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Stranded Investment Surcharges: Inequitable and Inefficient

Fortnightly Magazine - May 15 1995

mechanism in place for future recoveries. Credibly terminating the transition may require such extreme measures as the vertical breakup of utilities. Vertical de-integration is costly, entails problems with bond indentures, and will probably be governed by politics rather than efficiency. Instead of levelling the playing field, a vertical breakup artificially bars the formerly integrated utility from doing what it might eventually learn to do well.

What amounts are ultimately paid will depend on whose estimates regulators believe. Advocates for public power agencies and industrial users calculate figures that reach orders of magnitude below those proposed by utilities. With such a difference at stake, opposing parties might well entertain wasteful "rent-seeking" expenses. The amount at issue may make attorneys and consultants happy, but ultimately their standards of living will be gained at the expense of others, including captive ratepayers. Payment for up to $200 billion of strandings will only be politically palatable and economically bearable if spread over many years. Long-term payments will require long-term regulatory oversight, since stranding liabilities will change with market conditions in ways that are not predictable today.

Advocates of compensation fall oddly silent about what utilities are to do with the payments. Regulators who grant compensation should insist that it be earmarked to shrink the utility by retiring certain financial obligations and transferring ownership of the stranded facilities (at least the nonnuclear ones) to others. That is how firms in unregulated industries get rid of their stranded investments, usually at a loss. Without such restrictions, the temptation to spend stranding compensation inefficiently may produce little more than another generation of strandings. t

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