CONTRACT REMEDIES provide guidance on the measurement of stranded costs and the proper economic approach to determining compensation for those costs. Given that the utility incurred its costs under the regulatory contract, the opening of the utility's market to competition—that is, the termination of the exclusivity of the utility's franchise—is a breach of a material term of that contract if not accompanied by an offsetting removal of incumbent burdens. It is opportunistic behavior by the promisor—namely, the regulator.

In private contracts, damage remedies for breach guard against opportunistic behavior. The standard remedy for breach of contract is to award the promisee its expectation interest. The proper remedy for breach of the regulatory contract is therefore to give the utility the expected level of profit that it would have received had there not been a breach of the regulatory contract. The contract price under the regulatory contract equals the sum of the utility's revenue requirements over the years that the regulatory contract was expected to remain in force. As noted previously, the revenue requirement equals the utility's operating cost (plus depreciation), plus its allowed rate of return multiplied by its rate base. The utility's variable cost equals its operating cost plus depreciation.

THE PUBLIC UTILITY'S RIGHT TO EXPECTATION DAMAGES FOR THE REGULATOR'S BREACH OF THE REGULATORY CONTRACT

One can calculate the expectation-damage remedy for breach of the regulatory contract on the basis of principles of contract law.