| 1, 2005 | Vertical and Horizontal Economies in the Electric Utility Industry: An Integrated Approach |
| authors |
Massimiliano
PIACENZA
Davide
VANNONI |
| The empirical literature on the cost structure of the electric utility industry traditionally focused on the measurement of specific technological properties: i) scale economies in generation or distribution; ii) multi-product (or horizontal) economies of scope at the downstream stage; iii) multi-stage (or vertical) economies of scope between generation, transmission and distribution. This paper extends the results of previous studies by adopting an integrated approach, which simultaneously considers both horizontal and vertical aspects of the technology. The methodology is based on the estimation of a Composite cost function model (Pulley and Braunstein, 1992), which has been proven to be particularly apt for the analysis of cost properties of multi-output firms. The econometric evidence for a sample of 25 Italian electric utilities, operating in generation and distribution and serving different categories of users, highlights the presence of both vertical integration gains and scope economies at the downstream stage. In the light of recent regulatory changes in Europe, our findings have important policy implications for the optimal reorganization of the electric markets. Finally, our methodology can be usefully applied to the study of other network utilities involved in vertical and horizontal expansion processes, such as gas, water and telecommunications. |
| this page updated
07/21/2005