G+T+D=? Why the sum of the future parts is greater than the present whole.
Robert Rosenberg, principal of Benrose Economic Consultants, New York, has more than 25 years of experience in regulatory economics.
Genco, Transco, Disco. If that is the future, then rates collected formerly by the integrated electric company - with its generation, transmission and distribution functions - will have to be determined again for each segment. One aspect of these rates - the cost of capital - has generated significant controversy. %n1%n
The task becomes particularly difficult, for example, if regulators should attempt to set the cost of capital for distribution before the integrated utility spins off that segment, or if a distribution company operates as a separate subsidiary controlled by a public utility holding company that also includes generation and transmission affiliates. Comparable-risk proxy companies may prove impossible to find in either case: Subsidiaries do not issue their own stock to the public; holding companies, which do issue stock, will still reflect the combined risk of generation, transmission and distribution, if not other businesses as well.
Some authors have turned to the telephone or gas industries for analogies of how risks will change in a restructured electric industry. %n2%n Another method would start with the integrated utility's cost of capital and partition it into estimates for the generation, transmission and distribution functions. This approach assumes the capital costs of these segments on a standalone basis to reflect a weighted average of the integrated company. Michael T. Maloney, Robert E. McCormick and Cleve B. Tyler described this approach in a recent article. %n3%n
Such an assumption ignores two realities. First, the newly formed independent segments of an integrated electric utility will prove riskier. Second, because of restructuring, each segment will face increased uncertainty.