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Unbundling Electric Discos: Overseas and at Home

Fortnightly Magazine - April 1 1998

Lesson for U.S. Unbundling

From these examples it is clear that distribution unbundling is technically feasible but may prove costly. The main technical challenges lie in information management. Development of standards and procedures that are widely acceptable to market participants are critical, but the real costs lie in the metering and software infrastructures that will be required to implement those standards and procedures. U.S. power firms should note that in the U.K., where open access was phased in gradually, there was a time when billing systems broke down completely. Consequently, utilities lost money settling customers' bills.

Distribution unbundling raises questions of coordination and responsibility. Unbundling may split responsibilities among power firms in confusing ways. For example, when the lights go out, does the customer call the power supplier or the local distribution firm? If independent contractors build customer facilities that the local distribution monopoly must thereafter maintain, do the independent contractors have incentives to cut costs by providing shoddy equipment? Does the local distribution monopoly have incentives to blame independent contractors for high maintenance costs?

Investment incentives matter. International experience indicates that incentives affect market participants' willingness to invest appropriately in new distribution facilities. In jurisdictions where investments are determined through purely market processes, free-ridership leads to underinvestment in transportation facilities and to problems of congestion and reliability. In jurisdictions where the distribution monopolists are granted a reasonable opportunity to recover prudently incurred costs, there is adequate investment in transportation facilities.

Unbundling can encourage innovation in management of services; thus encouraging cost and price reductions. It can also encourage the introduction of new services.

Nevertheless, distribution unbundling might be bad for consumers. Unbundling may raise the costs of coordinating the provision of various services that together comprise delivered power. It may encourage the development of billing systems and the installation of equipment (notably meters) that have costs in excess of value. It may complicate consumers' buying decisions. Moreover, unbundling will lead to cost-shifting that is likely to reduce the bills of large consumers while increasing the bills of small consumers.

Ahmad Faruqui, Ph.D., technical manager in the Retail & Power Market Tools Target of EPRI, in Palo Alto, Calif., is leading research to help energy companies develop competitive retail pricing products. Laurence D. Kirsch, Ph.D., senior economist with Christensen Associates in Madison, Wisc., has specialized in economic analysis of electric power system cost structures, bulk power markets, power pool operations, and pricing. The authors wish to thank Cesar Herrera, Lawrence Kaufmann, and Mark Meitzen for their contributions to this article.

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