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

Author

Listed:
  • Giovanni Fraquelli

    ()

  • Massimiliano Piacenza

    ()

  • Davide Vannoni

    ()

Abstract

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. Copyright Springer Science+Business Media, Inc. 2005

Suggested Citation

  • 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.
  • Handle: RePEc:kap:regeco:v:28:y:2005:i:3:p:289-308
    DOI: 10.1007/s11149-005-3959-x
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    References listed on IDEAS

    as
    1. 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 221-230, May.
    2. Ivaldi, M & McCullough, G J, 2001. "Density and Integration Effects on Class I U.S. Freight Railroads," Journal of Regulatory Economics, Springer, vol. 19(2), pages 161-182, March.
    3. Primeaux, Walter J, Jr, 1977. "An Assessment of X-Efficiency Gained through Competition," The Review of Economics and Statistics, MIT Press, vol. 59(1), pages 105-108, February.
    4. Giovanni Fraquelli & Massimiliano Piacenza & Davide Vannoni, 2004. "Scope and scale economies in multi-utilities: evidence from gas, water and electricity combinations," Applied Economics, Taylor & Francis Journals, vol. 36(18), pages 2045-2057.
    5. Piacenza, Massimiliano & Vannoni, Davide, 2004. "Choosing among alternative cost function specifications: an application to Italian multi-utilities," Economics Letters, Elsevier, vol. 82(3), pages 415-422, March.
    6. 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.
    7. Garcia, Serge & Moreaux, Michel & Reynaud, Arnaud, 2007. "Measuring economies of vertical integration in network industries: An application to the water sector," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 791-820, August.
    8. 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.
    9. Michele Polo & Carlo Scarpa, 2003. "The liberalization of energy markets in Europe and Italy," Working Papers 230, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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    More about this item

    Keywords

    composite cost function; electric utilities; liberalization; subadditivity; vertical integration; L11; L50; L94;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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