Transmission Pricing and Stranded Costs in the Electric Power Industry
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Stranded costs are those costs that electric utilities currently permitted to recover through their rates but whose recovery may be impeded or prevented by the advent of competition in the industry. Estimates of those costs run from the tens to the hundreds of billions of dollars. Should regulators permit utilities to recover stranded costs while they take steps to promote competition in the electric power industry? William J. Baumol and J. Gregory Sidak argue that on both efficiency and equity grounds the answer to that question should be yes.
The authors show that a transmission price, the price for sending electricity over the transmission grid, can be determined in a manner that is compatible with economic efficiency and clearly neutral in its effects upon all competitors in electricity generation. A correctly constructed regime of transmission pricing may in fact achieve the efficiency and equity goals that justify the recovery of stranded costs.
J. Gregory Sidak is the F. K. Weyerhaeuser Fellow at AEI and a senior lecturer at the Yale School of Management.
William J. Baumol is the director of the C. V. Starr Center for Applied Economics at New York University and the Joseph Douglas Green 1895 Professor Emeritus of Economics and senior research economist at Princeton University.
