State and federal regulators and the industries we regulate have donned life jackets. It's as if we are boating down the unexplored Grand Canyon with John Wesley Powell1 in 1869. We share a vague...
As the U.S. Congress works to pass federal legislation introducing competition into the electric utility industry, one of the most divisive issues regulators and policymakers must grapple with is that of stranded cost. In a recent study completed by Resource Data International, we have found that an important issue will be how "negative" stranded costs are handled.
At the heart of our study is a detailed, plant-by-plant, analysis of stranded costs for every utility in the country. We estimate that the total above-market stranded cost nationally is $202 billion. The lion's share of this stranded cost ($86 billion) results from heavily financed nuclear power plants. Utilities with stranded costs, however, are able to offset some of their stranded nuclear costs with other generating assets that have market value higher than current book values ($17 billion offset). The second largest component of stranded costs results from power purchases from other utilities ($54 billion). The third largest component is regulatory assets ($49 billion). The final component of stranded costs, a nagging relic of the Public Utilities Regulatory Policy Act of 1978, consist of $42 billion in above-market power-purchase contracts from nonutility generators. Utilities with stranded costs will be able to offset a small portion of these costs through long-term, above-market sales to other utilities ($12 billion offset). These stranded costs burden all portions of the utility industry: investor-owned utilities account for $147 billion; public utilities for $33 billion; and cooperatives for $22 billion.
Stranded costs are highly concentrated within the industry. In fact, just 20 utilities account for more than half of the $202 billion of stranded costs. Another group of utilities have "negative" stranded costs. Specifically, the market value of these utilities' assets in a competitive market is higher than the existing net book value of the assets. We estimate that these utilities have stranded benefits of almost $59 billion.
The majority of these stranded benefits result from low-cost generating assets. Kentucky Utilities, one of the lowest cost producers in the country, provides a good example of a utility with assets where the market value is substantially higher than the current book value. In 1998, RDI estimates that the net book value of KU's coal-fired generating assets will be $181 per kilowatt. To put this number into perspective, a new combined cycle plant can cost as much as $450-$550 per kW and a new coal-fired plant costs even more. We estimate that the market value of these assets is $440 per kW, two and a half times the current book value. If KU could charge what the market will bear for its generation, its customers' rates would increase. Of course, the state regulatory commissions, prodded by consumer groups, will be looking for ways to capture the difference for retail customers. Other utilities that have generating assets that are valued considerably higher by the market than they are on the books include PacifiCorp, New York Power Authority, Oklahoma Gas and Electric, Ohio Power Company, and Appalachian Power Company. In the states where these and other similarly postured utilities operate, the impact of customer choice