Stranded commitments (SC), because they are potentially huge, may be a show stopper for increased competition in the U.S. electricity industry. Utility shareholders, industrial customers, and small commercial and residential customers are likely to wage tough battles before state and federal regulatory commissions as they seek to reduce their exposure to these costs. Widely varying estimates of the amounts of SC may be a key element in these battles.
We define SC more broadly than others define stranded costs or investments. Our definition can include four classes of costs:
s Stranded assets, primarily in expensive power plants and excess capacity
s Stranded liabilities, primarily in power-purchase contracts (including those with qualifying facilities) and deferred income taxes
s Regulatory assets (whose value is based on regulatory decisions rather than on market forces), including deferred expenses and DSM-program costs that regulators allow utilities to place on their balance sheets
s Stranded public-policy programs, including tax collection, DSM programs paid for by all customers, and support for energy research and development.
Estimates of SC vary widely. Niagara Mohawk Power Corp. estimates that stranded costs could run as high as $200 billion. At the other end of the spectrum, the American Public Power Association estimates potential losses at $10 to $20 billion. These and other estimates differ because of the assumptions used to calculate SC, differences between gross and net estimates, and the effects of federal and state income taxes.