Stranded costs in the electricity sector
AbstractThis paper discusses the stranded cost concept. Stranded costs have to do with the transition from a regulated to a more competitive market. The aim of the paper is threefold. First, the paper discusses the place of the stranded cost concept in the variety of costs concepts encountered in the economic literature. In order to come to a proper description of stranded costs, we first define a new concept, i.e. strandable costs. These are the fixed or sunk costs to be paid by the incumbents that have been imposed by the regulator. Strandable costs become stranded when they cannot be recovered through the market after the introduction of competition. Second, we argue on the basis of a simple graphical analysis that from the point of view of economic efficiency, there is no need to allow for stranded cost recovery. Third, this view is illustrated with some numerical simulations, based on the Belgian electricity sector. These simulations suggest that, according to the assumptions and to the definition of stranded costs in our model, there will be no stranded costs for the Belgian electricity producers. A fortiori , the conclusion is that there is no need to allow for stranded cost recovery. However, the simulations go one step further and assume that for one reason or another strandable cost recovery is allowed through a tax on electricity transmission.
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Bibliographic InfoPaper provided by Katholieke Universiteit Leuven in its series Open Access publications from Katholieke Universiteit Leuven with number urn:hdl:123456789/119767.
Date of creation: 2000
Date of revision:
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Web page: http://www.kuleuven.be
Cost; Costs; Sector; Working;
Other versions of this item:
- Guido Pepermans & Stef Proost, 2000. "Stranded costs in the electricity sector," Energy, Transport and Environment Working Papers Series ete0007, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- James Boyd, 1998.
"The "Regulatory Compact" and Implicit Contracts: Should Stranded Costs be Recoverable?,"
The Energy Journal,
International Association for Energy Economics, vol. 0(Number 3), pages 69-83.
- Boyd, James, 1996. "The "Regulatory Compact" and Implicit Contracts: Should Stranded Costs Be Recoverable?," Discussion Papers dp-97-01, Resources For the Future.
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