An Economic Analysis of the Stranded Cost Issue Facing Electric Utilities and Policymakers Today

Abstract

The electric utility industry is moving at a rapid pace towards retail competition and deregulation of the generation (supply) business. One of the major policy questions, which has a potentially enormous economic impact, is the treatment of “stranded costs” (or “stranded assets” as they are also more properly termed). “Stranded costs” result from the fact that the book values of a utility’s fixed obligations—physical, contractual, and legal—undertaken under the pre-existing regulatory regime are greater than their market value “going forward” in a competitive environment.

The opinions expressed in this paper are entirely those of the author and do not reflect in any way those of PSE&G. The author wishes to thank William Moore and Michael Crew for their valuable comments and suggestions.