Electric utility deregulation: The case of stranded costs.

Abstract

My dissertation focuses on electric utility deregulation and certain costs that may become unrecoverable (stranded) in a deregulated market. Recent federal and state deregulation has increased competition in the electricity generation industry. As a result, certain investments in plant and equipment have been rendered noncompetitive or obsolete, and certain deferred expenses may not provide future benefits. These "above-market" costs generally referred to as stranded costs, may have very low market value relative to their book value. The market's perception of the recoverability of stranded costs may affect the relation between market value and book value. This study examines the relation between market value and book value over time, and investigates the determinants of a utility's discretionary choice to write-off stranded costs. I compare the market value-book value relation during the post-regulatory period to the regulatory period, and test whether stranded costs help explain any observed differences over time. Also, I test whether various utility specific factors and other factors are determinants of a utility's discretionary choice to write-off stranded costs. This study documents the affect of deregulation on the market value-book value relation. Additionally, this study provides evidence on timeliness and accuracy in accounting for impairment of long-lived assets, and it identifies factors that may influence the discretionary choice to write-off stranded costs.