Suppose you own a business regulated by a government that protected you from competition in a system in which your customers and shareholders paid for your plants.

Now suppose the government decides to end your monopoly and open your business to competition, making you liable for plants that haven't been fully depreciated on your books.

What would you do?

If you are Maryland's four investor-owned electric utilities, you would want customers to pay for more than $2 billion in plant depreciation -- "the stranded costs" of the government's decision to deregulate the power industry.

"The regulatory equation that has been in place for 90 years will not balance in a competitive market," complained Christian H. Poindexter, Baltimore Gas and Electric Co.'s chairman and chief executive, as the utility filed its stranded cost recovery plan with state regulators earlier this month.

For residential customers, stranded costs -- defined as the difference between a plant's book value and market value -- will likely take the form of additional fees, especially for those who switch to cheaper providers of electricity.

If the fees, termed "competitive transition costs," are adopted in Maryland as they have been elsewhere, they could add $4 to $10 per month to theaverage utility bill for as long as 10 years.

Critics argue stranded costs are little more than a public bailout of a utility's bad investment decisions, and that they effectively could wipe out any savings from deregulation's cheaper utility rates -- at least in the short term.

"It's a robbing-Peter-to-pay-Paul type of transaction," said Adam Thierer, an economic policy fellow at the Heritage Foundation, the Washington think tank. "What the utilities are saying is that ratepayers are little more than slaves or hostages, captive until they pay off past debts."

Opponents also argue that giving utilities millions of dollars in stranded costs will only perpetuate the monopolistic system, because it would give the companies receiving the money an unfair advantage.

"Stranded costs are bad for competition," said John Golinger, a consumer advocate for California Public Interest Research Group CalPIRG), which is fighting lawmakers' decision to allow California utilities $28.5 billion in stranded costs.

"Of the 250 small energy providers that registered [in California] to compete in the opened market, only 25 are left. The rest realized they couldn't keep up because of the sweet deal the utilities received as a result of stranded costs," Golinger said. "With stranded costs, they're just not able to offer competitive rates, and so they're gone."

Groups such as CalPIRG have succeeded in getting an initiative on the November ballot that would repeal a majority of the stranded cost allotments and give residential ratepayers other protections.

Battle looms in Md.

If the fight in California -- and the growing resentment nationwide -- is any indication, Maryland could be in for a huge battle over stranded costs.

The Maryland General Assembly is poised to take up the issue in January, part of a package of bills likely to be proposed to alter the laws under which utilities operate.

L Some agencies aren't waiting for the winter session, though.

The state people's counsel, whose office is charged with protecting residential consumers, is planning a full-scale assault the stranded cost issue.

"We're going to litigate the hell out of this," pledged People's Counsel Michael J. Travieso. "We don't believe utilities are entitled to any stranded costs."

Travieso and other opponents of stranded costs believe that utilities should either take write-downs for stranded costs, or get shareholders to absorb them, especially since the utilities will continue to own and profit from the plants.

Utilities, not surprisingly, disagree and intend to fight to be reimbursed for their power plant investments, which they claim they were forced to build as part of their "regulatory compact."

"Assessing stranded costs to customers who choose to switch suppliers is proper, because they are paying only fixed costs incurred on their behalf," said the Edison Electric Institute, an industry trade association.

"Shifting these costs to others would be unfair as well as inefficient to the whole economy."

The utilities have managed to persuade a powerful ally to be on their side -- the federal government.

In April 1996 the Federal Energy Regulatory Commission, the agency principally charged with overseeing and monitoring utility concerns, determined that utilities are entitled to recoup "reasonable" stranded costs.

But FERC has largely left it up to the states to define reasonable -- a fact that has fueled the debate from California to Pennsylvania.

Recovering stranded costs is critical to competing effectively in the deregulated future, say BGE executives, who contend stranded costs are a way of "leveling the competitive playing field."

The largest proposed stranded cost in Maryland is $911 million in BGE's Calvert Cliffs nuclear power plant. In March, Calvert Cliffs became the first nuclear plant in the nation to seek an extension of its operating license from federal regulators.

Offsetting deals

Utilities also point out that stranded cost recovery mechanisms aren't completely one sided. In exchange, many utilities -- including BGE -- are offering to freeze or lower rates for one to four years. Other utilities plan to balance the cost by offering ratepayers a "credit" to sample rival power providers.

"The question you have to ask is how much have shareholders already been compensated for?" said Larry A. Frimerman, an official with the Ohio Consumers' Council, a citizens group studying the stranded cost issue. "And the other key question is whether power plants that were built were built because of management prerogative and how much because of specific legal obligations for which the utility had no choice."

The Maryland Public Service Commission is expected to issue its order on stranded costs in October 1999 after holding a series of hearings on the matter.

If other states' actions are any guide, the PSC will likely give Maryland utilities only a portion of the stranded costs they are seeking.

In Pennsylvania, for instance, power companies have asked for $12 billion, but they won't get anywhere near that amount if state regulators' decisions are upheld.

"I hope they take decisive action," said the Heritage Foundation's Thierer of the Maryland PSC.

"Because in the long run stranded costs could have disastrous consequences for deregulation. Because the question is whether competition will ever develop if utilities keep getting multimillion dollar golden parachutes."

Pub Date: 7/26/98