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<title>Pennsylvania: Public Utility Commission Reduces Request for Stranded Cost Recovery
by $1.2 Billion</title>
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<p align="left"><strong><small><font face="Arial">About The Author:</font></small></strong></p>
<p align="left"><font face="Arial" style="font-size: 9pt">Robert A. Olson is a partner in the law firm of
Brown, Olson & Gould, P.C. which maintains a nationwide practice in energy law,
public utility law and related commercial transactions.</font></p>
<p><small><font face="Arial"><font style="font-size: 9pt">He can be reached at:</font><br>
<br>
<b><font color="#0000FF">Brown, Olson & Gould, PC</font></b><br>
2 Delta Drive<br>
Suite 301<br>
Concord, NH 03301<br>
<a href="mailto:[email protected]">[email protected]</a><br>
(603) 225-9716<br>
<a href="mailto:[email protected]"></a></font></small></p>
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<td width="69%" valign="top"><img src="../images/statelin.gif" alt="STATELINE by Robert Olson" border="0" WIDTH="375" HEIGHT="75"><p><b><u>
<br>
<br>
July 1998</u><br>
<br>
</b></p>
<p><font size="6"><b>Pennsylvania: Public Utility Commission Reduces Request
For Stranded Cost Recovery By $1.2 Billion<br>
</b></font><strong>by Robert Olson -- Brown, Olson and Wilson, P.C.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
07/98</em>)</font></p>
<font FACE="Palatino" SIZE="3"><p ALIGN="JUSTIFY"></font><font face="Arial">On June 4, 1998, the Pennsylvania Public Utility
Commission ("PUC") issued an order modifying the restructuring plan proposed by
Pennsylvania Power & Light Company ("PP&L") and in that order reduced
PP&L’s stranded cost recovery from $4.5 billion to approximately $2.8 billion.
The PUC also ruled that PP&L could recover its stranded costs through June 30, 2007 by
imposition of a competitive transition charge ("CTC") applicable to all PP&L
customers.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Initially, PP&L asserted that it had the right
to recover 100% of its stranded cost under a "regulatory compact" theory and
under the provision of the United States Constitution which prohibits the unlawful taking
of property. The PUC’s administrative law judge ("ALJ") endorsed
PP&L’s "regulatory compact" theory and permitted PP&L to recover
$4.0 billion of stranded cost. The PUC ruled, however, that it is not required to grant
PP&L 100% of its claimed stranded cost under either constitutional grounds or the
"regulatory compact" theory. In addition, the PUC noted that the legislative
history of the Pennsylvania Restructuring Act ("PaAct") indicates there was no
intent to provide for 100% recovery of a utility’s claimed stranded investment. The
PUC stated that the legislative history of the PaAct indicates that it differs from the
California Restructuring Act in this respect. The PUC also stated that under traditional
rate regulation a utility was never entitled to a guaranteed recovery, but rather rates
were set to provide a reasonable opportunity for the utility to earn its anticipated
revenue requirement.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The PUC order rejected PP&L’s proposal to
determine the stranded costs associated with its generating assets. Under its proposal,
PP&L had projected that its generating assets resulted in "lost revenues" of
approximately $3.5 billion. The PUC rejected the "lost revenues" approach,
stating that it was not conceptually sound. The PUC reasoned that the major flaw in the
PP&L lost revenues approach was that it assumed a revenue stream which purported to
duplicate expected regulated revenues in a competitive environment. The PUC stated this
assumption is inconsistent with the goals of the PaAct and inconsistent with traditional
ratemaking. Instead, the PUC ruled that stranded costs associated with a utility’s
generating assets should be derived using an "asset valuation" method. Under
this method, the net book value of a utility’s generating plants as of January 1,
1999 are to be compared to the value of the generating plants in a competitive market. In
addition, the PUC ruled that the market value of PP&L’s generating assets was
approximately $2.5 billion and, therefore, the resulting stranded cost was $1.5 billion.
The PUC authorized PP&L to recover $2.8 billion of stranded costs through the CTC
until June 30, 2007 notwithstanding the fact that the PaAct generally required the
recovery of stranded cost by December 31, 2005. The PUC permitted PP&L to recover
stranded costs over this extended period: because of the large amounts involved; to assure
that competitive power suppliers have reasonable opportunity to compete; and to ensure
consumers have a reasonable opportunity to save during the transition period. The PUC also
noted that PP&L had not requested securitization of its stranded cost but stated that
a substantial portion of PP&L’s stranded cost should be securitized thereby
benefitting consumers and PP&L.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">In accordance with the PaAct, PP&L will act as
the supplier of last resort. This duty to serve, according to the PUC, applies not only to
customers who do not choose a competitive supplier, but also applies to customers who
cannot find a willing supplier and to the provision of backup energy supply. The PUC
rejected PP&L’s proposal that PP&L honor this statutory requirement by using
its competitive supplier affiliate to provide this energy service. Rather, the PUC ruled
that all customer who do not have a competitive supplier shall be served by PP&L
pursuant to the applicable tariff. In addition, the PUC noted that customers returning to
this service shall be treated no differently than customers who never selected a
competitive supplier. Recently, PP&L requested the PUC to reconsider the order.</font><font FACE="Palatino" SIZE="3"></p>
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<blockquote>
<p align="left"><font face="Arial">
<small>Robert A. Olson is a partner in the law firm of Brown, Olson &
Gould P.C.
which maintains a nationwide practice in energy law, public utility law and related
commercial transactions. He can be reached at:</small></font><p align="center">
<font face="Arial"><small><font color="#0000FF"><b>Brown, Olson & Gould, PC</b></font><br>
2 Delta Drive, Suite 301<br>
Concord, NH 03301 <br>
<br>
<a href="mailto:[email protected]">[email protected]</a> | (603) 225-9716<a href="mailto:[email protected]"></a></small></font>
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