A stranded cost refers to the amount invested in an asset that exceeds the market value of that asset. Stranded costs often arise during restructuring of energy markets when utility assets built under prior regulatory rules (but not yet fully depreciated) are no longer economic under the new market structure. An example is a high-priced power plant that will no longer run once lower-cost merchant power comes into a restructured marketplace.
Utility shareholders will argue that the above-market costs should be paid by consumers since the unit was initially built under the assumption that the utility was responsible for serving all loads in its territory. Companies attempting to compete with utilities will argue that providing full cost coverage for stranded assets makes it impossible for competitors to compete effectively and thus deprives consumers of the benefits of competition. In this case, a key job for regulators is to accurately identify stranded costs and then collect them in a manner that is fair to utility shareholders but does not impede the development of a competitive market.
Other examples of stranded costs include: