Paper short abstract:

Stranded-Cost Securitization was developed as a way of compensating electric utilities whose assets were rendered worthless by the introduction of markets. An examination of this financial innovation shows how the requirements of assetization impose a limit on governmental authority.

Paper long abstract:

When electricity markets are deregulated, some power plants that were guaranteed recovery of costs under regulation are no longer economically viable. They are designated by the evocative term "stranded costs." This paper traces the struggle to assign responsibility for stranded costs in the US during the massive introduction of electricity markets in the late 1990s.

The dominant technique for constructing a working resolution among these conflicting interests is through the securitization of stranded cost obligations. As an outcome of a bargaining process among a range of actors, governments legislate a transition charge, to be paid by all electricity customers, which will cover the estimated stranded costs amortized over a period of several years. The utility originates an asset, a property right to the stream of future transition charge revenues, which is then sold on the Asset-Backed Securities market.

In other cases of securitization, such as mortgages, debtors receive something of value in return for their payments, such as home equity. But in the case of stranded assets, the electricity customer is compensating the utility for a worthless asset. There is nothing but the legislated obligation to induce them to pay the transition charge. Therefore, for the newly defined assets to retain their value, government must legislate an irrevocable obligation from customers. This creates an anomaly for democratic governance, in which future legislators, and their constituents, are prevented from modifying the policies of their predecessors. In effect, the value of an asset is assured by enacting a limit on governmental authority.