SEPARABILITY TEST FOR THE ELECTRICITY SUPPLY INDUSTRY

This paper examines the vertical integration issue of the electricity industry. This industry is typically vertically integrated and heavily regulated. The paper investigates the potential technological efficiency loss due to the vertical disintegration using the translog production function. Three separability hypotheses using the Allen-Uzawa elasticity of substitution are tested to examine the feasibility of various degrees of disintegration of the current industry structure. All three separability hypotheses are rejected, and the cost of disintegration is estimated. Further, estimates indicate that the electricity industry appears to have exhausted economies of scale. Unlike other deregulated industries, disintegration of the electricity industry will entail technological efficiency loss.