Georgia public service commission

APPENDIX “A”

Center for Energy and Economic Development

Here are a few basic statements that I think should be a part of any discussion of the whole stranded costs/stranded benefits/stranded investments issue.

3. 
   The State of Georgia should assure that, since the current and past regulatory atmosphere has required the current suppliers to adhere to numerous obligations, not the least of which is the obligation to serve (“universal service”), there is an obligation to allow the recovery of legitimate stranded costs.
   

4. 
   Utilities have invested in significant generation, transmission, and distribution assets so as to provide universal service to current and past customers, as well as to future customers.
   

5. 
   Therefore, any transition to a more competitive marketplace must take into account past regulatory commitments so that recovery of legitimate stranded costs is assured.
   

6. 
   The State of Georgia should assure the recovery of legitimate, unmitigable stranded costs.
   

I think we should proceed down the list of topics you outlined with some real world language aligning the arguments in a side-by-side manner so as to see where we have differences, and those will be numerous, based on the first meeting. Good luck!

Comments of the Consumers' Utility Counsel Division9

of the Governor's Office of Consumer Affairs

for the Stranded Cost Focus Group

The Consumers' Utility Counsel ("CUC") Division of the Governor's Office of Consumer Affairs submits the following points on stranded costs for the purpose of discussion. CUC does not commit to any position outlined in this paper. While the CUC Division believes that deregulation should not be considered inevitable, CUC also believes that a fair resolution of the stranded costs issue is imperative to the success of any restructuring. In order to be successful, deregulation, when and if it occurs in Georgia, needs to offer the opportunity to all customer groups for less expensive, equally reliable power.
1. Ratepayers should not be forced to accept any portion of stranded costs prior to an evaluation of the particular costs at issue. It is unfair to commit ratepayers to bearing costs that may not be their responsibility. CUC, as representative of the residential and small commercial class of customers, is against forgoing its opportunity to present a case on any portion of any particular stranded cost issue that such costs should not be borne by the small consumers.
2. Any sharing of stranded costs must be based on principle, rather than just arbitrary figures. It is important to remember both the potential for rate shock to residential and small commercial customers in restructuring the electric industry, and the necessity that competition benefit all customers. Smaller customers, who may have less sophistication and less bargaining leverage, will likely have the most difficult transition to make. To burden these customers with a greater share of stranded costs than they deserve, if they deserve any, may make it impossible for them to receive affordable and reliable electric service in a restructured environment. The stranded costs issue needs to be resolved in a way that does not eliminate, or delay significantly, any benefits that residential and small commercial ratepayers may gain out of deregulation. At the same time, scenarios which could result in rate shock must be avoided. This means that it could be acceptable for consumers to bear some stranded costs if doing so will help avoid rate shock.

While stranded cost issues should be addressed on a case by case basis, it would appear that several general guidelines should drive any analysis of stranded cost recovery. Utilities should not recover for imprudent investments or for stranded costs that can be or could have been mitigated. In addition, the fact that investors have been earning a return on the investments should factor into the allocation of stranded costs. Also, an examination of any stranded investment should include an analysis of who is responsible for the cost being stranded. Also important to consider are the demographics of investors and the effect the absorption of stranded costs will have on the utility's ability to attract sufficient capital to provide safe, reliable and affordable power. Obviously, this will be a difficult balancing process.

In sum, these guidelines need to ensure that the transition period does not result in a windfall for one group at the expense of another. A transition to competition is different from complete deregulation. Some form of regulation and safeguards will be necessary for a level competitive playing field and for a fair and equitable rates for service to be achieved.
3. The concept of intrastate competition for retail electric service should be explored as an interim step to investigate possible glitches in restructuring as well as an opportunity to mitigate stranded costs. Such an experiment might provide all parties with a more informed notion of what should be included in any restructuring for interstate competition. Also, during the time period of the experiment, Georgia would be able to observe how other states handled the stranded costs issue, thereby benefiting from their successes and failures. Additionally, non-investor owned utilities might be able to use this period to restructure their debt so that they will be able to better participate as competitors.

The Territorial Act, Georgia Code sections 46-3-1 through 46-3-15, as currently written and interpreted, limits intrastate competition for retail service. It is worth exploring the idea that this Act may need to be modified to allow experimentation to take place. However, even during the experiment, the Public Service Commission, and other state agencies, would need to have the authority and jurisdiction to prevent rate shock, abuse of market power, fraud, unfair and deceptive acts and practices and any other potential abuses by participants.

Oglethorpe Power and the Electric Membership Cooperatives of the State of Georgia appreciate this opportunity to express their opinions concerning Stranded Cost. This paper will begin by defining “Stranded Costs” and the various components that comprise its determination. The paper will then provide our position concerning the calculation and recovery of actual “Stranded Costs”.

As a result of the obligation to provide electric service invoked by regulators in exchange for monopoly status, electric utilities have installed generating facilities and committed to contracts with other suppliers to ensure safe and reliable service. For this obligation to serve, the utilities were guaranteed recovery (plus in the case of investor owned utilities a rate of return) on these investments. As the industry contemplates moving from a regulated monopoly to an open competitive market there exists a potential for the utilities to be unable to collect these historically incurred cost.

Definition

In its most simplest form, stranded cost is defined as the difference between the value of an asset or contract under market conditions and the remaining cost obligations of those assets or contracts. However, like most real world problems, this definition is not as easy to articulate in terms of what is included, how it should be calculated, and how it will be recovered. Rather than attempting to develop a more encompassing definition, Oglethorpe Power and the Electric Member Cooperatives of Georgia would like to use the concepts defined by the Public Utility Commission of Texas. In the Texas definition, they acknowledge that “the concept of stranded investment has become confusing because of the number of definitions and interpretations”. They also recognize that no costs are actually stranded until such time as customers begin to switch suppliers. As such, they define two concepts, “stranded investments” and “potentially strandable investments”. The definitions made by Texas are as follows:

Stranded investment is defined as the historic financial obligations of utilities incurred in the regulated market that become unrecoverable in a competitive market. In the past, utility investments, i.e. “Financial Obligations,” have been made in the regulated market, the market in which utilities “historically” operated. In that market, utilities anticipated that investment would be recovered in rates charged to customers. These obligations may become “unrecoverable in a competitive market” because prices in a competitive market are uncertain, and as such, may be below regulated prices. If a utility cannot charge as much in a competitive market as it would have charged in a regulated market, a portion of the asset becomes “unrecoverable” or stranded.” Thus the change from a regulated to a competitive market can create stranded investment.

The market value is usually defined to be the potential revenue a particular asset or investment is worth in a competitive market place at any given point in time. This value is calculated in terms of the price of electricity in the marketplace at any given time multiplied by the energy sold from that asset at that time. Most models of stranded cost calculate this value over the life of the asset. What is important is that the revenues collected must provide for the collection of the historical costs associated with that asset. The critical assumptions required in calculating the market value are those assumptions concerning the competitive market price. First, since a competitive market is not currently in existence, there are no real prices to evaluate. Instead, there are models that will, under simplified assumptions, calculate the market price for whole regions. However, these models are simplifications of a very complex system. As such, the assumptions used and the simplifications made can drastically alter the results. These uncertainties and simplifications have resulted in estimates that are of such large variance that they appear to be unusable for making decisions about how to allocate stranded costs.

As with the market value, which costs to include and the assumptions about those costs are complex and contentious. These costs must also be determined for each period of time over the life of the asset. In a purely regulated environment, these costs would adjudicated in a regulatory setting in which all parties would be allowed to show their points of view. The costs associated with an asset should be those acquisition costs of the asset (fixed cost) as well as the costs associated with the operation of the facility. In financial terms, that is the total in depreciated assets remaining on the balance sheet as well the operating expenses from the operating statement. These costs must be established for each year until the asset has completed its used and useful life.

The values assumed for cost will make wide swings in the results of the calculation of potential strandable cost . In those states that have attempted to calculate the level of stranded cost within the state (e.g. Texas) the assumptions for fuel cost have greatly affected the resulting strandable investment. As such, it can be seen why there may be a difference between potentially stranded cost and the amount that is actually stranded. One is based on estimates of what may be the conditions of the future and the other on what the actual conditions will be in that future.

An additional cost element that must be discussed is the replacement of generating facilities in future years. Oglethorpe recognizes that in the future, the expansion of generation facilities will be dependent upon the market place. However, in developing the estimate of potentially strandable investments, we must include estimates of the cost to install new generation as well as estimates of the operating cost of those units. This is done without thought as to who will own the facilities. However, what is chosen to represent those new generators will greatly impact the estimate of potentially strandable investments. A delay of a year or a change from one generation type to another will alter the market price and therefore change the stranded cost estimate.

As mentioned above, the development of the amount of potentially strandable investment requires the estimate of future market values and costs of each asset. The variation of these estimates vary from region to region, utility to utility, utilities to potential competitive suppliers and from regulators to utilities. Each can potentially manipulate the assumptions so as to change results to obtain optimum positions in the competitive market. Therefore, Oglethorpe and the EMCs would like to stay away from trying to determine even a range of values for stranded cost. We find ourselves in a dichotomy in that on one hand we must prepare ourselves to compete in the future and on the other we are unable to determine the extent to which that future may include. However, even if we cannot determine the actual amount of potentially strandable investment, we can make sure that the following principles are included in determining the recovery of any actual stranded cost.

First, much discussion has gone into the concept that recovery of actual stranded cost must be shared equitably between all stakeholders. The cooperatives in the State of Georgia are member-owned. As such, the consumers, who are our owners, are the only entity from whom stranded costs can be collected. Therefore, if stranded costs occurs, the costs would still be incurred by the consumer. If any portion of stranded cost is disallowed, how the costs are allocated would be different between the different utilities in the state. For the IOUs, the shareholders would bear some of the burden. For the cooperatives, the consumers would bear the entire brunt of the burden. For the municipals, the consumers/taxpayers would be penalized. Therefore, in order to be equitable, we believe that 100% of the actual stranded cost must be recovered.

Second, Oglethorpe Power and the EMCs of Georgia believe that all historically incurred cost must be recovered. We believe that one cannot begin to second guess, based on today’s knowledge, which cost should be allowed or disallowed in the calculation of stranded cost. The financial obligations were made at a previous point in time, with the information known at that time, in an operating and regulatory environment of that time. Any one can play Monday morning quarterback and always win, but these investments were incurred and allowed into the ratebase based on uncertain foresight not clear hindsight. Therefore, we believe that all cost must be recovered.

Finally , we must be careful not to penalize today’s stakeholders for conditions that potentially may or may not occur in the future. That is, we should not level the playing field in order to foster competition by placing the incumbent utilities at jeopardy of bankruptcy. The current utilities made the commitment in good faith under the regulatory compact of the time. They should not be financially penalized because of a change in paradigm.

Summary

In summary, Oglethorpe Power and the Electric Membership Cooperatives in Georgia believe that stranded cost is an extremely important hurdle to be overcome if we are to move to a competitive market in Georgia. One hundred percent of the actual stranded cost must be recovered. All cost must be considered in that they were incurred in good faith under the existing regulatory environment. Any implementation of competitive markets should be accomplished without harm to the current utilities with regards to sunk cost.

The only reason we have stranded costs is that we can replace the existing system with something cheaper. The covenant of providing competitive prices by the regulated monopoly has failed. How these subsequent costs are shared will determine if we truly benefit by competition in the near term or if the Public Service Commission will reward utilities for their indiscretions over well run, more efficient utilities that have been successful at keeping costs in line.

Rate payers must not be viewed as bearers by default of all costs that the utilities deem to be potentially stranded. Even though regulators may have accepted costs that have now become stranded, the incurrence of those costs was the direct result of management discretion. The utilities should bear their fair portion of this responsibility. We take the position that the non-mitigable stranded costs should be shared 50/50 by the utilities and rate payers.

4. 
   DEFINITION OF STRANDED COSTS:
   

End users will not accept the erroneous definition that lost revenues constitute stranded costs. This approach assumes rates accurately reflect utilities costs and that these costs reflect the true economic value of its assets. Furthermore, this approach assumes that these assets aren’t undervalued as well as overvalued.

5. 
   COMPONENTS OF STRANDED COSTS
   

For all generating plants, nuclear, fossil fuel and hydro, the net present value of the future stream of revenues that a plant will generate less its operating expenses. The key determinant in this quantification of stranded cost is the expected market price of power in an open competitive market for electricity. This competitive price should be estimated based on long run incremental costs of new generating capacity and forecast of future fuel and operating costs, not the current regional wholesale market surplus rate. These regional wholesale rates only reflect the value of temporary surpluses in energy or capacity and not the reflected cost of “base” energy or capacity. This market price should reflect the long run incremental cost of new generating capacity such as efficient combined cycle gas/oil generation currently at near $.04 a kilowatt hour.

Another element in the present value calculation is the discount factor. This percentage should match the rate of return required by investors involved, typically 12% for utility shareholders.

(Subtraction) RESPONSIBILITY BETWEEN GOVERNEMENTAL MANDATES AND MANAGEMENT DISCRETION

If a utility supported construction of a nuclear facility before the PSC then they and their management should be held responsible for the cost of the facility regardless of the changing regulatory requirements. The incurrence of these costs whether they are attributed to a higher cost nuclear facility over that of fossil fuels or magnificent cost overruns through the life of a project, then those costs were the direct result of management discretion. The shareholders should bear their fair portion of these costs. If management showed no reluctance to move forward with the projects regulators urged them to pursue, then they clearly have no grounds for recovery.

Long term contract signed above client market costs.

The largest single category of regulatory assets are plant phase ins. These are costs initially incurred but allowed to be amortized over the future.

Other regulatory assets include costs of conservation, DSM programs and retirement benefits. Burdens associated with the clean air act are incurred up front and recovered over a number of years.

(Addition) LIABILITY OF DECOMMISSIONING NUCLEAR PLANTS

Recognition of the fund that has been established to accumulate sufficient monies to pay for the eventual dismantling of their plant and storage of the nuclear fuels.

Deferred taxes are a negative stranded cost. Utilities charge taxes based on straight line depreciation while they pay taxes based on accelerated depreciation, the difference represents money owed to the customers.

Reallocation would shift large amounts of depreciation reserve accumulated for the fossil/hydro plants to nuclear plants resulting in a right up in the value of non-nuclear and a right down in the nuclear assets. This is required so that any spin-off of the fossil and hydro plants by the utilities does not result in a windfall gain during the unbundling process without the gain being shared in the reduction of stranded costs.

Accelerate depreciation accounting practices should be undertaken to hasten the merging of net book value to true market value. This will not effect the utilities cash flow position. However, it will reduce reported earnings which is an honest recognition that the company is not as rich as its books imply. Under the remaining period of regulation, rates should not be insulated from this increase in depreciation reserve resulting in lower costs and hence lower rates.