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How Stranded Will Electric Utiliites Be?

Fortnightly Magazine - February 15 1995

SC that each large IOU might face. Our best estimates of potential SC range from 38 to 54 percent of equity. Roughly speaking, every 1›/Kwh change in the market price of electricity causes up to a $60-billion change in the amount of SC nationwide. The states with the biggest potential dollar loss include California, New York, Ohio, and Pennsylvania. The states with the biggest potential percentage loss include Maine, Massachusetts, New Hampshire, and Rhode Island.

Our analyses point to four major conclusions:

s Reported estimates of SC depend strongly on the assumptions made in deriving those numbers. Treat skeptically estimates that are not well documented.

s The most important assumptions are the fraction of a utility's retail load that can obtain electricity supplies in a competitive market and the price of electricity in that competitive market. In addition, the number of years during which the utility suffers this revenue loss is important in determining results. Of course, these three sets of assumptions are related to each other.

s The appropriate measure of SC is the net, not the gross, estimate. The net estimate adjusts for utility assets that have a market value above book value.

s SC estimates should reflect the effects of federal and state income taxes, which will reduce the amounts that utility shareholders and customers will ultimately have to absorb.

The amounts of SC computed here are large both in absolute terms and relative to utility shareholder equity. Developing reasonable and equitable ways to quantify, mitigate, and allocate these costs will likely be a critical precondition to restructuring the U.S. electricity industry. t

Eric Hirst and Lester Baxter are researchers at Oak Ridge National Laboratory. They specialize in electric-utility policy issues, including resource planning, demand-side management programs, and industry restructuring. Hirst holds a PhD in mechanical engineering from Stanford University, and Baxter holds a PhD in Public and Urban Policy from the University of Pennsylvania.

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