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Stranded Costs, Takings, and the Law and Economics of Implicit Constracts

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  • Brennan, Timothy J
  • Boyd, James

Abstract

Economic Analysis can help resolve the stranded cost controversy that has arisen in debates over electricity market deregulation. "Stranded costs" are costs electric utilities will not recover as power markets move from protected monopolies to an open, competitive environment. We describe the stranded cost problem, its magnitude and the prominent arguments for and against recovery. An economic analysis of implicit contracts can clarify whether there should be a legal duty to compensate utility shareholders for unrecovered costs. However, efficient approaches to electricity deregulation should rely on more than analysis of contracts. The politics of deregulation, as reflected in optimal compensation for regulatory "takings" of property, also affects the desirability of stranded cost recovery. Copyright 1997 by Kluwer Academic Publishers

Suggested Citation

  • Brennan, Timothy J & Boyd, James, 1997. "Stranded Costs, Takings, and the Law and Economics of Implicit Constracts," Journal of Regulatory Economics, Springer, vol. 11(1), pages 41-54, January.
    • Handle: RePEc:kap:regeco:v:11:y:1997:i:1:p:41-54
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    Cited by:

    1. Michele Moretto & Paola Valbonesi, 2004. "Opting-out in profit-sharing regulation," Industrial Organization 0403001, University Library of Munich, Germany.
    2. Brennan, Timothy J. & Palmer, Karen L. & Martinez, Salvador A., 2001. "Implementing Electricity Restructuring: Policies, Potholes, and Prospects," Discussion Papers 10508, Resources for the Future.
    3. Brennan, Timothy J., 2008. "“Night of the Living Dead” or “Back to the Future”? Electric Utility Decoupling, Reviving Rate-of-Return Regulation, and Energy Efficiency," RFF Working Paper Series dp-08-27, Resources for the Future.
    4. Simshauser, Paul & Akimov, Alexandr, 2019. "Regulated electricity networks, investment mistakes in retrospect and stranded assets under uncertainty," Energy Economics, Elsevier, vol. 81(C), pages 117-133.
    5. Berry, S. Keith, 2002. "Generation search costs and Ramsey pricing in a partially deregulated electric utility industry," Journal of Economics and Business, Elsevier, vol. 54(3), pages 331-343.
    6. Lin, Jiang & Kahrl, Fredrich & Yuan, Jiahai & Liu, Xu & Zhang, Weirong, 2019. "Challenges and strategies for electricity market transition in China," Energy Policy, Elsevier, vol. 133(C).
    7. Timothy Brennan, 2010. "Decoupling in electric utilities," Journal of Regulatory Economics, Springer, vol. 38(1), pages 49-69, August.
    8. Timothy J. Brennan & James Boyd, 2006. "Political Economy And The Efficiency Of Compensation For Takings," Contemporary Economic Policy, Western Economic Association International, vol. 24(1), pages 188-202, January.
    9. Brennan, Tim, 2023. "The Persistence of Volumetric Pricing," RFF Working Paper Series 23-40, Resources for the Future.
    10. Cowhey, Peter & Klimenko, Mikhail M., 2001. "The WTO agreement and telecommunications policy reform," Policy Research Working Paper Series 2601, The World Bank.
    11. Brennan, Timothy, 2000. "The Economics of Competition Policy: Recent Developments and Cautionary Notes in Antitrust and Regulation," RFF Working Paper Series dp-00-07, Resources for the Future.
    12. Christopher Decker, 2016. "Regulating networks in decline," Journal of Regulatory Economics, Springer, vol. 49(3), pages 344-370, June.
    13. Peter Cowhey & Mikhail M. Klimenko, 2000. "Telecommunications reform in developing countries after the WTO agreement on basic telecommunications services," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(2), pages 265-281.
    14. Beard, T. Randolph & Kaserman, David L. & Mayo, John W., 2003. "Regulation, competition, and the optimal recovery of stranded costs," International Journal of Industrial Organization, Elsevier, vol. 21(6), pages 831-848, June.
    15. Simshauser, Paul, 2017. "Monopoly regulation, discontinuity & stranded assets," Energy Economics, Elsevier, vol. 66(C), pages 384-398.

    More about this item

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L68 - Industrial Organization - - Industry Studies: Manufacturing - - - Appliances; Furniture; Other Consumer Durables

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