Productivity growth, technical change and economies of scale of Korean fossil-fuel generation companies, 2001¬タモ2012: A dual approach

a r t i c l e i n f o This paper examines total factor productivity (TFP) growth, technical change and economies of scale measure of Korean fossil-fuel power generation companies (GENCOs) between 2001 and 2012. For the empirical investigation , we estimated the cost function along with specification tests in order to find the most appropriate empirical model. Empirical results show TFP deterioration, technical regress, and economies of scale for the study period. The optimal size of the Korean GENCOs was also found, which is employed in developing policies regarding TFP growth and technical advance. The Korean electricity industry was supposed to undergo a serial reform after the 1997 Monetary Crisis. The reform in Korean electricity industry not only followed the global electricity restructuring trend during 1980s and 1990s but also attempted to overcome the 1997 Monetary Crisis in order to introduce competition to the a prior government-owned sectors such as electricity, telecommunication, steel production and so forth. The reform aimed at increasing consumer's benefit by lowering the end-user price. The vertically integrated electricity industry, in which the former Korea Electric Power Corporation (KEPCO) had monopolized the generation, transmission, distribution and sales, was planned to be separated. In the initial plan of the reform, the generation function of the former KEPCO was taken over by six generation companies (GENCOs) and the new entrant to the generation market was allowed in order to make the market competitive. After the failure of selling to the public of the five fossil-fuel power GENCOs in 2002, these five GENCOs have been generating and wholesaling electricity as subsidiaries of KEPCO. Although they are subsidiaries, KEPCO cannot exercise its vote on the operations of GENCOs since the Ministry of Strategy and Finance holds the floor regarding them. The governance surrounding the GENCOs appears not to make the market competitive, as opposed to the planned objective. Although the Korean electric wholesale market has attempted to transit to the de facto global standard, where price competition among GENCOs determines the wholesale price and generation quantity , it still shows an abnormal competition where price competition is limited and the government intervenes to the price determination (Nam, 2013). That is, an effective competition does not exist in the current Korean electric wholesale market, making it non-competitive. The long-term bilateral contract between generators and sellers is prohibited, whereas only trade through the hourly-based spot market is allowed through …