The Direct Costs and Benefits of US Electric Utility Divestitures
AbstractThis paper studies the impact of divestiture on the efficiency and costs of electric utilities. The empirical literature shows that there exist economies of scope for electric utilities and that divestiture decreases distribution efficiency but increases generation efficiency. This paper is to bring together these different results. Our analysis covers distribution, transmission, and power sourcing. Our data is an unbalanced panel of about 138 US electric utilities for the years 1994 to 2006 over which we observe 30 divestitures between 1997 and 2003. First, we regress firmlevel efficiencies for distribution and power sourcing on various divestiture indicators. Second, we compare the weighted cost between divested and non-divested firms and calculate a net present value for the entire sample of divestitures. Last, we regress net benefits from divestiture on the distribution side on the net benefit for power sourcing to see whether individual firms successfully off-set any costs of divestiture. We find that divestiture reduces distribution efficiency but increases power sourcing efficiency. Both effects depend on the amount of own nuclear generation output but not fossil-fuel or hydro output. The net present value for all divestitures in our sample is $11.3 billion. It seems that relatively lower costs of power outweigh losses in economies of scope as well as other restructuring costs. However, lower costs of power might be the result of favourable contracts put in place at the time of divestiture. Our study complements traditional studies of economies of scope and shows that divestitures might well be worth it.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1049.
Date of creation: 01 Oct 2010
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Web page: http://www.econ.cam.ac.uk/index.htm
Electric utilities; divestiture; economies of scope; net present value;
Find related papers by JEL classification:
- L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-16 (All new papers)
- NEP-EFF-2010-10-16 (Efficiency & Productivity)
- NEP-ENE-2010-10-16 (Energy Economics)
- NEP-REG-2010-10-16 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John Kwoka & Michael Pollitt & Sanem Sergici, 2010.
"Divestiture policy and operating efficiency in U.S. electric power distribution,"
Journal of Regulatory Economics,
Springer, vol. 38(1), pages 86-109, August.
- Kwoka, J. & Ozturk, S. & Pollitt, M.G., 2008. "Divestiture Policy and Operating Efficiency in U.S. Electric Power Distribution," Cambridge Working Papers in Economics 0835, Faculty of Economics, University of Cambridge.
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