When Électricité de France stepped in to buy Constellation Energy’s nuclear assets and help the company avoid bankruptcy, the Maryland Public Service Commission conditioned the sale on a set of...
Stranded Investment: Utility Estimates or Investor Expectations?
capital gains.) As before, after 10 years of $12 dividends, sudden deregulation depresses the stock price to $50. An investor who also receives an additional $50 for strandings is overcompensated relative to expectations at the time of purchase. Stranding compensation of $18.15 is all that is necessary to fulfill his 1987 expectations:
[$12 ( 1.10] + [$12 ( (1.10)²] + ... [$12 ((1.10)10 ] + [($50) ( (1.10)10]+ [($18.15) ( (1.10)10] = $100
3. Falling Dividend.
This method can also calculate compensation for investors whose expectations were frustrated (presumably not because of utility imprudence). Just after the investor buys the stock, dividends fall to $8 and continue at that level over the first 10 years. Just after the tenth dividend payment, the stock price falls to $50 with deregulation. Now a Jan. 1, 1998 stranding payment of $81.88 leaves the investor with an income stream that has a present value of $100, looking forward from 1987:
[$8 ( 1.10] + [$8 ( (1.10)²] + ... [$8 ((1.10)10 ] + [($50) ( (1.10)10] + [($81.88) ( (1.10)10] = $100
1For polar views, see William J. Baumol & J. Gregory Sidak, Transmission Pricing and Stranded Costs in the Electric Power Industry (Wash. D.C.: AEI Press, 1995), and Robert J. Michaels, "Unused and Useless: The Strange Economics of Stranded Investment," 7 Electricity Journal 12 (Oct. 1994), 12-22. On what utilities should do with the funds, see Robert Michaels, "After Stranding Recovery, What?," PUBLIC UTILITIES FORTNIGHTLY, June 1, 1996, 14-16.
2See J. Gregory Sidak and Daniel F. Spulber, Deregulatory Takings and Breach of the Regulatory Contract, 71 N.Y.U. Law Review 851 (1996); Lucas v. South Carolina Coastal Council, 112 S. Ct. 2886 (1992)[deprivation of all economically beneficial use required]; Yee v. City of Escondido, 112 S.Ct. 1522 (1992)[upholding rent control]; but see Dolan v. City of Tigard, 114 S.Ct. 2309 (1994).
3Duquesne Light Co. v. Barasch, 488 U.S. 299, 312-314 (1988).
4Energy Asso. of New York State et al., v. New York PSC, 653 N.Y.S.2d 502, 174 PUR4th 406 (Sup.Ct.1996).
5Moody's recent update of a 1996 report showed little change in aggregate stranded costs, but estimates for over 75 percent of utilities changed by more than 10 percent over the year. "New Moody's Survey Shows Many Changes in Estimated Stranded Costs and Prices," Electric Utility Week, Jan. 27, 1997, 11.
6Donaldson, Lufkin, and Jenrette, Electric Utility Company Outlook, Dec. 1996. Some utilities with large exposures have claimed that less than full recovery will lead them into insolvency, or, at worst, bankruptcy.
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