Testing for subadditivity of vertically integrated electric utilities

The public policy debate over electric utility deregulation has a long history and generated a considerable amount of research. Much of this research focused on estimating the degree of scale economies in generation with little attention given to the effect vertical integration may have on cost structure. The vertical integration issue is important because most observers consider the transmission and distribution stages to be natural monopolies. According to Joskow and Schmalensee, economics of integration, if any, would link the production stages together, possibly extending natural monopoly conditions from transmission/distribution to generation even if the latter exhibited no economies of scale. 27 refs., 5 tabs.

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