Economies of scale and technological progress in electric power production: The case of Brazilian utilities

- Non-homothetic technologies represent better the cost function in the Brazilian electric power production;
- Non-neutral fuel using technical change prevails over the capital and labor saving effects;
- We do not reject the existence of substantial economies of scale in the studied market.
- Diseconomies of scale related to fuel and water suggest that they do not support further increases in the scale economies.

This paper examined the cost structure of the electricity generation companies in Brazil during the period 2000-2010 by using a translog cost function that imposes no restrictions on production technology and allows for the existence of non-homotheticity. The hypothesis that economies of scale are a typical feature of the generation market in Brazil and, in general, are not exhausted at lower levels of production is not rejected. This result supports the vision that indivisibilities restrict efficiency gains from free-market competition in the Brazilian electricity generation and most of the last restructuring in the industry regulation was based on this assumption. Furthermore, over the sample period, technological progress led to cost reductions in electric power supply. These technological improvements take the form of both a neutral technological effect as well as a non-neutral fuel effect, which prevails over the capital and labor saving technical changes.