Vertical and Horizontal Economies in the Electric Utility Industry: An Integrated Approach

The empirical literature on the cost structure of the electric utility industry traditionally focused on the measurement of specific technological properties: 1) scale economies in generation or distribution; 2) multi-product (or horizontal) scope economies at one particular stage; 3) multi-stage (or vertical) scope economies. By adopting an integrated approach, which simultaneously considers both horizontal and vertical aspects of the technology, we find the presence, on a sample of Italian electric utilities, of both vertical integration gains and horizontal scope economies at the downstream stage. In the light of recent regulatory reforms aiming at restructuring European electricity markets, our findings have important policy implications as for the proper configuration of the industry. Moreover, this methodology can be usefully applied to the study of the production structure of other public network utilities involved in similar vertical and horizontal reorganization processes.