Economies of vertical integration in the Swiss electricity sector

Over the last two decades, several European nations have introduced reforms to their electricity sector. Generally, these reforms require a legal and functional unbundling of vertically integrated companies. These unbundling processes may reduce the possibilities that exist to fruitfully exploit the advantages of vertical integration. The goal of this paper is to empirically analyze the presence of economies of scale and vertical integration in the Swiss electricity sector. Economies of vertical integration between electricity production and distribution result from reduced transaction costs, better coordination of highly specific and interdependent investments and less financial risk. Different econometric specifications for panel data, including a random effects and a random-coefficients model, have been used to estimate a quadratic multi-stage cost function for a sample of electricity companies. The empirical results reflect the presence of considerable economies of vertical integration and economies of scale for most of the companies considered in the analysis. Moreover, the results suggest a variation in economies of vertical integration across companies due to unobserved heterogeneity. (C) 2010 Elsevier B.V. All rights reserved.