Stranded costs (sometimes called transition or uneconomic costs) refer to previously approved costs that a utility may no longer recover because of a change in law or policy, the introduction of competition, or the replacement of infrastructure or technology. A utility’s stranded cost usually is calculated as the difference between the sunk costs of the asset and its current value or earnings. A contentious issue during electric industry restructuring, stranded costs can occur today, for example, when a utility seeks to invest in smart meters or smart grid infrastructure before current investments in meters and other infrastructure are fully depreciated.
Stranded Costs: Policy
Any reasonable and verifiable stranded costs should be allocated equitably among shareholders and all classes of consumers.
In calculating stranded costs regulators should consider the following mitigating factors:
- previously compensated risk,
- investments made as a result of poor management decisions,
- ongoing profitable investments, and
- new revenue opportunities, including increases in the market price of power.
Policymakers should ensure that any mechanism for recovering stranded costs is nondiscriminatory and that no customer or customer class is exempt from paying for stranded costs.
Policymakers should provide a mechanism by which consumers would get back any stranded costs they overpaid because the market price of energy exceeded the estimate used in the stranded-cost calculation. If policymakers allow stranded-cost recovery, the reduced risk to the utility should be reflected in a reduced rate of return.