Stranded costs: So what's the worry?

This article is not concerned with the pros and cons of transforming a no-entry market into a market with unrestricted entry. The concern, instead, is with establishing the economic conditions under which stranded costs afflict the incumbents in a no-entry market undergoing a transformation to a market with unrestricted entry. What matters is an incumbent's cost structure in comparison to an entrant's cost structure. Section 1 presents a general model for a restructured electricity industry. Section 2 provides the 2 x 2 x 2 version of the model in which an incumbent and an entrant compete for the business of two customers. The intermediate bottleneck services are supplied by a regulated monopolist that does not behave anticompetitively in an effort to favor the incumbent. Section 3 contains the graphical analysis of the 2 x 2 x 2 model that is restricted to economic activity in a competitive generation market. Section 4 discusses the results of the graphical analysis that are pertinent to regulatory authorities. Section 5 sets out the conclusions derived from the analysis