Abstract
In the last decade, the European Commission promoted a new regulatory framework aiming at a gradual liberalization of the energy markets. The introduction of competition among generators implies the need to separate generation from transmission and distribution activities. However, if savings can be reached by operating at different stages, vertical separation would increase the costs of providing power. This paper tests for the presence of economies from vertical integration on a sample of Italian local electric utilities and finds evidence of both multi-stage economies of scale and vertical economies. Even if the hypothesis of global subadditivity is not supported, our evidence suggests that a complete divestiture policy would entail efficiency losses.
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*For helpful comments and discussions, we thank two anonymous referees, Graziano Abrate, Bruno Bosco, Diego Piacentino, and participants at the 31st Annual Conference of the European Association for Research in Industrial Economics (EARIE), Berlin, Germany, 2–5 September, 2004, the 60th Congress of the International Institute of Public Finance (IIPF), Milan, Italy, 23–26 August, 2004, and seminars held at the Bocconi University, University of Lecce, University of Naples, University of Pavia, and University of Turin, where earlier versions of this paper were presented. The financial support of MIUR (COFIN 2002) and HERMES Research Center is gratefully acknowledged. The usual disclaimer applies.
**HERMES, Center for Research on Regulated Services, Fondazione Collegio Carlo Alberto, Via Real Collegio 30, 10024 Moncalieri (TO), Italy, http://www.hermesricerche.it.
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Fraquelli, G., Piacenza, M. & Vannoni, D. Cost Savings From Generation and Distribution with an Application to Italian Electric Utilities*. J Regul Econ 28, 289–308 (2005). https://doi.org/10.1007/s11149-005-3959-x
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DOI: https://doi.org/10.1007/s11149-005-3959-x