Why were utilities integrated in the first place?

Vertical integration is not unique to utilities. Industries tend to be vertically integrated when coordination between intermediate suppliers and customers is difficult, quality control is challenging, or reliability of timely delivery is in question.

However, in countries where infrastructure is more poorly developed, contractual enforcement is weak, and communication between companies is more difficult, a higher degree of vertical integration continues to exist.

In the case of the electric sector, utilities at one time, in addition to generating stations, poles, and wires, may have owned coal mines and barges to transport the coal, and had extensive in-house engineering capabilities to build and maintain their generating stations. Utilities may also have owned the transit systems that used the power they generated, completing a cycle from primary fuel exploitation to end use.

When the industry began, utilities were largely isolated from one another; networks for transporting electricity had yet to be built. If a utility wanted to assure that its customers had power, it had to build a power station; in some cases, if it wanted to assure a supply of coal at a predictable price to fuel the power station, it had to dig the mine.

Gradually, as markets, networks, and enforceable contract relationships expanded, the number of activities a utility had to engage in to assure reliable supply decreased. In a way, the unbundling process is not new, but rather a continuation of trends that have been present since the beginning of the industry.