Functional unbundling is the separation of component parts of a previously unified product or service usually provided by a single party into distinct products or services each provided by different parties. In the energy industry, functional unbundling of services is often accompanied by the insistence on a structural unbundling of a vertically integrated utility that formerly provided all of those services.

A vertically integrated utility is often required to choose one component service in which it will specialize and restructure or divest itself of all parts of its business related to services in which it will not participate. The unbundling of a utility's divisions handling these component services is referred to as structural unbundling.

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