|M.Sc Thesis||Department of Industrial Engineering and Management|
|Supervisor:||Assoc. Prof. Bental Benjamin|
In recent years, electricity markets around the world are facing a massive process of restructuring. Similar to other industries, such as the telecommunication or the railway industries in the US, electricity markets, which have been based on regulated monopolies, are becoming increasingly competitive.
An important result of the introduction of competition to the electricity markets is that some investments that were carried out in the regulated environment under the assumption that they would be recovered through future prices, are not recoverable under price competition. Such investments are called “stranded investments” or “stranded costs”.
The emergence of the stranded costs problem in the late nineties brought about a wide debate for and against stranded costs compensation. The paper reviews the arguments in this debate, and attempts to determine whether the debate’s resolution has economic implications or if it is just a matter of income redistribution.
The paper presents a thought-experiment which shows that the resolution of the stranded costs issue depends, to a large extent, on whether the regime change has been expected, and on the implicit contract that has existed in the regulatory period between the government and the utilities. Some evidence is presented that shows that markets have taken into account the risk of the regime change, and awarded the utilities’ owners above-normal returns. Under these circumstances, no ex-post compensation is required.