The utilities fight back — and they have a point.
By the early 1990s, the case for competitive electricity markets was gaining momentum. Independent generators had proven they could build and operate power plants efficiently. Large industrial customers — who consumed enormous quantities of power and had the legal staff to navigate regulatory proceedings — were lobbying hard for the right to choose their supplier.
But utilities had a problem. Over the previous two decades, they had spent hundreds of billions of dollars on power plants — many of them nuclear — at the explicit direction of regulators, who had approved those investments as "prudent and necessary." Now, with natural gas prices low and independent generators offering cheap power, those investments were worth far less than their book value. The utilities' problem had a name: stranded costs.
The stranded cost debate was fundamentally a question about who should bear the losses from a policy change. Utilities argued that they had made investments in good faith under the regulatory compact — the promise that if they served all customers at regulated rates, they would be allowed to earn a fair return on their prudent investments. If deregulation destroyed the value of those investments, the utilities shouldn't have to eat the losses. Ratepayers — who had benefited from the regulated system — should pay.
Consumer advocates argued the opposite. Why should customers pay for overpriced nuclear plants that the utility had insisted on building over their objections? If deregulation meant competition and lower prices, why should those savings be clawed back to compensate utilities for uneconomic investments?
The debate was fierce, legalistic, and politically explosive. Different states reached different conclusions. California initially agreed to pay utilities substantial "transition charges" to compensate for stranded costs. Others were less generous.
The stranded cost battle was ultimately about whether deregulation would happen at all. It nearly derailed the movement multiple times. Utilities with large unrecovered nuclear investments — Northeast Utilities in New England, Pacific Gas & Electric in California, GPU Nuclear in Pennsylvania — had powerful incentives to slow or stop restructuring.
But the political momentum for competition was too strong. Large industrial customers, independent generators, and a growing consensus among economists all pushed for markets. FERC was watching these state-level experiments and preparing something much larger: a federal framework for open transmission access that would make the stranded cost debates moot by changing the entire structure of the industry.
Sacramento, September 23, 1996. California's electricity restructuring law, Assembly Bill 1890, solved a problem that had blocked deregulation in every other state: how to compensate utilities for investments made under the old rules that would lose value under competition. The legislature created the "Competition Transition Charge" — a non-bypassable surcharge on every retail electricity customer in the state. PG&E estimated its uneconomic assets at more than $8 billion, primarily nuclear plants and above-market QF contracts; the other major utilities carried comparable burdens. The CTC was the price of political agreement: utilities consented to restructuring only after being guaranteed that ratepayers would fund the transition. For California consumers, it meant paying for the old regime and the new one simultaneously during the four-year rate freeze — a burden that would grow heavier still when the market collapsed in 2000.
California LAO — Proposition 9, November 1998 (stranded cost background) Energyonline — "Restructuring in California: Costs of Transition and Stranded Assets"