What's Stranded Cost?

Stranded costs - also known as stranded investments or stranded assets - are a significant potential problem in the transition to competition among utilities.

In the bills currently paid by all ratepayers, utilities are allowed to recover the cost of the prudent investments made to serve its existing customers. A "stranded cost" occurs when customers of one utility leave that utility and have power brought to them from some other supplier, thereby leaving the original utility with debts for plants and equipment it may no longer need and without the revenue from the ratepayers the plants were built to serve.

These investments can include power generation facilities, transmission lines, nuclear plant maintenance and decommissioning costs and a variety of conservation measures. Other stranded costs could result from expensive government-mandated contracts to buy power from alternative energy sources at prices far above the going rate. These costs and assets could become "stranded" in an open market because it would be impossible for a utility to recover its investments when the government has compelled a utility to provide its competitors with access to its wires.

Most electric systems argue that every stranded cost is the result of decisions that were reviewed and approved by government regulators and were made by utilities under the unique regulatory compact with their state and their customers. The federal government has had a prominent role in creating the potential for stranded costs. Federal legislation has dictated which fuels could or could not be used, from whom utilities had to buy power and at what price and what the taxes would be on different types of projects. Federal legislation also has required utilities to invest in programs designed to reduce the demand for electricity. And now, federal policy mandates that utilities provide potential competitors with access to their transmission systems.

Others argue that today's common methods to calculate stranded costs ensure that a utility will be made competitive --- irrespective of how ill-prepared the company is, its past mistakes, or origin of the costs. Stranded cost calculations are overcompensating utilities for uneconomic costs. The process is subsidizing the incumbent, "privatizing profits and socializing losses." As a result, local electric utilities have an unfair advantage over their unaffiliated competitors, and they will continue to dominate their service areas. Causes of uneconomic costs need to be distinguished and not lumped together as "a legacy of the past regulatory regime." When costs resulted from poor performance by the utility --- even if they were approved by a commission --- only partial, temporary, or no recovery should be considered.

Estimating Stranded Costs is Difficult

It is impossible to predict the future cost of electricity with great precision, and therefore it is impossible to predict exactly how large the eventual stranded investments and costs might be. Estimates have ranged from $100 billion to $200 billion. Certainly decisions regarding the shape and rules of the new electricity marketplace can have a dramatic impact on the dimensions of stranded costs and assets.

Recovering Stranded Costs

The case of stranded cost recovery rests on four main points:

Competition - Pro - Providing for recovery will allow the rapid transition to a competitive industry - Con - The magnitude of recovery currently being proposed will result in delaying competition until the recovery is completed.
Equitable - Pro - Recovery of these costs is the fair thing to do - Con - Recovery of the costs being proposed is an unfair compensation for poor management and could easily result in a windfall in later years.
Economic - Pro - Recovery of these costs will produce an efficient market in which competition occurs on the basis of true marginal costs - Con - Recovery of the costs of uneconomic facilities as being proposed will seriously dampen efficiencies and subsidizing incumbent utilities will not ensure true marginal costs
Constitutional - Pro - Failure to provide recovery would result in an unconstitutional taking of utility property and an unconstitutional impairment of contract forbidden by the Contract Clause - Con - "There is not a valid argument that full 100-percent stranded cost recovery is required under the United States Constitution."---- Sonny Popowsky, Pennsylvania consumer advocate.

TVA Does Not Qualify to Receive Stranded Investment

Unfortunately we had to discontinue our guestbook because unscrupulous individuals were inundating it with links. If you want a link request it via email. If your interests are similar to ours, link this page and we'll reciprocate. Just send us an email and tell us where you posted the link.
Return to index

Want to live clean without exposing yourself or your family to hazardous chemicals? Miracle II soap is all natural and contains no hazardous chemicals. You can clean anything with it, including your body. A capful of it in the water each time you bathe will guarantee you will never see another scum ring in your tub, to say nothing of the infinitely more dramatic beneficial effects attested to by a multitude of Miracle II users throughout the world. From the mundane to the sublime, Miracle II works!