Vertical Economies in the Electric Utility Industry, Evidence from Italian Municipal Firms

It is very important to verify the existence of vertical economies in the different stages of the electricity supply industry, above all when the introduction of competition forces the regulators towards unbundling, then forcing vertically integrated utilities to divest. Notwithstanding positive effects that may follow competition, it must be clear that the choice is not at all neutral, because this means giving up to vertical economies. The paper investigates the presence and size of these vertical economies through empirical evidence deriving by Italian municipal utilities. A multistage cost function is estimated to verify the difference in technical and allocative efficiency between integrated and non-integrated firms. The results provide strong evidence of statistically significant differences between producers-distributors and pure distributors, with an increase of efficiency deriving from vertical integration.