COMPETITION IN ELECTRICITY DISTRIBUTION Roxana Saplacan Presented by Adekunle Dada

ABSTRACT The traditional view of electricity distribution is that it is a natural monopoly. Few authors have explored the question as to whether electricity distributors truly are natural monopolies or not, while observation of the current industrial practice tends to suggest that a “market” for distribution activities does actually exist. This is a paradox for a natural monopoly. Our explanation is that monopoly characteristics well characterize the network infrastructure, but not the network operation service.

Definition Electricity distribution is the penultimate process in the delivery of electric power. It is that part between transmission and user purchase from an electricity retailer.

PURPOSE OF STUDY The question this paper seeks to answer is whether this fraction of the delivery of electric power could be exposed more directly to the competitive market.

LITERATURE REVIEW Local electricity networks cannot be duplicated at a reasonable cost (Newbery, 1999) The theory of natural monopoly fails to reveal logical steps that carry it from scale economies in production to monopoly price in the market place (Demsetz, 1968) Competition is impossible when the reproduction of infrastructure is uneconomical or when the cost of service is lowest when supplied by a single firm (Viscusi et al, 2000)

LITERATURE REVIEW (CONTD) Subadditivity test shows that mean output is more efficiently produced by a single firm than by two firms in the Norwegian electricity distribution sector (Salvanes and Tjotta, 1998) These studies are not detailed enough to make clear enough conclusions on electricity distribution and it's relationship to natural monopoly.

CONSEQUENCES OF COMPETITIVE REFORMS Unbundling of distribution activity: Main factor driving subadditivity characteristic is the network infrastructure. Absence of separation from supply, the characteristic of network activities remain unclear. Cost structure: Only operational costs are considered. Fixed costs which are considered independent from the number of clients and from the age of the network. Infrastructure and it's operation have different characteristics thus their cost structures will also have different characteristics. A single cost function would be inaccurate.

FINDINGS AND IMPLICATIONS In the UK and France, network infrastructure and network operation are separate activities. Considering electricity distribution as a two function sector has some organisational and policy implications: Unbundling rules pose separation between distribution neworks and supply in order to allow non-discriminatory access of all suppliers to final consumers. Low productivity and lower labor cost means either company is cost efficient or employees are under-performing. If it has high labor costs, company is likely to automate it's operations. Thus these companies only externalize activities that are too expensive to be carried out internally. The search for reduced costs because of several packages from network operation will arise. There is also no consensus on how to split distribution activities into packages and tasks.

CONCLUSION The author proposes that distribution be considered as composed of two functions: one with monopolistic characteristics [the infrastructure] and the other potentially competitive [distribution services]. Traditional approach of natural monopoly is justified for electricity distribution network infrastructure but not justified for network operator service. Some network operation activities can be externalized to third parties to reduce costs. This aspect of operation can be separated into several packages.

CONCLUSION (CONTD) The need to be cautious because there is no unambiguous allocation of functions. A possible step is therefore to allocate costs by each package and use them in the network performance assessments made by the regulators when evaluating efficiency.

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