Electricity distribution as an unsustainable natural monopoly: a potentialoutcome of New Zealand's regulatory regime

The ongoing reform of New Zealand's electricity supply industry has attempt ed to separate its potentially competitive elements from those with natural ly monopolistic characteristics. Yet, some competition for distribution ser vices is occurring, raising the question as to whether electricity distribu tors are natural monopolies as is typically assumed. This paper presents a simple model of a representative New Zealand distribution business, and sho ws that, in a true economic sense, distributors are most probably sustainab le natural monopolies as expected. However, the model demonstrates that a m echanism for competition may arise because the financial principles enshrin ed in the Ministry of Commerce's regulatory regime can produce unsustainabl e cost structures and unintentionally introduce elements of contestability into the market for distribution services. (C) 1999 Elsevier Science B.V. A ll rights reserved.