Consumer-Based Franchises
By Scott Ridley

Reprinted from The Electricity Journal
May, 1995 issue, "The Territorial Imperative".

Seeing the Forest from The Trees:
Emergence of The Competitive Franchise


"In our present efforts to establish generation markets and transmission access, we risk losing sight of the strong consumer presence essential for competition to work. It's time to move discussion about restructuring to the consumer level and take up the issue of the franchise."


It's only once every few genera tions that we have the opportunity to contemplate major change in the electricity industry. The burden of that opportunity is now upon us. If we are to create something of lasting value, the most important task is to understand the balance of interests in the structure as it stands now, and where the balance in a restructured industry will lie.

Thus far, proposals for restructuring have focused on generation or transmission, and have largely ignored the retail customer and the distribution level of the business. We need to examine closely impacts and options as they affect the ultimate customer if we are to discem the forest from the trees and find the needed balance among industry sectors and customers of various stripes. Indeed, it seems preferable to choose the best models from the customer-distribution point of view first, and then design the generation and transmission sectors.

This article focuses on the need to begin a thorough discussion about the distribution level of the franchise. It points to the need to include a full assessment of options at the distribution level in restructuring proposals in order to assure balance within the industry. And it describes two such op-tions and the perspective they provide for tempering proposals for generation markets and transmis-sion access.

I. The Beginning of History

The distribution level of the franchise is both the historical and structural center of the industry. At one time, before the advent of state regulation, it was common for municipalities to offer the distribution franchise for competitive bidding. With the establishment of state regulation, monopoly service became the rule. Since the turn of the century the core of the electric utility industry has rested on the once-sacrosanct notion of the "natural monopoly" of the distribution franchise. The seemingly haphazard map of public, rural cooperative, and private investor-owned utilities has been drawn in a patchwork around this notion, our transmission grids have been built around it, and the layers of local state, and federal regulation have evolved from repeated attempts to manage the increasing impacts of the resulting monopoly operations.(2)

At the regulatory level the "natural monopoly" of the franchise has been enforced by the "exclusive" and "indeterminate" rights granted to a utility for a service territory and extended to transmission and generation to supply that service territory. It has also been supported by the "quasi-governmental status" conferred on electric utilities in order to provide service to the distribution level, allowing them to exercise powers of eminent domain and other privileges usually reserved for governmental bodies. And it has been further supported by what has commonly been referred to as the "compact"--the tacit understanding that utilities would be allowed a reasonable rate of return for providing a reliable supply of cost-efficient electricity to a specific service territory. (2)


"If regulatory rate-making is weakened, we will need a strong consumer presence to make competition work."


During the last two decades we've traveled a long way from these 19th-century concepts. As we all know, rising utility costs in the 1970s began to unravel the "compact." And a resulting shift toward deregulation and the accompanying belief that market forces could provide environmental and economic benefits combined to crack our notion of natural monopoly. With the passage of the Public Utility Regulatory Policies Act (PURPA) in 1978 we began to unbundle various rights associated with the franchise, and since then have seen the steady cascade of effects. Because PURPA focused on competition in generation, generating plants were unbundled from the "natural monopoly" of the franchise. (3)

Then proposals emerged to unbundle transmission as well because of access needed for the new competitors in wholesale generation. Finally, as new wholesale power producers came on line, the possibility for retail wheeling raised the prospect of unbundling the "exclusive" and "indeterminate" terms of the service territory and allowing competition at the distribution or retail level. The Energy Policy Act of 1992 was, of course, the final announcement that the era of competition had arrived. (4)

While all of this has taken place under the philosophical shift toward deregulation, the piecemeal nature of the discussion has backed us into a restructuring of the industry without addressing the need for balance and options for the distribution level of the franchise.

For the past 80 years or so, regulatory rate making, with its dual function of protecting both utility consumers and investors, has attempted to provide that essential balance. If regulatory rate making is weakened and command-and-control regulation is gradually swept aside in favor of competitive markets, as many envision will happen, that traditional balance will be gone. In its place we will need not only security for investors, but also a strong consumer presence to make competition work. Without one or the other, we risk losing that essential balance and will suffer the economic and environmental costs.

The failure to date to take up the fundamental issue of the franchise is perhaps a troubling warning of what might be in store. Retail-wheeling and direct-access proposals that assume consumers will fend for themselves are rife with discriminatory and predatory opportunities that would leave a competitive market badly flawed, and could create chaos for planning horizons and result in high financing costs. It is unfortunate that consideration of the potential benefits and impacts of competition at the distribution level has disappeared in the shadow of generation and transmission entities.

II. Risks in Losing Balance

Our preoccupation with generation and transmission is understandable, both for opportunities to achieve environmental protection and for economic savings.(5) For years now, estimates on potential economic efficiencies have been circulating. One study conducted in 1988 found that there was as much as $3.43 billion in annual savings to be gained in consolidating and streamlining electric utility operations. Nearly two-thirds of this was estimated to flow from a more economic mix of generating plants in regional consolidations. A liquidation of surplus assets was valued at nearly $16 billion. More recent estimates have pointed to potential stranded investment ranging between $19 billion to $300 billion, which reflects a different measure of possible consumer savings or costs.(6)

Despite the attractiveness of these estimates, our current focus in restructuring the industry to achieve savings and efficiencies could prove short-sighted. Reshaping the industry solely around generation and transmission is especially problematic if we believe that we are moving toward more local and self-generation and a declining need for centralized plants and transmission networks in the next two decades.


"Weak "direct access" proposals for the distribution level could erode the benefits of competition."


Reshaping the industry around generation and transmission is also problematic if we are thinking of saddling the distribution level and individual service territories with the costs of such transitions, thus locking certain areas or classes of consumers into discriminatory cost differentials. It is also a problem for capturing the benefits of competition in the longer term if we create new entities with a built-in resistance to the emergnce of technologies and policies aimed at decreasing central generating plant and trans-mission needs.(7)

The obvious danger in generation- and transmission-oriented restructure is that we will create a new competitive industry whose players will have enough market-weight to capture greater benefits for themselves than for consumers. The recently noted trend for consolidation among so-called independent competitors is only one warning sign of an industry controlled by producers.(8) Weak "direct access" proposals for the distribution level that play consumers off against each other could further undermine any new balance of interests and erode the benefits of competition.(9)

Even MCI-style aggregators which might be viewed as providing relatively strong voluntary representation for consumers could help to create markets subject to volatility in service switching that could create chaos not only for planning and financing, but also for reliability. They could also create situations of market domination by large direct-access entrepreneurs affiliated directly or indirectly with generating or transmission companies. MCI-style entrepreneurs driven by pure economics could also show little appreciation, or even hostility, toward environmental or social initiatives that interfere with their competitive posture. Whatever competitive system we develop will require compromise and new agreements in replacing the "compact" and "natural monopoly" with a new sense of balance between investors and consumers. And in the process of hammering out those compromises and agreements it would certainly appear reasonable to return to the structural center of the industry-- the distribution franchise--to understand what we're taking apart and what might still be useful. Although some analysts are willing to bet that deregulation will be limited to wholesale markets, and the retail or distribution level will remain subject to rate regulation, that system is likely to be transitional at best. Therefore, it is essential to approach restructuring with the understanding that we have to provide a counterweight to the influence of generators and transmission companies. It is also essential for the stability of a competitive market that the consumer entity be nondiscriminatory, include indirect costs in its rates, and have inherent public accountability to assure adequate guidelines for competition.

III. New Franchise Proposals

Proposals have emerged in California (the TURN "consumer-owned utility" proposal) and Massachusetts (competitive franchise legislation) that are likely to spark discussion about the nature of the franchise and efficiencies that can be driven by competition at the distribution level. (l) More than just alternative forms of aggregating consumers for participation in retail markets, these proposed consumer entities provide a context from which to evaluate proposals for new generation and transmission markets. At the least, they could help to temper the terms of those proposals and produce a more sound and efficient competitive system. And to a larger extent, proposals of this type might once again allow the natural monopoly of the distribution system to be used as the building blocks for a restructured industry.(11) In their most basic form these two proposals replace the "compact" and its general understanding with a contractual relationship.


"We should return to the structural center of the industry- the dis-tribution franchise to understand what we're taking apart and what might still"


A. Massachusetts' Competitive Franchise

In Massachusetts, legislation was introduced in December to establish rules and guidelines for municipalities to take back distribution franchise rights from private utilities and offer them for bid under time-limited contracts, similar to bidding for other municipal services such as cable television. (l2) The creation of local "Consumer Service Districts" allowed by the legislation would be optional, based on traditional franchise law, and would rely on a system of mixed regulation that allows competition within a framework of guidelines established by the state. The generic terms of the franchise contracts would include provisions to protect programs such as demand-side management and integrated resource planning, as well as protection of low-income consumers. For states that currently allow limited use of local electric franchises, it would allow the next logical step of bidding for those franchises as access to transmission opens up.

1. Background on Competition for Franchises. In many respects this is not a new idea. The concept of competitive electric utility franchising rises from the early roots of the industry, and predates the notion of "natural monopoly." During the latter 19th century, cities and towns commonly offered franchises similar to those for streetcar companies and other services to the fledgling electric utilities. Competitive bidding for distribution franchises was sometimes held on an annual basis. And in some cases cities granted multiple contracts and allowed construction of parallel distribution systems. Fierce competition led to problems such as cost-cutting that jeopardized service and public safety. And in at least one case the fever pitch of competition led a company's workers on nocturnal excursions to chop down a competitor's poles.(13)

It was the destructive side of this competition and the limitations of technology at the time that brought support for electric utility operations to be considered a "natural monopoly," to be placed under new state regulatory bodies.

Although no municipal franchising is currently in use in Massachusetts, vestiges of the municipal franchise system have remained in use in other states, primarily in the South and West. According to one study, approximately half the states still allow municipalities to utilize limited electric utility franchises.(14) The cities of Chicago, Miami, and Houston, for example, have franchise contracts with private utilities. These contracts have traditionally run for terms of 30 or 40 years and municipalities have had no opportunity to consider competitive bidding and innovative service terms.

In 1986 Chicago mounted a major effort to become the first major city to renegotiate its franchise and include innovative terms for consumer protection, cogeneration, and least-cost planning. However, the city lacked options now increasingly available with transmission access and an emerging wholesale power market. The city also lacked the leverage of a framework of state authorities that would provide support and guidelines for competitive bidding as well as standards for programs such as demand-side management, conservation, or integrated resource management in the franchise contract. (15)

The Massachusetts legislation seeks to establish the guidelines and competitive framework that Chicago lacked. It also provides a shortened time frame for the contract, and it upgrades the provisions usually contained in a traditional distribution franchise contract to include protection for consumers and environmental requirements that will reinforce state regulatory initiatives. By making these terms (such as demand-side management and integrated resource planning) part of the marketplace, the contract can help to reinforce state regulatory initiatives without use of ratemaking incentives and disincentives.


"In 1986 Chicago sought to become the first major city to renegotiate its franchise and include innovative terms for consumer protection."


On this new playing field, utilities must meet these terms to compete for the franchise, and their rates must be economical in order to win the contract.

2. Features of the Bill. Under the Massachusetts legislation a municipality would establish a Consumer Service District (CSD) by a two-thirds vote of its city council or board of selectmen. To prevent carving of sweetheart districts within the municipality, the CSD is defined by the borders of the entire municipality. Thus, all classes of consumers are contained within the CSD and problems of class discrimination common to retail wheeling proposals are avoided.

Contiguous municipalities are allowed to combine their CSDs in the issuance of a request for bids for service, and to negotiate collectively with prospective utility providers. An early criticism of the proposal is that it might create a Balkanization of electric service territories. Amendments are expected to expand the opportunities for collective municipal action by allowing other jurisdictions such as county governments or other bodies to act as the agents for municipalities desiring to undertake joint efforts. There is also a proposal to allow state regulators to take the current patchwork of service territories and divide the state into logical franchise districts. Municipalities electing to use a competitive franchise would do so with others in these areas.

Upon formation of a competitive franchise CSD, negotiations with utilities are to be conducted first with the current service provider, and after issuance of an RFP, with selected bidders. A second round of discussion with the current provider would ensue. In the event that the contract is awarded to a utility other than the current service provider, three alternatives are outlined for rental purchase, or acquisition of the distribution sys tem. The legislation specifies that the distribution facilities may be leased from the current service provider by the new service provider; that the new service providerer may acquire the facilities; or, the municipality may acquire the facilities by eminent domain using a specific valuation formula and binding arbitration. Because the eminent domain valuation is based on replacement cost minus depreciation, it should function to encourage the utility to rent or sell the system to the new provider.

If the current service provider loses the contact competition, it is allowed to file for "stranded investment" recovery. The basis for the filing would be the utility's claim that the facility or contract in question is no longer "used and useful." The utility must show that it has made reasonable efforts to market the capacity and/or energy and has no other alternatives to maintain the facilities as "used and useful."

If the utility meets these conditions and a facility or contract is determined by the Department of Public Utilities to be "stranded investment," the DPU may instruct that the capacity and/or energy, or the entire assets of a facility, be sold at prevailing market rates in order for them to qualify for stranded-investment compensation. Any resulting loss of the sale would be shared between the CSD's ratepayers and the utility. This allows the price of stranded investment to be set by the actual market, rather than through an administrative procedure. The utiliyt would be responsible for no less than two-thirds of the resulting loss, and the ratepayers for no greater than one-third. (16) The DPU would make such determinations prior to approving the new CSD contract so that rate projections and estimated savings would clearly reflect this cost.

Rate setting would be a combined effort of local government and the state regulatory body. Local officials can propose a rate structure for classes of consumers, under guidelines provided by the state. State regulators would have final authority over the rates, as they would over all other terms of the franchise contract.


"A 'Consumer Service District' proposal in Massachusetts would permit stranded-investment cost recovery."


State regulators would also examine the contract for compliance with generic environmental and social provisions. To assure that environmentalists and consumer advocates would have a forum for ongoing concerns, the current process of public participation in rulemaking would underlie the development of generic provisions for social and environmental goals to be included in the RFPs and contracts.

Both the Department of Public Utilities and the Massachusetts Legislature have taken up discussion of the competitive franchise, and other states engaged in their own discussions are listening in. States expressing early interest in the competitive franchise legislation are Illinois (where Chicago's experience has opened the way for consideration of a broader framework), Ohio, Texas, Iowa, New Jersey and Califorrlia (where a very different form for the local franchise has been proposed). (l7)

B. California COU Proposal

Last fall the California consumer organization Toward Utility Rate Normalization (TURN) announced plans to submit legislation for "Community Access To Competitive Electricity.'' (18)

TURN's plan would create a competitive pressure using the distribution franchise, similar to the pressure generated by the Massachusetts legislation. Under TURN's plan a "Consumer-Owned Utility" (COU) could be established by local agencies under the roof of county government, a water district, or a munici-pality. While the Massachusetts legislation is based on traditional franchise law, TURN's proposal is based on creation of a municipal utility system. But unlike municipal utilities, the COU would not acquire the assets of the distribution system; it would lease both transmission and distribution services. Also unlike the Massachusetts competitive franchise plan, the COU would take on all the operations of the system from metering to power supply planning, although the critical function would be negotiating and purchasing power supplies on the wholesale market.

1. COU Envisions Larger Restructure. TURN's proposal was submitted in response to the California PUC's Blue Book plan for direct access. Underlying the TURN proposal is the generally accepted belief that there are significant opportunities for real consumer savings through increased wholesale competition, economic dispatch, regional exchanges, voluntary pooling arrangements, conservation, and integrated resource planning. The drive for these benefits and the competition created by COUs shopping for competitive wholesale power are seen as sending positive signals into restructuring of generation and transmission. In order to facilitate the creation of competitive retail markets, TURN's plan envisions restructuring of the state's investor-owned utilities into distribution companies (Discos), transmission companies (Tran-scos) and generating companies (Gencos).

Under this scenario, the Discos and Transcos would remain under CPUC and FERC regulation, and would continue to be reasonably assured of receiv-ing adequate revenues and shareholder return on investment. The Gencos would become separate non-regulated companies competing with other non-utility generation in the wholesale market. The current control area operators would sell services including scheduling and dispatching to the Gencos and NUGs supplying this new system.

Stranded investment would be covered by a competitive "access fee" charged to consumers. Such non-economic resources might also be used to provide control area services and reserves, thus generating some economic value and reducing the level of the access fee.

TURN also suggests that a regional transmission group (RTG) form to provide pooling, regional exchanges, and competitive auctions on a voluntary basis, with pricing and use of the transmission grid for such wholesale transactions remaining under FERC jurisdiction. (l9)


"In California, TURN has proposed that utilities be vertically de-integrated."


2. Atmosphere for Consideration. Not surprisingly, TURN's proposal met a cool reception at the CPUC, according to news reports. Representatives of investor-owned utilities that could lose service territories to the proposed COUs also criticized the plan. (20) TURN subsequently held public meetings across the state to rally support for the plan and announced its intent to file state legislation in 1995.

Jurisdictional issues avoided by the Massachusetts competitive franchise by keeping the transactions at the retail level, could become a problem for TURN's proposal. Because the COU would operate in wholesale markets, it faces a test before FERC which could prove difficult. Regardless of the outcome, the proposal provides essential perspective for restructuring discussion, and may set benchmarks for other "strong consumer" options. TURN has also begun to examine further franchise options.

IV. Franchise Discussion Gives Perspective to Restructure Proposals

Although the Massachusetts legislation does not specifically address restructure of generation and transmission, the filing of the competitive franchise bill has come at a time when an ambitious restructuring of transmission and generation has been proposed for New England. The "deal" initially described in the November 1994 issue of this journal (2l) is being shopped to regulators, environmentalists, consumer advocates, and investor-owned utilities. The terms of the "deal" (or "Grand Bargain" as it has been renamed) are evolving, but those familiar with the published proposal will recall it involves utilities selling their transmission assets to a third-party entity for a market price (which is above depreciated value or replacement cost). The profits from the sales would be used to help write down stranded investment, and the new transmission entity would provide open access for a new generation market. (22)

A. Distribution Level: Perspective of the "Deal"

The initial proposal targeted all of New England. However, the "deal" has since been reduced to negotiations with a single utility-- New England Electric System (NEES). (23) The original purpose of opening the region's transmission access through the "deal" has been abandoned. But Conservation Law Foundation has proceeded to negotiate with NEES in hopes of achieving environmental savings and providing a model that may be replicable in other areas.

Even in its limited form, the "deal" is highly flawed. The competitive franchise offers a distribution level perspective to view some of the risks associated with the "deal" or "Grand Bargain."

One fundamental problem with the "deal" as originally proposed, is that in financing the transmission asset purchases, the third-party entity would place the cost of the purchases on individual service territories as an "access fee" in proportion to the price paid for the facilities. If the price paid to a particular utility is higher than to other surrounding utilities, the resulting "access fee" for that service territory would be higher, regardless of the extent of transmission utilized. This results in locking some service territories into relatively higher rates for the term of the financing (which could be thirty years). (24)

Although a "consensus" is often mentioned to exist for shifting costs of stranded investment onto the wires, that characterization appears to have little basis. While there may be a tenuous agreement among certain parties in the debate on stranded investment, it's quite a stretch to describe this as "consensus." Indeed, the recent filings with FERC opposing its proposal for "Recovery of Stranded Costs By Public Utilities and Transmitting Utilities" demonstrate the broad extent of dis-agreement. (25)

In addition to the problems of discriminatory pricing consumers could face by the cost of the "deal" being placed on the wires, fixed finance charges for transmission could produce resistance for other cost-saving measures and technologies at the distribution level. For example, even in those service territories where the level of charges is not at the high end of the discriminatory scale, consumers reducing the volume of wheeled energy by use of local self-generation or demand-side management programs could be penalized by the necessity to increase delivered kilowatt-hour charges because of fixed financing needs.

The generating and transmission companies envisioned by the "deal" would also have to be restricted from asserting their interests to slow down or chill a transition to more local self-generation, or decreased reliance on transmission through exorbitant back-up or reserve charges.

More important in the long term is the form these industry interests might take. NEES recently filed a letter with the Securities and Exchange Commission citing its work with the Conservation Law Foundation on the "Grand Bargain" and referred to changes in state and federal regulatory law that would be required. NEES specifically urged repeal of the Public Utility Holding Company Act of 1935. Removing the Holding Company Act would make it difficult if not impossible for state regulators to trace interrelationships of direct-access entrepreneurs, transmission companies, generating companies, fuel suppliers, or a host of other service companies or purchasers. Over the long term such relationships can undermine the fairness in a competitive marketplace. (26)

The "deal" now envisions opening up full direct access in the NEES service territory over a 10-year period, with 10 percent of the customers being allowed to go off line each year. This would create obvious customer discrimination. And it would undoubtedly create pressure for direct access in neighboring service territories, which could undermine the environmental gains Conservation Law Foundation is trying to win.

2. A Broader Comparative Framework. This raises the larger question of what just what the "Bargain" is. There is a marked lack of public accountabilitv and automatic industry-orientation inherent in the terms. And the estimated decrease in rates for consumers has shrunk from 15 to five percent. If compared to other future-oriented proposals, such as the competitive franchise, these estimated savings might shrink further. Relative displacement of stranded investment also needs to be compared to the options offered under the CSD or other stranded-investment proposals. And potential economic dislocations under the "bargain" and other alternatives also need to be examined. In its current form, with questions about fair competition, pressures of direct access, a lack of public accountability, and obvious customer discrimination, the "deal" appears unworkable even as a limited model. More than anything else, it points to the problem of attempting to restructure generation and transmission first, without adequate consideration of the distribution level or long-term protections for consumers and the market.

V. Consumers' Competitive Pressure

It may be that a regional transmission group (RTG) coupled with a competitive franchise would provide the most competitive and efficient system. The opportunity offered to utilities by the competitive franchise for new service territory (or for the COU to attract support from independent power producers) could provide a needed carrot for establishing a voluntary RTG. Conversely, the competitive franchise and COU options could also build public support for legislation or regulatory orders to open transmission access.

What this indicates is that we need to look at the relative compatibility of restructuring options in assessing their advantages and disadvantages. One national consumer organization has pointed to four elemental tests that every proposal for restructuring should meet: 1. Can all consumers benefit and not just a few large customers? 2. Will electricity be affordable for all consumers? 3. Will the incentive to protect the environment be protected from competitive pressure? 4. Will we fairly allocate the costs of past mistakes in the transition to a new industry structure? (27) To these could be added four forward-looking requirements for proposed industry entities, regulation, and policies: 1. restructuring proposals must include a thorough evaluation of balancing of market forces through investigation of the compatibility of options for generation, transmission, and distribution; 2. new entities (Poolcos, wholesale markets, Tran-scos, transmission markets) must be structured and financed with mechanisms that facilitate and not obstruct development of new technologies and fuels; 3. regulation at the federal, regional, and state levels must be put in place in order to adequately "referee" the competitive playing field; and 4. on-going public accountability with easy inclusion of indirect cost items in the market, and the ability to adjust the entities as they move through a transitional period, must be assured.

VI. The Rest of History

If history provides any lessons, it is that policy and legislative decisions may be made relatively quickly, but subsequent restructuring of the industry will be slow and piecemeal. Litigation is inevitable and we should not determine the future of the industry based on threats of litigation. The danger is that we would avoid the short-term costs of litigation and create a flawed industry that will cost us much more in the long term. Measures taken later to inject public accountability into the system might not be able to undo the damage. Thus, it is critical that our visions of a restructured industry contain a clear understanding of where the ultimate balance of interests will lie. Within that framework, it is not difficult to argue that a thorough examination of restructuring at the distribution level should accompany proposals to restructure generation and transmission, and even that the establishment of strong consumer options at the distribution level might precede generation and transmission decisions.

Given the steady march of proposals to restructure generation and transmission, and to develop auctions or other direct access at the distribution level, there is an urgency to take up a fuller discussion about the distribution level of the franchise and the balance and productive influence it may exert. Obviously it's not just markets for generation and transmission access we're changing, but policies that will have far-reaching impacts on local and regional economies and the environment. That seems to demand we view the original balance in the industry as a solid reference or context--a forest of bundled social, economic and environmental values--from which we come to see the relative shifts we are proposing, where benefits can be lost or gained, and where the balance of interests in a reformed industry may lie.

And in that broader perspective it is also important to see that, as we attempt to escape the monopolistic thickets of the l9th century, we must take care not to saddle a restructured industry with the preoccupations and political expediencies of the 20th century.


Endnotes:

1. For background on structural and regulatory evolution of the industry see RICHARD RUDOLPH AND SCOTT RIDLEY, POWER STRUGGLE: THE HUNDRED YEAR WAR OVER ELECTRICITY (Harper & Row, 1986) as well as LEONARD S. HYMAN, AMERICA'S ELECTRIC UTILITIES: PAST, PRE-SENT, AND FUTURE (Public Utilities Re-ports, 1983).

2. For additional background and per-spective on regulatory evolution and philosophy see IRSTON R. BARNES, THE ECONOMICS OF UTILITY REGULATION (F.S Crofts & Company, New York, 1942); WILLIAM T. GORMLEY, JR., THE POLITICS OF PUBLIC UTILITY REGULATION (University of Pittsburgh Press, 1983).

3. Although our common usage in the industry refers to "bundling" and "un-bundling" of services, traditional legal vocabulary recognizes "bundling" of rights. The fundamental concept here is that the "natural monopoly" bundle has been broken open and it is difficult if not impossible to keep other segments from unbundling, and further it may prove counterproductive to do so, such as maintaining "exclusive" and "indeterminate" control over service territories.

4. The Energy Policy Act did not take a position on retail competition, but in what has become a common scenario, the pressures of deregulation and the presence of independent power producers have encouraged large industrial customers to petition state regulators and legislators for the option of direct access.

5. There are of course a number of reasons that the initial discussion focused on generation. In addition to the trend for deregulation there is the confluence of interests with FERC having jurisdiction over wholesale markets, environmental organizations which have become key players in electric utility policy making interested in reducing the burden of pollution from generating plants, and utility managers and investment bankers concerned with the generating plant as a primary asset. These and other factors such as the emergence of alternative generating technologies have combined to make competitive markets in generation the point from which we have backed into industry restructuring discussions .

6. EDWARD J. TIRELLO, JR. AND MICHAEL WORMS, ELECTRIC UTILITIES: THE CASE FOR CONSOLIDATION Part 1, at 2 (Shearson Lehman Hutton, March 18, 1988); also, Comments of the American Public Power Association in FERC's NOPR on Recovery of Stranded Costs, Dec. 6, 1994 for the $19 billion figure, and Stranded Investment--$300 billion Anchor or 'Tonya Harding' Issue?, ELEC. J., March 1994. The stranded investment figures indicate potential consumer savings only to the extent that consumers are relieved of paying those costs.

7. See for example David Moskovitz and Douglas Foy, Looking for Peace in the Middle of a Nervous Breakdown, ELEC. J., Nov. 1994, for examples of restrictive entities.

8. See David W. Penn, How Likely Is Long-Run Competition in Electricity Generation? Warning Signs, ELEC. J., Jan./Feb. 1995.

9. Among the "weak" options at the distribution level I would include buying clubs, utility "auctions" for wire access, entrepreneurial aggregating ventures, and retail wheeling proposals; each of which is exclusionary and provides little or no public accountability or no inherent investment in social and environmental policy.

10. TURN Proposal, September 7, 1994; Competitive Franchise legislation filed in Massachusetts, December 7, 1994 (Senate bill No. 447).

11. At first glance, the uninitiated might confuse both of these options with traditional distribution alternatives to an investor-owned utility-- municipal systems and rural electric cooperatives. However, these new proposals take neither of those forms, and are also very distinct from each other.

12. Consumer-Based Electric Utility Competition bill, introduced by Senator Mark Montigny, co-chair of the Joint Committee on Energy, Massachu-setts Legislature, December 7, 1994 (Senate bill No. 447).

13. See Rudolph and Ridley, supra note 1, at 33 for the flavor of problems with competitive utility franchising in the 19th century.

14. Energy Task Force of the Urban Consortium for Technology Initiatives, The Electric Utility Franchise Expira-tion and Renewal Process (prepared by City of Chicago Dept. of Planning) (Sept. 1989).

15. City of Chicago Department of Planning, p. iii; and personal conversations with department staff.

16. The Maine Public Utilities Commission has taken a different approach which is likely to have its greatest application to municipalities forming new entities to provide retail service. It recognizes that the marginal cost of a utility's service reflects its market value and it involves a "lost revenue contribution." It specifies that stranded costs recovered will be calculated as one-half the difference between embedded and marginal costs. See Docket No. 95-055, Order of Feb. 27, 1995.

17. Since the original drafting of this article, the National Association of Regulatory Utility Commissioners and the National Conference of State Legislatures has issued an RFP to examine the competitive franchise as one of five distribution models. FERC Com-missioner James Hoecker has also indicated interest in the stranded investment provisions of the competitive franchise legislation filed in Massachusetts.

18. Statements and information from TURN press conference, Sept. 7, 1994.

19. TURN, supra note 12 and telephone conversation with TURN utility analyst Dr. Eugene Coyle, Nov. 7, 1994.

20. Bobbi Nodell, Utility Group Seeks Simultaneous Deregulation, OAKLAND TRIBUNE, Sept. 8, 1994; Jonathan Marshall, Co-op Planfor Power Industry, SAN FRANCISCO CHRONICLE, Sept. 8, 1994; Group wants little guy to get electric bill break: Public agencies would set rates, MARIN INDEPENDENT JOURNAL, Sept. 8, 1994 (As-sociated Press).

21. Moskovitz and Foy, supra note 7.

22. Id. Also personal discussion with Doug Foy regarding the proposed deal., Nov. 10, 1994.

23. NEES is a holding company operating in three states, but is only one of eight private utilities in Massachusetts. Although a major player in New England power politics, the NEES system is much smaller in size than Northeast Utilities which controls 40 percent of the region's transmission, including a corridor that encircles Massachusetts.

24. Although this would appear to be an illegal "tying" arrangement, the nature of the "deal" as a private transaction may help to avoid anticompetitive claims.

25. See "Comments of the Ad Hoc Coalition on Environmental and Consumer Protection," December 9, 1994; Also see Comments of the American Public Power Association In FERC's NOPR On Recovery of Stranded Costs (Dec. 6, 1994). These filings indicate broad opposition and disagreement on positions of stranded investment re-covery advocated by investor-owned utilities and others.

26 NEES Letter of Frederic Greenman and Kirk Ramsauer to Jonathon Katz of the Securities and Exchange Commission, filed with "Comments of New England Electric System, file No. s7-32-94, Feb. 6, 1995." The Letter says in part: "We also believe that a comprehensive solution is required to establish a competitive electric market. We have proposed such a comprehensive solution by way of the so-called 'Grand Bargain' which we put forth together with the Conservation Law Foundation. Among the components of that proposal are the transfer of the NEES transmission system to an independent entity, the introduction of retail customer choice and the application of stricter environmental standards, all in a way which allows recovery of stranded investments and provides lower rates. Imple-menting this 'Grand Bargain' as a replacement for continued regulation of vertically integrated monopoly utilities, requires changes to Federal and state regulatory law. Our vision does not include a continuing role for the Act [Public Utility Holding Company Act] and for this reason we support its repeal."

27. Nancy Brockway, National Consumer Law Center (Jan. 10, 1995) (statement accompanying release of Massachusetts "Consumer-Based Competition" bill).