Ownership vs. Regulation in Electricity Reform: The Role of Governance

Abstract

Electricity reform typically involves little regard to the possibility that customerownership might substitute for the "protections" of state ownership or for investor ownership under regulatory safeguards where market power is a concern. Recognising that regulation is itself costly and that market contracting ownership and regulation are partly substitutable forms of governance this paper argues that state ownership of natural monopolies in electricity distribution (and transmission) is inefficient. Unregulatedcustomer ownership of these activities is superior better aligning monopolist and customer incentives at lower cost. Even unregulated investor ownership of distribution is predicted to better balance the costs of market contracting ownership and regulation than does state ownership. Regulation of customer owned distribution (and transmission) is also shown to be inefficient imposing regulatory costs without compensatory gains. Examples of widespread customer ownership of distribution in New Zealand and of distribution and sometimes transmission in the US illustrates how such ownership has evolved as an effective substitute for regulation. Policy implications are drawn.