Economies of scale and utilization swiss electricity distribution industry
-
Upload
rashi-saxena -
Category
Business
-
view
366 -
download
1
Transcript of Economies of scale and utilization swiss electricity distribution industry
Economies of Scale and Utilization in the Swiss Electric Power Distribution
Industry
Author: Massimo Filippini
Presenters: Arvind K. YadavRashi Saxena
Electric Utility Industry
• Local monopolies• Cyclical demand• Require spare capacity for peak
periods– Too high?– Over-capitalization?
• Swiss electricity distribution industry– Economies of scale empirically evident
Cost Structure
• Convention: long-run cost functions• Implication: – static equilibrium– Optimal utilization of inputs
• Contention: Absence of static equilibrium w.r.t. stock of capital (quasi-fixed)
• Implication: Economies of scale based on LR cost function may be imprecise
Suboptimal capacity: Supporting arguments
• Costly adjustment to time profile of electricity demand– Longevity of transformers and distribution
lines– Long-term load forecasts and distribution
planning (inaccurate)
• Legal obligation to maintain excess capacity– Service guarantee– Exclusivity of territorial franchise
Variable Cost Function
• To model production structure• Takes account of sub optimality• Physical capital can’t be adjusted to
minimize TC during observation period
Production function …y= F(x1,x2,…, xg; k1,k2,…ke; q1,q2,…qn; T) ❶
– Y: output; x: inputs; k: quasi fixed inputs; q: operating and o/p characteristics variable;
T: vector of time shifts
Variable Cost Function
Properties• Concave and linearly
homogenous in i/p prices
• Non-decreasing in input prices
• Decreasing in quasi fixed inputs
Inputs• Labor• Purchased power• Quasi fixed input
capital
VC function of a Swiss electricity distribution utilityVC = VC (y, wp, wl, k, T, LF, FDj) ❷
- y: output (kWh); wp, wl : kWh i/p and labor prices-K: stock of capital; T: time; LF: load factor; FD: firm specific variables
Translog function
Sl = βl + µu ln (wl/wp) + ωyl ln y + πlk ln k + ᵟlLF ln LF ❸
• Tested for– Homotheticity– Cobb-Douglas technology
Data/Structure
• Swiss electric power industry• 1200 firms (public/private)– 900: municipals– 300: urban/regional
• Generation/Transmission/Distribution: small amount of power generated
• 10 main utilities vertically integrated– Generation/Transmission/Distribution:
backbone
• 74%: distribution utilities
Caveats and Procedure
• Publically owned• Data available: 60 utilities• Utilities with more than 20% of their capital
invested in generating activities (21 nos.): excluded39 distribution utilities serving cities were
analyzed• Measures of capital stock:– Capacity measure– Cost measure (data N.A.)
Results
• Four models:–Model 1: Estimates of VC function model
specified in ❸–Model 2: homotheicity assumed–Model 3: corresponding to Cobb-Douglas
technology–Model 4: ignores firm-specific effects,
biased
• Statistically significant coefficients• Cost elasticity < 1
Results
Expected• VC function should be
increasing w.r.t. output and input prices
• Concave w.r.t. input prices
• Non-increasing VC w.r.t. capital stock
Estimated• Labor cost share is
positive; increasing in input prices
• Concavity is satisfied• Increase in capital cost
with increase in capacity; non-increasing VC w.r.t. capital stock not satisfied
• Cobb-Douglas and identical fixed-effects hypothesis: rejected
LR Results
• Marginally increasing in capital stock increases (not decreases, as expected in cost theory) VC
• Interpretations– Positive sign of coeff. of capital stock indicates
excessive amount of capital stock employed by firms
– Incorrect sign of coeff. of capital stock comes from multicollinearity between output and capital stock• More precise as based on empirical analysis• Causes unexplained
LR Results
• Cause of positive sign of coeff. of capital stock: empirical difficulty in defining/calculating capital stock variable
• Lack of data SR cost studies use physical measures reflect max. available production capacity highly correlated with increasing output multicollinearity
• Solution: calculate capital stock using capital inventory methodEstimation results are inconclusive to LR cost
minimization hypothesis
Economies of utilization and scale
• According to results:– Utilization and scale economies exist– If S/M/L companies increase output with
holding capacity fixed, VC increases less than proportionally
– Increase in output without holding capacity fixed increases TC less than proportionally
– Importance of utilization and scale economies increases with sizeEmpirical results confirm economies of scale in
Swiss electric distribution utilities
Conclusions
• Economies of scale exist for S/M/L utilities
• Inconclusive regarding over-capitalization
• Policy implications:– Utilities should operate as local franchised
monopolies– Redesign on economic incentives to promote
optimal behavior– Encourage competition and merger policy
THANK YOU