The cost of capital does not compensate for stranded-cost risk

Journal Article · Mon May 15 00:00:00 EDT 1995 · Fortnightly

OSTI ID:96074

Kolbe, A L; Tye, W B ^[1]

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1. Brattle/IRI, Cambridge, MA (United States)

Electric utilities now face the risk that existing assets, costs, or contract commitments may be {open_quotes}stranded{close_quotes} by increased competition, leaving shareholders rather than customers to bear the costs. Have shareholders already been compensated for this risk? Some argue that shareholders have automatically been compensated for this risk by an allowed rate of return equal to the cost of equity capital determined in efficient capital markets. If so, forcing shareholders to bear stranded costs may seem fair. However, this argument does not stand up to scrutiny, because the cost of capital by definition does not include such compensation.

• OSTI ID: 96074
• Journal Information: Fortnightly, Journal Name: Fortnightly Journal Issue: 10 Vol. 133; ISSN FRTNE8
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
CAPITALIZED COST
COMPETITION
COST RECOVERY
ELECTRIC POWER INDUSTRY
ELECTRIC UTILITIES