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.     

Does more competition increase business-level innovation? Evidence from domestically focused firms in emerging economies

This paper explores the relationship between the level of competition and innovation output for domestically focused businesses in emerging economies in Central and Eastern Europe and Central Asia. It uses survey data from 5054 businesses from the fifth Business Environment and Enterprise Performance Survey. A multivariate probit estimation of the likelihood of different innovation types finds that higher levels of competition are associated with greater likelihood of innovation, but this rises at a decreasing rate as competitor numbers grow. Also, firms operating in economies where competition policy is more effectively enforced are more likely to innovate. However, there is a point where ‘too much’ competition leads to less innovation – suggesting a tipping point effect. This suggests that policies to maximise competition, as measured by number of competitors, may not be optimal for promoting innovation in emerging economies. This requires a need for more nuanced competition policy approaches. The paper also finds that businesses relying on local markets are significantly less likely to introduce innovations than businesses trading domestically outside their local area, but increased competition in local markets increases the likelihood of businesses introducing product innovation. This points to a local rivalry effect.     

Governance Alternatives and Pricing in the U.S. Electric Power Industry

Alternative governance mechanisms can be expected to resultin differences in enterprise performance. This research analyzesthe prices charged by U.S. electric utilities using a comprehensivepricing model and a large and detailed dataset that controlsfor enterprise costs and subsidies. It finds that public ownershipis associated with significantly lower prices than with privatelyowned utilities, most likely because the latter are subjectto regulation. Also associated with lower prices are electedcommissioners (rather than those appointed by state governors),commissions with fewer members, and utilities whose governingbodies hold open meetings–all characteristics that implymore direct consumer influence on the price-determination process.Among customer groups, residential users are the biggest beneficiariesof public ownership, while industrial users appear to have moreinfluence with elected state regulatory commissions. These findingsare reconciled with theory and help explain the sometimes ambiguousresults of previous studies.     

VERTICAL AND HORIZONTAL ECONOMIES IN THE ELECTRIC UTILITY INDUSTRY: AN INTEGRATED APPROACH

ABSTRACT ** :  The empirical literature on the cost structure of the electric utility industry traditionally focused on the measurement of specific technological properties: 1) scale economies in generation or distribution; 2) multi-product (or horizontal) scope economies at one particular stage; 3) multi-stage (or vertical) scope economies. By adopting an integrated approach, which simultaneously considers both horizontal and vertical aspects of the technology, we find the presence, on a sample of Italian electric utilities, of both vertical integration gains and horizontal scope economies at the downstream stage. In the light of recent regulatory reforms aiming at restructuring European electricity markets, our findings have important policy implications as for the proper configuration of the industry. Moreover, this methodology can be usefully applied to the study of the production structure of other public network utilities involved in similar vertical and horizontal reorganization processes.     

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

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%.     

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.     

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)     

Efficiency analysis of German electricity distribution utilities – non-parametric and parametric tests

This study applies non-parametric and parametric tests to assess the efficiency of electricity distribution companies in Germany. Traditional issues in electricity sector benchmarking are addressed, such as the role of scale effects and optimal utility size, as well as new evidence specific to the situation in Germany. Labour, capital, and peak load capacity are used as inputs, and units sold and the number of customers as output. The data cover 307 (out of 553) German electricity distribution utilities. A data envelopment analysis (DEA) is applied with constant returns to scale (CRS) as the main productivity analysis technique, whereas stochastic frontier analysis (SFA) with distance function is the verification method. The results suggest that returns to scale play but a minor role; only very small utilities have a significant cost advantage. Low customer density is found to affect the efficiency score significantly, in particular in the lower third of all observations. Surprisingly, East German utilities feature a higher average efficiency than their West German counterparts. The correlation tests imply a high coherence of the results.     

Wholesale Spot Price Pass-Through

It has been proposed that, when electricity markets open to retail competition, incumbent distribution utilities should be required to sell to residential customers at wholesale spot market prices. It is argued here that this overestimates the value of spot-price sales to customers, and underestimates the costs and disadvantages of the proposed policy. Experience in San Diego illustrates the problems. But other policies such as shopping credits have deficiencies too. An alternative approach, based on transitional maximum price caps, has facilitated the development of a competitive and fully deregulated residential retail market in the United Kingdom.     

Rate structures in nuclear and non-nuclear US electric utility jurisdictions

This study investigates whether the structure of customer rates for US electric utilities with nuclear power generation is significantly different from the rate structure of non-nuclear utilities. Using previous estimates of the marginal costs of generation by nuclear and fossil-fuel plants, and of transmission and distribution, tests are made to determine if pricing practices are similar in nuclear and non-nuclear jurisdictions. The results show that the rate structure for the nuclear utilities is inefficient, with industrial rates significantly higher than first-best or second-best pricing criteria allow, whereas the rates for non-nuclear utilities are second-best efficient, with a slight favouritism toward the industrial class.     

Financial openness,market structure and private credit: An empirical investigation

Consistent with recent theoretical models, this paper finds that financial openness has a positive effect on private credit in economies characterized by a competitive banking sector, but that this effect vanishes and even becomes negative in economies with imperfect banking competition.     

Service quality,scale economies and ownership: an econometric analysis of water supply costs

Issues related to service quality are crucial for water utility management and regulation. Omitting these aspects, especially when they are treated as exogenous, can lead to large biases in estimating cost functions as well as to misleading information concerning technology. In this article, we integrate the output multi-dimension in the cost function, considering delivered water volume and service quality as being endogenous. Network-related scale measures and private versus public ownership are investigated with the objective of evaluating how endogenous quality may affect their impact on costs. A translog cost model is estimated from a dataset of US water utilities. It is shown that including the quality level of the delivered services has a significant impact on scale economies and ownership effects. Significant economies of scope confirm the existence of trade-offs between water production and service quality.     

Stock returns and output growth in emerging and advanced economies

This paper studies the correlation between output growth and lagged stock returns in a panel of emerging market economies and advanced economies. It finds that the proportion of countries in which this correlation is significant is the same for emerging market economies as it is for advanced economies using yearly data, and somewhat lower using quarterly data. Asset prices therefore seem to contain valuable information to forecast output also in emerging market economies. Moreover, the paper finds that the strength of the correlation between output growth and lagged stock returns is significantly related to a number of stock market characteristics, such as a high market capitalization to GDP ratio and, less robustly, English legal origin and the number of listed domestic companies and initial public offerings.     

Sources of business-cycle volatility: An exploratory study on a sample of OECD countries

This paper investigates the sources of output volatility in twenty-four OECD economies using annual data from the 1960 to 1990 period. The paper finds that output volatility is positively related to the volatility of the money supply and the variance of the Solow residual, but negatively related to government size. The degree of openness of the economy and the exchange rate flexibility are also positively related to the size of business fluctuations, while price flexibility and industrial structure have no effect on output volatility. These results shed some light on the issue of the sources of business cycles.     

Trade credit use and competition in the value chain

Trade credit is a major source of finance in value chains in developed and emerging economies. Despite its ubiquitous use, this is one of the first empirical studies that analyzes why the use of trade credit varies along the value chain. We argue that competition faced by firms at different stages in the value chain and enforcement mechanisms that stimulate repayment jointly determine the use of trade credit. We distinguish two dimensions of competition, that is, rivalry and customer bargaining power. Competition may stimulate firms to provide trade credit to keep customers from switching to other suppliers. Yet, high contract enforcement costs relative to the value of the transactions, reduce the willingness to offer trade credit. We find empirical evidence showing that competition does not (strongly) influence the use of trade credit in the retail market, whereas it does in the markets for wholesalers and millers. We interpret these results as suggestive evidence that the retail, wholesale and milling market segments differ in terms of the enforcement costs involved in the provision of trade credit. Rivalry at the retail market segment makes switching easy for customers, even in case of default. As enforcement of repayment in this market segment is difficult and costly, trade credit appears to be a risky and less attractive marketing instrument for retailers. In contrast, in the wholesale and milling market segment, trade credit is widespread as stakeholders know each other, making informal mechanisms effective in supporting the enforcement of trade credit repayment.     

Production, trade, prices, exchange rates and equilibration in large experimental economies

We study market equilibration in laboratory economies that are larger and more complex than any that have been studied experimentally to date. Complexity is derived from the fact that the economies are “international” in economic structure with multiple input, output, and foreign exchange markets in operation. The economies have twenty-one markets and due to the fact that they have roughly fifty agents, the economies are characterized by several hundred equations. In spite of the complexity and interdependence of the economy, the results demonstrate the substantial power of the general equilibrium model of perfect competition to predict the direction of movement of market-level variables. Empirical patterns in the convergence process are explored and described.     

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.     

Municipal aggregation and retail competition in the Ohio energy sector

Ohio allows communities to vote to aggregate the loads of individual consumers (unless they opt out) in order to seek a competitive energy supplier. Over 200 communities have voted to do this for electricity. By 2004 residential switching reached 69% in Cleveland territory (95% from municipal aggregation) but by 2006 had fallen to 8%. Savings are now small, but customer acquisition costs are low and the cost to consumers is negligible. Aggregation and retail competition have been thwarted by Rate Stabilization Plans holding incumbent utility prices below cost since 2006. In the Ohio gas sector, rate regulation has not discouraged aggregation and competition, but market prices falling below municipally negotiated rates can be politically embarrassing. Municipal aggregation thus works when conditions allow it, and enhances competition. How it would fare against individual choice in a market conducive to retail competition remains an open question.      

An empirical investigation of customer market analysis–a microfoundation for macroeconomics

The slow adjustment and stickiness of output prices is widely regarded as an important determinant of macroeconomic behaviour. Recently, a number of writers have argued that customer market analysis can provide a microfoundation for price stickiness. This paper develops the theory of a firm selling in a customer market and investigates the empirical implications of the theory. The model is shown to imply a particular pattern of behaviour between retail prices and wholesale prices. Data on retail and wholesale prices for the United States, the United Kingdom and Australia at various levels of aggregation is investigated and found to support the predictions of the customer market model. In the conclusion the macroeconomic implications of the empirical conslusions are drawn out.     

Economies of scale in the Australian tourism industry

The measurement of economies of scale in the tourism industry has not been done to this point, as tourism is not a specific industry according to international statistical standards. Among many industries related to tourism, four sectors (accommodation, transport, retail trade and recreational services) across six states and two territories from 1997 to 2007 are studied as they contribute nearly 70% of tourism output in Australia. By comparing regression results from the Cobb–Douglas (C–D) production function and the translog production function, we find that there is evidence of increasing returns in transport, retail trade and recreational services at the industry level. However, accommodation is characterized by constant returns to scale at the industry level. As accommodation is responsible for the biggest share of tourism output, this suggests that overall the tourism sector is not characterized by increasing returns. We also find that the degrees of returns to scale from the C–D and translog production functions are different and that the imposition of input share also influences the empirical results. Both of these factors stress the importance of model specification to the measurement of economies of scale.