Letter to Tennessee
February 27, 1998
Ms. Loudene Gee
Senate Commerce Committee
309
Subject: Restructuring Electric Industry in
Dear Ms. Gee:
In following up on our telephone conversation of February 13, 1998, I would
like to share with you and the Tennessee Senate Commerce Committee certain
information and arguments concerning restructuring the electric industry in
Although several bills have been introduced in the US Congress to restructure the electric industry on a national basis, many of them provide for states to pass legislation and enforce regulations to implement restructuring. However, there is some concern that the US Congress may pass legislation that would be all encompassing, to the point that it would encroach on states' rights. The controversial issue of "stranded cost" is one of the issues that many feel should be left to the individual states, but in recognizing that it could be addressed in national legislation as well as state legislation, a group of investor-owned utilities and independent power producers banned together and drafted a January 22, 1998 letter in support of stranded cost. This letter was sent to legislators and regulators on both the state and federal level throughout the nation. Although you may have already seen this letter, a copy is enclosed for your convenience.
The argument for recovery of stranded cost by an electric system from all of its existing ratepayers concurrent with competition being introduced is based on (1) a long-standing obligation to serve all consumers of electricity in a given area in exchange for an assured return on investment, (2) prudent investments made to carry out that obligation, (3) past pervasive regulatory oversight, and (4) government imposed programs. Reasonable expectation for continued service is also an issue as it would relate to individual consumers.
On the other hand, it is argued that today's common methods to calculate stranded costs ensure that a utility will be made competitive -- irrespective of how ill-prepared the company is, its past mistakes, or origin of the costs. Stranded cost calculations are overcompensating utilities for uneconomic costs. The process is subsidizing the incumbent, privatizing profits and socializing losses. As a result, local utilities have an unfair advantage over their unaffiliated competitors, and they will continue to dominate their service areas.
The Tennessee Valley Authority (TVA) has recently declared that it would not
provide transmission service to
Does TVA meet the generally established criteria to recover stranded cost? The TVA Act authorizes TVA to "sell the surplus power not used in its operations, and for operation of locks and other works generated by it, to States, counties, municipalities, corporations, partnerships, or individuals," but there is no obligation to serve any specific area. The territorial limitations contained in section 15d of the TVA Act established a "fence" beyond which TVA could not supply inexpensive TVA power, but it still did not impose an obligation to supply within the fence. TVA now uses the fence to hold its ratepayers captive by refusing transmission access to other potential suppliers, but that still does not constitute an obligation to serve. TVA does not exert monopoly control via some regulatory or statutory obligation to supply. It has simply evolved into the dominate colossus it is today, and now finds itself in a position where it can no longer be the benevolent supplier of inexpensive power it once was, but must rather use its monopoly and federal powers for its own self-preservation. TVA has never had a statutory or regulatory obligation to supply anyone.
How much of TVA's $27 billion debt is the result of prudent investment? During the late Chili Dean's tenure as Chairman of the TVA Board (1981-88), Duke Power Company performed an evaluation of TVA to determine if it would be a prudent investment for an investor-owned utility to essentially purchase TVA. With a debt of about $10 billion at that time, TVA would have been a marginal investment. While it is clear that most of TVA's debt is the result of bad decisions and poor management of its nuclear program, today's mismanagement of personal services contracts with windfall profits going to TVA cronies, and exorbitant bonuses to executives, all of which have been well publicized, further contribute to the appearance of imprudent management. The results of imprudent management of TVA was so obvious when Marvin Runyon became chairman, that he was once quoted as saying that TVA would be bankrupt if it were a private company. It is very questionable if any but a small portion of TVA's $27 billion debt is the result of prudent investment.
Has TVA been exposed to pervasive regulatory oversight, or any regulatory oversight at all? The answer is no. Neither state commissions or the Federal Energy Regulatory Commission has reviewed or approved any of TVA investment decisions or strategies. (The Federal Energy Regulatory Commission only has authority in regard to TVA providing transmission access, and that is restricted such that TVA cannot be ordered to provide transmission access if it results in the ultimate consumer being located in the Tennessee Valley.) TVA has on occasion held public hearings on various matters, but no investment decision by TVA was contingent on public consensus or the approval by any independent commission as to prudence, public necessity, or being used and useful. In addition, the distributors of TVA power have had no control over investment decisions made by TVA.
All decisions were made by TVA's 3-member board, each of whom was appointed
by the President and confirmed by the US Senate for staggered 9-year terms. The
removal of a board member requires a concurrent resolution of the US Senate and
the US House of Representatives. TVA is an unregulated enterprise that just
happens to be owned by the federal government, and is beyond the control of any
state or local jurisdiction. Therefore, TVA and its owner, the federal
government, should be liable for the $27 billion debt resulting from imprudent
business decisions, and certainly not the citizens or ratepayers of the State
of
The final question regarding TVA meeting the generally established criteria to receive stranded cost is whether or not governmental programs resulted in stranded cost to TVA. It must be understood that TVA has its appropriated programs and its power programs. TVA has received hundreds of millions of dollars annually directly from the US Congress to carry out its governmental appropriated programs; however, its $5 to $6 billion per year power programs are funded by the ratepayers. Typically, when utilities make this claim they are referring to governmental mandates that they purchase power from certain qualifying independent generating facilities at projected avoided cost rates. Several utilities overestimated their projected avoided cost, and are now under obligation to purchase power well above the current market rates. This is a stranded cost they legitimately wish to recover.
TVA may have a few purchase power agreements for insignificant quantities of
power which may be slightly above market rates as a result of this government
mandated program. However, what is likely the most expensive purchase power
agreement above market rates was recently entered into by TVA for the output of
a lignite fueled facility located in
In summary, TVA simply does not meet the criteria established for the
recovery of stranded cost, but they fully intend to recover it, as demonstrated
with
Sincerely,
Michael R. Knauff
Enclosure
January 22, 1998
Dear Congressman/Senator:
We are writing to express our strong support for recovery of what have come to be known as "stranded costs" and for recognition of the sanctity of existing contracts in connection with legislation bringing choice to all electricity consumers. While everyone should be able to choose their electricity supplier by an early date certain, the transition to full customer choice must include an opportunity for utilities to recover stranded costs after mitigation. These costs include existing investments, regulatory commitments and other obligations undertaken to meet their legally required regulatory and service obligations. Long-term contracts and obligations must be honored with costs recovered consistent with such obligations.
Utilities should be able to recover these costs for four very important reasons:
- Electric utilities historically accepted an obligation to serve all customers requesting service, in exchange for a regulated, cost-based rate of return on their investment, pervasive regulatory oversight, and recovery of their investments over time horizons much longer than unregulated enterprises. To meet their service obligations, electric utilities made substantial long-term investments and entered into long-term contracts. Utilities entered into these investments and obligations with the reasonable expectation that the government would allow utilities to recover fully their prudently made investments through customer rates. Legislation providing for customer choice should be coupled with a provision providing for the recovery of costs previously incurred by utilities.
- Recovery of stranded costs is a transitional issue and can occur over a relatively short period of time. Moreover, stranded costs are not new costs. They have been previously approved by regulators and are already reflected in existing utility rates.
- Denying utilities recovery of
stranded costs will only delay competition by encouraging litigation and
adversarial regulatory proceedings. A case in point is the current
litigation over stranded cost recovery in
- Full utility recovery of these costs in a consistent fashion will help ensure robust and fair competition among all industry participants. Stranded costs are not limited to investor-owned utilities. Many municipal utilities and rural electric co-ops also have costs that may not be recoverable in a fully competitive electric generation market. Establishing a common framework for recovery of these costs is one step necessary to help ensure that all industry participants enter the competitive marketplace in comparable positions.
As States such as
Accordingly, we urge you to include in any federal legislation to promote
competition in the electric industry provisions to assure recovery of stranded
costs and respect for the sanctity of existing contracts.
Jerry Maulden
Vice Chairman
Entergy Corporation
on behalf of the
P. Chrisman Iribe
Executive Vice President and COO
U.S. Generating Company
on behalf of the
Electric Power Supply Association
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