(Subtraction) AVOID ANY NEW INVESTMENT IN GENERATING PLANT

Under current rate of return accounting practices generating plants are front loaded to the cost equation and appear to create the near term appearance of increased stranded costs. Accept no new stranded investments.

Many of these contracts were negotiated in the early 80’s when it was anticipated that fuel prices would go up. This has not occurred and for the few remaining years of those contracts, utilities and the power producers should be forced to renegotiate, considering current costs and limited length remaining of contract.

Aggressive management will downsize its staffing and reduce its cost. Contrary to dollar for dollar cost recovery a factor should be applied for improvement and efficiency reducing future costs. In the past, rate of return regulation offers no incentive for utility to maximize the efficiency of its operation. To the contrary, it rewards inefficiency by passing through those costs incurred.

It is understood that utilities must have a market rate of return to acquire future capital. However, a reduced rate of return limited to specific stranded investments does not threaten the integrity of the remainder of the utilities investment. More importantly, it does not imply that future investments will be subject to below market returns.

Securitizing only those costs explicitly caused by PSC action, which remove stranded costs from the books of the utilities to a bonding authority will have the benefit of a reduction of carrying costs for the unrecovered assets. However, applying this strategy to all uneconomic assets is not acceptable because such action makes the government the guarantor of imprudent investments.
(Subtraction) MITIGATION STRATEGY OF APPLYING A FACTOR FOR GOOD WILL

A factor should be applied for representing the good will attained by a local utility while in its monopoly position. Rate payers have contributed to the advertising and marketing campaigns of the incumbent utility which positions the incumbent utility over new entrants.

Even though incumbent utility transmission business will remain regulated, revenue sources from its ownership in transmission line easements should be applied to reduce stranded costs. Services encompassing the telephone, cable TV and on-line Internet form a market value of the utility’s easement rights. An example of this in Georgia is that the marketing rights to its digital “linc” telephone network.

Finally, after the value of a utility’s assets under a regulated environment are netted out with their value under competition, and a utility initiated effort is made to absorb at least some of these costs, then a recovery mechanism that splits the remaining responsibilities 50/50 between rate payers and shareholders should be considered. End users must ensure that recovery mechanisms are non discriminatory. That they do not shift the burden of stranded costs from competitive to monopoly rate payers or from the industrial class to the commercial and residential classes. If stranded costs are to be covered from rate payers, the fairest recovery mechanism is a per-KWH charge.

Realizing that the future competitive market for energy and capacity, although estimated is still unknown, a mechanism should be available to adjust the calculation once this power market develops.
IV. SOCIAL BENEFITS

With the elimination of the “obligation to serve” mandates it should be made clear that deregulation demands the end of the utility company having to bear the cost of our social burdens. In place, state and local officials should be allowed to design targeted, means tested methods of delivering assistance to impoverished individuals, independent of the utilities, such as in a voucher system. This will now become a state obligation not the utility’s.

Mp
Georgia Public Service Commission

The Public Service Commission has established a series of workshops to address issues regarding deregulation that may impact the current legislative and regulatory environment under which Georgia’s electric utilities operate. Within the context of these workshops, focus groups have been established to provide positions related to various issues concerning restructuring. Interested parties included in the various focus groups are suppliers, consumers, regulators and other interested citizens. The focus group for Stranded Costs and Benefits has been tasked to provide guidelines for the definition of stranded cost, principles of associated societal benefits, and a definition for the derivation of future market costs. The Public Service Commission has also invited interested parties to file a white paper on stranded costs and benefits for a workshop on June 6, 1997. The Municipal Electric Authority of Georgia (MEAG Power) will file a position paper at that time. The following summary reflects the Municipal Electric Authority of Georgia’s (MEAG Power) initial response to this request from the focus group.

Stranded cost to MEAG Power is the annual cost owed by MEAG Power that is in excess of the electric revenues that can be collected or charged by MEAG Power in a deregulated market environment. Electric revenues are defined as the electric revenues necessary to recover the operating, construction, decommissioning, administrative & general, tax and debt expenses for MEAG Power’s generating units.

Several methods may be utilized to determine stranded cost. One method of determing stranded costs may be made by comparing on a net present value basis, the revenues that are required to be collected over the remaining life of the generating asset to pay for the operating cost of the unit including debt cost, against the market revenues that may be charged for the output of the same unit over the remaining life. By determining the projected electric revenues, including debt cost, that must be recovered for each of MEAG Power’s generating units, and then comparing this cost to the projected market operating revenue that may be charged for each unit, it is possible to determine a forecast in which units are able to run and recover their full costs, and which ones are not. Thus, the net present value of costs of the generating asset which are in excess of the net present value of the forecasted market revenue become the stranded cost. This may be expressed as; ( NPV of the forecasted operating cost of the unit minus the NPV forecasted market price for the generating unit’s output). The key in this approach, obviously, is making accurate forecasts of both future generation costs and the future market price of power. Errors in such forecasts could drastically affect the stranded costs estimates, either up or down.
Principles of Associated Societal Benefits.

Associated societal benefits may be defined as those policies, protections, procedures and legislation that provide for the ability of all consumers to have universal access to electric service, environmental programs and general programs that provide for the public safety, good or economic well being. These objectives provide a benefit to all consumers either directly or indirectly, as well as creating the availability of taxes or transfers in lieu of taxes, to support Georgia’s state, county and municipal governments. Traditionally, such benefits have included an obligation to provide service by all electric suppliers, environmental and energy conservation programs, charitable and governmental support efforts, low income subsidization, and taxes charged or revenues provided in lieu of taxes to support governmental functions. Typically, all revenue classes of customers of the electric supplier have contributed to the support of these societal benefits in their tariff rates.

Future market cost or forecasted market price is defined as the revenues that can be expected to be charged for the output of the generating unit in a deregulated market. The future market cost may be forecasted over an hourly, weekly, annual or other defined period of time. The final actual market prices will differ from forecasted prices. In the determination of market cost for electricity, as with other competitive markets, it can be expected that a seller will sell at the highest price that they can expect to receive for their plant’s output. The seller can also be expected not to sell below the operating cost of the unit. Thus, a counterbalance of supply and demand is created at the marginal cost of the unit in its ability to meet the prevailing market price. This counterbalance of supply and demand determines if the unit is run or not run to meet the price and demand expectations of the market. The market clearing price is the price of the available generation that can be supplied against the expected demand created for that generation. Excess generation and low use will create low market prices while a shortage of generation and high use will create higher market prices.

intracompany memo

6. 
   Stranded Cost - Stranded cost are only the transition costs that develop as a result of retail competition.
   

7. 
   Transition Costs - These cost must not be recoverable by utilities until the utilities have demonstrated that they have taken reasonable steps to mitigate such costs. Transition costs that develop as a result of retail competition should be recovered by equitable allocation among consumers, shareholders, and other stakeholders. Transition costs should be limited to the net cost of generation that exceeds the market price. The cost of generation costs should be limited to the net cost of generation that exceeds the market price. The cost of generation that is below the market price should be balanced against the cost of generation that exceeds the market price.
   

8. 
   Stranded Benefit - These benefits are the ones provided by Social programs, etc. Social program cost, such as lifeline rates, should be funded by appropriate social agencies, not by electric rate payers. Other programs, such as prospective demand side management, renewables, and alternative generation should not be subsidized or promoted at the electricity consumers’ expense.
   

9. 
   Market Place - This is the competitive arena created after full deregulation of the electric industry has been completed. There is a true supply and demand for their products.
   

C. E. S.

Stranded costs are the costs incurred by regulated utilities to meet legal or contractual obligations which become unrecoverable as a result of transition to competition. Utilities have invested in power plants and other facilities to provide for the customers that they are obligated to serve. Additionally, under existing cost based regulation regulators have in cases ordered utilities to defer current costs for recovery through future rates. These deferred costs, commonly known as regulatory assets, are also costs that may become stranded in the transition to competition. These investments have been determined to be used and useful by the Public Service Commission and, in many cases, have undergone specific prudence or certification reviews.

7. 
   Substantially increase costs to customers without competitive options.
   
8. 
   Affect the utility’s bond ratings and increase interest costs. This would ultimately increase costs for small business and residential customers.
   
9. 
   Adversely affect the utility’s stockholders, many of whom are retired and depend on the stock dividend to meet living expenses.
   
10. 
    Illegally confiscate value from the utility and investors by changing the rules of a government-managed regulatory system without compensation to injured parties, i.e., utility investors and captive customers.
    

Georgia Power supports fair competition and fair choice that honor past regulatory commitments by providing for full recovery of legitimate stranded costs over a reasonable transition period.

Both federal and state government often impose costs on utilities for conservation or social programs that the utility would not undertake on its own if the programs raised rates to some or all of its customers. Examples of such programs could include mandated demand-side measures, low-income subsidies, weatherization programs, audits, etc. Utilities have in the past supported these programs because regulators allowed the costs to be passed through to the total customer base. However, as we transition to a competitive environment, it could be possible for some customers to escape paying for the costs of these programs by bypassing their franchise utility. Thus, the continuation of such programs could be put in jeopardy by the transition to retail competition.

Electricity has become a necessity of modern life, be it for heating, cooling, hot water, industrial processes or lighting. In most competitive markets, participants have the ability to enter the market when they see profit opportunity and leave the market where there is no profit opportunity. Electric utilities do not, and likely will not, have this luxury in competitive markets. Regulators will ensure that franchised utilities remain to provide universal service to all customers requesting it, at regulated rates, regardless of the profitability of the customer to the utility. Furthermore, it may be difficult if not impossible to refuse to take back customers when their contract with a distant supplier ends or is not satisfied. There are significant costs associated with maintaining the capacity and ancillary services needed to provide such universal service. Yet third parties in a competitive retail environment might have the ability to serve only profitable customers, leaving the franchised utility with the unprofitable customers. Such a policy would lead to significant rate increases for those unprofitable customers or significant losses to utility investors who should be compensated for taking on the residual duty to serve.

Stranded costs result from the fact that in today’s utility world, marginal costs of producing electricity are below the historical embedded costs for existing generating capacity. Since marginal costs of generation determine market prices in a truly competitive market, the implication is that competitive market prices for electricity will be less than current embedded cost-based rates. This, of course, has not always been the case. For most of the history of the industry, marginal costs have exceeded historical costs, and regulation has ensured that utilities not be allowed to charge more than historical costs. Today, the situation is reversed. Because we were unable to take advantage of “market prices” when they were higher than embedded costs, we should not be expected to bear the burden of stranded costs when market prices fall below embedded costs. Furthermore, utility investments currently in rate base have been deemed to have been prudently incurred. Utilities were under a legal or contractual obligation to incur those costs, and utility investors should not have to bear the burden of changes to government rules.

11. 
    the market structure chosen for competition (e.g., “poolco” vs. bilateral contracts)
    
12. 
    the timing for introduction of competition and the method of phase-in
    
13. 
    prices (and availability) of natural gas, which to a large extent will drive future market prices
    
14. 
    prices of other fuel sources
    
15. 
    any additional required expenditures incurred between now and the onset of competition to meet a utility’s legal obligations (e.g., new PURPA or purchased power contracts that turn out to be above market prices
    
16. 
    changes in the estimated costs of nuclear decommissioning
    
17. 
    the amount of capacity available in the region and growth in demand
    
18. 
    the costs of any new environmental requirements which could be imposed
    
19. 
    amount of accelerated depreciation allowed before the onset of competition
    
20. 
    changes in technology
    
21. 
    pricing strategies and behavior of competitors
    
22. 
    the mix of resources which evolves
    
23. 
    inflation and interest rates
    
24. 
    generation location and transmission constraints, and
    
25. 
    any renewable portfolio requirements that might be imposed on the competitive market
    

If accurate assumptions for each of the above variables could be made, it would be possible to develop a model to fairly estimate future market prices. There is so much uncertainty in the above variables, however, that accurate forecasts of stranded costs are extremely difficult.

Campaign for a Prosperous Georgia

overseen by the Georgia Public Service Commission

in Docket 7313
Campaign for a Prosperous Georgia appreciates this opportunity to express our

positions and concerns on stranded costs. To date, no electric utility

stranded costs have ever been established or presented before the Georgia

Public Service Commission or, to our knowledge, any regulatory body by

Georgia's electric utilities. Moreover, an active debate around the country

continues as to whether utilities should be allowed any recovery of stranded

costs and if so, at what level.
Stranded costs are any utility-owned generation, transmission, power purchase

contracts of system assets that would allegedly be rendered uneconomical in a

competitive market.
Guidelines for Addressing Prudent Stranded Costs:
*As a starting point, except in exceptional circumstances, utility

shareholders should be assigned full liability for stranded costs.

of costs associated with uneconomical assets. Cost recovery of stranded

costs: a) rewards inefficient investor-owned utilities, b) unfairly holds

ratepayers responsible for poor utility decisions, and c) ignores the risk

inherent in all past utility investments. While utilities often have

monopoly rights and market power, they have never been guaranteed that

customers will buy from them.
*The burden must fall on each utility to prove that any asset merits cost

recovery from ratepayers.

conclusively prove that the investment in a particular generation asset was

specifically required by law over utility objections or customer agreement to

payment. If prudent stranded costs are allowed (improperly) where the

utility had no contractual right to make a sale, the investments on an asset

must have been the least-cost option available, in hindsight, including both

fixed and variable costs, to meet actual increases in demand. An investment

cannot be considered the least-cost option if it is currently more expensive

to own and operate than investments available or made by neighboring

utilities at the same time, including the use of demand reduction measures.

A determination of "least cost" should use actual market conditions over the

life of the asset rather than projected or estimated costs used in the

original decision to proceed with construction. Prior state regulatory

approvals or prudency reviews cannot be used to determine that an investment

is currently a least-cost option.
*The recovery of any costs for prudent stranded generation assets must not be

tied to their continued insulation from competing with other generators or

preferred status in wholesale or retail markets.

*Calculations of prudent stranded costs should be netted against undervalued

assets and include only amortized sunk costs for prudently incurred

uneconomical assets or mandated power purchases. These costs should be

adjusted by deducting a utility's previously accrued risk premium for that

asset. Calculations for utility-owned assets should not include any capital,

operating or regulatory costs associated with future operation or lost

revenues even if these expenses can be anticipated at the time of prudent

stranded cost recovery. Any utility assets that have a book value lower than

market price should be balanced against overvalued assets in the

determination of any outstanding prudent stranded costs. Balances for CWIP,

AFDC, and deferred taxes should be offset against prudent stranded costs.

period to serve customers at any level of kW usage, then the utility must not

receive any stranded cost recovery.
*If a utility receives stranded cost recovery for an asset that, through

continued operations, generates profits for the company (or any new owner of

the asset), then half of future profits must be refunded to consumers for

repayment of any initial prudent stranded cost recovery that was granted.

Repayment must include all initial cost recovery plus a rate of return

comparable to that granted for public sector bond issues.

until all market power issues are mitigated and full competition exists in

the retail market.
*No ratepayer funds should be used prior to competition for the purposes of

subsidizing any accelerated depreciation of utility assets.

*Any charges to ratepayers for prudent stranded cost recovery must be

allocated equitable among and recovered from all customer classes.

affiliates should be scrutinized for their contribution to diverting utility

resources from the mitigation of stranded costs or failure to lower the debt

burden of existing assets and thus resulting in greater overall levels of

stranded costs. These investments should then be deducted from prudent

stranded costs eligible for recovery.

fund dividends.

Mr. Ed Smith

Georgia Pacific Corporation

Engineering Technical Department

18th Floor

133 Peachtree Street, NE

Atlanta, Georgia 30303

Phone No. 404-652-4387 Fax No. 404-654-4769 e-mail Address – cedsmith@gapac.com

Home Depot

2455 Paces Ferry Road

Atlanta, Georgia 30339-4024

Phone No. 770-433-8211 ext. 85888 Fax No. 770-319-2392 e-mail Address – jim_laird@homedepot.com
Mr. Ron Hinson

Georgia Power Company

333 Piedmont Avenue

12th Floor

BIN 10120

Atlanta, Georgia 30308

Phone No. 404-526-6641 Fax No. 404-526-7963 e-mail Address – w.r.hinson@gpc.com
Mr. George Bullock

Center for Energy and Economic Development

213 South Candler Street

Decatur, Georgia 30030-3743

Phone No. 404-371-9722 Fax No. 404-638-5157
Mr. Norman Lee

Oglethorpe Power Corporation

2100 East Exchange Place

P. O. Box 1349

Tucker, Georgia 30085-1349

Phone No. 770-270-7642 Fax No. 770-270-7872 e-mail Address – norman.lee@opc.com

Manager, Government & Community Relations

MEAG Power

5660 New Northside Drive

Suite 550

Atlanta, Georgia 30328-9759

Phone No. 770-563-1248 Fax No. 770-563-0004 e-mail Address – fcrane@meagpower.org
Mr. Jim Hurt

Consumers’ Utility Counsel

Two MLK Jr. Drive

Plaza Level East

Atlanta, Georgia 30334-4600

Phone No. 404-656-3982 Fax No. 404-651-9394 e-mail Address – gacucdir@mindspring.com

Page 2

Campaign for a Prosperous Georgia

1083 Austin Avenue, NE

Atlanta, Georgia 30307

Phone No. 404-659-5675 Fax No. 404-659-5676 e-mail Address – cpgenviro@aol.com

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