This paper explores how transaction cost economics supports the regulatory compact and
can provide guidance on the proper regulatory treatment of stranded assets. Stranded assets are
regulated assets that are no longer used for utility service, but have not been fully depreciated.
Traditional rate regulation has limited the amount of stranded asset risk exposure to utilities and
pipeline companies. However, recent regulatory decisions in Canada have signaled that
regulators may alter the way that they treat stranded costs, based on their interpretation of the
Calgary Stores Block Supreme Court of Canada decision. Such a change, shifting the risk of
stranded assets entirely to shareholders, could result in a major increase in business risk for
utilities and energy infrastructure companies, increased rates for services and underinvestment in
the industry. An analysis of transaction cost economics illuminates the importance of the
regulatory compact, supporting the conclusion that prudently incurred stranded asset costs should
be allowed full recovery. The paper ultimately provides policy recommendations for a legislative
amendment supported by the economic theory of contracts entrenched in the implicit regulatory
compact affecting utilities, regulators and ratepayers.