Uncertainty, Capacity Costs, and Potential Gains From Cooperation and Competition

During the actual debate on reforming the European utility industry the concept of regional monopolies is challenged. Opponents of deregulation in the utility industries argue that competition fails to guarantee security of provision in view of severe uncertainties. This paper analyzes the question to what extent markets can coordinate the supply of different utilities under demand and breakdown uncertainty. First, the isolated regional monopolies are compared with the cooperative solution. Subsequently, competitive wholesale trade is introduced where customers still cannot choose between different utilities. Finally, competitive retail markets are considered.