Structural reform of Japanese electric power industry: Separation between generation and transmission & distribution
This study examines the cost structure of Japanese electric power industry to investigate whether a structural reform on the industry really enhances a cost-saving benefit to consumers. A composite cost function model, using a panel data set, is used for this study. The data set consists of nine electric power companies from 1990 to 2008. Based upon the estimation results, this study examines whether economies of scale and vertical economies exist in the industry. Then, this study conducts a cost subadditivity test that is a necessary condition of natural monopoly. The empirical results indicate that the electric power firms exhibit the status of economies of scale in their transmissions and distributions and the operation as a whole. However, they do not exhibit economies of scale in their generations. Thus, the transmission operation, by integration, in a large area can improve its economic efficiency. Furthermore, the industry should introduce more competition in both generation and wholesale power markets where more firms can participate in their power trades. This study also empirically confirms that vertical economies have existed in the industry. Moreover, this study confirms that all the estimates in the cost subadditivity test satisfy the necessary condition of natural monopoly, where each estimate indicates cost saving in cost subadditivity. The test does not guarantee a sufficient condition of natural monopoly. However, it clearly indicates that the functional separation between generation and transmission will increase total production cost in the industry. The complete separation may result in a net loss of economic efficiency if a competition benefit does not exceed an expected economic loss. Consequently, this study suggests that the industrial structure of future Japanese electric power industry should be evaluated from not only an expected benefit by introducing competition but also an unbundling cost that occurs with a loss of vertical integration.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
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.:
- Evans, David S & Heckman, James J, 1984. "A Test for Subadditivity of the Cost Function with an Application to the Bell System," American Economic Review, American Economic Association, vol. 74(4), pages 615-23, September.
- Sueyoshi, Toshiyuki & Goto, Mika, 2012. "Returns to scale and damages to scale on U.S. fossil fuel power plants: Radial and non-radial approaches for DEA environmental assessment," Energy Economics, Elsevier, vol. 34(6), pages 2240-2259.
- Nemoto, Jiro & Goto, Mika, 2004. "Technological externalities and economies of vertical integration in the electric utility industry," International Journal of Industrial Organization, Elsevier, vol. 22(1), pages 67-81, January.
- Houldin, Russell William, 2005. "Lost Economies of Integration and the Costs of Creating Markets in Electricity Restructuring: Evidence from Ontario," The Electricity Journal, Elsevier, vol. 18(8), pages 45-54, October.
- Giovanni Fraquelli & Massimiliano Piacenza & Davide Vannoni, 2005. "Cost Savings From Generation and Distribution with an Application to Italian Electric Utilities," Journal of Regulatory Economics, Springer, vol. 28(3), pages 289-308, November.
- Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
- Baltagi, Badi H. & Chang, Young-Jae, 1994. "Incomplete panels : A comparative study of alternative estimators for the unbalanced one-way error component regression model," Journal of Econometrics, Elsevier, vol. 62(2), pages 67-89, June.
- Arocena, Pablo, 2008. "Cost and quality gains from diversification and vertical integration in the electricity industry: A DEA approach," Energy Economics, Elsevier, vol. 30(1), pages 39-58, January.
- Jara-Diaz, Sergio & Ramos-Real, Francisco Javier & Martinez-Budria, Eduardo, 2004. "Economies of integration in the Spanish electricity industry using a multistage cost function," Energy Economics, Elsevier, vol. 26(6), pages 995-1013, November.
- Pulley, Lawrence B & Braunstein, Yale M, 1992. "A Composite Cost Function for Multiproduct Firms with an Application to Economies of Scope in Banking," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 221-30, May.
- Biorn, Erik, 2004. "Regression systems for unbalanced panel data: a stepwise maximum likelihood procedure," Journal of Econometrics, Elsevier, vol. 122(2), pages 281-291, October.
- A. Charnes & W. W. Cooper & T. Sueyoshi, 1988. "A Goal Programming/Constrained Regression Review of the Bell System Breakup," Management Science, INFORMS, vol. 34(1), pages 1-26, January.
- Lee, Byung-Joo, 1995. "Separability Test for the Electricity Supply Industry," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(1), pages 49-60, Jan.-Marc.
- Sueyoshi, Toshiyuki & Anselmo, Peter C, 1986. "The Evans and Heckman Subadditivity Test: Comment," American Economic Review, American Economic Association, vol. 76(4), pages 854-55, September.
- Massimiliano Piacenza & Davide Vannoni, 2009. "Vertical And Horizontal Economies In The Electric Utility Industry: An Integrated Approach," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 80(3), pages 431-450, 09.
- Gilsdorf, Keith, 1994. "Vertical integration efficiencies and electric utilities: A cost complementarity perspective," The Quarterly Review of Economics and Finance, Elsevier, vol. 34(3), pages 261-282.
- Toshiyuki Sueyoshi, 1996. "Divestiture of Nippon Telegraph and Telephone," Management Science, INFORMS, vol. 42(9), pages 1326-1351, September.
- Fetz, Aurelio & Filippini, Massimo, 2010. "Economies of vertical integration in the Swiss electricity sector," Energy Economics, Elsevier, vol. 32(6), pages 1325-1330, November.
- Greer, Monica L., 2008. "A test of vertical economies for non-vertically integrated firms: The case of rural electric cooperatives," Energy Economics, Elsevier, vol. 30(3), pages 679-687, May.
- Mark J. Roberts, 1986. "Economies of Density and Size in the Production and Delivery of Electric Power," Land Economics, University of Wisconsin Press, vol. 62(4), pages 378-387.
- Kwoka, John E., 2002. "Vertical economies in electric power: evidence on integration and its alternatives," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 653-671, May.
- Takanori Ida & Tetsuya Kuwahara, 2004. "Yardstick Cost Comparison and Economies of Scale and Scope in Japan's Electric Power Industry," Asian Economic Journal, East Asian Economic Association, vol. 18(4), pages 423-438, December.
- Michaels, Robert J., 2004. "Vertical Integration: The Economics that Electricity Forgot," The Electricity Journal, Elsevier, vol. 17(10), pages 11-23, December.
- Sueyoshi, Toshiyuki & Goto, Mika, 2012. "Environmental assessment by DEA radial measurement: U.S. coal-fired power plants in ISO (Independent System Operator) and RTO (Regional Transmission Organization)," Energy Economics, Elsevier, vol. 34(3), pages 663-676.
- Sueyoshi, Toshiyuki & Goto, Mika, 2012. "DEA radial measurement for environmental assessment and planning: Desirable procedures to evaluate fossil fuel power plants," Energy Policy, Elsevier, vol. 41(C), pages 422-432.
When requesting a correction, please mention this item's handle: RePEc:eee:enepol:v:56:y:2013:i:c:p:186-200. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.