The big switch

Nation's Business, Sept, 1997 by James Worsham

In a regulated market, power companies are permitted to charge customers rates high enough to enable the companies to pay down debt from the construction of nuclear plants. That may mean the companies sell power for 2 or 3 cents more per kilowatt-hour than do low-cost producers, which usually haven't made such investments.

Hence, as the nuclear power plants' customer base migrates to cheaper power sources, the costs of paying off nuclear plants would no longer be covered by revenues, and those plants would become so-called stranded assets.

Other stranded costs include contracts for electricity at above-market prices from alternative power sources such as solar power. The portion of the price that could not be recovered in the market would thus be stranded.

Resource Data International Inc. of Boulder, Colo., says stranded costs nationwide total about $202 billion. Moody's Investors Service puts them at about $135 billion. Other estimates are lower.

Resource Data International says that 86 percent of the stranded costs lie in 10 states that have 43 percent of the electricity market. California has the highest stranded costs, at $22.9 billion, followed by New York, Texas, Illinois, Pennsylvania, New Jersey, Ohio, Georgia, Massachusetts, and Connecticut.

Officials of utilities with high stranded costs say that when they made the investment decisions, they had expected, under regulation, to be able to recover the costs. Now they say that if they can't recover the costs, they might go bankrupt.

Opponents of proposed rules to allow utilities to tack on charges to their bills to recover those costs say the companies made their own decisions to build plants and that they were never guaranteed a protected, regulated market forever.

The big question on stranded costs is: Who will pay them? Will it be the ratepayers of an individual utility, all ratepayers in a state, taxpayers via a government bailout, or the utility's shareholders?

If stranded costs are built into post-regulation customer bills -- as is expected to occur in some states considering or phasing in deregulation, including California -- the full benefits of competition will have to wait until these costs are paid

Coping Tips For Small Firms

How can a small-business owner or manager cope in the world of deregulated electricity?

You or someone at your company has probably always paid the local electric utility without much thought about the kind of service provided, how much is being paid, or what other services you might get. That will change as the competitive electricity market spreads through the United States.

Here are some suggestions from experts for coping with electricity deregulation:

* Even if deregulation is not at hand in your state, calculate how much electricity your company uses. Know what it costs at various times of the day, week, and year, and know your firm's monthly charges.

* Look at your company's specific products or services. Determine how much electricity, in kilowatt-hours and in dollars, is needed to make, say, 100 units. This will help you compare offers from other electricity providers later.