In discussions of
electric power generation deregulation
Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. It is the repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a ...
, stranded costs represent a
public utility's existing
infrastructure investments that may become redundant after substantial changes in regulatory or market conditions. An incumbent electric power utility will have made substantial investments over the years and will carry
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
. The
whole-life cost of electricity includes payments on this debt.
As technology improves, with all else equal, the cost of generating electricity falls. A new entrant to the
market
Market is a term used to describe concepts such as:
* Market (economics), system in which parties engage in transactions according to supply and demand
* Market economy
*Marketplace, a physical marketplace or public market
Geography
*Märket, a ...
, unencumbered by debt, can build a modern plant and generate electricity at a lower cost than existing providers. Logical customers leave the incumbent utility for the new entrant, reducing the incumbent's
revenue
In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business.
Commercial revenue may also be referred to as sales or as turnover. Some companies receive reven ...
and spreading its debt payments across fewer remaining customers.
The problem is often caused by overlong
depreciation
In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the a ...
schedules for capital investments by utilities, presuming that regulatory and market conditions would not change substantially.
Solutions to the stranded costs problem include assigning a portion of the incumbent utility's debt to the new entrant as a condition of entry, or charging all customers in the market area a "stranded cost recovery fee". In some cases, a government may assume a portion of an incumbent utility's debt and assign it to the public debt, thus freeing the incumbent to compete more efficiently against new entrants.
See also
*
Stranded asset
References
{{Reflist
Electricity economics
Electric power distribution