Scale effects in the Southern Electric Utility industry and the performance of Houston Lighting and Power relative to other southern utilities
Krasner, Thomas P.
Young, Richard D.
Master of Arts
Using an econometric, cost function analysis, the author found large economies of scale, and in some cases, large diseconomies of scale associated with firm size. The regressions supported the findings of previous authors, which suggest the existence of constant returns to scale for fimrs above 4 MW. The effect of capacity factor proved to be minor. Input prices as well as regional and technological distinctions explained significant cost variation. Cost differences between Houston Lighting and Power and the other companies in the sample, whether positive or negative, seemed due to economies of scale and HL&P's wage structure. In most cases these cost differences were minor. HL&P’s recent nuclear and coal construction programs were also considered. HL&P initiated its nuclear construction program in national and regional environments which favored nuclear power. According to cost estimates in the 197s, nuclear generating costs would undercut those of coal or lignite. Like other utilities, HL&P seemed to not anticipate future nuclear cost escalation. Further contributing to its cost overruns, HL&P hired Brown & Root, a contractor without previous nuclear experience, and failed to provide adequate quality control. HL&P's coal construction costs appear reasonable. Its need for new coal plants, however, is debatable.