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Economy of Scale in Russian Retail Electricity Market: On One Natural and One Unnatural Monopoly

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  • Maxim Valerievich Kukoverov

    (Russian Presidential Academy of National Economy and Public Administration)

Abstract

The paper presents an econometric analysis of the economy of scale in retail electricity markets in respect to the main service providers in the retail markets, which are territorial distribution grid companies and energy sales companies – guaranteeing suppliers. The research was made for the regions included in so-called ‘price zones’ of the wholesale electricity market (European part, Urals, Siberia). The paper provides econometric estimates of economies of scale both for distribution companies and for guaranteeing suppliers, obtained with the least squares method on cross-sectional regional data. The paper also provides the confirmation of the statistical hypotheses of the existence of the economy of scale in energy distribution and in retail supply. The existence of the economy of scale in energy distribution is quite natural and is consistent with the existing status of distribution grid companies as natural monopolies. Indeed, economy of scale usually results from significant capital expenditures. With small volumes of production, the role of capital costs in average costs is significant, but decreases with the increase of production volumes. In the case of distribution grid companies, which are responsible for the operation of power grid equipment, the obtained econometric results are consistent with economic theory. The existence of economies of scale in retail supply is not as natural as in the case of energy distribution. Energy sales do not require significant capital expenditures. Historically, apparently this fact (the absence of significant capital costs) is the reason why energy sales activity is considered as potentially competitive one, and was privatized. Nevertheless, retail energy supply today is, in fact, monopolized for some groups of commercial customers. The paper concludes with the regulatory recommendations about the sensibility of delivering the policies to implement competition in the energy sale sector in the retail markets

Suggested Citation

  • Maxim Valerievich Kukoverov, 2018. "Economy of Scale in Russian Retail Electricity Market: On One Natural and One Unnatural Monopoly," Spatial Economics=Prostranstvennaya Ekonomika, Economic Research Institute, Far Eastern Branch, Russian Academy of Sciences (Khabarovsk, Russia), issue 4, pages 39-66.
    • Handle: RePEc:far:spaeco:y:2018:i:4:p:39-66
    DOI: 10.14530/se.2018.4.039-066
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    References listed on IDEAS

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    1. Christian Growitsch & Tooraj Jamasb & Michael Pollitt, 2009. "Quality of service, efficiency and scale in network industries: an analysis of European electricity distribution," Applied Economics, Taylor & Francis Journals, vol. 41(20), pages 2555-2570.
    2. Massimo Filippini, 1998. "Are Municipal Electricity Distribution Utilities Natural Monopolies?," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 69(2), pages 157-174, June.
    3. Antonio Estache & MartÌn A. Rossi & Christian A. Ruzzier, 2004. "The Case for International Coordination of Electricity Regulation: Evidence from the Measurement of Efficiency in South America," Journal of Regulatory Economics, Springer, vol. 25(3), pages 271-295, May.
    4. Joskow, Paul L., 2007. "Regulation of Natural Monopoly," Handbook of Law and Economics, in: A. Mitchell Polinsky & Steven Shavell (ed.), Handbook of Law and Economics, edition 1, volume 2, chapter 16, pages 1227-1348, Elsevier.
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    More about this item

    Keywords

    retail electricity markets; economy of scale; retail electricity supply; guaranteeing suppliers; unnatural monopoly; energy sector regulation; operations research; econometric estimation;
    All these keywords.

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • L4 - Industrial Organization - - Antitrust Issues and Policies
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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