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The issue of possibly unrecoverable cost incurred by a utility, or `stranded costs,` has emerged as a major obstacle to developing a competitive generation market. Stranded or transition costs are defined as costs incurred by a utility to serve its customers that were being recovered in rates but are no longer due to availability of lower-priced alternative suppliers. The idea of `stranded cost,` and more importantly arguments for its recovery, is a concept with little basis in economic theory, legal precedence, or precedence in other deregulated industries. The main argument recovery is that the ``regulatory compact`` requires it. This is based on the misconception that the regulator compact is simply: the utility incurs costs on behalf of its customers because of the ``obligation to serve`` so, therefore, customers are obligated to pay. This is a mischaracterization of what the compact was and how it developed. Another argument is that recovery is required for economic efficiency. This presumes, however, a very narrow definition of efficiency based on preventing ``uneconomic`` bypass of the utility and that utilities minimize costs. A broader definition of efficiency and the likelihood of cost inefficiencies in the industry suggest that the cost imposed on customers from inhibiting competition could exceed the gains from preventing uneconomic bypass. Both these issues are examined in this paper

An economic and legal perspective on electric utility transition costs