Legacy contractual and commercial arrangements
All legacy contractual arrangements should continue to be honored, though the benefits and obligations will be transferred from the former vertically integrated utility to the newly formed entities.
As markets evolve, however, it is often the case that pre-existing contracts may be silent on important issues that may arise. For example, contracts may be vague about delivery points, fail to specify whether ancillary services are included in the sale, or have limited treatment of force majeure issues.
The newly formed entities to which these legacy contracts are allocated will need to be prepared to have discussions on contract addendums or modifications to address new issues that arise during the unbundling process.
Stranded costs
Stranded costs arise during the process of electricity sector unbundling when market participants are able to obtain power at a lower cost from the market or new assets than they can by paying the full cost of existing assets. The difference between the market value of the existing assets and their remaining book value can be referred to as a “stranded cost.”
It is important to note that any divestiture that requires the incumbent utility to sell segments of its portfolio will carry stranded cost risks. Conversely, some utility assets may be more valuable than is reflected in the corporate accounts; during a sales process, proceeds above book value for some assets may off set negative valuations for others.
Thus, an appropriate methodology for how to fairly assess, compensate and allocate any arising stranded cost risks must be considered when making transitional arrangements.