© 1996 Oxford University Press
research-article |
Introducing Competition into Regulated Network Industries: from Hierarchies to Markets in Electricity
Massachusetts Institute Of Technology, Department of Economics, E52–373 Cambridge, MA 92139, USA
Abstract
This paper examines the technological, economic and organizational attributes of electric power networks and the challenges that must be confronted to expand competition in the supply of generating services from a comparative institutional perspective. The evolution of the governance structures of the electric power sectors around the world, which rely extensively on vertical and horizontal integration and multilateral agreements, can be explained as potentially efficient organizational arrangements for dealing with vertical coordination and network externality problems that are intrinsic to modern AC electricity networks. As a result, the sector evolved with regulated or government-owned monopolies and limited opportunities for competition. The institution of regulated monopoly creates its own cost, however. There is a trade-off between the costs associated with regulated or government-owned monopolies and the benefits of operational and investment coordination within vertically and horizontally integrated industrial hierarchies. Around the world countries have come to view the costs of these historical governance structures as exceeding their benefits and are implementing structural and regulatory reforms to promote competition in the supply of generation services while creating new governance structures to maintain efficient short-term coordination relationships between generators and the network, to manage network constraints, and to internalize network externalities. Major issues in designing new governance structures to facilitate efficient competition among generators and reduce the scope of regulation are discussed. Alternative approaches to these challenges in the USA, Europe and other countries are examined.