NCPA - National Center for Policy Analysis

Surprise: Mandatory "Unbundling" Is Not Deregulation

December 19, 2001

Some observers of electricity deregulation, noting the California and Enron fiascos, are making the point that breaking up the functions of energy companies into their smallest possible components does not constitute "deregulation."

Critics of deregulation have been using the California and Enron examples in their arguments.

  • The idea that vertically-integrated utilities were things of the past grew out of a school of deregulation that cut its teeth on telephone and natural gas deregulation.
  • But a market economy's central virtue is letting various business models contest to show their value.
  • As business professors Samuel Bodily and Robert Bruner have explained: "Enron argued that integrated firms and industries are riddled with inefficiencies stemming from bureaucracy and the captive nature of 'customers' and 'suppliers.'"
  • The trouble began when electricity deregulators -- prodded by Enron and many others -- decided to impose this vision by fiat, resulting in what has been called mandatory "unbundling."

Enron went from state to state promoting its view that mandatory unbundling was the proper way to deregulate. Enron and others insisted that every component of service -- even including meter reading -- that could possibly be "unbundled" should be unbundled, leaving utilities only the job of maintaining a network of wires.

But the market should be allowed to test the alternate hypothesis that integrated utilities can do the job just as well or better for customers in a given geographic area, even in a competitive environment.

Source: Holman W. Jenkins Jr., "Enron = Deregulation?" Wall Street Journal, December 19, 2001.

For WSJ text


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