Scope and scale economies in multi-utilities: evidence from gas, water and electricity combinations

Abstract

Within the recent debate on liberalization of local public services, the paper investigates the cost properties of a sample of Italian public utilities providing in combination gas, water and electricity. The estimates from a Composite Cost Function econometric model (Pulley and Braunstein, 1992) are compared with the ones coming from other traditional functional forms such as the Standard Translog, the Generalized Translog, and the Separable Quadratic. The results highlight the presence of global scope and scale economies only for multi-utilities with output levels lower than the ones characterizing the 'median' firm. This indicates that relatively small specialized firms would benefit from cost reductions by evolving into multi-utilities providing similar network services such as gas, water and electricity. However, for larger-scale utilities the hypothesis of null cost advantages is not rejected. Thus, it is possible that the recent diversification waves of leading companies are explained by factors other than cost synergies, so that the welfare gains that can be reasonably expected from such examples of horizontal integration, if any, are likely to be very low.

The role of environmental factors in water utilities’ technical efficiency. Empirical evidence from Spanish companies

“…Other studies have tested for the existence of scope economies in water utilities derived from cost reductions as the number of water services provided increases (Hayes, 1987, Lynk, 1993, Hunt and Lynk, 1995, Saal and Parker, 2000, Fraquelli et al, 2005. However, most of these papers only consider two of the services representative of the urban water cycle, water distribution and sewage collection.…”

Economies of Scale and Scope in Multi-Utilities

“…In the literature there are only a few studies on the economies of scope in multiutilities: Mayo (1984a), Chappell and Wilder (1986) and Sing (1987) in electricity and gas distribution, and Fraquelli, Piacenza et al (2004) and Piacenza and Vannoni (2004) in electricity, gas and water sectors. Mayo (1984a) and Chappell and Wilder (1986) estimate a quadratic cost function for two cross sectional data sets from the US electricity and gas distribution sectors.…”

“…The short panels used in the recent studies by Fraquelli, Piacenza et al (2004) and Piacenza and Vannoni (2004) probably have not allowed the authors to account for unobserved heterogeneity and correlation in the error terms. Another interesting study is Yatchew (2000) who applied a semi-parametric model to a 3-year panel data set of Canadian electricity distributors.…”

“…In addition to the factor prices of labor, capital and fuel, he includes the customer density as an output characteristic. While reporting diseconomies of scope for the sample mean Sing (1987) The relatively recent papers by Fraquelli, Piacenza et al (2004) and Piacenza and Vannoni (2004) use data from 90 Italian electricity, gas and water distributors over 3 years. However the data is pooled across the years and no panel data models are applied.…”

Economies of scale and scope and opening hours in post offices and agencies

“…Bradley and Colvin (1999) focused on mail sorting and estimated a multiproduct total cost function for 250 US sorting centers between 1988 and 1996. They found evidence for substantial 5 For example, see for example Caves et al (1981), Caves et al (1984), Cabini and Filippini (2003) or (transport sector), Koshal and Koshal (1999) or Sav (2004) (higher education), Fu and Heffernan (2008) (banking sector), Preyra and Pink (2006), Filippini (2001) or Farsi et al (2008b) (health sector), Nerlove (1963), Filippini (1996), Fraquelli et al (2004), Farsi et al (2007) or Farsi et al (2008a) (electricity distribution), Filippini and Luchsinger (2007) (hydropower). 6 See also NERA (2004) for an overview on the relevant empirical literature.…”