packages -- e.g., electric power bundled with a home security system. Result: The clear benefits of competition for the consumer causes the formerly regulated utility (and its shareholders) to lose customers and revenue. Perfectly good -- though often still mortgaged -- facilities have to be shut down. It's like the reckless driver with no insurance who totals his new car: He ends up with a $20,000 stranded cost in the form of obligations for a monthly payment to the bank and a junked car he can't drive to work.

In the case of the driver, the wreck was his fault. But in the case of utilities, many stranded costs occur because policy-makers and regulators changed the rules of the game. That's the nub of the problem: How to be fair to people who put their savings in a "safe" government-regulated industry versus how to give consumers the many benefits of more competition, including lower prices and more innovation.

This is not a small problem. RDI says stranded costs total more than $200 billion nationally. The lion's share is found in heavily financed nuclear power plants -- about $86 billion. These costly nuclear plants, some of which are shut down, still have to be paid for. Result: Even utilities that generate cheap power by coal or gas still have high costs because of the payments they owe for their stillborn nuclear plants.

Major stranded costs are also a result of government regulations or court decisions that rewarded utilities for signing long-term contracts to purchase power from other utilities (about $54 billion) or for using "green" renewables (e.g., expensive steam heater biomass) produced by non-utility generators -- called NUGs (about 42 billion). Now utilities are stuck with them, at a time when new entrants can buy power more cheaply on the open market.

The third largest component of stranded costs is what the industry calls "regulatory assets" (about $49 billion). A better name: broken promises. Reason: Utilities spent money to build power plants (or other facilities) on the understanding that future regulated rates would permit cost recovery. With deregulation, cost recovery may be impossible.

High-cost utilities and many pension funds, recalling the S&L debacle in the late 1980s, will fight hard to ensure that government policies don't leave investors holding the bag of stranded costs. According to Christopher Steiple, the study's principal author, even though a small group of 20 utilities accounts for nearly half the stranded costs, potential losers include additional scores of co-ops and investor-owned utilities. "Many will be pressed into insolvency without some form of stranded cost recovery," he says.

RDI president Ron McMahan says it best: "With so much at stake, so-called deregulation really looks more like a question of re-regulation, or a different kind of regulation. The design and timing of formulas to permit at least some stranded cost recovery will have profound impacts on investors and consumers alike. There is a bright future for electro technologies in America, provided we don't screw it up in the transition."