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Proposed Changes in the Electric Utility Industry Would Fan the Embers of Stranded Costs

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Former Partner
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by Raymond S. Heyman

Initiatives at ballot boxes, legislatures and regulatory agencies in various states in 2018 are aimed at changing the electric utility industry.  Some seek a transition from fossil fuel reliance to renewable fuel dependence.  Others look to replace regulated monopolies with marketplace competitors.  When there is a paradigm shift and utilities believe that there is not a reasonable chance of recovering their prudent investments and costs, they point to the “regulatory compact” and its escape hatch, “stranded cost recovery”.

The argument is simple—utilities incur massive costs and invest enormous amounts of money to meet their obligation to provide us with reliable and safe electric service. Regardless of where we are when we flip the switch we expect that the light will come on, the TV screen will illuminate or the charger will give new life to our smartphone.  Recovery by the utilities of the costs and investments to make this happen (and a modest return) is authorized by the government and included in customer rates.  When a new policy prevents the utility from recovering its prudent historic costs and investments through rates, then additional compensation is sought for the deficit, or in other words the “stranded costs”.

In past cases, stranded cost recovery proved to be a complex and difficult issue to resolve.  Opponents of stranded cost recovery argued that there was no “regulatory compact” or that stranded costs and investments were imprudent and therefore, non recoverable.  Utilities argued that denial of stranded cost recovery was confiscatory and a violation of their due process rights.  The amount of stranded costs claimed by utilities can be in the billions and tens of billions of dollar.  Some previous attempts at industry changing initiatives stalled over the stranded cost debate.

Although many of the discussions surrounding the 2018 initiatives raise the question of whether there will be an increase in costs to the customer, none appear to propose a solution for the stranded cost claim that will accompany the implementation of such initiatives.

Learning from past experience, proponents of the 2018 initiatives would be wise to deal with the realities of stranded costs now, rather than ignore them, or risk delay of or preclusion from implementing approved initiatives.