Network unbundling and flawed coordination: Experience from the electricity sector

• Unbundling promotes competition, but this should be balanced against the downside of unbundling: the cost of flawed coordination.
• Do further steps in unbundling pay off and do the additional benefits outweigh the additional cost of flawed coordination?
• As firm-internal coordination is falling away, our focus should be on the design of contractual mechanisms to secure market coordination.
• This is the key problem: a system of prices and contracts to arrange market coordination is as yet at best imperfect.

What is a good balance between competition and coordination? On the upside, unbundling in network industries promotes competition, but this should be balanced against the downside of unbundling, that is, the cost of coordination. Firm-internal coordination falls away and must be replaced by external market mechanisms. This is a non-trivial task. The cost of flawed coordination resulting from fragmentation can be substantial and policy should focus more on market mechanisms and governance structures to secure better coordination. This paper examines the problem of coordination and discusses with real-world examples why the market faces difficulty in providing effective coordination.