ASi" kUCTURE FlOR DEVELOPMENT

Unbundling services for competition
proves management accountability. The trend is unniistakable:
unbundling of infrastructure services is
Should one company provide all telephone ser- proceeding at a brisk pace.
vices-local, long distance, celiular, data transmission-or
should the elements of the telecomnmu- Vertical unbunding
nications business be unbundled into separate
enterprises? Is electric power provided most effi- The electric power industrv illustrates how regulaciently
when generation, transmission, and distribu- tory and technological innovation interact In 1978,
tion are coordinated within a single entity, or should the Public Utilities Regulatory Policy Act (PURPA)
the stages involved in delivering power be sepa-- required electric utilities in the United States to
rated? Should a railway be a monolithic organiza- purchase power from independent power production
owning all facilities and offering a variety of ers. This requirement opened up the industry to
passenger and business services, or should services more efficient generators, including those that prbe
operated as separate lines of business, possibly duce power from waste heat in manufacturing opunder
independent ownership?
era tions (cogeneration). Combined-cyde gas tur-
Central to this discussion is the concept of a nat- bines, using clean natural gas and requiring small
ural monopoly, which is said to exist when one investments, also became popular, although many
provider can serve the market at a lower cost than independent power projects continue to use contwo
or more providers could. Such is the case when ventional technologies.
the costs of producing ant delivering a service de- Such vertical unbundling-separating electricty
cline with increasing output (a condition often re- generation from transmission and distribution-has
ferred to as economies of scale). In infrastructure since been effectively adopted in many developing
sectors, it is also common for providers to supply a countries, allowing new, substantial entry in generanumber
of services, some of which are natural mo- tion Countries that have operationally independent
nopolies and others of which are not- However, a power producers indude Argentina, Chile, Colomnatural
rrnnopoly in one service may allow the bia, Guatemala, and the Philippines. Independent
provider to gain an advantage in another service power projects are being constructed or considered
that can be competitively provided. This occurs in Cote d'Ivoire, India, the Lao People's Democratic
when it is cheaper for a single provider to produce Republic, Pakistan, Sri Lanka, and Tanzania. (See
and deliver two or more services jointly than for Chapter 5 on the financing of independent power
separate entities to provide the services individually producers.) In addition, to facilitate competition in
(and, when that happens, economies of scope are the distribution of electric power, transmission and
said to exist).
distribution have been separated in several coun-
By isolating the natural monopoly segments of tries. The transmission agency handles the transport
an industry, unbundling promotes new entry and function, and generators ard distributors contract
competition in segments that are potentially com- directly for power supply. Transmission is likely to
petitive. Failure to unbundle can constrain an entire remain a natural monopoly. While the physical dissector
to monopoly provision even when numerous tribution network will also retain monopoly characactivities
can be undertaken competitively. In the teristics-it would not be economical to run more
past, maintaining sectors in a bundled form has than one distribution line to a home or a business-
-been justified ontwocounts. First,whereeconomies alternative suppliers can and do compete for the
of scope are significant, unbundling raises the costs right to supply over the single distnbution line.
of provision. However, the gains from economies of Similarly, in the natural gas industry, the wellscope,
where they do exist, need to be weighed head and the pipeline and local distribution sysagainst
the benefits of cost-minimizing behavior tens can be owned and operated by different entiunder
competitive pressures. Second, subsidy of ties. In Argentina, Gas del Estado was until recently
one service by another has been extensively under- an integrated monopoly in both the transportation
taken within enterprises offering multiple services and distribution of natural gas, acting as the sole
and has been the main mechanism for subsidizing gas trader. Today, ten distinct entities-two transservices
to poor customers or those in remote areas. port businesses and eight distribution corpora-
Unbundling, however, is desirable because it makes tions-provide these services, as well as gas treatcross-subsidies
between different lines of business ment and storage. To demonopolize the natural gas
more transparent, identfies more precisely the sub- industry in Hungary, the OKGT-a trust that opersidies
needed to deliver services to the poor, and im- ated the entire oil and gas sector-was split into six
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