The Direct Costs and Benefits of US Electric Utility Divestitures

This paper studies the impact of divestiture on the efficiency and costs of electric utilities. The empirical literature shows that there exist economies of scope for electric utilities and that divestiture decreases distribution efficiency but increases generation efficiency. This paper is to bring together these different results. Our analysis covers distribution, transmission, and power sourcing. Our data is an unbalanced panel of about 138 US electric utilities for the years 1994 to 2006 over which we observe 30 divestitures between 1997 and 2003. First, we regress firmlevel efficiencies for distribution and power sourcing on various divestiture indicators. Second, we compare the weighted cost between divested and non-divested firms and calculate a net present value for the entire sample of divestitures. Last, we regress net benefits from divestiture on the distribution side on the net benefit for power sourcing to see whether individual firms successfully off-set any costs of divestiture. We find that divestiture reduces distribution efficiency but increases power sourcing efficiency. Both effects depend on the amount of own nuclear generation output but not fossil-fuel or hydro output. The net present value for all divestitures in our sample is $11.3 billion. It seems that relatively lower costs of power outweigh losses in economies of scope as well as other restructuring costs. However, lower costs of power might be the result of favourable contracts put in place at the time of divestiture. Our study complements traditional studies of economies of scope and shows that divestitures might well be worth it

Learning to forecast business conditions – Evidence from German reunification

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Management in production: from unobserved to observed

Are productivity estimates good proxies for unobserved management? And, does management affect production in a neutral and monotonic fashion as assumed by these proxies? We use Bloom and Van Reenen’s management data to show that two popular proxies, fixed effects and inefficiency scores, correlate with observed management practices. We find that the correlations are positive but weak. Also, management explains only a fraction of the proxies’ variances. The data rejects the assumptions of neutrality and monotonicity. Last, our results suggest that management has characteristics both of a technology and an input

Scale and scope economies and the efficient vertical and horizontal configuration of the water industry: A survey of the literature

This paper surveys the literature on scale and scope economies in the water and sewerage industry. The magnitude of scale and scope economies determines the cost efficient configuration of any industry. In the case of a regulated sector, reliable estimates of these economies are relevant to inform reform proposals that promote vertical (un)bundling and mergers. The empirical evidence allows some general conclusions. First, there is considerable evidence for the existence of vertical scope economies between upstream water production and distribution. Second, there is only mixed evidence on the existence of (dis)economies of scope between water and sewerage activities. Third, economies of scale exist up to certain output level, and diseconomies of scale arise if the company increases its size beyond this level. However, the optimal scale of utilities also appears to vary considerably between countries. Finally, we briefly consider the implications of our findings for water pricing and point to several directions for necessary future empirical research on the measurement of these economies, and explaining their cross country variation

Estimating economies of scale and scope with flexible technology

Economies of scope are typically modelled and estimated using a cost function that is common to all firms in an industry irrespective of their type, e.g. whether they specialize in a single output or produce multiple outputs. Instead, we estimate a flexible technology model that allows for type-specific technologies and show how it can be estimated using linear parametric forms including the translog. A common technology remains a special case of our model and is testable econometrically. Our sample, of publicly owned US electric utilities, does not support a common technology for integrated and specialized firms. Our empirical results therefore suggest that assuming a common technology might bias estimates of economies of scale and scope. Thus, how we model the production technology clearly influences the policy conclusions we draw from its characteristics

Estimating economies of scale and scope with flexible technology

The final publication is available at Springer via http://dx.doi.org/10.1007/s11123-016-0467-1Economies of scope are typically modelled and estimated using a cost function that is common to all firms in an industry irrespective of their type, e.g. whether they specialize in a single output or produce multiple outputs. Instead, we estimate a flexible technology model that allows for type-specific technologies and show how it can be estimated using linear parametric forms including the translog. A common technology remains a special case of our model and is testable econometrically. Our sample, of publicly owned US electric utilities, does not support a common technology for integrated and specialized firms. Our empirical results therefore suggest that assuming a common technology might bias estimates of economies of scale and scope. Thus, how we model the production technology clearly influences the policy conclusions we draw from its characteristics

Productivity and efficiency of US gas transmission companies: A European regulatory perspective. Energy Policy

Abstract On both sides of the Atlantic the regulation of gas transmission networks has undergone major changes since the early 1990's. Whereas in the US the longstanding regime of cost-plus regulation was complemented by increasing pipeto-pipe competition, most European countries moved towards incentive regulation complemented by market integration. We study the productivity development of a panel of US interstate companies using Data Envelopment Analysis and Malmquist productivity indices. Results are presented for changes in productivity, as well as for several convergence tests. The results indicate that taking productivity and convergence as performance indicators, regulation has been rather successful, in particular during a period where overall demand was flat. However, we argue that a benchmarking-based regulation might have brought about stronger convergence. Lessons for European regulators are twofold. First, the US analysis shows that benchmarking of European transmission operators would be possible if data were available. Second, our results suggest that, in the long-run, market integration and competition are alternatives to the current European model