Stranded Costs and Competitive Forces in the Electric Utility Industry

It is likely that deregulation of the electric utility industry will force high-cost electric utilities to write off the “stranded” cost of plant and equipment that would be rendered obsolete in a competitive marketplace. In this paper, we examine the financial statement analysis implications of ongoing deregulation. Based on 1993 data for a sample of 111 large investor-owned electric utilities, our analyses suggest that it is possible to use financial statement data to form estimates of these potentially stranded costs. In addition, we find that recent trends toward deregulation are associated with an increase in the significance of the firm's cost structure in explaining the relation between market values and book values of equity.