Are Municipal Electricity Distribution Utilities Natural Monopolies?

The purpose of this study is to analyse the cost structure of the Swiss electricity distribution utilities in order to assess economies of scale and density and the desirability of competition in the distribution of electric power. A translog cost function was estimated using panel data for a sample of 39 municipal utilities over the period 1988–1991. The results indicate the existence of economies of density for most output levels and the existence of economies of scale only for small and medium-sized electric utilities. The empirical evidence suggests that franchised monopolies, rather than side-by-side competition, is the most efficient form of production organization in the electric power distribution industry. Further, the majority of the utilities analysed do not operate at an optimal service territory size. Therefore, the consolidation of small utilities whose service territories are adjacent is likely to reduce costs.     

Is big better? On scale and scope economies in the Portuguese water sector

The ‘big is better’ idea has recently been challenged in network industries. Scale economies are considered finite so that for the individual utility an optimal scale of operations arises. A similar observation yields for scope economies as joint production is not predicted univocally anymore. In the water sector, scale economies and joint production are preferred. Nevertheless, several countries are restructuring the sector in order to improve the scale and scope of operations. This article intends to provide some insights into this matter. We analyze the Portuguese water market structure using non-parametric techniques with data from the year 2005. After surveying the literature on scale and scope economies, we discuss the peculiarities of the Portuguese water sector. The paper confirms the natural monopoly features. Although scope economies are absent, it highlights scale economies. The optimal scale of the utilities is located between 160,000 and 180,000 inhabitants. As such, the Portuguese water sector optimally counts 60 water utilities.     

Cost Savings From Generation and Distribution with an Application to Italian Electric Utilities*

In the last decade, the European Commission promoted a new regulatory framework aiming at a gradual liberalization of the energy markets. The introduction of competition among generators implies the need to separate generation from transmission and distribution activities. However, if savings can be reached by operating at different stages, vertical separation would increase the costs of providing power. This paper tests for the presence of economies from vertical integration on a sample of Italian local electric utilities and finds evidence of both multi-stage economies of scale and vertical economies. Even if the hypothesis of global subadditivity is not supported, our evidence suggests that a complete divestiture policy would entail efficiency losses. *For helpful comments and discussions, we thank two anonymous referees, Graziano Abrate, Bruno Bosco, Diego Piacentino, and participants at the 31st Annual Conference of the European Association for Research in Industrial Economics (EARIE), Berlin, Germany, 2–5 September, 2004, the 60th Congress of the International Institute of Public Finance (IIPF), Milan, Italy, 23–26 August, 2004, and seminars held at the Bocconi University, University of Lecce, University of Naples, University of Pavia, and University of Turin, where earlier versions of this paper were presented. The financial support of MIUR (COFIN 2002) and HERMES Research Center is gratefully acknowledged. The usual disclaimer applies. **HERMES, Center for Research on Regulated Services, Fondazione Collegio Carlo Alberto, Via Real Collegio 30, 10024 Moncalieri (TO), Italy, http://www.hermesricerche.it.     

A generalized panel data switching regression model

This paper considers a generalized panel data model of polychotomous and/or sequential switching which can also accommodate the dependence between unobserved effects and covariates in the model. We showcase our model using an empirical illustration in which we estimate scope economies for the publicly owned electric utilities in the US during the period from 2001 to 2003.     

Electric power distribution: economies of scale,mergers, and restructuring

Electricity distribution is generally viewed as a natural monopoly and therefore as having the least potential for the kinds of reforms that have swept the electric power sector in many countries. Mergers among distribution companies and efforts at retail competition have nonetheless altered the operation of the distribution stage. This research into US electric utilities uses a much larger and less selective data base than previously available to examine the scale properties of distribution with respect to output, distance, and customer numbers, and for different functions within distribution. It finds significant economies at low output levels, holding system size and customer density constant, but the cost gradient is otherwise modest. It also finds that geographic size and customer numbers are quite important and that economies are significantly stronger for the infrastructure or ‘wires’ business than for the marketing function performed by distribution utilities. These results lend credence to efforts at retail competition that separates these functions, but cast doubt on the benefits of mergers between distribution systems.     

Economies of density, scale and scope in the water supply and sewerage sector: a study of four developing and transition economies

Using panel data, we estimate measures of density, scale and scope economies in four countries that differ substantially in their levels of economic development and in their piped water and sewerage coverage: Brazil, Moldova, Romania and Vietnam. We find evidence of economies of scale in Moldova, Romania and Vietnam. In Brazil, we cannot reject the null hypothesis of constant returns to scale. The results of this study show that the cost structure of water and sewerage utilities varies significantly within and between countries and over time.      

Excess Returns in Electric Utility Mergers During Transition to Competition

A standard event methodology is used to evaluate recent electric utility mergers as the industry moves to competitive generation markets. Statistically significant effects were focused on the day before the announcement and the day of the announcement, and were fairly small, although statistically significant. Shareholders perceive very little merger benefits occurring in a highly competitive generation sector. Markets reacted more positively to the gas/electric mergers, indicating stockholder appreciation for opportunities for scope economies. U.S. acquirers suffered no significant wealth losses in mergers with British and Australian utilities.     

Entry into the electric power industry

Entry of new firms into the electric power industry is becoming commonplace. The entrants typically are unregulated firms that compete with regulated electric utilities only in the generation stage of the latter's vertically integrated structure. Because of the asymmetric regulatory treatment of the incumbents and entrants, there is the possibility of biases either against efficient entry or for inefficient entry. A model of a vertical integrated utility subject to rate-of-return regulation is used to illustrate the biases, and several implications for regulatory policy are discussed.     

THE EFFECTS OF FIRM BOUNDARY AND FINANCING CONSTRAINTS ON UTILITY COSTS: THE CASE OF MUNICIPALLY OWNED ELECTRICITY DISTRIBUTION UTILITIES

ABSTRACT: A number of studies have examined costs and potential for scale and scope economies in electricity distribution; however, few if any, have examined this area in terms of the unique constraints associated with municipal ownership or historical and regulatory constraints associated with former municipal ownership. This paper focuses on 19 distribution‐only municipally owned utilities for a ten‐year period (1988–97). Distortions from variable outputs but largely fixed inputs are minimized. The data used were collected specifically to assess productivity, cost, and efficiency performance and include value‐based capital inputs and service prices. Outputs include energy conveyed and number of connections; inputs include capital, system losses, labour, and materials. We examine the effect of using third‐party financing (e.g., connection charges), with its inherent principal‐agent problems, on utility costs, as well as the effect of shared services and multi‐utility output (e.g., electricity and water). A translog total cost function is estimated. Our findings suggest significant returns to scope but also significant increases in costs associated with the use of third‐party financing. The results also suggest scale diseconomies. Shared outputs, which have been greatly restricted or eliminated under restructuring, may have provided larger, and now lost, economies than the scale returns blindly pursued by some through restructuring or incented/forced mergers or divestitures. Finally, it is clear that third‐party financing can raise costs; such financing is widely used among utilities providing electricity, gas, water, and telecommunications, and should be closely scrutinized.     

基于平台包络视角的平台生态系统竞争优势构建路径研究

通过对美团的发展历程和平台包络路径进行案例研究，梳理平台企业向平台生态系统演化过程中，如何通过平台包络战略获取竞争优势。研究发现，生态系统情境中竞争优势的构建路径与传统企业存在差异，平台包络战略通过“以用户需求为起点，利用横向包络和纵向包络获取互补性资源，最终实现全系统协同”路径获取竞争优势；平台利用相同组件进行包络，促进供给端效率性协同产生，进而实现供给端范围经济；利用重合的用户群体进行包络，激发需求端价值性协同产生，从而实现需求端范围经济，并通过用户数据资源的积极共享与深度使用，实现全系统协同，最终完成竞争优势构建；平台发起包络战略的过程也是平台向平台生态系统演化的过程，其中横向包络助益平台扩大用户规模，推动平台演化进程。     

Short-memory equilibrium in stochastic overlapping generations economies

In stochastic OLG exchange economies, we show that short-memory equilibria—the natural extension from deterministic economies of steady states, low-order cycles, or finite state-space stationary sunspots equilibria—fail to exist generically in utilities. As a result, even with independent and identically distributed exogenous shocks there is serial correlation in endogenous economic variables in equilibrium. This arises even if utilities are time-separable, some goods inferior, and there are no technological lags. Hence, the origins of economic fluctuations can be traced only to the demographic structure of a heterogeneous agent, multiple-good economy.     

Scope economies in the pharmaceutical sector

The paper’s objectives are twofold: to propose an experimental simulation to measure scope economies between pairs of submarkets and to point out the role of submarkets in explaining the concentration level in the pharmaceutical market. We simulate scope economies consistent with the diversification choices of large international companies in the years 1987 and 1997. Our results suggest that: i) the random diversification (that is no scope economies hypothesis) is rejected, and ii) scope economies are significant. (JEL: C15, D21, L11, L65)     

Economies of scope and the scope of the enterprise

This paper examines elements of an efficiency-based theory of the multiproduct firm. The theoretical framework developed by Williamson to explain vertical integration is extended to explain diversification. The proposition is advanced that a cost function displaying economies of scope has no direct implications for the scope of the business enterprise. However, if economies of scope are based upon the common and recurrent use of proprietary knowhow or the common and recurrent use of a specialized and indivisible physical asset, then multiproduct enterprise (diversification) is an efficient way of organizing economic activity. These propositions are first developed in a general context and then examined in the context of diversification in the U.S. Petroleum industry.     

DEREGULATION OF ELECTRICITY: A VIEW FROM UTILITY MANAGEMENT

Significant structural changes already have occurred in the electric power industry due to the Public Utility Regulatory Policies Act. The industry has not, however, faced the same degree of deregulation as has some other industries such as natural gas and telecommunications. This is not mere happenstance. In many ways, the electric power industry presents the toughest case of all for deregulation. In fact, deregulation—in the usual sense of the term—probably is both unlikely and undesirable. Government is involved in the industry directly and is unlikely to withdraw. The production, transmission, and distribution of electric power is characterized by physical interdependencies potentially giving rise to externality problems as well as economies of horizontal and vertical integration. Any initiative to deregulate or substantially restructure the industry must address fairness in transition rules, the exact nature of the utility's obligation to serve customers, the potential loss of integration and coordination efficiencies, and a host of issues surrounding market participants' transmission access. Similarities as well as important differences exist among the electric power, natural gas, and telecommunications industries, suggesting that their respective benefits and problems associated with deregulation may be different. Policymakers must not draw hasty parallels among these industries.     

The Effects of Rivalry with Price Regulation of Electric Power Generation

This article examines how rivalry between an electric utility and nonutility generators (NUGs) affects electricity prices, market structure and welfare. If a utility cannot break even financially when outputs are priced at marginal cost, then the Ramsey optimal price paid by a utility purchasing electricity from a NUG should be below avoided cost, in contrast to the requirements of PURPA. The analysis also compares FDC, Residual and Ramsey prices for a utilitys electricity sales. It illustrates how FDC prices may force a utility to exit relatively competitive business markets, eliminating any benefits of economies of scope from serving both business and residential customers.     

Vertical R&D Spillovers,Cooperation, Market Structure,and Innovation

This paper studies vertical R&D spillovers between upstream and downstream firms. The model incorporates two vertically related industries, with horizontal spillovers within each industry and vertical spillovers between the two industries. Four types of R&D cooperation are studied: no cooperation, horizontal cooperation, vertical cooperation, and simultaneous horizontal and vertical cooperation. Vertical spillovers always increase R&D and welfare, while horizontal spillovers may increase or decrease them. The comparison of cooperative settings in terms of R&D shows that no setting uniformly dominates the others. Which type of cooperation yields more R&D depends on horizontal and vertical spillovers, and market structure. The ranking of cooperative structures hinges on the signs and magnitudes of three "competitive externalities" (vertical, horizontal, and diagonal) which capture the effect of the R&D of a firm on the profits of other firms. One of the basic results of the strategic investment literature is that cooperation between competitors decreases R&D when horizontal spillovers are low; the model shows that this result does not necessarily hold when vertical spillovers are sufficiently high, and/or when horizontal cooperation is combined with vertical cooperation.     

ECONOMIES OF SCOPE FOR MICROFINANCE: DIFFERENCES ACROSS OUTPUT MEASURES

In banking, scope economies of mobilizing deposits and lending are often estimated, while consideration of the same measures for microfinance institutions (MFI) is still in its infancy. An open issue remains regarding what characterizes an output of an MFI. Moreover, depending on the output used, do estimated scope economies differ? We use a novel data set for over 800 MFI across more than 70 countries to estimate economies of scope. Our findings suggest that statistical differences arise between estimates of scope economies. However, our qualitative findings indicate that both of these measures provide similar overviews of the landscape of scope economies for MFI.     

HAVE RENEWABLE PORTFOLIO STANDARDS RAISED ELECTRICITY RATES? EVIDENCE FROM U.S. ELECTRIC UTILITIES

Using a panel dataset of U.S. electric utilities, we investigate the effect of a Renewable Portfolio Standards (RPS) on the rates of electric utilities affected by the mandate. Our findings are twofold. First, we find that, on average, electric utilities affected by an RPS mandate charged a higher electricity rate. This would suggest that an RPS mandate is a costly constraint on the utilities that have to comply with the requirement. The second finding of our analysis is that marginal increases in a utility's RPS requirement do not necessarily translate into higher electricity rates. This would imply that the costs imposed on utilities affected by the RPS mandate tend to be fixed costs rather than variable costs. We also find that controlling for time‐varying unobserved factors at the state level is key to identifying the RPS effect on electricity retail rates. (JEL Q42, Q48, L98)     

Racing in two dimensions

In this paper we study an industry in which there is an ongoing sequence of R&D races between two firms. Firms are engaged in product innovation. Products are horizontally and vertically differentiated. There are two key characteristics/dimensions to products, and the level at which these are embodied in products can be increased by R&D. At each time firms can spend R&D on improving their product in one or both dimensions. We allow the possibility of economies scope — so R&D undertaken in one dimension can spillover to the other. The question we are interested in is whether a firm that is ahead in a single dimension but behind in another will focus all its R&D effort in the area in which it is ahead (product specialisation), or whether it will try to do R&D in both dimensions in the hope that it might get ahead in both and end up with a superproduct that dominates in both characteristics. The outcome of this R&D competition determines a Markov transition probability matrix determining the evolution of the industry. We show that when the R&D technology is characterized by constant returns then the only steady-state outcome is one in which the economy stays forever in a position in which one firm produces a super-product and the other gives up doing R&D altogether. This outcome is unaffected by the degree of economies of scope. When the R&D technology is characterised by decreasing returns, then the industry will visit all states and so will exhibit both product specialisation and superproduct dominance at various times. Now the extent of economies of scope matters and we show that the greater the extent of economies of scope, the less likely is the industry to exhibit product dominance, and the more likely it is to exhibit product specialisation.     

Shadow prices of $$\hbox {CO}_{2}$$ emissions at US electric utilities: a random-coefficient,random-directional-vector directional output distance function approach

We estimate the shadow prices of \(\hbox {CO}_{2}\) emissions of electric utilities in the US over the period from 2001 to 2014, using a random-coefficient, random-directional-vector directional output distance function (DODF) model. The main feature of this model is that both its coefficients and directional vector are allowed to vary across firms, thus allowing different firms to have different production technologies and to follow different growth paths. Our Bayes factor analysis indicates that this model is strongly favored over the commonly used fixed-coefficient DODF model. Our results obtained from this model suggest that the average annual shadow price of \(\hbox {CO}_{2}\) emissions ranges from $61.62 to $105.72 (in 2001 dollars) with an average of $83.12. The results also suggest that the firm-specific average shadow price differs significantly across electric utilities. In addition, our estimates of the shadow price of \(\hbox {CO}_{2}\) emissions show an upward trend for both the sample electric utilities as a whole and the majority of the individual sample electric utilities.