Cost functions and the electric utility industry. A contribution to the debate on deregulation

This study analyses the main articles that estimate cost functions in the electricity utility industry with a view to studying of the initial arguments for proposing competition and vertical disintegration. The works reviewed here, in general terms, confirm the initial arguments in favour of the deregulation process, mainly, the exhaustion of scale economies for moderate size firms in generation and the condition of natural monopoly for transmission and distribution. However, the savings obtained from undertaking different activities together should be kept in mind when restructuring the sector. On the other hand, the improvements in productivity deriving from the reforms have not translated into reductions in the price of electricity in many countries. These last two results suggest the need for appropriate market regulation for the deregulation process to translate into an improvement in how the sector works and into benefits for consumers. There is still insufficient empirical literature on these issues due to the fact that the process is still ongoing in many countries and more time will have to transpire before sufficient data is available.