Economies of integration in the Spanish electricity industry using a multistage cost function

Abstract

The Spanish electric sector is empirically analysed using a multistage-multiproduct quadratic cost function estimated with data on firms from 1985 to 1996. Economies of both vertical (EVI) and horizontal (EHI) integration are calculated through economies of scope. Estimated EVI indicate that joint generation and distribution saves 6.5% of costs, lower than what has been obtained in similar studies in the USA. This difference suggests that expenses in both system coordination and market transactions are a relevant source of economies, already accounted for in the Spanish electric sector where a central coordination agency exists. EHI between generation products are somewhat larger.