CEI Statement Opposing "Stranded Cost" Recovery

CEI Statement Opposing "Stranded Cost" Recovery

August 07, 1997

"Stop the Bailout" Coalition Clyde Wayne Crews Jr.

National Press Club CEI Fellow in Regulatory Studies

With at least $200 billion at stake, the "stranded cost recovery" demanded by electric power utilities during the transition to competition presents an eat-or-be-eaten situation for unwary consumers. Today’s solid coalition -- drawn from left, right, and libertarian public policy organizations who oppose this bailout -- represents a pivotal development. It’s pivotal because it means consumers now have a chance.

The case against stranded costs can be summed up simply. Electric utilities deserve to be compensated for the electricity they sell, not for the monopoly power they lose. Competition is not a crime or tort against utilities. They have no entitlement to their captive customers.

Success in this effort will require perhaps unprecedented grassroots work by groups such as those represented in the "Stop the Bailout" coalition. Success also depends upon the emergence of principled legislative champions at the federal and state levels.

Everything about the utilities’ self-serving formulation of a mythical "regulatory compact" leaves consumers holding the bare end of the wire.

Regulation, from the get-go, served the interests of utilities rather than consumers. Substantial research shows that the power industry deliberately sought regulation to protect the profits that were being eroded by rampant competition.

Consumers don’t normally get up on their hind legs to complain when prices are falling. But utilities did. Indeed, prices rose following state regulation of this industry. Consumers never would have agreed to a compact that not only took away their falling prices, but also held them and their children and grandchildren financially liable for the industry’s ultimate obsolescence.

This is all obvious, of course. But even if we were to accept the validity of a regulatory compact, that still doesn’t create an entitlement to recovery. The typical formulation of the compact grants utilities an opportunity to earn a reasonable rate of return on prudent investment.

  • An opportunity is not a guarantee.
  • A rate of return is hardly reasonable if customers must be prevented by force from getting better deals elsewhere. In fact, the very existence of above-market prices is evidence that utilities have breached the regulatory compact themselves by failing in the duty to maintain fair prices.
  • Investments must have been prudent. Consumers should not be held accountable for utilities’ management blunders or lack of foresight.

Furthermore, there is no basis for utilities’ claim that competition was unexpected, and that therefore recovery is warranted. According to the Yale Law Journal:

While many have been resigned to the notion of "natural monopoly," the sanctity of the concept has not gone unchallenged. In fact, during the past 30 years there have been at least 120 reported cases in which the desirability of competition in gas and electricity has been an issue before a state commission.

While this sounds like it could have been uttered at a recent congressional hearing, it was in fact written in 1941. More recently, the Edison Electric Institute acknowledged in 1981 that "deregulation is going to be a major item of the next decade."

Alongside the illegitimacy of the regulatory compact, too many serious questions are being evaded.

  • What is to be done with the stranded cost funds paid to utilities? Are utilities giving them back to the shareholders they say they’re protecting?
  • What is to be done with the stranded asset? Can the utility collect stranded costs and yet still sell electricity produced by the "stranded" asset and thus unfairly undercut competition?
  • Since deregulation will increase the value of some units, why aren’t utilities being required to net out gains? In other words why don’t customers get credit for stranded benefits?
  • Why aren’t policymakers concerned with calculating the amounts of strandings that consumers have already paid and continue to pay in above market rates?
  • Who will answer for the inefficiencies caused if stranded costs are awarded, such as the delay of competition and of technologies such as those that capture waste heat from generation?

Stranded cost recovery should be denied not to punish utilities, but simply to protect consumers from the ill effects of decisions they had little part in making -- decisions by an industry that had no business being monopolized in the first place.

Utilities are owed nothing for the fact that others may choose not to purchase electricity from them. The real stranded plants are the ones that cannot offer customers cheaper power without committing a crime. The people at risk are consumers, not the utility shareholders whose association with the utility is strictly voluntary.

Since both sides claim to be the true strandees, that suggests a compromise: Utilities need not pay consumers strandings, consumers need not pay utilities strandings. Let’s just call it even.

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