(December 19, 1997) What are "stranded costs" and why are they so important? "Stranded costs" are investments or assets owned by regulated electric utilities that are likely to become inefficient or uneconomic in a competitive market. Before deregulation, electricity monopolies could charge these costs back to their captive customers.
(483/4.4795) Paxus Calta - Not surprisingly, US utilities with high debts are asking the regulators to protect them before competition starts by forcing potential competitors or existing customers to pay off the transitional losses they will incur.
US customers and competitors to these existing monopolies argue that granting stranded cost:
- Will damage the competitive market that deregulation is trying to create, by taxing new entrants into the market.
- Creates a US$ 100 to U$160 billion corporate welfare policy to some of the richest companies in the country.
- Is unprecedented: US railroad, telecom, trucking and aviation monopolies were not granted such compensation when they were deregulated.
- Will hurt the environment, by giving inefficient utilities money to continue to operate older less efficient facilities (including nuclear plants).
Unfortunately, these arguments have not persuaded the regulators in California who have granted a significant stranded costs package to the power utilities of that state, which will be the first to deregulate on Jan 1, 1998. In this case, electricity prices will be fixed for 2 years at 10% less than the current costs for residential and small users, while the current utilities are allowed to recover much of their stranded costs. Larger users can immediately start negotiating with the almost 200 companies which have entered the market which used to be controlled by a small handful of regional monopolies. But by the year 2002, it is expected that all customers can choose, without having to pay for the past mistakes of the states nuclear utilities. Virtually everyone agrees that electricity prices will drop further than this, the US Department of Energy believes that nationwide they will decrease about 20%.
California is important because it has two utilities in the top 5 with stranded cost in the country. Southern California Edison with US$ 8.3 billion (which operates the two San Onofre reactors) and Pacific Gas and Electric with US$ 7.8 billion (which operates the two Diablo Canyon reactors). The most significant part of these stranded costs are related to these nuclear facilities, which are producing some of the most expensive electricity in the country at this point.
Across the US, 15 states have approved deregulation plans. Most plans call for phased in competition over the next 2 to 5 years. In some cases, like New Hampshire, virtually no stranded costs were granted and the nuclear utility (Public Service Company of New Hampshire - owner of the highly expensive Seabrook Nuclear Power plant) immediately took the state plan to court, claiming it would be bankrupted without compensation for it stranded costs.
But consumers are not sympathetic, a 1997 poll conducted by Research/Strategy/Management Inc. showed that 70% of respondents thought that utilities and their shareholders should be responsible for their own passed management decisions and thus not be permitted to force stranded costs onto past customers or future competitors.
Most of the rest of the US states (35 of them) are watching these early deregulation plans to see which ones they will mimic. The fight to block stranded costs from being granted is just beginning in the US and a similar fight is pending in many European Union states.
Sources:
- Power for the People, July 3, 1996 by Citizen Action, Environmental Action, Public Citizen and US PIRG AP, May 8, 1997
- Electricity Deregulation: Separating Fact from Fiction in the Debate over Stranded Cost Recovery, Adam Thierer, The Heritage Foundation, 1997
- Nuclear Power Plants and Implications of Early Shutdown for the future of Natural Gas Demand, INGAA Foundation Inc, 1997; Moodys Investors Services: Stranded Costs Will Threaten Credit Quality of US Electrics, August 1995
- USA Today Ahead on the Shopping List: Electricity, December 10, 1997 page 15A-16A
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