This paper explores ways in which economic analysis can help resolve the stranded cost controversy that has arisen in debates over electricity market deregulation. "Stranded costs" are costs electric utilities will not recover as power markets move from protected monopolies to an open, competitive environment. The paper begins with a description of the stranded cost problem, its magnitude, and the prominent arguments for and against recovery. We then turn to an analysis of contracts in order to understand whether there is, or should be, a legal duty to compensate utility shareholders for unrecovered costs. The paper also argues that efficient approaches to electricity deregulation will rely on more than an analysis of contracts. In particular, the politics of deregulation should be viewed as an independent constraint that affects the desirability of alternative approaches to stranded costs.
Tim Brennan is a Senior Fellow at RFF. His work examines electricity market design, state and federal regulation, and more recently energy efficiency policy.
James Boyd is a Senior Fellow and Thomas Klutznick Chair in Environmental Policy at RFF. Boyd’s research emphasizes collaborations between ecologists and economists in order to guide decisions that affect natural resources.
Common Resources — Oct 16, 2017
DOE’s Grid Resiliency Pricing Rule: Does It Address Market Failures?
Inability to rely on energy-only markets need not mean that DOE must specify resources to address intermittency.
Workshop/Seminar — Nov 23, 2020
Private Event: The US Wood Pellet Industry
A discussion on US forestry and land management practices
Journal Article — Nov 23, 2020
Estimating Forest Sustainability Bond Prices for Natural Resource and Ecosystem Services Markets
A journal article that introduces a sustainable forestry bond that is composed of wood products and ecosystem services, geared toward increasing the cash flow to a traditional forest bond.