With no need for new capital, utilities have lost political pressure, exposing the regulatory compact as an illusion.Recovery of stranded investment today marks the central issue in the debate over electric utility competition. Unfortunately, the utility argument in favor of recovery is flawed. It assumes that utilities invest in plant to meet a public need; that a regulatory compact guarantees cost recovery; that the public must acquiesce. But consider the circumstances that prevailed when the utilities took on the investments now deemed at risk for stranding. Those circumstances suggest no such public need. Moreover, the idea of a regulatory compact presents a self-serving view. It does not square with the hard realities of ratemaking politics. The utilities stand on weak ground.Investment at Risk
In general, only the newest and most expensive plants face exposure to stranding, in part because cost-of-service ratemaking loads capital costs at the front end. The capital cost included in rates is derived by multiplying a plant's undepreciated cost by an allowed return. Since a plant's undepreciated cost declines to zero over its life, so do the capital costs included in rates. All else equal, new plants will carry higher capital costs for ratemaking purposes than old plants.