In the electric industry restructuring debate lurks an important issue: If utilities recover some level of stranded costs, how do you design a cost recovery mechanism that minimizes stranded costs? This issue is important because, among other things, it will affect total customer savings.
One way to encourage utilities to mitigate stranded costs is to allow recovery of only a portion of costs. For instance, the California stranded cost recovery mechanism provides utilities with a "fair opportunity" to recover all of their stranded costs. The goal of California utilities will be to accelerate depreciation of their generation-related assets so that by March 31, 2002, the book value of remaining assets will approximate the market value of the assets. If the book value is greater than the estimated market value in 2002, the utility will need to write off this portion of stranded costs, thereby reducing shareholder value. To avoid this write off, the utilities will have a strong incentive to reduce costs. Allowing utilities to recover only a portion of stranded costs provides the same incentives to reduce overall costs as a "fair opportunity." It is important to note that a "fair opportunity" to recover stranded costs is very different from the Rhode Island legislation, which "guarantees" full recovery.