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Unbundling Electric Discos: Overseas and at Home

Fortnightly Magazine - April 1 1998

unbundling, which is now mandatory in urban areas, and a few years away in rural areas.

The unbundled distribution services of the gas industry are recognizable to electric industry observers. These services include firm transportation, interruptible transportation, storage, metering and billing services. Except for storage service, these are all transportation services that will be offered and likely unbundled in the electric power industry. (In electricity, storage service is likely to be offered by generation and/or merchant firms rather than by transportation firms.)

The telecommunications industry's unbundled distribution services are a different story. These include local loop, transport, end-office switching, tandem switching and interexchange carrier access services. Local loop and transport services are analogous to electric distribution wires services. Switching services are specific to telecommunications technology and are vaguely analogous to power system scheduling and dispatch service. Interexchange carrier access service is not a service but instead a cross-subsidization scheme similar to the transition charges that will prospectively be levied by some electric utilities.

The deregulation of the gas and telecommunications industries were undertaken to promote competition, encourage technological innovation, encourage service innovation, improve service quality and lower prices. In the gas industry, there was motivation to improve the allocation of underutilized transportation and production resources. In the telecommunications industry, deregulation is focusing on achieving all of these benefits at the distributor level.

Gas has had few technology barriers during unbundling; technology has posed more significant roadblocks for telecom. For gas, market values vary by month and sometimes, near the annual peak load, by day. Gas does not face the metering and billing problems that afflict the unbundling of electricity services. For telecom, on the other hand, it is difficult to determine the physical locations at which unbundled services may be distinguished from one another. These locations change over time with evolving technology. Furthermore, telecom services may be more expensive when unbundled than if left bundled.

Market power problems have been limited in gas and telecommunications distribution because local distribution firms all have remained tightly regulated. The chief problem in both industries has been one of monitoring the cross-subsidization of transactions between the regulated firms and their unregulated affiliates. In the telecommunications industry, cross-subsidization is being mitigated through structural separation of regulated and competitive affiliates or price regulation that forces prices to equal incremental costs plus some share of joint costs.

Gas deregulation resulted in lower, but more volatile, gas supply prices. This volatility has led to the development of financial markets and instruments to hedge price risk. Investment by regulated transportation firms has generally been adequate, so service reliability has remained good.

The overall effect of telecom deregulation has produced lower prices for consumers and a wider variety of services. At the distribution level, however, it is too early to tell if unbundling will reduce prices or affect quality. Competition has realigned prices among distribution services. Prices may increase and reliability may falter if, as some observers believe, competitive entry and investment are proceeding at too slow a pace. Customers seem to find unbundled billings inconvenient, and may prefer one-stop shopping.