Methods to estimate stranded commitments for a restructuring US electricity industry

Estimates of stranded commitments for US investor-owned electric utilities range widely, from as little as $20 billion to as much as $500 billion (more than double the shareholder equity in US utilities). These potential losses are a consequence of the above-market book values for some utility-owned power plants, long-term power-purchase contracts, deferred income taxes, regulatory assets, and public-policy programs. Because of the wide range of estimates and the potentially large dollar amounts involved, state and federal regulators need a clear understanding of the methods used to calculate these estimates. In addition, they may want simple methods that they can use to check the reasonableness of the estimates that utilities and other parties present in regulatory proceedings. This report explains various top-down and bottom-up methods to calculate stranded commitments. The purpose of this analysis is to help regulators and others understand the implications of different analytical approaches to estimating stranded-commitment amounts. Top-down methods, because they use the utility as the unit of analysis, are simple to apply and to understand. However, their aggregate nature makes it difficult to determine what specific assets and liabilities affect their estimates. Bottom-up methods use the individual asset (e.g., power plant) or liability (e.g., power-purchase contract, fuel-supply contract, and deferred income taxes) as the unit of analysis. These methods have substantial data and computational requirements.