Transmission and distribution networks are "natural monopolies", and it is not rational to have more than one operator (DSO or TSO). Energy production and sale are, on the other hand, open to the market.

Given the cost of the assets, their long lifetimes and the difficulty in getting access to land on which to place the assets it is generally in the best interest of the community for the transmission and distribution systems to be "natural monopolies" and not be duplicated. This requires the shared assets to have close independent regulatory overview to provide open access to the assets and ensure they are constructed and maintained in the most efficient manner to meet set reliability and security requirements. Dedicated connection assets are paid for by a single customer and hence the construction and maintenance regime utilised for those assets are at their discretion.

The regulatory authority should limit the profit of a distribution company to a small percentage. As Dr. Loveday said, for social reasons (to keep the electricity price low) the payback time for these assets should be almost equal to their lifetime. The distribution cost pe kWh should be set according to the investments needed.

Dear Alexander, Dear Anthony and Dear Lucian

Thanks for your responses. My other query is that in a power system, how bilateral transactions can be implemented? How a retailer can direct a specified amount of power to a specific consumer? or how a wholesaler directs a specified power to a specific retailer? While Kirchoff's laws determine the power of different parts of the system?

In relation to your other query about bilateral transactions, the customer's load determines the amount of power that flows to the customer. Customers (I refer to large customers in general) will have contracts with retailers and with Network Service Providers that may specify demand charges (kW or kVA) and energy charges (kWh) on which the charges to the customer will be made. Of course other parameters such as time of use, maximum motor starting current, flicker, harmonics, security, reliability, supply voltage, point of common coupling, etc.. may, and generally are, specified and may impact the charges. Network Service Providers need to ensure they can supply the required levels of demand, power quality, security and reliability and the network charges to the customer are based on the value of the shared assets and the dedicated assets used to supply the customer, as well as rate of asset depreciation and cost of asset maintenance. When supplying a number of customers an appropriate amount of diversity may be determined to ensure the supply network is planned and constructed in the most efficient manner. Retailers need to ensure they can supply the required energy and may have contracts with generators and may purchase energy from the market (or a combination based on their risk profile and shapes of customer loads in their portfolio) to provide for the needs of their customers. Of course this is a fairly simplistic view and many of these areas are each worthy of detailed economic and engineering research in themselves.