Georgia public service commission

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Presented: June 13, 1997








Georgia Public Service CommissionGeorgia Public Service CommissionGeorgia Public Service Commission

Stranded Cost Recovery Focus Group
Summary Report Dated: June 13, 1997Summary Report Dated: May 30,1997Summary Report Dated: May 30,1997
Committee Chairman: Michael A. Goodroe


The Georgia Public Service Commission (“The Commission”) has initiated discussion in Georgia concerning the possible re-regulation of the electric utility industry. The Commission and the PSC staff have developed a focus group approach to explore in greater detail the various aspects of this potential action. This report is proposed as the work product to be submitted to the Commission and the PSC staff from the Stranded Cost Focus Group (“SCFG”) on the topic of Stranded Cost. The SCFG has allowed interested parties to participate in a forum to express their ideas, concepts and concerns relative to Stranded Cost. The SCFG has met on three (3) occasions to initiate discussions and to review the views/concerns/concepts of the participants.

The participants on the SCFG who supplied comments were from the investor owned utility market sector (Georgia Power Company), the municipal utility market sector (Municipal Electric Authority of Georgia), the electric cooperative market sector (Oglethorpe Power Corporation), the large industrial/commercial consumer sector (Home Depot and Georgia Pacific Corporation), and other interested consumer and business sectors (Consumers’ Utility Counsel, Campaign for a Prosperous Georgia, and Center for Energy and Economic Development). Some members of the SCFG provided brief overviews of their respective organizations and memberships to enlighten the reader on the nature of their views (see Appendix “A”). The information and comments provided by these participants serve as the basis for this work product. In the attached written reports (see Appendix “A”), each of the participants presents their view of the market and addresses their major concerns going forward. They represent diverse viewpoints, but demonstrate a common theme of concern for the citizens of this state and the effects any change may have upon their lives and businesses. While each participant has reserved the right to modify their reports, this report seeks to set forth those points on which the participants generally appear to agree, as well as those on which consensus is questionable. For a greater understanding of these issues, additional review of the individual responses is recommended. To clarify any specific interpretations, the authors of the various papers should be contacted.


Summary of Major Points:

The restructuring of the electric utility industry in Georgia will be complex and have far-reaching consequences. As such, the development of a definitive definition of Stranded Cost brings with it significant requirements of diligence and resources. This undertaking must be based on a legislative as well as a regulatory perspective. The SCFG’s limited knowledge and available resources coupled with the need for regulatory and legislative guidance would not begin to allow the group to develop such a definition. In addition, the various regulatory guidelines, governing the energy providers, further constrain the development of a definitive definition. While it is unlikely that consensus can be reached on a definitive definition of stranded costs, it appears that the participants have similar beliefs on a number of the important aspects of such a definition.
In the process of restructuring the industry from a regulated monopoly to a competitive, re-regulated market, the participants agree that all parties, including incumbent utilities, new entrants, shareholders, taxpayers, all classes of consumers and other “stakeholders,” should all receive fair and equitable treatment. Fairness to competitors entails not only the equitable treatment of investments made under the existing framework, but also the creation of a re-regulated market in which no competitor is given an unjust advantage. Fairness to consumers requires that any mechanism for stranded costs recovery treat all classes of consumers equitably. Due consideration must also be given to social, environmental, and universal service issues. These areas of concern will require a balancing of interests and a number of subjective value judgments.
The participants appear to generally agree that a determination of what is fair and equitable treatment of incumbents and their stakeholders requires a review of: 1) the regulatory treatment that occurred when the potentially stranded investments were made, 2) the corporate structure of the incumbents, 3) the discretion exercised by management in reaching their decisions, and 4) the structure of the market in general at the time of the investment. The investor owned utility sector of the industry, represented by Georgia Power Company, has operated in a regulatory environment over which the Commission has had direct oversight in a significant number of the sector’s activities. Unlike municipal systems and cooperatives, an investor owned utility is not necessarily owned by its ratepayers. Further, investors in an investor owned utility could receive service from either a municipal or cooperative. The municipal market sector, represented by the Municipal Electric Authority of Georgia, has operated in a regulatory environment in which the Commission has had limited and indirect oversight of its activities. The municipal sector’s investments are


generally guaranteed by local taxpayers. Like municipals, electric cooperatives, represented by Oglethorpe Power Corporation, have operated in a regulatory environment in which the Commission has had limited and indirect oversight of their activities. A result of the fact that the ultimate stakeholder in both municipal and cooperative utilities is typically the ratepayer is that there is little opportunity to transfer responsibility for stranded costs among stakeholders other than ratepayers and taxpayers. Cooperatives are not for profit entities that have received oversight from both lenders and regulatory bodies in making investment decisions.

In addition to these issues, developing a workable definition of stranded costs will require the refinement of a number of underlying objective concepts. While participants appear unlikely to reach consensus on the exact parameters of these concepts, or even which of the concepts should be included or excluded from stranded costs, it appears that the SCFG has developed a list of potentially applicable concepts for further discussion. These concepts include: the prudency of utility investments, market price and how it should be estimated, timing and type of re-regulation, speed of transition, predictability of fuel prices, load growth estimates, future cost estimates (e.g., nuclear decommissioning cost), depreciation allowances, resource mix, transmission constraints, stranded benefits, reasonable mitigation measures, marginal cost of production, avoidance of rate shock, investor and rate payer demographics, and the ability of Georgia utilities to attract future capital.


In conclusion, although they differed on numerous issues, the various market sectors shared several key beliefs. First, the various market sectors represented generally believe a move to a competitive market place may be likely, but not inevitable. Second, it is recognized that the various energy providers have existed in unique and diverse regulatory environments. Generally, the various market sectors recognized that a period of transition is likely to occur, and that the plan for re-regulation needs to be tailor-made to suit Georgia’s unique electric environment and public policy concerns. With regard to the question of Stranded Cost, the group generally agrees that, given a truly competitive market place, certain assets currently employed by the various providers may have a book value higher than their potential competitors and thus the market place. A consensus of how to account for and/or collect these “above market” costs was not reached. All participants in the SCFG recognize and accept that this is a complex and far reaching subject. Further, while not specifically mentioned in their papers, the participants generally recognize that it

is in their best interest and that of the state to ensure that there is “effective” competition in any re-regulated marketplace, and that “effective” competition will require, among other things, financially viable and healthy incumbent providers (e.g. GPC, MEAG, and OPC). However, the cost to ensure such healthy competitors should not be allocated unfairly to any specific group. At the same time, significant differences exist on how to calculate and determine the elements of what is called “Stranded Cost”. Additionally, significant differences exist among the sectors represented regarding how to transition the existing system of universal service to the new world of a competitive environment. Further, significant differences exist regarding what prudency reviews are appropriate or even needed. The belief that change will occur is commonly held, but the question of who will pay for the past and be responsible for the future requires further review and consideration. For a greater understanding of these issues, additional review of the individual responses is recommended.


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