Abstract
Recovery of stranded costs is perhaps the most litigious issue encountering regulators in promoting competition in United States and European utility industries. We build a dynamic model of Cournot competition which takes into account a particular regulatory mechanism regularly employed in United States and also in Spain for settling stranded costs payments, the competitive transition charges (CTC). Our results establish the conditions under which we are able to show that efficient competition and stranded costs recovery are not necessarily incompatible. Mechanism design is the key element in welfare analysis outcomes. Under ideal conditions we can prove that SCR payments can be used as a versatile regulatory tool to encourage competition and achieve allocative efficiency. On the contrary we also demonstrate that an unappropriated design of the SCR mechanism may deliver productive inefficiency in the market and delay or prevent desired new competition.
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