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Electric power distribution: economies of scale, mergers, and restructuring

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  • John Kwoka

Abstract

Electricity distribution is generally viewed as a natural monopoly and therefore as having the least potential for the kinds of reforms that have swept the electric power sector in many countries. Mergers among distribution companies and efforts at retail competition have nonetheless altered the operation of the distribution stage. This research into US electric utilities uses a much larger and less selective data base than previously available to examine the scale properties of distribution with respect to output, distance, and customer numbers, and for different functions within distribution. It finds significant economies at low output levels, holding system size and customer density constant, but the cost gradient is otherwise modest. It also finds that geographic size and customer numbers are quite important and that economies are significantly stronger for the infrastructure or 'wires' business than for the marketing function performed by distribution utilities. These results lend credence to efforts at retail competition that separates these functions, but cast doubt on the benefits of mergers between distribution systems.

Suggested Citation

  • John Kwoka, 2005. "Electric power distribution: economies of scale, mergers, and restructuring," Applied Economics, Taylor & Francis Journals, vol. 37(20), pages 2373-2386.
    • Handle: RePEc:taf:applec:v:37:y:2005:i:20:p:2373-2386
    DOI: 10.1080/00036840500309247
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    4. Jamasb, T. & Söderberg, M., 2009. "Yardstick and Ex-post Regulation by Norm Model: Empirical Equivalence, Pricing Effect, and Performance in Sweeden," Cambridge Working Papers in Economics 0908, Faculty of Economics, University of Cambridge.
    5. Mountain, Bruce R., 2019. "Ownership, regulation, and financial disparity: The case of electricity distribution in Australia," Utilities Policy, Elsevier, vol. 60(C), pages 1-1.
    6. Saastamoinen, Antti & Bjørndal, Endre & Bjørndal, Mette, 2017. "Specification of merger gains in the Norwegian electricity distribution industry," Energy Policy, Elsevier, vol. 102(C), pages 96-107.
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    8. Cheng, Xiaomei & Bjørndal, Endre & Bjørndal, Mette, 2015. "Optimal Scale in Different Environments – The Case of Norwegian Electricity Distribution Companies," Discussion Papers 2015/22, Norwegian School of Economics, Department of Business and Management Science.
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    10. Luis Gautier & Mahelet G. Fikru, 2024. "Electric Utility Mergers in the Presence of Distributed Renewable Energy," Natural Resource Management and Policy, in: Handbook of Merger Control and Environmental Policy, chapter 0, pages 63-92, Springer.
    11. de Oliveira e Silva, Guilherme & Hendrick, Patrick, 2016. "Lead–acid batteries coupled with photovoltaics for increased electricity self-sufficiency in households," Applied Energy, Elsevier, vol. 178(C), pages 856-867.
    12. Klien, Michael & Michaud, David, 2019. "Water utility consolidation: Are economies of scale realized?," Utilities Policy, Elsevier, vol. 61(C).
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    15. Dimitri Dimitropoulos and Adonis Yatchew, 2017. "Is Productivity Growth in Electricity Distribution Negative? An Empirical Analysis Using Ontario Data," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
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    17. Beecher, Janice A. & Kalmbach, Jason A., 2013. "Structure, regulation, and pricing of water in the United States: A study of the Great Lakes region," Utilities Policy, Elsevier, vol. 24(C), pages 32-47.
    18. Robert Clark & Mario Samano, 2022. "Incentivized Mergers and Cost Efficiency: Evidence from the Electricity Distribution Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 70(4), pages 791-837, December.
    19. Tooraj Jamasb & Magnus Söderberg, 2010. "The Effects of Average Norm Model Regulation: The Case of Electricity Distribution in Sweden," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 36(3), pages 249-269, May.
    20. Capece, Guendalina & Costa, Roberta & Di Pillo, Francesca, 2021. "Benchmarking the efficiency of natural gas distribution utilities in Italy considering size, ownership, and maturity," Utilities Policy, Elsevier, vol. 72(C).
    21. Saastamoinen, Antti & Bjørndal, Endre & Bjørndal, Mette, 2016. "Specification of merger gains in the Norwegian electricity distribution industry," Discussion Papers 2016/7, Norwegian School of Economics, Department of Business and Management Science.
    22. Subal Kumbhakar & Roar Amundsveen & Hilde Kvile & Gudbrand Lien, 2015. "Scale economies, technical change and efficiency in Norwegian electricity distribution, 1998–2010," Journal of Productivity Analysis, Springer, vol. 43(3), pages 295-305, June.
    23. Nikogosian, Vigen & Veith, Tobias, 2011. "Vertical integration, separation and non-price discrimination: An empirical analysis of German electricity markets for residential customers," ZEW Discussion Papers 11-069, ZEW - Leibniz Centre for European Economic Research.

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