The measurement of scope, scale and diversification economies: How (in)efficient is electricity restructuring and unbundling?

Abstract

This paper estimates the degree of economies of scope, diversification and scale in the Spanish electricity industry by means of Data Envelopment Analysis. Our results show that there exist economies of integrating power generation and distribution, as well as economies of product diversification at the generation stage. Particularly, the hypothetical vertical unbundling and the generating product specialization of the existing diversified firms would raise the total operating costs of the Spanish electricity sector by 4.7 and 3.5 percent respectively. Additionally, size appears to be irrelevant provided that vertical scope and product-mix are preserved. Further, it is estimated that overall operating costs of the sector could be reduced by 2.7% by partitioning each of the diversified firms down the middle. In addition to improving firms’ scale efficiency, such fragmentation would help to create a more competitive market structure.