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Unbundling Electric Discos: Overseas and at Home

Fortnightly Magazine - April 1 1998

and ultimately increase costs. This situation may occur because transmission facilities are built by the transmission company only when it has a contract from a distribution company, but distribution companies will sign contracts only if they have the necessary customers lined up. Customers, meanwhile, will promise to pay for infrastructure only at the last minute, if then. This is a classic free-rider problem wherein everyone wants somebody else to pay for investments that provide benefits to all. Alberta is already experiencing transmission congestion; it is likely to get worse.

CHILE. Severe market power problems arise from the huge cross-ownership between generation firms and transmission and distribution firms. Because of the high concentration of ownership in generation, market power problems in generation are mirrored by those in distribution. Chile's worst market power problems allegedly afflict its metering services. Chile's local distribution monopolies own and control the metering industry. They are said to collude (implicitly) in dividing the metering market among themselves and thereby restraining metering competition. They impede new entry by independent metering firms, arguing that these new entrants cannot properly calibrate meters. Because metering services are not price-regulated, the distribution monopolies exercise monopoly power when setting their meter service prices. Chile's market power problems are leading to a political reaction against distribution service unbundling. Experience has led to the view that distribution services cannot be competitive and that they should therefore revert to full regulation. These problems may have disaffected consumers. In particular, customers complain they are charged for non-existent services, such as "meter maintenance" that never occurs. The distribution companies say these complaints are arbitrary.

NORWAY. There are numerous local distribution companies. Each has a local monopoly and is governed by incentive regulation. Some observers believe that incentive regulation has minimized any problems of market power in distribution services. Other observers believe that vertically integrated power companies sometimes use their distribution subsidiaries' monopoly status to subsidize their non-distribution subsidiaries.

UNITED KINGDOM. Regulation severely limits the market power abilities of local distribution monopolists. There is, nonetheless, some question about whether the distribution companies cross-subsidize their affiliates, which is an illegal practice. Restructuring generally has improved service quality for customers. Appropriate distribution investments are being undertaken because distribution companies are subject to regulation that offers reasonable assurance of recovery of prudently incurred investments. Restructuring has significantly reduced prices for large customers. Part of this benefit is due to the improved distribution service efficiencies that have accompanied industry restructuring. But the price reductions ultimately offered to smaller customers are likely to be less significant than those offered to larger customers. This will occur partly because of the relatively higher distribution costs of serving smaller customers.

Telecom & Gas Lessons

Of the many U.S. industries that have deregulated in the past two decades, gas and telecommunications are most likely to offer the keenest insights into the possibilities of electric distribution deregulation. Table 3 indicates that these industries have been deregulated for several years longer (and to a greater extent) than most of the international electricity industries. Telecommunications distribution services are on their way toward complete