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plans to continue issuing n e w equity through a dividend reinvestment program will reduce leverage, which is aggressive for the rating. C o m m o n equity represents about 34% of capitalization before adjusting for off-balancesheet obligations. Although an immediate equity offering is not necessary to maintain the current rating in the short term, a stronger equity layer is required for longterm rating stabili~" • Even scandal-plagued Orange and Rockland Utilities is moving bullishly to protect its credit position. O&R announced in early April that it plans to appeal the April decision by Standard & Poor's to downgrade O&R's preferred stock from A+ to A, and to place the utility on S&P's CreditWatch negative list. S&P lowered O&R's senior secured and senior unsecured debt rating to A from A+ and preferred stock rating to A- from A. The commercial paper rating was affirmed at A-1. And, all ratings were placed on CreditWatch with negative implications pending a meeting with O&R management. As of Dec. 31, 1993, about $430 million of total debt was outstanding at Orange & Rockland, the rating agency noted. S&P said, "The downgrade reflects the adverse effects of the ongoing criminal investigation, which has negatively impacted senior management. This has caused concerns about management continuity and stability as well as increased uncertainty surrounding the pending electric rate May 1994

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filing for a $17.1 million increase and a three-year extension of the company's Revenue Decoupling Mechanism. As a result, the overall business position has weakened to average from slightly above average." O&R President and Acting CEO Victor J. Blanchet, Jr. said O&R was "disappointed" with S&P's decision and planned "to contest their action." Blanchet added, "We have made significant progress in resolving the issues raised.., and we plan to make

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our case on its merits." • On the equity side, NatWest Securities analyst Edward J. Tirello raised seven utility stocks to "buy" from "hold," in spite of rising interest rates and their usual pressure on utility shares. ~rello believes electric utility stocks, after declining about 20 percent as a group since fall 1993, have neared the bottom of a cycle. He looks for a full-fledged reversal for utilities in late 1994 or early 1995 and has recommended investors add high-quality utilities to their portfolios.

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The analyst raised Dominion Resources, Duke Power, Nevada Power, The Southern Co., Texas Utilities, Union Electric and Western Resources to "buy" from "hold."

FERC Is Listening

With Access Resolved, Federal Regulators Tune in To Transmission Pricing I K m b e d d e d costs." "Increb . mental costs. ' "Embedded costs! .... Incremental costs!" At the end of a long, intellectually challenging and sometimes tedious Federal Energy Regulatory Commission inquiry on transmission pricing early last month, it was clear that there is little consensus among the players in the electric utility business over almost anything regarding transmission pricing. Even the issue of how to calculate costs has the parties disputing with the zeal of the old Miller Lite ads: "Tastes great! Less filling!" Well, there was one area of consensus, even unanimity: Transmission pricing is important. That's w h y FERC was inundated with written comments on the matter, logging some 165 separate comments, according to Chair Betsy Moler, who detailed the responses as follows: 67 from investor-owned utilities, 39 from municipal or cooperative utilities, 15 from non-utility generators, 25 from regulatory or government entities, and 19 described as

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"other," which a wag described as "the transmission pricing homeless." Transmission pricing "is the linchpin" to success in bringing on a new era of wholesale power, Commissioner William Massey commented, the first of several metaphors the commissioners used to describe their views of the issue. Massey noted that while FERC must focus on a series of technical issues related to pricing, it "shouldn't focus too narrowly." Commissioner James Hoecker stressed the need to maintain flexibility, and to collaborate with state regulators. Flexibility, he said, means there is "not a single prescription that fits" all the patients. ommissioner Vicky Bailey, playing off a statement Moler had made at a different forum, observed that pricing "is crucial to the vision thing. If we don't get pricing right, the vision doesn't happen," adding that transmission pricing is "probably the most challenging issue this commission has addressed." Commissioner Donald Santa described pricing as an "important piece of the puzzle, the kind of piece that w h e n you get it in place, you may find where all the other pieces fit in." State commissioners were all over the landscape, with Lisa Crutchfield of the Pennsylvania Public Utility Commission, on one extreme, expressing doubts about the wisdom of wholesale wheeling, especially if even one native load customer is harmed, regardless of how slight the in-

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sult. "The system was not originally constructed to implement wholesale wheeling," the former investment banker said. "It was constructed as a transmission grid and distribution network for the native load customers, not as a commercial bulk power mover. While a reasonable cost-effective opportunity to wheel bulk power over the transmission grids might be provided to third-party purchasers, that opportunity should not happen at the expense of na-

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tive load customers." Crutchfietd said FERC should abandon its hotly debated "or" pricing policy, which allows the transmission utility to recover embedded costs when a transmission transaction does not require expansion of the grid, and incremental cost or embedded cost where expansion is needed. She, along with most of the investorowned utility communit)¢ wants an "and" polic)~ permitting transmission utilities to recover both embedded and incremental costs. On the other hand, Craig Glazer, chairman of the Public

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Utilities Commission of Ohio, seemed fairly sanguine about the ability of the system to sustain bulk power transmission, based on his state's experience. "Ohio has for some time n o w experienced vibrant wholesale competition at the municipal level," said Glazer, who has worked for Cleveland's municipal utility. "Ohio municipalities have plenary power in our constitution to establish municipal utilities, including electric utilities. Municipalization activities have had significant impact for the industrial and other customers." Glazer recommended that FERC look at unbundled transmission pricing and congestion pricing. He said Ohio is "somewhere in between the 'and' and the 'or' with the obvious need to trade off the extent of unbundling with ease of administration." Glazer also got off one of the better boris mots of the day with his comment about utility regulators resembling the mafia. "We'll make you an offer you can't refuse," Glazer said. "But we'll also make you an offer you can't understand." that happens w h e n you put public power and commercial power on the same platform? "Tastes great! .... Less filling!" "Embedded costs." "Incremental costs." As the most experienced third-party wholesale customers, the American Public Power Association suggested the FERC hew to the well-understood practice of pricing on embedded costs and not lose sight of the structural issues involved. "Unlike power

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suppl);" said APPA's Dave Penn, whose Ph.D. in economics involved structural analysis, "transmission is and will be for the foreseeable future a natural monopol~ In this situation, the idea of pricing incentives, whether of the 'or,' 'and,' or 'opportunity cost' varie~, is inappropriate. Worse, they can have anticompetitive impacts on transmission services markets, on the generation market that should be the focus of our attention, and even at the distribution level." ow to price the service? The intricacies are less important than the equities, Penn said, arguing that "all transmission users, retail loads as well as wholesale and transmission loads, should pay the same cost for the same service. This extends to all terms and conditions of transmission service. Without this comparability, given our current situation of integrated utilities owning the essential transmission facilities, there can be no true competition in generation or fair competition among distribution utilities." But for investor-owned utilities, the issue is that FERC is imposing costs that are not being recovered, argued Georgia Power CEO Allen Franklin on behalf of the Edison Electric Institute. He said that "any time a utility provides transmission service, margins in the transmission system are used by the third party that w o u l d otherwise be available for future economic use by native load. The transmission system will have to be expanded for native load cus-

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tomer growth sooner than would otherwise have been the case." Franklin said FERC should not come up with a single pricing framework, but promote voluntary negotiation and dispute resolution and provide general guidance to state commissions. Probing the chasm between public power and the investorowned utilities, Massey noted that FERC had heard most of the arguments before, during the restructuring of the gas indust W. In

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definite. "We oppose sale of capacity rights," he said. "I heard these comments on the gas side years ago," noted Moler, adding that, as for gas, "it works." Echoing that sentiment was ELCON's John Anderson, the outspoken representative of the big industrial energy users. "FERC should "636' the electric industry," Anderson said, creating a useful new verb to summarize in shorthand the restructuring path FERC followed in the natural gas industry. - - Kennedy P. Maize

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But Headaches Await

Central Maine Power, Lookingfor Relief, Strikes Deal with Regulators he Maine Public Utilities Commission approved in early April a stipulation agreement between Central Maine Power Co. and other parties that settles an earlier investigation related to the utility's 1993 base-rate case. "With the stipulation, most of the things people have been [wrestling] over for a long time are off the table," said a knowledgeable ex-PUC staff member. "The big question now is what the commission is going to do about the town of Madison's request to buy lower cost power from Northeast Utilities to sell to Madison Paper." CMP disclosed the stipulation in a Form 8-K filed with the Securities and Exchange Commission on April 6, stating that it "resolves

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that proceeding, Massey recalled, FERC approved capacity release, the ability of buyers of gas transportation services to resell their rights should the market change. H o w would this fit in electricity? Penn responded favorably: "If you are going to unbundle services, you are going to have to have a secondary market." The IOUs were aghast at the idea. "It's more difficult in a networked system," responded Franklin, suggesting that gas pipeline are much simpler beasts than electric grids. Duke Power's Steven Young was even more

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