Cost and quality gains from diversification and vertical integration in the electricity industry: A DEA approach

This paper analyzes the degree of economies of vertical integration, diversification and scale in the electricity industry by means of Data Envelopment Analysis. We estimate the impact that alternative forms of unbundling would have on the cost and quality of supply, measured as the number and duration of supply interruptions, in a group of Spanish electric utilities. We find evidence of the existence of cost and quality gains from integrating power generation and distribution in the range of 1.1 to 4.9%, whereas diversifying the source of power generation saves between 1.3 and 4.3% of costs and quality. Finally, the scale efficiency of the largest utilities could be improved by dividing them into smaller units, provided that their current vertical scope and generation-mix are preserved. (C) 2006 Elsevier B.V. All rights reserved.