Stranded Costs

16 Pages Posted: 23 Oct 2001  

J. Gregory Sidak

Criterion Economics, L.L.C.

William J. Baumol

New York University - Stern School of Business, Berkley Center for Entrepreneurial Studies; Leonard N. Stern School of Business - Department of Economics

Abstract

Through the end of the twentieth century, the most critical regulatory issue facing electric utilities was stranded costs, which can be defined as those costs that the utilities were permitted to recover through their rates but whose recovery may have been impeded or prevented by the advent of competition in the industry. These costs represent expenditures incurred by a utility in the past in meeting its obligation to serve all customers within the area in which it held an exclusive franchise, granted to it under the traditional regulatory regime. The article explores whether entry of competitors who were not burdened by these stranded costs could have prevented incumbent utilities from recovering their costs. In this article, we explain why it generally benefits consumers for stranded costs to be recovered as part of the price of service. In part I of this article we discuss the efficiency justifications, and in part II the equity justifications, for recovery of stranded costs. In part III, we briefly discuss the takings implications of stranded costs. In part IV, we discuss a utility's duty to mitigate stranded costs.

JEL Classification: K0,K2,L1,L4,L5,L9,L94,L95,L96,L97

Suggested Citation

Sidak, J. Gregory and Baumol, William J., Stranded Costs. Harvard Journal of Law & Public Policy, Vol. 18, pp. 835-849, 1995. Available at SSRN: https://ssrn.com/abstract=283232 or http://dx.doi.org/10.2139/ssrn.283232

J. Gregory Sidak (Contact Author)

Criterion Economics, L.L.C. ( email )

1717 K Street, N.W.
Washington, DC 20006
United States
(202) 518-5121 (Phone)

HOME PAGE: http://www.criterioneconomics.com

William J. Baumol

New York University - Stern School of Business, Berkley Center for Entrepreneurial Studies ( email )

New York, NY
United States
212-998-8943 (Phone)
212-995-3932 (Fax)

Leonard N. Stern School of Business - Department of Economics

269 Mercer Street
New York, NY 10003
United States

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