Stranded Investment: Is the Sale Worth Keeping? (A Look at Utility Options)

Fortnightly Magazine - May 15 1996
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Giving up today's customer to retail wheeling could help cut losses tomorrow.

Estimates of stranded investment for U.S. investor-owned electric utilities (IOUs) range from as little as $20 billion to as much as $500 billion (em more than double the shareholder equity in U.S. utilities. These potential losses can be traced to above-market book values for some utility-owned power plants and long-term power-purchase contracts, as well as deferred income taxes, regulatory assets, and public policy programs.

A utility can react to the potential loss of retail customers in two ways.1 It can let the customer go, and then resell some or all of the lost load on the wholesale market. Or it can offer its at-risk customers the lower, competitive wholesale price and thereby retain the sale. These two options, keep the sale (KEEP) or relinquish it (FORFEIT), often yield very different estimates of stranded investment. (In principle, regulators could cap utility recovery at the smaller of these two amounts.)

Estimates of stranded investment for the two options depend strongly on interactions between the utility's generating assets (both utility-owned units and long-term power-purchase contracts) and the wholesale power market, but in different ways. Several key factors in the wholesale market will affect the level of stranded investment: wholesale prices, utility marginal production costs, transmission capacity, the percentage of retail load at risk, and the difference between wholesale purchase and sale prices.

Under the KEEP option, a utility loses revenue in two ways:

s Lost Margin. For those customers that wheel, the utility loses the margin between its embedded cost of generation and the market price of power.

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