Stranded Costs

Stranded Costs are costs that the operator has properly incurred and that the operator does not have a reasonable opportunity to recover given the introduction of competition or some other (unanticipated) policy change (eg. new environmental regulations that shut down a generating facility). Stranded costs are calculated as the difference between sunk costs (usually book values) and the present value of expected operating earnings from those sunk assets. Thus, stranded costs represent lost revenues or reductions in asset values experienced by a regulated firm when new policies alter a well-defined regulatory contract. The utility will seek to recover those costs from remaining customers in the new policy environment. See stranded assets.