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The Direct Costs and Benefits of US Electric Utility Divestitures

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  • Thomas P. Triebs
  • Michael G. Pollitt

Abstract

Competition increases firms performance. But in many industries, especially network based industries, effective competition requires the separation of firms. Separation can lead to a trade-off between technical efficiency gains from competition and losses from separation. But separation itself can be beneficial, too. We estimate the combined effect of competition and vertical separation (as well as the individual effects) for the case of US electric utility divestitures. We analyse the difference-indifference in inefficient costs between divested units and non-divested units in either restructuring or non-restructuring states. We find that for our benchmark model of technology the combined effect is virtually zero. We analyze the uncertainty about the unobserved true technology and find that this number constitutes the lower bound whereas the upper bound is $24 billion. Generally, the effect of separation itself is much larger than the effect of competition. Also, the effect of separation is positive for most models of the technology.

Suggested Citation

  • Thomas P. Triebs & Michael G. Pollitt, 2015. "The Direct Costs and Benefits of US Electric Utility Divestitures," Cambridge Working Papers in Economics 1543, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1543
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    Cited by:

    1. Pollitt, Michael G., 2012. "The role of policy in energy transitions: Lessons from the energy liberalisation era," Energy Policy, Elsevier, vol. 50(C), pages 128-137.
    2. Pollitt, Michael G. & Steer, Steven J., 2012. "Economies of scale and scope in network industries: Lessons for the UK water and sewerage sectors," Utilities Policy, Elsevier, vol. 21(C), pages 17-31.
    3. Michael Pollitt, 2021. "Measuring the Impact of Electricity Market Reform in a Chinese Context," Working Papers EPRG2111, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    4. Gultom, Yohanna M.L., 2019. "Governance structures and efficiency in the U.S. electricity sector after the market restructuring and deregulation," Energy Policy, Elsevier, vol. 129(C), pages 1008-1019.

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    More about this item

    Keywords

    divestiture; economies of scope; electric utilities;
    All these keywords.

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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