chapter  5
16 Pages

Organizational form and the wires

Two of the most pervasive features of the retail sale of electric power service have been the bundling of the energy transaction with the wires transaction and the monopoly ownership of the physical infrastructure. Technological change has made it possible to change both of these features. Over the past century technological change has transformed the nature of the electricity value chain and its cost structure (Hirsh 1991). The vertically-integrated utility is no longer a natural monopoly, although the regulatory institutions premised on its being a natural monopoly persist. The only portion of the value chain that retains any natural monopoly characteristics (economies of scale and more efficient provision by a single firm) is the transportation function performed by the transmission and distribution wires. Despite that fact, the retail sales of the electricity commodity with the wires transportation service continue as a bundled transaction between individual customers and a single, regulated firm. Thus the electricity sale is still treated as a regulated transaction, even though the retail sale of the electricity commodity is technically competitive or contestable.