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The "Regulatory Compact" and Implicit Contracts: Should Stranded Costs Be Recoverable?

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  • Boyd, James

    (Resources for the Future)

Abstract

Progress toward electricity market deregulation has brought controversy over whether or not utilities are entitled to compensation for "stranded costs," i.e., costs utilities will not be able to recover due to the advent of competition in their markets. This paper uses a legal and economic analysis of contracts to address the desirability of utility cost recovery. First, underlying principles of law are reviewed to determine whether or not there is a legal presumption of recovery. Then, the analysis considers whether or not an implicit "regulatory compact" between utilities and regulators follows from principles in the economic analysis of law, particularly theories of efficient breach and implicit contracts. The paper concludes that recovery should occur in only a proscribed set of circumstances and that, when called for, compensation should be partial, rather than full.

Suggested Citation

  • Boyd, James, 1996. "The "Regulatory Compact" and Implicit Contracts: Should Stranded Costs Be Recoverable?," RFF Working Paper Series dp-97-01, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-97-01
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    Cited by:

    1. Timothy J. Brennan & James Boyd, 2006. "Political Economy And The Efficiency Of Compensation For Takings," Contemporary Economic Policy, Western Economic Association International, vol. 24(1), pages 188-202, January.
    2. Simshauser, Paul & Akimov, Alexandr, 2019. "Regulated electricity networks, investment mistakes in retrospect and stranded assets under uncertainty," Energy Economics, Elsevier, vol. 81(C), pages 117-133.
    3. Simshauser, Paul, 2017. "Monopoly regulation, discontinuity & stranded assets," Energy Economics, Elsevier, vol. 66(C), pages 384-398.
    4. Loredo, Enrique & Suarez, Eugenia, 2000. "The governance of transactions: Joskow's coal-burning generating plants example revisited," Energy Policy, Elsevier, vol. 28(2), pages 107-114, February.

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    JEL classification:

    • F0 - International Economics - - General

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