New Zealand’s electricity sector is organised in a way that is very similar to how many liberalised electricity sectors around the world have become organised. Natural monopoly activities like high-voltage long-distance transmission, and lower-voltage shorter-distance distribution, have been separated from competitive activities like generation, and retailing. Some generators and retailers are vertically integrated – i.e. commonly owned and controlled – “gentailers”. Each gentailer competes with other gentailers, and also with stand-alone (separated) generators or retailers. The pros and cons of vertical integration between generation and retailing – “gentailing” – is often the subject of scrutiny. It is currently receiving scrutiny in New Zealand with lower-thannormal hydro lake levels and disruptions in the availability of gas-based generation having led to sustained increases in wholesale prices. This has placed strain on separated retailers and large consumers purchasing electricity at those prices. A natural question is whether vertical integration is exacerbating this situation, and whether separating gentailers might improve it? This study surveys scholarly economics literatures on the pros and cons of vertical integration between generation and retailing – relative to their vertical separation – in electricity and comparable sectors. It focuses on the pros and cons of vertical integration relative to vertical separation – between generation and retailing – from the perspective of electricity consumers. In the main, distinctive features of electricity systems serve to reinforce the overall conclusions of studies of vertical integration and vertical separation from a wide range of sectors including electricity sectors. Specifically, that vertical integration – where it naturally arises – is superior to vertical separation in managing wholesale price risks, supporting investment, reducing incentives for the exercise of market power, and providing better outcomes for consumers. The main sources of these benefits are through integration offering much more effective protection against wholesale price risks, which means consumers can be insulated from wholesale price volatility, and gentailers are better able to finance investments. However, another key benefit is that vertical integration avoids inefficiencies in pricing along the vertical supply chain – i.e. it achieves the so-called “elimination of double marginalisation” – which results in lower retail prices than would arise under separation. Importantly, these benefits of integration often coexist with practices by integrated firms that appear to be anticompetitive. These include foreclosure (refusing to supply rivals), and raising rivals’ costs (by purchasing on wholesale markets to raise wholesale prices, and hence the input costs of separated downstream rivals). However, integration is not always associated with such activities, especially in electricity systems which have design and regulatory features which reduce foreclosure risk. And even when foreclosure incentives exist, the benefits of integration are sufficient to result in net consumer benefits. In any case, separated firms can also engage in anticompetitive activities – but without the countervailing benefits of integration. They can also engage in countervailing strategies, such as integrating themselves, or using contracting to offset or neutralise integrated firms’ strategies. These conclusions do not imply that “one size fits all” – not all firms find it beneficial to be vertically integrated. Indeed, many studies show that firms would often prefer not to be vertically integrated, as they could make higher profits by remaining separated. However, integrating can still be their best strategy if they can’t stop their rivals from integrating. This means many firms find integration to be their “least worst” alternative – they do it even though it reduces their profits, because not doing so when their rivals do means they could suffer even worse profits. Importantly, when firms find it beneficial to integrate, this also tends to benefit consumers. However, depending on the existing level of integration and their own circumstances, some firms may still find it preferable to separate, or to remain separated. Integrated firms might also find it preferable to separate if circumstances change to make alternatives to integration more viable solutions to the challenges that cause firms to integrate in the first place. Where naturally-occurring vertically integrated firms are forcibly separated, there is solid evidence from a variety of sectors around the world that this harms consumers. There is also evidence that it can harm separated retailers, and the large customers that purchase electricity directly on wholesale markets. Ironically, where vertical separation of integrated firms is mandated, this forces those firms to use contracting to a greater degree to try to replicate the outcomes of vertical integration. This undermines separation, and imposes costs on firms and consumers alike where contracting is only an imperfect substitute for integration. Where neither approach is feasible – i.e. where separation is mandated, and contracting is not permitted – there is clear evidence that this can lead to system-wide collapse (e.g. as occurred in California in 2000-2001). A balanced assessment of the pros and cons of either approach, and an acknowledgement that policymakers do not face a simple choice between complete integration and complete separation, is therefore critical for identifying the source of any perceived problems in alreadyintegrated electricity sectors. It is important for distinguishing the impacts of vertical integration or separation from other relevant considerations, such as fuel supply volatility, or (as in California) ill-considered or poorly implemented reforms. It is also critical for ensuring that any policy prescriptions meet their stated aim, and avoid causing greater problems.