An investigation of distribution costs by means of regression analysis

The scale economy of electricity distribution depends to a great extent on how the output is defined. If the output is defined as the (variable) amount of electricity (in terms of kilowatt hours/year) supplied, assuming the supply area and the number of customers to be constant, an increasing return to scale is found, i.e. marginal costs are lower than average costs. If pricing questions are discussed, this is a relevant way to define output. If economy of scale is discussed in relation to the organizational structure of the industry, the output has to be defined in another way. In this study, it was defined as the number of customers served, assuming the area per customer to be approximately constant. In this case, the authors found a decreasing cost with increasing size of the utility, a tendency that gradually levels off with increasing number of customers. The conclusions are based on regression analyses. Electricity distribution costs were also studied by means of design studies. These studies produced cost figures that were different from those obtained by the regression analyses. However, the principal form of the cost model and some trends were in accordance with the results of the regression analyses