The economics of stranded investment - a two-way street
In the transition to deregulation, the risk, costs and benefits of utility assets are transferred from the customer to the investor, creating potential stranded benefits as well as stranded costs. Investors may be better or worse off depending on whether an asset`s cost is below or above market. Regulators can minimize unintended wealth transfers by compensating each potential loser in the transition. The amount of investment stranded - i.e., the portion of plant that is above market value - does seem to be a murky issue. This article sets a framework for evaluating stranded investment and traces the possible welfare effects of different policies to address it. It defines {open_quote}stranded costs,{close_quote} {open_quote}stranded investment,{close_quote} and {open_quote}stranded benefits.{close_quote} It addresses their interrelationship, and shows that the redefinition of property rights during the transition to a competitive market is what leads to stranded investment. The elimination of the utility`s exclusive franchise - i.e., its obligation to serve and customers` obligation to pay - leads to the redefinition of those property rights as they pertain to the costs, benefits and risks associated with existing utility generation. Finally, the authors address the possible welfare implications from this transition.
- OSTI ID:
- 456946
- Journal Information:
- Electricity Journal, Vol. 8, Issue 9; Other Information: PBD: Nov 1995
- Country of Publication:
- United States
- Language:
- English
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