IPD AI

Regulating Unbundled Network Utilities

08/25/2001
Network Papers

The new conventional wisdom is that network utilities should be unbundled, with the potentially competitive segments under separate ownership from the natural monopoly network. Regulation should provide the same incentives as the competitive market, differing sharply from the traditional rate-of-return form evolved in the United States. But the new model has problems.

Unbundling creates new price risks that require a variety of hedging contracts. The consequences of the risks and resulting contracts are often not well understood by regulators. The conditions for effective competition, at least in electricity, are considerably more demanding than in normal product markets, so that competition law must be adapted if it is to be effective.The electricity supply industry provides the richest body of evidence of the consequences of unbundling, and provides the sharpest test of the new conventional wisdom. This paper will therefore concentrate on the regulatory lessons from electricity unbundling.