Methods to estimate electric-utility transition costs

Estimates of transition costs for U.S. investor-owned electric utilities range from $20 to $500 billion. These potential losses are a consequence of the above-market book values for some utility-owned power plants and long-term power-purchase contracts, as well as deferred income taxes, regulatory assets, and public-policy programs. Because of the wide range of estimates and the potentially large dollar amounts involved, state and federal regulators need a clear understanding of the methods used to calculate these estimates. In addition, they may want simple methods that they can use to check the reasonableness of the estimates that utilities and other parties present in regulatory proceedings. This paper explains various methods to calculate transition costs. Top-down methods, because they use the utility as the unit of analysis, are simple to apply and to understand. However, their aggregate nature makes it difficult to determine what specific assets and liabilities affect their estimates. Bottom-up methods use the individual asset (e.g. power plant) or liability (e.g. power-purchase contract) as the unit of analysis. These methods have substantial data and computational requirements.