Most firms in the electricity sector are vertically integrated. Often these integrated firms are accused of using income generated in the regulated sector in order to cross-subsidize their unregulated activities. This cross-subsidization is said to distort the level-playing field and lead to an unfair competition between incumbent and entrants.
In this paper we argue that cross-subsidies are a normal business practice which should only be a concern when they are part of anti-competitive practice such as a price squeeze or predatory pricing. If the government is concerned about those practices, it should evaluate the sector using a similar analysis as developed under Article 82 EC, regardless of whether cross-subsidies are involved.
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