established on several issues, but that there are 19 or 20 issues remaining to be heard to determine
what position results in adjusting reasonable rates.
Sen. Blackham said his observation is that recognizing the recovery of the stranded costs to
the utility is appropriate, but, on the other side, the customers deserve an adjustment if price goes
up compared to what it would have been under a regulated utility over the same period of time.
Commissioner Mecham said the PSC moved from the phase "stranded costs" to "stranded
commitments" to point out that there are two sides to the equation.
Sen. Blackham asked if the PSC would suggest that if in a year when because of a
competitive market there was an increase in retail prices of 20 percent, that the 20% excess be
returned to the customers that year or put into a pool to offset future stranded costs.
Mr. Artie Powell, Division of Public Utilities, said that a rebate to the customer from the
utility would be one approach to consider. Another approach would be to have some kind of
standard offer over the transition period where the utility offers a cost-base or regulated rate to the
customers that choose not to leave the utility.
b. Panel Discussion -
Mr. Doug Larson, PacifiCorp, stated that PacifiCorp is still a supporter of customer choice, but there are some things to consider with stranded costs. If there are lower prices that result from
the competitive market, the state would end up with a scenario where there are stranded costs. Mr.
Larson indicated that if competition brings lower prices, three things must occur in that process: 1)
customers remaining on the system should be treated fairly; 2) shareholders should be treated fairly
and need to be compensated for the investment they have made; and 3) customers that choose to go
to the competitive market should be treated fairly.
Mr. Larson stated that in the PSC's report, the analysis of stranded cost is not a separate issue
from the decision to implement competition because the Legislature and regulators must come to
the conclusion that the competitive market is going to produce lower prices and, once they are
convinced that this is the case, there will be customer choice. Mr. Larson said that the report also
talks about the concept of a regulatory compact and PacifiCorp feels that they as a utility with an
obligation to serve customers have had that obligation to make sure that the facilities are in place to
serve customers. With that obligation, PacifiCorp feels that its shareholders who have invested
money in the plant have the right to receive compensation for that investment.
Mr. John Harvey, Committee of Consumer Services (CCS), said that CCS believes that it is
unlikely that significant stranded costs exist in Utah and that nothing significant has occurred during
the intervening year that would alter these results. However, if it can be convincingly shown that
legitimate stranded costs exist, CCS has no objection to reasonable measures that would compensate
PacifiCorp shareholders. He pointed out that: 1) CCS feels the proper arena for determining the
extent of any stranded costs is an evidentiary hearing before the PSC; 2) if restructuring occurs,
PacifiCorp should provide all customers with the choice of accepting a standard offer with prices
based on historical imbedded costs; 3) from a national perspective, most stranded costs are
associated with nuclear assets or regulatory assets not with coal or hydro plants such as those that
make up much of PacifiCorp's generation portfolio; 4) if some assets are shown to be not profitable
in a market-oriented environment, PacifiCorp's shareholders may have already been compensated
for the potential loss; 5) many unanswered questions remain regarding the advisability of
restructuring in general; 6) if money is paid to PacifiCorp to cover assets that are not profitable, the
potential competitions to enter the market will be decreased; and 7) it would be in the state's best
interest for the task force to explicitly address the issue of what legal basis exists for a private
company to receive compensation through governmental taxation for past poor investments.
Mr. Rick Anderson, Utah Electric Deregulation Group (UEDG), stated that UEDG supports
the PSC's position that the most effective way of determining the value of stranded costs is by
utilizing a market evaluation approach. He said that the question of stranded cost or stranded
benefits, if they exist, is a question of a point in time and a summation of historical benefits up to
that point. Mr. Anderson pointed out, however, that there is the question about risk mitigation into
the future and the large industrial customers probably have the capability, skill level, and resources
to engage in some kind of risk mitigation strategies that the residential customer probably would not
have access to. He indicated that when and if the state goes to a restructured electric industry,
recovery mechanisms and the design of the recovery mechanisms can either make or break a
competitive market. Customers not only want lower prices, but there are customer service questions,
there is trust, and there is innovation and packaging of different services that are not in the regulated
market. He concluded by saying that competition can serve to lower prices.
Mr. Mike Peterson, Utah Rural Electric Association, said that the coops agree with the term
the PSC used in its report in defining stranded commitments as costs potentially being born by the
ratepayers because the coops are borne by the ratepayers. He indicated that the coop structure is
different than the structure of the investor-owned utilities and municipalities. If there are benefits
at the end of the year, those benefits, through the income that flows through the balance sheet, flow
back to the customers in the form of margins and are refunded to the members of the coops. Mr.
Peterson stated that as the state approaches customer choice, the coops are concerned as to whether
or not there will be some kind of mechanism in place that if a large block of customers is lost, that
it will not negatively impact those customers who remain on the system. He concluded by saying
that the coops are allowed to set rates on their own and do not bring them before the PSC.
Mr. Ted Rampton, UAMPS, said that one of the statements made in the report is that the
stranded cost recovery is basically a public policy question, and that statement makes the recovery
of stranded costs less legitimate than it should be. Mr. Rampton reemphasized some statements that
UAMPS has made in the past concerning stranded costs: 1) all legitimate stranded costs should be
recovered; 2) treatment of stranded costs must be dealt with consistently between the three types of
utility kind of organizations so that one utility type does not have an advantage over the other; 3)
utilities should be obligated to mitigate their stranded costs before they go into avenues of recovery;
and 4) UAMPS favors those approaches that are market oriented or market geared and has always
advocated an approach that looks at what the market is after the fact, because UAMPS believes that
approach makes it so there is not one group, one component, or one part of either the investor utility
or the ratepayers that has an advantage over the other.
Mr. Van Schmidt, Manager of Operations, Utah Municipal Power Agency (UMPA), said that his comments focus on areas where facts and circumstances of municipal public power providers
differ from PacifiCorp. 1) UMPA supports the PSC's conclusions, but disagrees that stranded cost
recovery on the basis of obligation to serve is a matter of public policy; 2) UMPA believes the
obligation to serve and stranded costs are intertwined and cannot be separated; 3) UMPA believes
that one customer class should not benefit at the expense of another customer class and the most
equitable way to resolve the problem is an exit fee for a customer departing a utility provider's
system; 4) UMPA believes that the concept to be applied to utility providers is one of equity; 5)
UMPA believes that given the complexities in the law of the nature of municipal power providers,
they should not be forcibly included nor excluded in any deregulation legislation, rather the
Legislature should provide for each municipal power provider to decide what is best for their
consumers and how to proceed; 6) UMPA believes that a reasonable time frame should be
established for the option period; 7) UMPA believes that for all customer classes to benefit, all
utilities need to remain financially viable for competition in a customer-choice market. Mr. Schmidt
concluded by saying that if municipal power providers do opt in, their stranded costs should be
treated with equity and with a comparable cost recovery mechanism in place to that which is applied
to PacifiCorp and others in the utility market.
Mr. Powell said that the PSC's report does not talk about municipals or coops. He stated that the PSC had in mind that coops or municipals would voluntarily opt in or opt out and if they did opt
in, they could recover their stranded costs through various mechanisms on their own. He indicated that the PSC stressed the issue of whether a utility does or does not recover stranded costs is not an
economic question. The market will, by definition, be efficient if it works correctly; therefore,
whether or not a utility recovers any stranded costs is a political decision that has to be made on
other principals other than economic efficiency. Mr. Powell pointed out that some of the debate in
the literature on stranded costs has assumed that it's a government initiated change and the
government is obligated to allow for stranded cost recovery, but it is a combination of consumers,
government, and regulators that are initiating this change. If the municipal is pushing for change,
it should be responsible for its stranded costs and if the utility is pushing for change, it should bear
the responsibility.