The economies of scale in the French power distribution utilities

The aim of this study is to provide some empirical evidence in support of the ongoing re-structuring initiated in 2005, toward re-grouping certain activities across several distribution units, by exploring the cost structure of the electricity distribution units operating in France over the three year period between 2003 and 2005. The sample includes 279 observations from 93 distribution units operating within the French electricity distribution network ERDF. A Cobb-Douglas cost function is estimated using several specifications focusing on the analysis of the economies of scale and customer density. In order to account for the unobserved heterogeneity and its impacts on the economies of scale, we use a latent class specification. The results suggest that a majority of the distribution units can exploit statistically significant economies of scale. Further, the empirical analysis indicates that the unexploited economies of scale can vary considerably from one unit to another, not only because of variations in outputs but also because of the unobserved differences in networks and technological characteristics. In particular, the latent class approach can identify a group of distribution units that do not show any significant economies of scale. Further analysis suggests that such distributors are often located in metropolitan areas with high customer density.