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

There 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 speed so that effects can be traced back to separate policy causes. Furthermore, residential and industrial customer prices are disposable, which allows comparing more and less price sensitive customer groups as well as redistributive tendencies. In particular, negative short term effects of ownership unbundling found in static models are approximately cancelled out by subsequent positive impacts in the dynamic model. Third party access seems to allow for similar benefits while avoiding the (restructuring) costs of ownership unbundling. Previously estimated static models thus appear to suffer from either omitted variable biases or endogeneity problems of static non-difference models.

Schober, Dominik (2013), Static vs. Dynamic Impacts of Unbundling – Electricity Markets in South America, ZEW Discussion Paper No. 13-033, Mannheim.