Ask this question: Are Investors today earning what they thought they would, back when they last had faith in regulation?
As their customers discover more competitive prices, many utilities remain saddled with the costs of uneconomic plant and power purchase contracts approved under regulation. They seek compensation for these costs, but the amount deserves a close examination.
Some utilities seek remuneration that exceeds the market value of their common stock. Such a settlement seems overly generous for investors, who will continue to own their shares after the payoff. Some utilities with large claims also want a once-and-for-all regulatory determination of the settlement. These utilities want the amount frozen by securitization plans, like those promised in new laws enacted in California and Pennsylvania.
Of course, before regulators can begin to determine how much compensation utilities deserve for stranded costs, they must first determine whether to award any compensation at all. They must also decide which assets deserve payoffs and how utilities ought to dispose of the amounts recovered. The last step, however, is often overlooked: Regulators must design a method of calculating the payoff that promotes efficiency and fairness.
We argue for a reorientation of the stranding debate that emphasizes the fortunes of investors and de-emphasizes the booked costs of utilities. In fact, recovery of expected investor returns should be the basis for a reasonable armistice in the stranded cost wars. If investors are the central actors of the stranding drama, calculations that disregard their fortunes have little claim to primacy in a debate whose stakes are measured in the hundreds of billions.