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%.