Stranded costs and exit fees

The New Brunswick Market Design Committee has been directed to examine the issue of stranded costs since it is a major component of restructuring within the electricity sector. When regulated monopolies are faced with competition, they could find that some of their embedded costs cannot be recovered. These costs are referred to as stranded costs. Common sources include large capital investments in uneconomic plants or expensive power purchase contracts or fuel supply contracts. In general, stranded costs do not include gains or losses associated with normal business risks experienced by regulated utilities. This report presents recommendations for mitigation of stranded costs, valuation methodologies and cost-recovery mechanisms. It also presents a summary of experience with stranded costs in other jurisdictions such as California, Rhode Island, Pennsylvania and Ontario. Stranded costs are often recovered through an obligatory charge on all customers, particularly in jurisdictions where retail competition exists. In the New Brunswick market, however, the only customers who can create stranded costs are those eligible to choose their own suppliers. It is argued that since most customers will not have a choice of electricity suppliers, they cannot generate stranded costs and therefore, should not have to pay costs stranded by others. A method to quantify stranded costs is presented, along with a review of transmission-related stranded costs in New Brunswick. Expansion of self-generation in New Brunswick could strand transmission assets. Currently, self-generators only contribute a small amount to fixed charges of the transmission system. However, under new recommended tariffs, the amount could increase. It is likely that the net amount of stranded transmission costs will not be large. 2 refs., 1 fig