1 Vertical separation of the energy distribution industry: a cost-benefit analysis Machiel Mulder 1 , Victoria Shestalova and Mark Lijesen Netherlands Bureau for Economic Policy Analysis (CPB), The Netherlands Paper to be presented at 4 th Conference on Applied Infrastructure Research, Berlin, 8 October 2005 Keywords: electricity, unbundling, efficiency; JEL-codes:L51, D61, Q4, ABSTRACT This paper provides a systematic overview of costs and benefits of the policy decision recently taken by the Dutch government to introduce ownership separation between energy distribution on the one hand, and production and retail on the other. Ownership unbundling increases independence of network management as well as efficiency of regulatory activity. Moreover, ownership unbundling facilitates retail competition by tackling the potential tight oligopoly in this market, but total welfare would be hardly affected by this. The impact of ownership unbundling on welfare is higher if it facilitates competition in the wholesale market which mainly depends on the future development of small-scale generation and separation of the transmission grid. Furthermore, ownership unbundling enables privatisation of commercial activities. The realisation of these results is, of course, not a free lunch. Ownership unbundling reduces economies of scope and, furthermore, creates one-off transaction costs. Unbundling may also affect investments in generation by the currently vertically integrated Dutch utility holdings. We conclude that mainly because of the uncertainty about the future role of small-scale generation and the uncertainty about the magnitude of the transaction costs related to the cross-border leases, the net effect on welfare of ownership unbundling is ambiguous. 1 P.O. Box 80510, 2508 GM The Hague, The Netherlands; Tel. +31 70 338 338 3; Fax. + 31 70 338 3350; e-mail corresponding author: mmd@cpb.nl.