[BETA] Fortnightly

Despite two years of debate, little progress has been made toward a solution to the issue of stranded costs. And since the two sides have almost no common ground, any accommodation seems unlikely. Utilities that seek stranded-cost recovery appear to have the upper hand at present, but the stiffest resistance still lies ahead. The Federal Energy Regulatory Commission's Order 888 clearly favors utilities, but customer reaction signals a shift to another venue. In addition, opposition to stranded-cost recovery from utilities with little or no stranded-cost exposure has become increasingly vocal.

What provokes surprise is that utilities in favor of stranded-cost recovery have fared so well, given the issues involved. The heart of the problem is that utilities seeking recovery ask for a disposition that violates the way the American people believe their economic system should work. This breach of faith makes it unlikely that utilities can prevail in the end. Accordingly, utilities would probably be best served by settling for indirect financial benefits during the transition in lieu of identifiable recovery.

Consumer Entitlement

Stranded cost is not the parochial industry issue it may seem at first blush. On the contrary, the issue directly challenges the sovereignty of the competitive market, running afoul of what might be called the great consumer entitlement: the right to purchase goods and services at a competitive free-market price.

The desirability of competitive market prices has its foundation in economic theory and lies embedded in the nation's laws and policies. According to economic theory, a society's welfare is maximized by the competitive market price and output. When market power raises the price above the competitive level, society's welfare suffers and income is redistributed away from the customer. The competitive outcome has been ingrained as a social norm. It is the basis for the antitrust laws and has fostered a common feeling that it is unfair to be charged more than the competitive price. Americans believe they have a right to buy at the competitive price.

A price above the competitive level is considered indicative of a market failure that demands corrective action. The policy response is to create economic forces that will bring the price down to the competitive level, to reduce market power by changing the structure of the market. There may be disagreement over the proper policy, but the desirability of achieving the competitive price is never in question.

It is generally agreed that current electricity prices are above the competitive level. In the context of American social values, customers are being charged an unfair price, and fairness demands a price reduction. In a sense, the excessive price reflects a failure of regulation, and the prospective restructuring of the electric power industry can be viewed as an effort to correct that failure.

In seeking stranded-cost recovery, utilities are asking regulators to create artificial mechanisms that will hold the price of electricity above the competitive price in the face of downward pressure from restructuring. Utilities that seek recovery will obviously encounter resistance in justifying such efforts to their customers. They must convince customers to acquiesce in suspending