Transition Losses in the Electric Power Market: A Challenge to the Premises Underlying the Arguments for Compensation
71 Pages Posted: 9 Jun 2010
Date Written: January 10, 2000
In this Article, Professor Lois R. Lupica examines whether the electric utility industry, currently in the midst of deregulation, ought to sustain the resulting transition losses. Due to the significant modification of legal rules affecting the electric power market and changes in regulatory policy, the utilities currently have expenditures and expectations that are unrecoverable in a competitive market. In recent years, momentum has moved in the direction of compensating the electric utilities and their investors for these losses. Professor Lupica challenges the arguments for transition loss recovery and ultimately concludes that the doctrinal premises in support of transition loss recovery are flawed.
The Article begins by examining the history of the electric power market and continues by addressing the central arguments in favor of transition loss recovery. Proponents of transition loss recovery argue that investors will suffer losses as a result of a change in market dynamics or legal rules, and because the changes were not foreseeable, investors should be insulated from these resulting losses. Advocates of transition loss recovery further perceive the regulatory environment as contract-based, and thus argue that the 650 modification of the market's legal rules constitutes a breach of contract. Finally, some advocates claim that changes in legal rules and the resulting transition losses is a taking of property under the Fifth Amendment. Professor Lupica addresses each of these arguments and contends that the premises underlying these arguments are faulty. She further argues that transition losses are not unique to this context, and that, in addition to acknowledging the doctrinal challenges to recovery advocates' arguments, policy makers must evaluate transition loss recovery as an issue of fundamental fairness to utility consumers.
Keywords: securitization, transition losses, electricity deregulation, utility regulation, transition loss recovery, deregulation, takings, regulatory takings, deregulation as takings
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