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Stranded Costs: Who Should Pay?

The electric industry is changing to a competitive market structure that will allow consumers to choose a lower-cost supplier. Switching suppliers could leave the previous utility provider with high-cost investments in power plants, power contracts, and other assets that are above market rates. These investments will be considered "stranded" by the change to competition.

Utilities Argue:

• They are "guaranteed" stranded cost payment by state regulation.
• They were "forced" into investments by regulators.
• Consumers are currently paying for these higher than market costs and should continue to do so.
• The failure of consumers to pay 100 percent of stranded costs is unfair to stockholders.
• Previous commitments must be "honored" by paying stranded costs.
• Workers would be hurt by the failure of consumers to pay 100 percent of stranded costs.
• If utilities do not receive 100 percent of stranded costs they will litigate and delay the establishment of competitive markets.
• Early entry into competition would save consumers money because utilities that sell off their assets would receive premium payments from suppliers wanting to get involved in competition.
• Debt could be "securitized" to reduce stranded costs (government-backed tax exempt bonds would be given to utilities and paid off by consumers over a 30 year period).
• 100 percent stranded costs can be paid and consumers would still receive a 10 percent rate reduction from "securitization."

Consumer Advocates Argue:

• Regulatory law allows utilities an "opportunity" to receive payment, but does not guarantee payment.
• Utilities had a desire to invest capital to make profits and insisted on making these investments. Smarter utilities included escape clauses and renegotiation provisions in contracts.
• Consumers should not bear the full burden of a changing utility industry. Changes in other industries (such as the fishing industry) frequently leave those who have invested in equipment and infrastructure with losses. Utilities should not receive preferential treatment.
• Stockholders in electric utilities have earned generous returns on their investments. These returns are much higher than one would receive in a guaranteed interest bank account. The higher stockholder returns reflect the element of risk. Stockholders accepted the profit of this risk, and must accept the loss as well.
• Payment of stranded costs to utilities who made mistakes is unfair to lower-cost utilities that made smart decisions. It constitutes a subsidy for mismanagement and distorts the competitive playing field for the future.
• Labor costs are a very small amount of overall stranded cost claims. The fact is that consumers want to maintain reliability of electric service and have broad common interests with utility workers.
• The threat of litigation is hollow. Payment of 100 percent of stranded costs could eliminate any savings from competition, thus the delay caused by litigation would have little effect.
• The process of determining what is fair in dividing stranded costs between stockholders and consumers should be accomplished by an open and deliberate process - and not because of threats of litigation, promises of "phantom 10 percent savings," or unfair "securitization" measures that will damage the ultimate structure of the competitive market and longterm benefits to consumers.

Adapted from "Stranded Costs Fact Sheet," Cape and Islands Self-Reliance Corp., www.reliance.org/strandfacts.htm.