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 New reforms have been passed to modernize the Swiss electricity sector.  Legal (transmission and generation are separate legal entities) and functional.

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Presentation on theme: " New reforms have been passed to modernize the Swiss electricity sector.  Legal (transmission and generation are separate legal entities) and functional."— Presentation transcript:

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2  New reforms have been passed to modernize the Swiss electricity sector.  Legal (transmission and generation are separate legal entities) and functional (separate accounts and management for transmission and generation activities) unbundling of the utilities is required.  The intended result of unbundling the services into separate functions will allow for greater efficiency through stronger and more transparent competition in the generation and sale activities of this sector

3  Unbundling reduces the chances of companies benefiting from vertical integration  Vertical Integration can be cost effective › Substantial need for coordination across stages › High transaction costs are associated with using intermediary markets

4  A multi-stage cost function using two panel data econometric models were used: › A Generalized Least Squares (GLS) model with random intercept › A Random-Coefficients (RC) model

5  The cost function includes › Two outputs: electricity generation and distribution › Two inputs › Three output characteristic variables: customer density, load factor of the network and the capacity utilization factor at the generation level › A Linear time trend

6  C=C(Q1, Q2, PC, PL, CD, EC, LF, CU,T) › C= Total Costs › Q1= Electricity Generated › Q2= Electricity Distributed › PL=Input Factor Prices for Labor Services › PC= Input Factor Prices for Capital Services › CD= Customer Density › EC= Share of the Distributed Electricity to End Consumers › LF= Load Factor of the Network › T= Linear Time Trend Controlling for Technical Change.

7  Quadratic functional form › Unobserved heterogeneity › Readily adaptable to panel data econometric models › Relevant option for estimating scope economies › Accommodates zero values for outputs  Allows for the inclusion of specialized companies  Straight forward identification of economies of vertical integration. › Disadvantage: the linear homogeneity of the cost function in input prices cannot be imposed by parametric restrictions without sacrificing the flexibility of the functional form.  Solution: Normalization of prices- dividing the costs and all factor prices by one common factor price

8  Another option was to use a logarithmic function › However, with the vast number of zero’s logarithmic functions could result in large errors in the estimation of scope › Could mislead conclusion about economies of vertical integration

9 The quadratic form is a flexible functional form with a second order Taylor approximation of any arbitrary function around a local approximation point. C it = 0 +  Q1 Q1 it+  Q2 Q2 it + 1/2 Q1Q1 (Q1 it ) 2 + 1/2 Q2Q2 (Q2 it ) 2 + 1/2 Q1Q2 Q1 it Q2 it +  PL PL it +  CD CD it +  BC BC it +  LF LF it +  CU CU it +  T T t › Subscript “i” represents the company › Subscript “t” represents the year

10  The data set contains financial and technical information from 74 companies  Covers a 9 year period from  36 companies are integrated with electricity distribution and hydropower generation  9 companies are only electricity distributors  29 companies are hydropower generators  This data set covers 42% of total electricity distribution and 40% of total hydropower generation in Switzerland

11  Output and Input price coefficients are highly significant and have the expected positive sign.  Customer Density coefficient is negative › an increase in the customer density decreases costs  End Consumers coefficient is positive  Load Factor and Capacity Utilization Factor are negative › A higher peak load profile leads to higher costs, ceteris paribus  Time trend coefficient › GLS suggests a cost decrease in the electricity sector › RC shows the coefficient as not statistically significant  RC model shows the standard deviations are all statistically significant for the outputs and intercept › Significant variation in the output coefficients and the intercept across companies › There is a considerable unobserved firm-specific heterogeneity

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13  Global economies of scale describe the cost behavior caused by proportional changes in the entire production.  Economies of scale exist when ES>1  Diseconomies of scale exist when ES<1

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15  EVIs are present when costs can be reduced by joint production of multiple outputs across different production stages  The degree of EVI across two stages can be defined as the ratio of excess costs of separate production to the costs of joining production in one company

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17  Both GLS and RC estimates suggest the existence of EVI and scale economies across a major part of the sample.  The majority of companies in the analysis have less than 100,000 customers › These results apply mainly to small and middle-sized companies  RC model provides lower estimates of both economies › Gives a relatively lower weight to differences regarding fixed costs  No conclusive pattern suggesting one-sided bias  Table 4 confirms the presence of product-specific economies of scale

18  Additional costs could result from unbundling vertically integrated companies › Due to the significant economies of vertical integration and economies of scale that exist in a majority of the electricity companies  Results support the EU policy directive that allows for companies with fewer than 100,000 customers to be exempt from any functional unbundling requirement.  Unbundling processes reduce the possibilities to exploit the advantages of vertical integration


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