Empirical tests of cost subadditivity in the investor-owned electric-utility industry

Thesis/Dissertation · Tue Jan 01 04:00:00 EST 1985

OSTI ID:5705051

Finder, A E

This dissertation examines the hypothesis that the social cost of electricity is reduced by concentrating the sale of electricity in one firm instead of several. The criterion for exploring the validity of the hypothesis was cost subadditivity. When costs are subadditive, the industry is said to be a multiple product natural monopoly. The presence of cost subadditivity was tested by performing for a sample of sixty firms during the years 1975 through 1980. The research improves upon the existing empirical literature by: (i) demonstrating that the functional form used for estimating is the only one capable of yielding global results; (ii) treating wholesale and retail electricity as heterogeneous outputs when measured at the point of final delivery; and (iii) being the first effort to empirically test for multiple product natural monopoly using wholesale and retail electricity. The result indicates that in most cases null hypotheses cannot be rejected...i.e., that multiple product natural monopoly may not exist. The estimated cost function has parameters that do not differ significantly across regions defined by the Federal Energy Regulatory Commission. Nor do the parameters differ if the sample is divided between the years 1975 through 1977 and 1978 through 1980. Given the results, it is not possible to draw meaningful inferences about the advisability of creating a competitive market for generating electricity.

• Research Organization: Indiana Univ., Bloomington (USA)
• OSTI ID: 5705051
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
290200 -- Energy Planning & Policy-- Economics & Sociology
296000* -- Energy Planning & Policy-- Electric Power
COST
ECONOMIC ANALYSIS
ECONOMICS
ELECTRIC POWER
ELECTRIC UTILITIES
MARKET
MONOPOLIES
POWER
PUBLIC UTILITIES