02. Newbury Article

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. The three network utilities where competition appears attractive – telecoms, gas, and electricity – present different challenges. In telecoms, the choice between facilities-based competition and access price regulation is still finely balanced. In gas, particularly on the Continent, finding a satisfactory equilibrium that addresses import security and competition concerns is at an early stage. Electricity provides the best evidence of the consequences of unbundling, and provides the sharpest test of the new conventional wisdom.