Reed W. Cearley and Daniel H. Cole
A central controversy in electric utility deregulation concerns the treatment of so-called “stranded costs, ” which are costs of investments undertaken in reliance upon the pre-existing regulatory regime, with its guaranteed rate of return. Utilities argue that if they are not allowed to recover investment costs-if those costs are left “stranded”-they (and their shareholders) will suffer losses estimated at between $10 and $500 billion. 1 At worst, such losses could threaten the existence of some investor-owned utilities; at least, they would place post-regulatory utilities at a competitive disadvantage to new entrants to their markets.
To avoid this prospect, utilities have successfully lobbied the Federal Energy Regulation Commission and several state legislatures to permit them to recover their stranded costs in the process of utility deregulation. 2 This seems only fair. But the discussion of the stranded-cost issue has been one-sided. The real issue concerns not just stranded costs but all stranded investments, which can result in either stranded costs for utilities or stranded benefits for utility customers. While utilities have complained about the prospect of the former, they have been rationally silent about the later, which would accrue to their benefit and to the detriment of electricity consumers, who have had little voice in discussions of deregulation.
The End of a Natural Monopoly: Deregulation and Competition in the Electric Power Industry, Volume 7, pages 169-190.
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