Definitions for "Stranded Cost"
Difference between the market value of generating assets and the amount of the debt still own on them. If the utility must drop its rates to meet the deregulated competition, revenue may not be adequate to cover the debt and the operating costs of the facility. The amount of debt uncovered is the stranded cost.
costs that were incurred by utilities to serve their customers with the understanding that state regulatory commissions would allow the costs to be recovered through electric rates. Stranded costs can occur either because particular customers discontinue their use of a service or because such customers are no longer willing to pay the full costs incurred to provide a service. Potentially stranded costs are the result of decisions that were reviewed and approved by government regulators and were made by utilities under the unique regulatory compact with their state and their customers.
Under monopoly regulation, utilities recover the costs of their prudent investments. In a competitive market, prices are market determined and a participant might not recover all of its investment. In transitioning from a regulated monopoly industry to a competitive model, the net utility investment that is above market is said to have been "stranded" (e.g. unrecoverable from ratepayers in a market economy). Because the electric utility industry is highly capital intensive, recovery of these costs is a central issue. Assignment of costs (ratepayers versus shareholders), jurisdiction over costs (state versus federal), and recovery method are core concerns.