Using markets to value stranded costs

Electricity Journal

Volumn 9, Issue 8, 1996, Pages 66-74

  Lesser, Jonathan ^a   Ainspan, Malcolm ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

COMPETITIVE MARKETS; MARKET MECHANISMS; MARKET VALUES; REGULATORY MECHANISM;

COMMERCE;

EID: 0002706793     PISSN: 10406190     EISSN: None     Source Type: Journal    
DOI: 10.1016/S1040-6190(96)80436-2     Document Type: Article

References (14)

1. For an explanation of why full recovery is consistent with a competitive generation market, see Joskow P. Does Stranded Cost Recovery Distort Competition? ELEC. J. April 1996;31.
2. There is some uncertainty as to what happens during the "transition" period, which we define as beginning with the onset of retail competition and ending when stranded-cost recovery either is complete or no longer allowed. We argue that, if there is no retail competition, there are no stranded costs, since utility customers remain "captive."
3. For example, in Great Britain there is concern that regulators may be basing their oversight of privatized telephone, natural gas, and electric utilities on political considerations. Making Merry. http://www.economist.com Internet Edition THE ECONOMIST. Aug. 24, 1996; Additional competitive distortions will be introduced should different states' regulators select different market price proxies. It may be that a single generating asset with multiple owners spanning different states will face a variety of stranded cost estimates, opening up possibilities for gaming and arbitrage.
4. This is different from New England Electric's "Choice: New England" restructuring proposal, which defines stranded generating costs as those assets' fixed costs.
5. The buyer's bid will include provisions for "normal" profits, or a return consistent with the non-diversifiable risk associated with the project.
6. McMillan John. Selling Spectrum Rights. J. ECON. PERSPECTIVES. Summer 1994;145-162.
7. See also Preston McAffee R., McMillan John. Analyzing the Airwaves Auction. J. ECON. PERSPECTIVES. Winter 1996;159-175.
8. A brief summary of the FCC auction results is contained in the "Auction Fact Sheet" published on the FCC's World Wide Web site: http://www.fcc.gov/wtb/aucfct.
9. At this time, we do not know the specific ownership caps that should be imposed, though we anticipate these caps would involve both overall regional, and geographical restrictions, while recognizing any economies resulting from aggregation of bids on generators and possibilities for demand side-bidding.
10. Note that an auction of generation assets is not equivalent to divestiture. As we envision an auction, there should be no restrictions on current owners being allowed to bid on their generation assets, subject to the aforementioned caps to address market power concerns.
11. Regulators probably care less if market prices fall unexpectedly, perhaps because of technological breakthroughs, resulting in windfalls for consumers and losses for the new owners of existing generating assets.
12. Obviously, risk-averse bidders would also consider the overall probability distribution of net present value in deciding on a bid price, not just the expected value.
13. Salant David. CARRIER OF LAST RESORT SALES. Apr. 1, 1996;Charles River Associates, Cambridge, Massachusetts.
14. For a summary, see Winston Clifford. Economic Deregulation: Days of Reckoning for Microeconomists. J. ECON. LIT. 31:Sept. 1993;1263-1289.