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PSC report targets deregulation

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Deregulation of Utah's electrical industry may put a $3 billion burden on PacifiCorp, parent company of Utah Power, and bring about higher electricity costs for the state's consumers.

Or it could result in a $2.4 billion windfall for the company, leaving consumers unscathed.It all depends on how state legislators and utility regulators deal with the complex issue of "stranded costs."

That issue is at the heart of a new Utah Public Service Commission report that is scheduled for discussion during Thursday's meeting of the Legislature's Electrical Deregulation and Customer Choice Task Force.

It is impossible to say exactly what will happen in Utah, the report said, because no one can predict what will happen to electricity prices under deregulation.

The task force is trying to decide whether to let free-market forces shape the prices for some electric services. Currently, most electrical utilities operate as state-regulated monopolies.

For that regulation to end, stranded costs need to be considered, the 50-page PSC report said.

The report uses the phrase "stranded commitments" instead of standard costs, it said, because the PSC wants to emphasize that costs may be borne by customers as well as a utility company.

"Utility stranded costs will arise if market-determined retail prices for electricity do not allow the recovery of all generation-related costs," or the amount utilities still need to pay on their power plants, the report said.

But it said it also is possible that the market value of some of those power plants may exceed their book value. In that case, a utility could have "negative stranded commitments."

"Unaddressed positive stranded commitments could damage a utility financially, perhaps impairing its ability to provide adequate service," the PSC report said. "If negative, stranded commitments could damage customers, stripping them of the benefits associated with low-cost resources, and permanently raising rates."

When different parties tried to estimate stranded commitments for the task force last year, the results varied wildly. PacifiCorp estimated a positive stranded commitment of $1.5 billion to $3 billion, while the Committee of Consumer Services' guess was a negative $2.4 billion.

"Using that approach, you are basically testing one person's prediction of the future against another," said D. Douglas Larson, PacifiCorp's director of regulation for Utah, Idaho and Wyoming.

For that reason, the PSC report recommends that legislators not base their decisions on forecasts of future market prices.

Instead, the report said, they should use a market-based evaluation of PacifiCorp's assets after restructuring occurs. That will provide the most accurate measure of stranded commitments, and it will help ensure that costs are not shifted unfairly from the company's shareholders or big industrial power users to residential customers.

Larson said Friday that PacifiCorp agrees that the only way to determine stranded commitments is to see how market prices actually develop.

"Based on the market prices of power that we're seeing today, we would have stranded costs," he said. "Whether those prices will continue in the future is anyone's guess."

Larson said the key is to make sure everyone is treated fairly during the transition from a regulated to a competitive market, and it appears that Utah is not yet ready to push forward with that change.

"People are comfortable that the prices of electricity are fairly low (in Utah) compared to a national average," Larson said.