Divestiture policy and operating efficiency in U.S. electric power distribution

Divestiture of generation assets by vertically integrated electric utilities has been a key element of restructuring in the U.S. The resulting generation sector has received much attention, but the standalone distribution sector that has been simultaneously created has received very little. This paper addresses the effects of divestiture policy on the operating efficiency of the resulting distribution utilities. Using data envelopment analysis to measure operating efficiency, we examine 73 utilities in the period 1994–2003 and find that the major divestitures that were required by state regulators had large adverse effects on efficiency, whereas utilities that divested at their own initiative had at worst neutral efficiency outcomes. These results raise serious questions about one of the centerpieces of electricity restructuring.