243 Stranded Costs

Stranded costs are generally described as legitimate, prudent and verifiable costs incurred by a public utility or a transmitting utility to provide a service to a customer that subsequently are no longer used. Since the asset or capacity is generally paid for through rates, ceasing to use the service leaves the asset, and its cost, stranded. In the case of de-regulation, stranded costs are created when the utility service or asset is provided, in whole or in part, to a deregulated customer of another public utility or transmitting utility. Stranded costs emerge because new generating capacity can currently be built and operated at costs that are lower than many utilities' embedded costs. Wholesale and retail customers have, therefore, an incentive to turn to lower cost producers. Such actions make it difficult for utilities to recover all their prudently incurred costs in generating facilities.

Stranded costs can occur during the transition to a fully competitive wholesale power market as some wholesale customers leave a utility's system to buy power from other sources. This may idle the utility's existing generating plants, imperil its fuel contracts, and inhibit its capability to undertake planned system expansion leading to the creation of "stranded costs." During the transition to a fully competitive wholesale power market, some utilities may incur stranded costs as customers switch to other suppliers. If power previously sold to a departing customer cannot be sold to an alternative buyer, or if other means of mitigating the stranded costs cannot be found, the options for recovering stranded costs are limited.

The issue of stranded costs has become contentious in the state proceedings on electric deregulation. Utilities

Retail access is either currently available to all or some customers or will soon be available. Those states are Arizona, Connecticut, Delaware, District of Columbia, Illinois, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, Texas, and Virginia. In Oregon, no customers are currently participating in the State's retail access program, but the law allows nonresidential customers access. Yellow colored states are not actively pursuing restructuring. Those states are Alabama, Alaska, Colorado, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Mississippi, Missouri, Nebraska, North Carolina, North Dakota, South Carolina, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming. In West Virginia, the Legislature and Governor have not approved the Public Service Commission's restructuring plan, authorized by HB 4277. The Legislature has not passed a resolution resolving the tax issues of the PSC's plan, and no activity has occurred since early in 2001. A green colored state signifies a delay in the restructuring process or the implementation of retail access. Those states are Arkansas, Montana, Nevada, New Mexico, and Oklahoma. California is the only blue colored state because direct retail access has been suspended. *As of January 30, 2003, Department of Energy, Energy Information Administration

Figure 24.1 Status of State Electric Industry Restructuring Activity*

have argued vehemently that they are justified in recovering their stranded costs. Customer advocacy groups, on the other hand, have argued that the stranded costs proposed by the utilities are excessive. This is being worked out in the state utility commissions. Often, in exchange for recovering stranded costs, utilities are joining in settlement agreements that offer guaranteed rate reductions and opening up their territories to deregulation.


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