Everybody's talking about electric utilities dabbling in telecommunications. That's fine. But how about vice versa? Maybe what we've really got is telephone companies (and cable television, too) getting into energy. That's different.

Real-time Pricing, Not Restructuring

Richard Abdoo's article, "Wisconsin Electric's View of a More Competitive Industry," (Feb. 15, 1995), brought this quote to mind: "We trained

hard. . . . But it seemed that every time we were beginning to form up into teams we would be reorganized. I was to learn later in life that we tend to meet any situation by reorganizing; and a wonderful method it can be for creating the illusion of progress while producing confusion, inefficiency, and demoralization" (Petronius (em 256 BC).

After Congress enacted the Clean Air Act Amendments of 1990, the electric utility industry focused considerable attention on what seemed the key provisions of the acid rain program: e.g., emission allowance trading. In contrast, the highly technical, seemingly innocuous continuous emission monitoring (CEM) provision received scant attention (em only a few engineers took notice. We now know that emission trading and other supposed key provisions had only a modest impact on utilities.

a comparable cost. But what, exactly, are those "different uses"?

For better or worse, deregulation is now a factor in the electric utility industry. As a general proposition, deregulation makes for increased competition, which in turn will trim costs for consumers. Deregulation of the electric industry means that utilities face the prospect of freezing or reducing rates to retain market share. Stranded investments and the burdens of above-market supply contracts and construction and development contracts (especially nuclear-related contracts) will place additional pressure on these utilities and further reduce their revenue.

Real-time Pricing, Not Restructuring

Richard Abdoo's article, "Wisconsin Electric's View of a More Competitive Industry," (Feb. 15, 1995), brought this quote to mind: "We trained

hard. . . . But it seemed that every time we were beginning to form up into teams we would be reorganized. I was to learn later in life that we tend to meet any situation by reorganizing; and a wonderful method it can be for creating the illusion of progress while producing confusion, inefficiency, and demoralization" (Petronius (em 256 BC).

The question I am asked most frequently is "Who will emerge as the 'winners' and 'losers' among today's electric utility companies?" The short answer is painfully simple. The winners will offer the best prices (a.k.a., the low-cost producers). The losers will be unable to cut prices to meet the market (a.k.a., the high-cost producers).

Unfortunately, real-world answers rarely come in black and white. The electric utility industry enjoys less pricing flexibility than one might imagine.

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.

Retail competition will render a substantial fraction of existing electric utility plant worthless. Some estimates are so large that the question of compensation for these so-called "stranded investments" overshadows debate on the value of retail competition. Advocates of compensation frequently appeal to a "regulatory compact." They claim that this compact justifies compensation for utilities on grounds of fairness. The case for fairness, however, is badly flawed. Moreover, compensation may adversely affect the efficiency of markets in which competition is emerging.

Stranded costs are those costs that electric utilities are currently permitted to recover through their rates but whose recovery may be impeded or prevented by the advent of competition in the industry. Estimates of these costs run from the tens to the hundreds of billions of dollars. Should regulators permit utilities to recover stranded costs while they take steps to promote competition in the electric power industry?