Vertical and Horizontal Economies in the Electric Utility Industry: An Integrated Approach

11 Pages Posted: 28 Sep 2004

See all articles by Massimiliano Piacenza

Massimiliano Piacenza

University of Torino - Department of Economics and Statistics

Davide Vannoni

Faculty of Economics- University of Torino

Date Written: September 2004

Abstract

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.

Keywords: Electric utilities, Vertical and horizontal scope economies, Composite cost function

JEL Classification: C52, D20, L50, L94

Suggested Citation

Piacenza, Massimiliano and Vannoni, Davide, Vertical and Horizontal Economies in the Electric Utility Industry: An Integrated Approach (September 2004). Available at SSRN: https://ssrn.com/abstract=596361 or http://dx.doi.org/10.2139/ssrn.596361

Massimiliano Piacenza (Contact Author)

University of Torino - Department of Economics and Statistics ( email )

School of Economics
Corso Unione Sovietica 218 bis
Torino, TO 10134
Italy
+39 011 6706188 (Phone)
+39 011 6706062 (Fax)

HOME PAGE: http://web.econ.unito.it/piacenza/

Davide Vannoni

Faculty of Economics- University of Torino ( email )

Corso Unione Sovietica 218bis
10134 Torino
Italy
+39+011+7716806 (Phone)
+39+011+6706062 (Fax)