Stranded Asset Risk in Large Load Agreements: How Utilities Can Protect Ratepayers
The math of hyperscale large load infrastructure is unforgiving. A utility that builds a dedicated 230-kilovolt substation for a 600-megawatt facility has committed hundreds of millions of dollars to a single customer. If that customer exits the agreement before the infrastructure is fully depreciated, the utility is left holding an asset that serves no other purpose—and ratepayers are left holding the bill.
This is stranded asset risk, and it is among the most significant financial exposures utilities face as they navigate the large load boom. It is not hypothetical. Utility executives across the industry know that large load customer demand projections have been wrong before—and that the technology industry’s enthusiasm for infrastructure can cool quickly when business models shift.
Managing stranded asset risk in large load agreements requires a layered approach that combines contractual protections, regulatory design, and accounting structures. None of these layers alone is sufficient. Together, they can substantially reduce the exposure that otherwise falls on general ratepayers.
Understanding the Stranded Asset Problem
A stranded asset in the utility context is an asset that is no longer used and useful in providing regulated service but whose cost has not been fully recovered through rates. The classic example comes from electricity restructuring—generating plants that were economic under regulated rates became uneconomic when wholesale markets were introduced, leaving utilities with assets on the books that customers could not be asked to pay for under market-based pricing.
The large load version of this problem is structurally different but financially similar. The stranded asset is not a generation plant but a transmission line or substation. The cause is not market restructuring but customer exit. The financial exposure is the unamortized book value of dedicated infrastructure that cannot be redeployed to serve other customers.
Stranded asset exposure is largest when:
- The infrastructure investment is large relative to the utility’s overall rate base
- The infrastructure is truly dedicated and cannot serve other customers
- The remaining depreciation life of the assets extends well beyond the contracted service term
- The large load customer’s creditworthiness deteriorates during the agreement term
Five Layers of Protection Against Stranded Cost Exposure
Accelerated Depreciation of Dedicated Assets
The most direct way to reduce stranded asset risk is to recover the cost of dedicated infrastructure faster. If a substation built for a 20-year large load agreement is depreciated over the 20-year contract term rather than over its 40-year physical life, the utility has substantially less at-risk book value if the customer exits after year 15.
Accelerated depreciation requires regulatory approval in jurisdictions where depreciation rates are set by commission order. Regulators have generally been receptive to accelerated depreciation for genuinely dedicated assets, recognizing that aligning the depreciation period with the contract term is economically rational and protects ratepayers from long-tail exposure.
The tradeoff is that accelerated depreciation produces higher annual charges during the contract period, which flows through to higher rates for the large load customer. This may require negotiation, but it is a negotiation that most sophisticated large load customers will understand.
Minimum Bill and Take-or-Pay Provisions
Minimum bill provisions reduce ongoing stranded cost exposure by ensuring that infrastructure carrying costs are recovered from the customer even if actual energy delivery falls below contracted levels. A well-structured minimum bill, set to recover the fixed infrastructure costs associated with the dedicated facilities, means that the utility collects carrying charges on the dedicated investment regardless of large load customer utilization.
The minimum bill does not directly address the terminal stranded cost that arises on early termination, but it substantially reduces the cash flow risk during the agreement term by ensuring that infrastructure cost recovery is ongoing rather than contingent on full operation.
Early Termination Fees Sized to Stranded Costs
Early termination fees are the primary contractual mechanism for addressing terminal stranded cost exposure. The critical design question is: what is the fee designed to recover?
A termination fee that covers only lost margin on undelivered energy is not sufficient protection against stranded asset risk. The fee must also cover the unamortized book value of dedicated infrastructure that cannot be redeployed. The calculation should use the actual regulatory book value of the dedicated assets at the time of termination, not a simplified formula that may understate actual exposure.
Some utilities have negotiated termination fee structures that include both a minimum guaranteed payment and a formula-based component tied to actual infrastructure book value. This hybrid approach ensures adequate recovery even if asset values differ from projections at the time of negotiation.
Security Instruments Sized to Maximum Exposure
Security deposits, letters of credit, and performance bonds are only useful if they are sized to cover the utility’s actual maximum stranded cost exposure. A security deposit equal to three months of minimum bill payments does not address a $200 million stranded substation investment.
Sizing security instruments to stranded cost exposure requires a forward-looking model of what the utility would be left holding at various points in the agreement term if the customer exits. The security requirement should be sufficient to cover the largest plausible stranded cost exposure, which typically occurs in the early years of a long-term agreement when infrastructure is new and fully depreciated value has not yet been recovered.
Security instruments should also include refresh and replacement requirements. A letter of credit that expires in year 3 of a 20-year agreement provides no protection from year 4 onward unless it is continuously renewed.
Regulatory Mechanisms for Stranded Cost Recovery
Even with robust contractual protections, some stranded cost exposure may slip through—the large load customer developer goes bankrupt, security instruments are inadequate, or early termination fees are uncollectable. Regulatory mechanisms provide a backstop for these scenarios.
Several states have developed regulatory frameworks that allow utilities to seek recovery of verifiable stranded costs through rate proceedings when contractual protections fail. These proceedings require the utility to demonstrate that it acted prudently in constructing the infrastructure, that it took reasonable steps to mitigate stranded costs, and that the residual exposure is appropriately assigned to ratepayers rather than shareholders.
Utilities should understand the regulatory stranded cost recovery framework in their jurisdiction before entering into large large load agreements. The availability of regulatory backstop protection affects how aggressively the utility needs to negotiate for contractual protections in the first instance.
FERC is expected to issue a ruling in June 2026 establishing a federal framework for connecting large electricity users — including large load customers exceeding approximately 20 MW — directly to the transmission grid. The proceeding (Docket RM26-4-000, Interconnection of Large Loads to the Interstate Transmission System) is expected to address standardized interconnection study requirements, deposit and readiness standards, network upgrade cost allocation, and the boundary between FERC-jurisdictional transmission matters and state authority over retail service and distribution.
The content in this article reflects current practice under existing tariff structures. Readers should monitor the June 2026 FERC order for requirements that may affect how utilities structure agreements, assign infrastructure costs, and design rates for large transmission-connected loads. This page will be updated following the ruling.
The Accounting Dimension of Stranded Asset Risk
From an accounting perspective, stranded asset risk implicates ASC 980 (Regulated Operations) and, in cases of severe impairment, ASC 360 (Property, Plant and Equipment). Under ASC 980, a utility can defer costs that would otherwise be charged to expense if regulatory approval provides reasonable assurance of future recovery. Dedicated infrastructure costs that are recoverable under a rate rider or through minimum bill provisions may qualify for regulatory asset treatment during the period before they are collected.
If regulatory recovery becomes unlikely—for example, if a large load customer exits and the termination fee is insufficient to cover stranded infrastructure value—the utility may be required to recognize an impairment loss under ASC 360. This is precisely the outcome that well-structured agreements are designed to prevent.
Utility accountants involved in large load agreement review should work closely with rate personnel to ensure that the cost recovery structure in the agreement supports the accounting treatment the utility intends to apply. A mismatch between contractual cost recovery and regulatory accounting treatment can create financial reporting problems that outlast the original agreement dispute.
Practical Risk Assessment Before Signing
Before executing a large load service agreement, utilities should conduct a structured stranded cost risk assessment that addresses:
- Maximum stranded cost exposure by year across the agreement term
- Probability-weighted assessment of customer exit risk based on creditworthiness analysis
- Gap analysis between contracted protections (termination fees, security) and maximum exposure
- Availability of regulatory backstop recovery if contractual protections fail
- Accounting implications of various exit scenarios
This assessment should be documented and reviewed by utility management, legal counsel, and regulatory affairs staff before execution. It should also be updated periodically during the agreement term as infrastructure investments are made and customer creditworthiness evolves.
Disclaimer: The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by Utility Accounting & Rates Specialists, LLC. You should seek formal advice on this topic from your accounting or legal advisor.