Firm structure, scale economies, and productivity in the U.S. electric power industry: A cost function analysis

Abstract

This paper analyzes economic performances of cooperatives relative to other types of ownership in the US electric power industry. Specifically, the paper uses a panel data of electric utilities over 2001–2013 to analyze economic performances of cooperatives relative to for-profit firms and to investigate the sources of performance differences under a model of cost minimization. The results show that investor-owned utilities are more profitable than cooperatives, but there are no significant differences in physical productivity between investor-owned utilities and cooperatives. Independent power producers are more financially profitable and more physically productive than their counterparts. The results also support that although the industry exhibits substantial scale economies over a broad range of output, cooperatives are constrained to exploit the scale economies than other groups as it is limited by higher cost of financing. This suggests that while a small number of very large firms are not required for efficient production in the industry, mergers between cooperatives could provide substantial scale economies, as discussed in the literature.