Trends

Fortnightly Magazine - January 15 1995
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A competitive market for electric power raises the point that some utility investments might be overvalued, giving rise to "stranded investment." Nevertheless, actual utility exposure to stranded investment may prove less severe than reported, according to a recent study we conducted at Resource Data International, Inc. (RDI), Retail Power Markets in the U.S., (em perhaps the first detailed analysis of stranded investment from generating assets, performed on a unit-by-unit basis for all power plants in the United States.

The move to competition implies "transition costs" (em costs that might become "stranded" if they cannot be recovered in a competitive market. The most critical and visible factor affecting cost recovery (em and whether investment becomes stranded (em is the gap expected to arise between regulated retail rates and unregulated competitive prices. In a competitive market, prices will no longer reflect average "bundled" costs; instead, they will track the demand/supply equilibrium in the power markets. Because competitive market prices may show little or no relation to historic average embedded industry costs, we may see the market mark down certain utility assets and liabilities below book value.

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