In discussions of

electric power generation Electricity generation is the process of generating electric power from sources of primary energy. For utilities in the electric power industry, it is the stage prior to its delivery (transmission, distribution, etc.) to end users or its storag ...

deregulation, stranded costs represent a

public utility A public utility company (usually just utility) is an organization that maintains the infrastructure for a public service (often also providing a service using that infrastructure). Public utilities are subject to forms of public control and r ...

'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 Whole-life cost is the total cost of ownership over the life of an asset. The concept is also known as life-cycle cost (LCC) or lifetime cost, and is commonly referred to as "cradle to grave" or "womb to tomb" costs. Costs considered include the f ...

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, an ...

, 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 ...

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.

References

{{Reflist Electricity economics Electric power distribution

See also

References