Advertisement

Journal of Regulatory Economics

, Volume 42, Issue 1, pp 95–114 | Cite as

Economies of scope in electricity supply and the costs of vertical separation for different unbundling scenarios

Original Article

Abstract

Motivated by the movement towards vertical unbundling in Europe this study measures the economies of scope for the U.S. electricity industry based on a multi-stage cost function. The paper analyzes three unbundling options and finds evidence for synergies that may be explained by coordination and risk effects. Separating generation from networks and retail appears to be the most costly alternative with an average cost increase of 19 to 26%. If generation and transmission remain integrated but are separated from distribution and retail, average scope economies amount to 8 to 10%. A split between the transmission level and the remaining supply stages leads to a cost increase of approximately 4%.

Keywords

Ownership unbundling Vertical integration Economies of scope Coordination economies Market risk Cost function estimation 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Arocena P. (2008) Cost and quality gains from diversification and vertical integration in the electricity industry: A DEA approach. Energy Economics 30: 39–58CrossRefGoogle Scholar
  2. Arocena, P., Saal, S., & Coelli, T. (2009). Measuring economies of horizontal and vertical integration in the U.S. electric power industry: How costly is unbundling? Working paper RP 0917, Birmingham: Aston Business School.Google Scholar
  3. Baumol, W., Panzar, J. C., & Willig, R. D. (1982). Contestable markets and the theory of industry structure. New York: Harcourt, Brace, and Javanovich.Google Scholar
  4. Brunekreeft, G. (2008). Ownership unbundling in electricity markets – A social cost benefit analysis of the German TSOs. UNECOM discussion paper DP 2008–05 (www.unecom.de), Jacobs University Bremen and EPRG Working Paper 0816, University of Cambridge.
  5. Bushnell J. (2004) California’s electricity crisis: A market apart?. Energy Policy 32(9): 1045–1052CrossRefGoogle Scholar
  6. Bushnell, J., Mansur, E., & Saravia, C. (2004). Market structure and competition: A cross-market analysis of U.S. electricity deregulation. CSEM Working Paper 126, California: University of California Energy Institute.Google Scholar
  7. De Nooij, M., & Baarsma, B. (2007). An ex ante welfare analysis of the unbundling of the distribution and supply companies in the Dutch electricity sector. SEO Discussion Paper 52 and UNECOM DP 2008-02.Google Scholar
  8. EC (1996). Directive 96/92/EC, 1996, of the European parliament and of the council of Dec. 19, 1996, concerning common rules for the internal market in electricity. Brussels: European Commission.Google Scholar
  9. EC (2003). Directive 2003/54/EC, 2003, of the European parliament and of the council of June 26, 2003, concerning common rules for the internal market in electricity and repealing directive 96/92/EC. Brussels: European Commission.Google Scholar
  10. EC: (2007) DG competition report on energy sector inquiry. European Commission, BrusselsGoogle Scholar
  11. EC (2009). Directive 2009/72/EC of the European parliament and of the council of 13 July 2009 concerning common rules for the internal market in electricity and repealing directive 2003/54/EC. Brussels: European Commission.Google Scholar
  12. Ehlers, E. (2010). Electricity and gas supply network unbundling in Germany, Great Britain and the Netherlands and the Law of the European Union: A comparison. Antwerp: Intersentia.Google Scholar
  13. Fraquelli G., Piacenza M., Vannoni D. (2005) Cost savings from generation and distribution with an application to Italian electric utilities. Journal of Regulatory Economics 28(3): 289–308CrossRefGoogle Scholar
  14. Jara-Díaz S., Ramos-Real F. J., Martíınez-Budría E. (2004) Economies of integration in the Spanish electricity industry using a multistage cost function. Energy Economics 26: 995–1013CrossRefGoogle Scholar
  15. Joskow P., Schmalensee R. (1983) Markets for power: An analysis of electric utility deregulation. MIT Press, CambridgeGoogle Scholar
  16. Kaserman D., Mayo J. (1991) The measurement of vertical economies and the efficient structure of the electric utility industry. The Journal of Industrial Economics 39(5): 483–502CrossRefGoogle Scholar
  17. Kolbe L., Read J. (1986) The cost of capital. MIT Press, CambridgeGoogle Scholar
  18. Kwoka J. E. (2002) Vertical economies in electric power: Evidence on integration and its alternatives. International Journal of Industrial Organization 20: 653–671CrossRefGoogle Scholar
  19. Meyer, R. (2011). Vertical economies and the costs of separating electricity supply – A review of theoretical and empirical literature. Bremen Energy Working Papers No. 06. Bremen: Bremer Energie Institut.Google Scholar
  20. Nillesen P., Pollitt M. (2011) Ownership unbundling in electricity distribution: Empirical evidence from New Zealand. Review of Industrial Organization 38(1): 61–93CrossRefGoogle Scholar
  21. Prais, S., & Winsten, C. (1954). Trend estimators and serial correlation, Cowles Commission Discussion Paper 383, Chicago.Google Scholar
  22. Willems, B. (2005). Cournot Competition, financial option markets and efficiency. CSEM Working Paper 139. Berkeley: University of California Energy Institute.Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.Jacobs University Bremen/Bremer Energie InstitutBremenGermany

Personalised recommendations