Regulating unbundled network utilities

Abstract

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 hedging. The consequences of the risks and resulting hedging 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. Competition law may need to be adapted to be effective.