Estimating Potential Stranded Commitments for U.S. Investor-Owned Electric Utilities

New technologies, low natural gas prices, and federal and state utility regulations are restructuring the electricity industry. Yesterday's vertically integrated utility with a retail monopoly franchise may be a very different organization in a few years. Conferences, regulatory-commission hearings, and other industry fora are dominated by debates over the extent and form of utility deintegration, wholesale competition, and retail wheeling. A key obstacle to restructuring the electricity industry is stranded commitments. Past investments, power-purchase contracts, and public-policy-driven programs that made sense in an era of cost-of-service regulation may not be cost-effective in a competitive power market. Regulators, utilities, and other parties face tough decisions concerning the mitigation and allocation of these stranded commitments. We developed and applied a simple method to calculate the amount of stranded commitments facing U.S. investor-owned electric utilities. The results obtained with this method depend strongly on a few key assumptions: (1) the fraction of utility sales that is at risk with respect to competition, (2) the market price of electric generation, and (3) the number of years during which the utility would lose money because of differences between its embedded cost of production and the market price.