Transition costs: Estimation, sensitivities, and recovery

The pro-competitive, deregulatory forces sweeping the electricity industry could cost electric-utility shareholders $100–200 billion in transition costs. These potential losses reflect the difference between regulated prices for electricity generation and the prices that might occur in a fully competitive power market. This paper discusses alternative ways to calculate transition costs, focusing on differences between aggregate (top-down) vs. disaggregate (bottom-up) methods to calculate these losses. The paper also discusses the relative importance of different factors that determine transition-cost amounts and the strategies that utilities and their regulators can use to address these potential losses.