Mitigation depends on the market. For regulators, that means a going-forward view.
If regulators allow recovery of some stranded costs, they should at least ensure that utilities operate their generating plants in a manner consistent with the actions taken by other owners of similar resources that participate in competitive markets for bulk power.
A priori estimates of stranded costs are almost certain to be wrong. Therefore, regulators should adjust recovery to reflect actual events (em in particular market prices for electricity.
Regulators should hold utilities responsible for all future avoidable costs. These avoidable fixed costs include operating and maintenance expenses, administrative and general expenses, and capital additions. By contrast unavoidable fixed costs include depreciation, property and income taxes, interest payments and return on equity. In short, the recovery mechanism shouldn't indemnify the utility against the types of risks faced by its competitors. What costs are truly avoidable, however, will depend on the market.
Consider an example. (See graph.) It depicts a generating unit with variable costs of 2.1 cents/kWh, avoidable fixed costs of $16/kW-year and unavoidable fixed costs of $20/kW-year. In this example regulators should cap stranded costs at $20/kW-year. Nevertheless, the effects of this cap on stranded-cost recovery will differ with fluctuations in market prices.
If the market price averages 2.4 cents/kWh over the entire year, the unit might operate for 3,320 hours. Its operating revenue (total revenue minus variable cost) will be $22/kW.* Because its fixed costs total $36/kW ($20 + $16), stranded costs amount to $14/kW ($22-$36).