Stranded Assets: This Time is Different
Reinhart and Rogoff subtitled This Time is Different to describe “Eight Centuries of Financial Folly” and the durability of hope over experience. Material changes in relative market economics for long-lived assets create the problem of stranded assets. Wise investors look ahead to avoid or insure against such losses, but sophisticated investors have been surprised in the past. For energy, the regulatory compact implies symmetry under cost-based regulation, but the record presents a history of prominent challenges. Before electricity, natural gas restructuring found interstate pipelines with out-of-market take-or-pay costs estimated at the time at 40% of their book value. The FERC settlement process applied rough justice to the painful allocation between pipelines and their regulated customers. In electricity restructuring, the early days were dominated by stranded assets, and policy discussions were distorted for years by the implications for who would pay for stranded assets. Questions remain regarding short- and long-term effects. Today’s clean energy agenda is changing the mix of assets in ever more profound ways, shifting toward a more capital-intensive industry. Developers of new projects, and state politicians who favor them, argue that long-term contracts or rate-base arrangements, that shift stranded-cost risk to consumers, will mean lower costs of financing and an assurance that the projects will be constructed. How does one weigh those benefits against the risk that consumers will pay for something that long before the contract has ended is well out-of-the-money? Stranded assets that have been the focus of attention will likely grow, and it would take historic optimism to assume that new stranded assets will not appear across all sectors of the electricity system. What is being done now to deal with existing stranded assets? Will out-of-market costs become a bigger problem in the future? What is the split of responsibility between private investors and regulators representing regulated customers? Given the prominence of stranded assets in the past, are we hoping that this time is different?