Competition and stranded costs re-revisited

Natural Resources Journal

Volumn 37, Issue 1, 1997, Pages 31-41

  Kahn, Alfred E ^a,b  

^a Department of Obstetrics Gynecology   (United States)

^b NERA ECONOMIC CONSULTING   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 26444512232     PISSN: 00280739     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (26)

1. See Michael T. Maloney, et al., Customer Choice, Utilities' Loss: Stranded Cost Recovery in the Deregulation of America's Electric Power Industry, 37 NAT. RESOURCES J. (1997);
2. and see Michael J. Doane & Paul W. MacAvoy, Transmission Access Pricing and "Non-bypassable" Competitive Transition Charges, 37 NAT. RESOURCES J. (1997).
3. Presentation of Peter A. Bradford before the Vermont Public Service Board on behalf of the Department of Public Service (July 15, 1996) at 3 〈http://www.cit.state.vt. us/psd/vttesty2.htm〉.
4. Even though Chairman Bradford has been so foolhardy as to assert (on p. 3) that the concept of neither a "compact" nor a "bargain" appears anywhere in the 559 pages of my book, ALFRED E. KAHN, THE ECONOMICS OF REGULATION (MIT Press 1988) (1970-71), it seems a trifle unfair for me to observe that it took me some five minutes to find I had italicized Justice Holmes' characterization of the task of setting a fair rate of return as "not a matter of economic theory, but a fair interpretation of a bargain." I id. at 43, in the Chapter: "The Traditional Issues in the Pricing of Public Utility Services."
5. Market St. Ry. v. Railroad Comm'n of State of California, 324 U.S. 548 (1945).
6. Maloney et al. supra note 1.
7. ALFRED E. KAHN, THE ECONOMICS OF REGULATION 37-39 (1988).
8. Id. at 35-41, 190-216.
9. Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989).
10. Id. at 315.
11. Fed. Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591 (1944).
12. See e.g., William J. Baumol & J. Gregory Sidak, Stranded Cost Recovery: Fair and Reasonable, PUB. UTIL. FORT., May 1995, at 22;
13. William J. Baumel & J. Gregory Sidak, Recovering Stranded Costs Benefits Consumers, 19 REGULATION 12-15 (1996)
14. [hereinafter Baumol & Sidak, Recovering Stranded Costs].
15. Robert J. Michaels, Stranded Investments, Stranded Intellectuals, 19 REGULATION at 49 (1996).
16. Bradford, supra note 2, at 11.
17. See my description of "the tendency of regulation to spread," II KAHN, supra note 3, at 28-32 passim; and Alfred E. Kahn, The Changing Environment of International Air Commerce, 3 AIR LAW (Netherlands Journal) (1978).
18. See also Alfred E. Kahn, Who Should Pay for Power-Plant Duds?, WALL ST. J., Aug. 15, 1985, Op Ed Section.
19. I attribute my first recognition of this point to the lucid exposition by Prof. Robert H. Litzenberger in testimony on behalf of Central Maine Power Company before that State's Public Utilities Commission, Docket No. 84-120, 1984-85 (on file with author). See also A. Lawrence Kolbe & William B. Tye, The Duquesne Opinion: How much 'Hope' is there for Investors in Regulated Firms?, 8 YALE J. ON REG. 113-157 (1991),
20. and The Fair Allowed Rate of Return with Regulatory Risk, 15 RES. L. & ECON. 129 (1992).
21. Irwin M. Stelzer, Editorial, Stranded Costs, Strained Rationale, 19 REGULATION at 2 (1996).
22. Consideration of the effect of an emerging recognition of a change in the rules of the game on individual purchasers and sellers of the companies' securities invites all sorts of sophistry. For example, the assertion of Dr. Jake Hauck, of the Allegheny Institute for Public Policy, that "stockholders of utilities that are likely to have large stranded costs have had plenty of time to sell their shares and can not be treated as innocent victims of a change in regulatory policy" suggests a convenient, all purpose justification for governments changing the rules of the regulatory game any time they see some political advantage in doing so: (1) announce the possibility of such a change; (2) watch some shareholders sell out at prices depressed by the announcement and take their losses; (3)point out that the losers, having taken their lumps, can no longer be helped; and the new investors who came in and bought the stocks at the new prices "can not be treated as innocent victims of [that] change" and deserve whatever they get. (That leaves unanswered possible complaints by the original stockholders who did not sell out, but nobody's perfect.) See Jake Hauck & Alfred E. Kahn, The Case Against Stranded Cost Recovery, UTILITIES & PERSPECTIVES (Standard & Poor's, New York, N.Y.), Dec. 2, 1996, at 1-4.
23. In that event, just like the purchasers of junk bonds, they could have earned the promised return sufficiently in excess of the cost of capital on the successful investments to compensate them for zero returns on the unsuccessful ones. See Kolbe & Tye, The Duquesne Opinion, supra note 16, at 123-27.
24. See Anna P. Della Valle & Miles O. Bidwell, Restructuring Rates Creates Value and Reduces Stranded Costs, 8 ELECT. J. 19-25 (1995).
25. Alfred E. Kahn, Ask Not the Bells for Tolls, WALL ST. J., Aug. 6, 1996, at A14;
26. see also Alfred E. Kahn, How to Treat the Costs of Shared Voice and Video Networks in a Post Deregulatory Age, POLICY ANALYSIS (The CATO Inst., Wash., D.C.), Nov. 27, 1996.