Transition Losses in the Electric Power Market: A Challenge to the Premises Underlying the Arguments for Compensation

In this Article, Professor Lois R. Lupica examines whether the electric utility industry, currently j.n the midst of deregulation, ought to sustain the resulting transition losses. Due to the signifi· cant modification of legal rules affecting the electric power market and changes in regulatory policy, the utilities currently have expenditures and expectations that are unrecoverable in a competitive market. In recent years, momentum has moved in the direction of compensating the electric utilities and their investors for these losses. Professor Lupica challenges the arguments for transition loBS recovery and ultimately concludes that the doctrinal premises in support oftransition loss recovery are flawed. The Article begins by examining the history of the electric power market and continues by addressing the central arguments in favor oftransition loss recovery. Proponents oftransition loss recovery argue that investors will suffer losses as a result ofa change in market dynamics or legal rules, and because the changes were not foreseeable, investors should be insulated from these resulting losses. Advocates of transition loss recovery further perceive the regulatory environment as contract-based, and thus argue that the modification ofthe market\u27s legal rules constitutes a breach ofcontract. Finally, some advocates claim that changes in legal rules and the resulting transition losses is a taking of property under the Fifth Amendment. Professor Lupica addresses each of these arguments and contends that the premises underlying these arguments are faulty. She further argues that transition losses are not unique to this context, and that, in addition to acknowledging the doctrinal challenges to recovery advocates\u27 arguments, policy makers must evaluate transition loss recovery as an issue of fundamental fairness to utility consumers