Electric Utilities: Scale Economies and Diseconomies

Abstract

For many decades, the electric power industry has been regarded as one of the more-efficient sectors of American industry. Many observers have cited improvements in the productivity of all inputs as evidence of the industry's rate of technological progress and ability to exploit economies of scale. Economic studies of both plant and firm-level economies have concentrated almost solely on the generating sector of the industry but have generally reached similar conclusions although there have been important disagreements as to the source of the efficiencies (i.e., economies of scale, technological change, or utilization of capacity) and the ranking of productivity improvements among the inputs. None of these studies, however, has ever identified any diseconomies of scale or ever challenged the natural monopoly concept as applied to the electric power industry. The present study justifies the use of a non-traditional cost concept (Section II). Section III utilizes a multivariate regression analysis to assess firm level economies of scale in generation, transmission, distribution, and administration. Existing econometric studies cannot form the basis for this analysis because they have had several important shortcomings, have concentrated primarily on generation, and excluded transmission and distribution, and have, with two exceptions, been based on data existing priormore » to 1959. The final section summarizes and evaluates the results. 29 references. (MCW)« less

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