Stranded
Electrical Costs are like Leftover Beer
As the power generation industry moves more
and more towards deregulation and privatization, the term "stranded costs" gets
thrown around a lot. It even came up at my annual superbowl party (well…Professor
Overdrive DOES have a lot of engineering friends, ya know).
In any case, we were trying to explain the concept to a non-engineering pal who was
completely without a clue. Actually, we were growing tired of his incessant droning and
got rid of him after the game by asking if he would mind helping us clean up… my ears
are still ringing from the sonic boom that marked his speedy departure.
Anyway, little did he realize that had he stayed to help, he would have seen a huge
example of the concept of stranded costs, namely, all of the leftover beer! You see,
stranded costs in the power generation industry are not unlike all that beer you have left
after a party.
The term stranded costs refers to investments in generating capacity left stranded with a
utility when a customer leaves the system, many times because they've built their own
cogen. In the regulated electricity industry, a utility has an obligation to serve all the
customers in its territory at all times, regardless of load on the system or size of the
client base. This means that many utilities must build "standby power plants"
which may only be online at peak load times. It also means that before deregulation, they
would plan ahead for areas of potential growth. In an era of competition however, when a
utility loses a customer, it also loses the chance to recoup the costs it incurred to
serve that customer. Resources that were once necessary for adequate capacity, may stand
unused, or stranded as the industry deregulates.
This concept is easily illustrated by the parties I throw. My roommate is responsible for
planning the alcoholic refreshment at our little shindigs. He believes that no party
should ever run out of the "lubricant" by which its very gears turn, so to
speak. As a result, we always have a cubic buttload of leftover beer. Now don't get me
wrong, we throw some pretty wild parties. Many is the time I wind up stumbling over bodies
the next morning on my way to the medicine cabinet for some aspirin, and that kind of
serous debauchery requires massive amounts of liquid aid, no doubt about it. But my pal
overdoes it sometimes… He'll say, "You never know who might show up with a
couple of friends, or co-workers, or their entire bowling team: We need more beer!"
As a result, in attempting to ensure that we never run out of beer for our guests, we plan
ahead and have lots of backup, just like a utility wanting to ensure its customers always
have power.
Now I know what you're thinking. You can NEVER have too much booze at a party. Believe
me…you can. For even after our 40 or so guests have completely drank themselves into
la-la land, we still have enough booze to put a herd of rhinos into permanent comas. That,
my friends, is a stranded cost.
Now, let's say you wanted to charge your guests for all the booze that they DID NOT drink.
Aside from getting laughed at and maybe even decked by your hungover buddies, you would
seriously hurt the attendance at your future parties. But let's say you did something a
little different. Let's say you bought a little less beer for the next party
(yeah….right…), but charged people who left early, as another way of recovering
what you spent on booze. In party planning, this is called "How to whip up an angry
mob". In the utility industry, it is called an "exit fee".
That is exactly what many utilities want to do (see this month's feature article on
PSE&G and Exit Fees). They want to charge customers for all the leftover beer,
er…that is , unused power that they leave behind when they jump ship for another
party. For the utilities, these costs can be in the billions, which is a lot of beer.
What many independent power producers fear is that if potential customers are going to
have to pay an exit fee for leaving the utility, they might as well stay. I mean why build
a cogen to save on electric costs, when much of that savings will be lost to fees and
penalties anyway? For you see, unlike your party, these people will not be able to simply
"leave the party" without paying. If exit fees become the norm, these customers
will have no choice but to "stay or pay".
In any case, with the current trend of deregulation, this issue will be coming up more and
more. As you read this, a case on stranded costs and exit fees is being debated between
Public Service Electric & Gas and independent power producers in New Jersey. The final
outcome could have implications for the entire nation. Independent power producers are
hoping they will not have to pay at all, but if exit fees become a reality, they had
better hope that the utilities don't have a garage full of untapped kegs.
