Companies of all types have to make costly decisions about planning and construction that depend on a certain set of market conditions. When those conditions change, the viability of those plans can also change. And when a change as dramatic as deregulation of a marketplace occurs, those changes can be financially catastrophic. Companies can be stuck with massive investments that they would never have made in a competitive marketplace. When companies suffer expenses such as these as a result of legislated changes in market conditions, the associated costs are said to be stranded, or nonrecoverable, or occasionally referred to as transition costs. Any assets that suddenly become worthless in such a situation are referred to as stranded assets.

Stranded costs and stranded assets are inevitable in any industry whose regulatory environment changes dramatically, and partial or full compensation for stranded costs is usually considered fair play for monopoly services suddenly thrust into a competitive marketplace. These unrecoverable costs may be passed along to consumers as a transition charge or competitive transition charge, or recovered by the utility through deferred taxation, direct government funding or other means. In most cases, utilities are only permitted to recover a portion of their stranded costs in this fashion.

Examples of stranded costs and assets may include nuclear reactors which are half-finished when a government bans all new nuclear energy production, back-up service infrastructure that won't be needed in a competitive marketplace, and coal- or oil-fired generation facilities planned for a market which chooses instead to acquire its energy from solar or tidal generators.

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