Static vs. Dynamic Impacts of Unbundling – Electricity Markets in South America

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Non-technical SummaryThere is an intensive debate among academics as well as policymakers on which of the two options of unbundling, either ownership unbundling or non-discriminatory third party access, is more appropriate to foster competition and thus achieve efficient market outcomes. Whereas non-discriminatory third party access to grids and networks comprises softer forms of unbundling as informational, organizational or legal unbundling, ownership unbundling of monopolistic bottlenecks from potentially competitive value chain levels represents a much stronger approach. On the one hand, a consensus has been reached on the general advantageousness of implementing a non-discriminatory third party access regime. On the other, economists still disagree on the closely related political measure of ownership unbundling. Theoretical arguments concerning this strict form of separation are ambiguous as ownership unbundling may involve substantial restructuring costs before reducing prices in subsequent competition. The net effect is unclear a priori. In contrast, third party access might save restructuring costs but, if ineffective, leave efficiency potentials unexploited. Given these theoretical trade-offs an empirical investigation is indispensable in order to clarify whether softer measures like legal unbundling or independent transmission system operation are sufficient to make efficient operation in potentially competitive segments possible. In this article, the relative benefits of both options are investigated in static as well as in dynamic models. In prior studies, static approaches have been used to examine the effects of the measures on efficiency, prices, and distributional consequences. Market reforms, however, often induce slow adaptation processes or even reversal of initial trends after some time. Effectiveness of reforms is thus not easily measurable. A prominent example in this context is the British restructuring and privatization process. Only after several supplementary reforms competition in the wholesale electricity market started to work efficiently (cf. Newbery and Pollitt (1997)). Against this background, a dynamic framework which takes such lags into account may offer deeper insight. For the empirical analysis, the South American continent seems to be a suitable object of study, since many countries introduced regulatory reforms during the past two decades, following diverse routes. Law giving bodies have often chosen a moderate reform spee...

Energy reform in Mexico: Imperfect unbundling in the electricity sector

“…Srivastava et al (2011) reviewed alternative arrangements in the US and four other unbundled markets, focusing on governance and incentives. Schober (2013) analyzed the static and dynamic effects of unbundling in Latin American electricity markets but concentrated on wholesale and integrated TO/DO only. As in other countries, Mexico faces the problem of insufficient electric infrastructure.…”

“…The same regulator may also establish operational and accounting separation in the industry, but the law is not clear whether the regulator will undertake the same actions for the public incumbent CFE and subsidiaries created by CFE. Hence, the public utility incumbent could renege on obligatory separation overseen at the Secretary level, and have little incentive for internal planning and financing grid expansion (Cave and Stern, 2013;Schober, 2013). This situation has prevailed in the past, with CFE as a vertically integrated state-owned firm with private permit generating entities, such that access has been conditioned or denied with the argument of insufficient transmission capacity.…”