How the Spatial Characteristics of the Gas Distribution Networks Affect Economies of Scale: Evidence from a Panel Study of Italian Data

In this paper, using a unique database accounting for unbundling between distribution and retail sales in Italy, we analyse the effects of the spatial characteristics of the gas distribution network on the distribution costs. Beyond scale and density variables, we propose an operational measure of compactness for Distribution System Operators (DSOs). We use econometric panel data techniques to find that the Minimum Efficient Scale (MES) is around 50 thousand Delivery Points (DPs). Economies of density extend to our entire range but become modest beyond 120 DPs per km. Moreover, congestion costs significantly reduce density benefits in highly urbanized areas. Average costs decrease monotonically in compactness, but the latter matters especially for small-scale DSOs. Despite regulatory efforts, allocative and productive inefficiencies are found to be substantial. In particular, DSOs with cost advantages due to their size, density or compactness do not exploit those advantages to reduce tariffs for service users. This implies that they keep such benefits inside firms, to the advantage of other stakeholders. Our results suggest some policy conclusions regarding the heterogeneous structure of the distribution industry across European Countries and the need for National Reforms.