Vertical economies in electric power: evidence on integration and its alternatives

Abstract The restructuring of the electric power industry raises questions about the possible sacrifice of economies previously secured by integrating generation with downstream transmission and distribution. This study utilizes a data set of U.S. electric utilities that differ widely in their degree of vertical integration in order to model, estimate, and measure such economies. Cost savings from vertical integration are found to be quite substantial for all but the smallest utilities and are largest for those that are nearly fully integrated. The study goes on to investigate alternatives to, sources of, and determinants of vertical integration. Among other findings, it appears that some holding companies achieve economies comparable to those from vertical integration.

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