Restructuring rates creates value and reduces stranded costs

Journal Article · Fri Dec 01 04:00:00 EST 1995 · Electricity Journal

DOI:https://doi.org/10.1016/1040-6190(95)90138-8· OSTI ID:376989

Della Valle, A P; Bidwell, Jr, M O

Current electricity rate structures do not reflect the true cost of providing electricity to customers. With a two-part rate - a lower energy rate close to the utilities` true marginal cost and a fixed charge that makes up the required difference in present revenue requirements - utilities can make both their stockholders and ratepayers better off. But the window of opportunity to do this is closing. Traditional electricity rates in many parts of the U.S., particularly for residential and small commercial customers, are characterized by kilowatt hour charges that are far above the individual utility`s marginal cost. In a competitive electricity industry, price will be driven down to marginal cost. The difference between a utility`s current rates (based on embedded cost) and the competitive rate (based on marginal cost) is the dreaded stranded cost. Since the threat of stranded costs has reared its head, many proposals have been put forth on how to mitigate and collect stranded costs, including cost-reduction strategies, accelerated depreciation of stranded assets and proposals for recovering all or a portion of stranded costs from customers through exit fees, transmission and distribution charges and other methods. But as far as the authors know, there has been little, if any, discussion of how restructuring rates can help to reduce and to collect stranded costs. Here the authors propose a simple yet radical restructuring of electricity rates that not only reduces stranded costs significantly but also creates value for the company on its own, whether the electricity industry moves to a more competitive structure or not.

• OSTI ID: 376989
• Journal Information: Electricity Journal, Journal Name: Electricity Journal Journal Issue: 10 Vol. 8; ISSN ELEJE4; ISSN 1040-6190
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
COST RECOVERY
DEREGULATION
ELECTRIC POWER INDUSTRY
RATE STRUCTURE
REGULATIONS