NCPA - National Center for Policy Analysis

Utilities' Asset Sales Offset Stranded Costs

April 10, 2000

As the states are introducing retail competition in electric power, utilities want compensation for their investment in power plants that they cannot recoup under free market competition (called "stranded costs"). Compensation is usually made through a special charge on all electric customers' bills. The U.S. Department of Energy's Energy Information Administration estimates stranded costs could range from $70 billion to $170 billion.

However, an NCPA study by economist Vernon Smith concluded that if the electric power industry were restructured -- with utilities selling off their power generating facilities -- the market might place a greater value on generating or transmission assets than utilities themselves, and thus the profit from those sales could be used to offset stranded costs.

It turns out that as utilities have sold off generating plants in preparation for competition, utilities have found that their assets are indeed worth more in a free market than they previously thought.

  • According to Stone & Webster's Utility Asset Database, about 76,500 megawatts (MW) of utility capacity were sold from August 1997 to November 1999 (these figures exclude capacity sold by nonutility generators).
  • Generating assets have been auctioned off for two to three or more times their value as shown on the company's account books.
  • Thus, for example, primarily due to the above-book-value price it received for its power plants, California's San Diego Gas & Electric paid off its stranded costs last July and reduced basic electric rates 2 and 1/2 years ahead of schedule.

Studies have shown that consumers could save from $20 billion to $50 billion annually from competition in the electric power industry. That cost saving will come sooner as stranded costs are retired earlier than projected, allowing electricity prices to fall in deregulated, competitive markets.

Source: "Power For Sale," Brief Analysis No. 320, April 10, 2000, National Center for Policy Analysis.


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