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

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  • Brennan, Timothy J.
  • Boyd, James

Abstract

This paper explores ways in which 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. The paper begins with a description of the stranded cost problem, its magnitude, and the prominent arguments for and against recovery. We then turn to an analysis of contracts in order to understand whether there is, or should be, a legal duty to compensate utility shareholders for unrecovered costs. The paper also argues that efficient approaches to electricity deregulation will rely on more than an analysis of contracts. In particular, the politics of deregulation should be viewed as an independent constraint that affects the desirability of alternative approaches to stranded costs.

Suggested Citation

  • Brennan, Timothy J. & Boyd, James, 1996. "Stranded Costs, Takings, and the Law and Economics of Implicit Contracts," Discussion Papers 10688, Resources for the Future.
    • Handle: RePEc:ags:rffdps:10688
    DOI: 10.22004/ag.econ.10688
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    Cited by:

    1. Brennan, Timothy J. & Palmer, Karen L. & Martinez, Salvador A., 2001. "Implementing Electricity Restructuring: Policies, Potholes, and Prospects," Discussion Papers 10508, Resources for the Future.
    2. 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.
    3. 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.
    4. 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.
    5. Brennan, Tim, 2023. "The Persistence of Volumetric Pricing," RFF Working Paper Series 23-40, Resources for the Future.
    6. 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.
    7. 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.
    8. 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.
    9. Simshauser, Paul, 2017. "Monopoly regulation, discontinuity & stranded assets," Energy Economics, Elsevier, vol. 66(C), pages 384-398.
    10. Michele Moretto & Paola Valbonesi, 2004. "Opting-out in profit-sharing regulation," Industrial Organization 0403001, University Library of Munich, Germany.
    11. Timothy Brennan, 2010. "Decoupling in electric utilities," Journal of Regulatory Economics, Springer, vol. 38(1), pages 49-69, August.
    12. Christopher Decker, 2016. "Regulating networks in decline," Journal of Regulatory Economics, Springer, vol. 49(3), pages 344-370, June.
    13. 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.
    14. 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).
    15. Cowhey, Peter & Klimenko, Mikhail M., 2001. "The WTO agreement and telecommunications policy reform," Policy Research Working Paper Series 2601, The World Bank.

    More about this item

    Keywords

    Resource /Energy Economics and Policy;

    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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