Unbundling is the process of separating production and supply of vertically joined transport activities in the monopolistic markets. Unbundling can be achieved from various ways like; using transportation system operators, legalizing bundling to separate enterprise from operators and full ownership unbundling. Unbundling is used to introduce a more competitive environment in markets and hence allow a free access to the products . Concept of Ownership Unbundling. Ownership unbundling also known as expropriation can be achieved in many ways . These include sharing of the grids by different producers or full ownership.
There was a need for separation of activities related to transmission and distribution in the energy markets. The directors therefore called for an independent team to deal with legal and organizational matters including decision making . The proposal did not meet the requirements hence the need for a full ownership unbundling of the networks. The following are reasons that led to ownership unbundling; to legalize the distribution and transmission system operators to be managed separately and to have fair policies to govern distribution operators hence develop market according the users requirements .
According to Tonjes (2005), legal and functional requirements for unbundling were not effective for fair competitions in the markets. Improvements were suggested as follows; no discrimination in accessing information, no use of incentives to attract network agents and no corruption in network investment decisions towards service provision for the retail businesses . There are two main approaches for unbundling the ownership and independent system operators unbundling. Ownership unbundling involves division of the integrated vertical entities of network operations to be owned and managed separately.
An independent system operator is the process of separating the operators to work individually from the original owner using the network assets on contracts . Different types and approaches of ownership unbundling in the Energy markets. According to Pillott (2007), there are many approaches or models for ownership unbundling supported by various people . These models include; independent transmission system operators which operates totally separate from the main system. For example the National Grid of the United Kingdom that owns and operates separately.
It is a major provider of electricity in many countries around the world. Secondly there is the legally unbundled transmission system operators’ which is the most common model operating legally from the main asset owner . Example is the RTE in France used by the directives and operated separately. The third approach is the independent system operator that has been widely used in the United States for electricity transmissions. The model is operated separately but not owned by the operator . Has not been used for gas supply in many countries worldwide . These approaches can be combined to form hybrid systems.
Transmission system operator can be used with the independent system operators. The two models can be owned and operated separately from the main system. Such a model has been used in rapidly developing systems to facilitate its efficiency. According to Pillott (2007), there is a fifth approach by which ownership unbundling can be implemented . This is the vertically integrated utility which is an ad hoc system used in the European nations. The approach has been very successful in transmission of gas in the European markets. Political and legal implications and challenges of ownership unbundling.
Ownership unbundling has had many debates and arguments after liberalization of the energy package for the third time. According to Leveque & Glachant (2007), ownership unbundling is more advantageous economically and will obviously improve the energy markets internally . As a legal requirement the authority should therefore accept its installation since it reduces costs and enhances management. Ownership unbundling reduces the incentive usage hence enhance competition. Ownership unbundling also promotes solidarity in using the networks and limits the transmission boundaries .
To create a more competitive environment in the energy markets required liberalizing the market. This required restructuring of the market that for a very long time had been monopolized due to the network infrastructure . There was a need for a third party in the supply chains hence the unbundling to provide heterogeneity. For free and fair competitions there was need to regulate the providers for instance reducing incentives to be used. This is a challenge and also a legal requirement to enhance competition. Ownership unbundling is not a panacea.
Even though it is a recommended policy for the energy markets it cannot work on its own efficiently hence a challenge. This has implications that the process requires further separation of the markets particularly the transmission system operators to be strongly cooperated hence cater for a big market . According to Pollitt (2007), European unions were undecided whether to implement Ownership unbundling or not . This is because they were not sure if it will improve the network situation. The European wanted an increased network investment hence non discriminatory access to information required.
Another challenging issue was whether ownership unbundling will result to improvement in network investments. Researchers have argued that there is no evidence to guarantee a success . According to Pollitt (2007), it is very difficult to identify the benefits that can be realized from network ownership unbundling . This is because it involves a lot of timing required in justifying the economic effects. This has implications that process is just as legal as redesigning, merging or even privatizing a company and putting into place new policies to govern the business operations .
According to Moffatt Associates (2007), the debate about the ownership unbundling was based on politics from various regions . Some people opposed the system in favor of the one they had. The Europeans didn’t want the UK’s chosen model. The Europeans preferred the independent system operator available in their region. The European had refuted the transactional system operator that was to be used internally. Politically, some countries didn’t want ownership unbundling because it was a threat to their leading markets. French Government for example feared loosing their global leadership in the energy market .
A link between unbundling and energy services market. In energy markets there are many services to be offered to consumers. Customer services like billing or metering requires a lot of efficiency . Customers are always competitive and hence should always get quality services to be retained. With monopoly such customer will not achieve the competitive effect hence the need for network unbundling. Through network unbundling these services will be operated separately giving the customers a chance to choose from the many suppliers .
Costs of services can be unbundled to allow the customers to get services in a way that suits each needs. This is because there will be enhanced customer choice hence reduce the cost of such services . Suppliers will have the chance to make clear records of the customer bills hence enhance a relationship between them by providing for all the customer needs. With the standard measurement policies in place, there will be easy regulation or calculations of the customer accounts. According to Howes et al (2000), with consolidated billings the suppliers can not come up with counterfeit products or services in the markets.
This is because there are standards in place to regulate such irregularities in the market. With the network unbundling the customers will be in a position to access the required information about their services any time. There has to be competition in the metering services as called by many consumers. For any efficient market, unbundling of the networks should be done . The retail services have to be unbundled for a third party to be involved in between. This will also help identify the monopolistic services that hinder competitions in the markets . It is through competitions that quality production is assured.
Competitive markets will also enhance the relationships between the consumers and the suppliers. With such relationships, the consumers will have an opportunity to freely choose from a variety in the market hence an increased customer satisfaction. Conclusion. Ownership unbundling is of great importance to the economy of the energy markets. Countries should implement ownership unbundling to increase access to the information in the networks . There will also be a free and fair environment for competition in the markets. According to CPB (1997), network ownership unbundling provides more independent channels in the network .
This enhances performance by catering for a specific part of a market. In this sense there will be an enhanced competition in the markets. Sharing network ownership will increase services, this improves efficiency in terms of service time and quality of products . Reference: 1. Caramanis, M. , Regional co-operation in the energy sector: Perspectives for the Western Balkans and the European Union. Political and legal implications. 2007. Viewed on 21st May, 2009. Available at http://siteresources. worldbank. org/INTECAREGTOPPOVRED/Resource 2.
CPB, Challenging Neighbours; Rethinking German and Dutch Economic Institutions, Springer Verlag, Berlin – Netherlands Bureau of economic policy analysis. 1997, Viewed on 21st May, 2009. Available at http://www. cpb. nl/eng/pub/cpbreeksen/document/84/doc84. pdf 3. Frontier Economics, Further unbundling in European energy markets. Different types and approaches to ownership unbundling specifically in energy markets. February 2007. Viewed on 21st May, 2009. Available at http://www. frontier-economics. com/_library/publications/frontier%20paper%20-%20further%20unbundling%20in%20european%20energy%20markets%20-%20feb%2007. pdf.