Your SlideShare is downloading. ×
Economies of scale and utilization swiss electricity distribution industry
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Economies of scale and utilization swiss electricity distribution industry

354

Published on

Published in: Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
354
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
4
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide
  • T: index of technology
  • T: time for shift in tech representing change in tech. efficiency
  • Transcript

    • 1. Economies of Scale andUtilization in the Swiss Electric Power Distribution Industry Author: Massimo Filippini Presenters: Arvind K. Yadav Rashi Saxena
    • 2. 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
    • 3. 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
    • 4. 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
    • 5. 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
    • 6. Variable Cost FunctionProperties Inputs• Concave and linearly • Labor homogenous in i/p prices • Purchased power• Non-decreasing in input • Quasi fixed input capital prices• Decreasing in quasi fixed inputs VC function of a Swiss electricity distribution utility VC = 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
    • 7. Translog function Sl = βl + µu ln (wl/wp) + ωyl ln y + πlk ln k + ᵟ ln LF ❸ lLF• Tested for – Homotheticity – Cobb-Douglas technology
    • 8. 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
    • 9. Caveats and Procedure• Publically owned• Data available: 60 utilities• Utilities with more than 20% of their capital invested in generating activities (21 nos.): excluded 39 distribution utilities serving cities were analyzed• Measures of capital stock: – Capacity measure – Cost measure (data N.A.)
    • 10. 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
    • 11. ResultsExpected Estimated• VC function should be • Labor cost share is increasing w.r.t. output positive; increasing in and input prices input prices• Concave w.r.t. input • Concavity is satisfied prices • Increase in capital cost with increase in capacity;• Non-increasing VC w.r.t. non-increasing VC w.r.t. capital stock capital stock not satisfied • Cobb-Douglas and identical fixed-effects hypothesis: rejected
    • 12. 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
    • 13. 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 method Estimation results are inconclusive to LR cost minimization hypothesis
    • 14. 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 size Empirical results confirm economies of scale in Swiss electric distribution utilities
    • 15. 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
    • 16. THANK YOU

    ×