Review of Industrial Organization 15: 65–76, 1999.
© 1999 Kluwer Academic Publishers. Printed in the Netherlands.
Multiproduct Outputs and Scale Economies in
Electric Power Production: Some New Estimates
DAN M. BERRY
Regulatory Economist, Nevada Public Utilities Commission, Carson City, NV 89701
FRANKLIN G. MIXON, JR.
Department of Economics and International Business, University of Southern Mississippi,
Hattiesburg, MS 39406, Box 5072, USM, Hattiesburg, MS 39406-5072, USA
Abstract. The present study offers an argument, through a technical exposition, which suggests
that there are cost differences inherent in serving different types of buyers in the electric utilities
industry. To this end, we employ a translog joint cost function (for electricity production) with three
outputs, which allows for the examination of the cost differences between wholesale and retail trade
for vertically integrated, investor-owned companies in the industry. The regression estimates suggest
different costs at the means, however the estimated marginal cost curve for wholesale power is not
as robust as those for low-voltage and industrial power.
Key words: Economies of scale, electric power production, translog cost function
Since the seminal work on scale economies in electric power generation by Marc
Nerlove (1963), many changes have occurred in the electric power industry. In-
dustrial economists, however, have been slow to incorporate empirically the vastly
increased reliance on wholesale power transactions that has taken place within the
industry. While the quantity of electricity consumption in the US has tripled since
Nerlove’s work, the amount of power traded between utilities has grown nearly
twice as fast. By 1988, in fact, the wholesale trade to retail trade ratio was 43
per cent, or 845 million megawatt hours (Mmwh). Today, roughly 40 per cent
of all power consumed by investor-owned utilities’ (IOUs’) end-use customers is
generated by some entity other than the utility that delivers the power, and these
“purchased power” expenses now account for more than 25 per cent of the average
IOU’s “monetary costs” of production.
The authors thank an anonymous referee, the Editor, Steve Caudill, Dan Gropper, David
Kaserman, and Sharon Oswald for many helpful comments. Any remaining errors are our own.
The mean purchased-power cost share of the sample ﬁrms observed in this study is 27 per cent.
We say “monetary” costs because many ﬁrms engage in wholesale trade by barter. These costs can