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Stranded Cost Recovery: Fair and Reasonable

Fortnightly Magazine - May 15 1995

There, the Court said that decisions regarding rates of return for regulated utilities "should be commensurate with returns on investments in other enterprises having corresponding risks" and should not "jeopardize the financial integrity of the companies, either by leaving them insufficient operating capital or by impeding their ability to raise future capital."

The Means

Regulators and courts dealing with stranded costs are enjoined to promote adequate and reliable service for consumers. Preclusion of recovery of stranded costs threatens service quality in the long run and thus serves consumers as well as investors badly.

The crucial issue for stranded cost recovery is the means by which it is done. Various devices have been suggested, including an "access charge" to be imposed on every electricity customer, an "entrance fee" to be paid by every current generation competitor of the utility and every entrant, and an "exit fee" to be paid by any customer that terminates service. Other suggestions include fuel charges and subsidies from the public sector. Most of these give rise to difficult issues such as how high the charge can be without impeding competition or distorting the market.

Another approach would add a stranded-cost component to electric transmission rates. As we show in our new book, a transmission price of this sort can be carried out in a manner compatible with economic efficiency and clearly neutral in its effects upon all competitors in electricity generation. A correctly constructed regime of transmission pricing may in fact achieve the efficiency and equity goals that justify the recovery of stranded costs. t

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