Market forces unleashed by deregulation are starting to reshape the US electric utility industry. As with banking and telecommunications before it, the sector is set to be transformed. Mergers and massive consolidation will take place. New competitors will emerge to redefine the economics and competitive dynamics of the business, just as MCI did in telecom, and Fidelity in banking. Some traditional players, like AT&T and Citibank, will make and mold the transition; others will dwindle, vanish, or be subsumed. The winners will create substantial value for their shareholders.

This vertically integrated industry is about to fragment into three separate but linked businesses—generation, wires, and power services—plus a dispatch function (Exhibit 1). Each will have its own players and distinctive competitive dynamics. Generation will be a cost-based commodity business. Wires, combining transmission and distribution functions, will consist of regulated open-access networks. Power services, encompassing wholesale and retail commodity sales and including other energy and nonenergy products, will be provided by a third set of competitors. The dispatch function, responsible for scheduling, grid control, and price settlements, will be fulfilled by an independent regulated entity.

Tremendous value is at stake as the industry evolves into these three businesses. The delivered cost...