An ex ante welfare analysis of the unbundling of the distribution and supply companies in the Dutch electricity sector

The Dutch Minister of Economic Affairs intends (i) to unbundle the distribution companies from the commercial companies which are currently in the same holding (supply and generation) and (ii) to allow the Transmission System Operator to manage all the 110 kV grids (currently it manages the 220 kV lines and above). He expects the benefits of increased competition on efficiency, savings on regulatory costs and increased reliability to outweigh the cost of reorganization, the cost of the duplication of several activities currently carried out in one business unit of the integrated companies and the cost associated with cross-border leases. This paper presents an ex ante cost-benefit analysis of this proposal which demonstrates that it is unlikely that the benefits will exceed the costs for a large number of policy alternatives. Given the fact that the effects cannot be estimated with any great degree of certainty, there is still a possibility that this policy will be attractive. The only alternative which seems an appealing proposition is simply to extend the grids managed by the TSO. However, this crucial issue depends on one controversial report.