Vertical integration efficiencies and electric utilities: A cost complementarity perspective

Abstract

This article analyzes the effect of vertical integration on electric utility cost structure by testing for cost complementarities between generation, transmission, and distribution. Cost complementarities would transfer monopoly features commonly associated with transmission and distribution to generation and, thus, preclude competition. The study estimates a multiproduct translog cost function and finds no evidence of cost complementarity, although each stage exhibits increasing returns to scale at the point of approximation. These results suggest that, if regulators wish to promote competition in generation, they must include policies which expand generation markets beyond a utility's franchise service territory.