While the benefits of unbundling include increased transparency and management focus, as well as a reduced potential for preferential dealing, one must consider the range of factors that may impact these expected benefits, such as the potential for:
- increased transaction costs: opponents of unbundling argue that the greater number of entities resulting from unbundling leads to higher aggregate transaction costs, as internal responsibilities that were once managed by one vertically integrated company are instead replaced by various (independent) entities with external/contractual duties and obligations to support ultimately reliable service. The increased number of stakeholders involved in regulatory decisions also has the tendency to increase regulatory costs;
- loss of economies of scope and scale related to vertical integration: a loss of economies of scope is thought to arise because savings once enjoyed by the vertically integrated entity can no longer be derived from common costs among various segments of the business, as these segments have been disaggregated into separate and distinct entities with their own internal processes;
- price increases for small customers who choose to take default service (i.e., electric service from the incumbent utility): this risk arises when large customers depart from utilities and choose to take electric service from competitive suppliers instead. As such, the utilities’ costs can only be recovered from the remaining small customers; and
- new challenges related to organization and coordination: under the unbundled structure, where prices are largely set by competition, new functions of market power monitoring and mitigation must be undertaken by regulators. Furthermore, ensuring reliability becomes a more complex task as ISOs must coordinate with transmission owners and a multitude of generators. In addition, new entry is triggered primarily by market dynamics, which are not under the control of the regulator or the ISO.