248 Electricity Cost Modeling Calculations This equation is modified so that it is possible to estimate the lost savings due to the coops' choice of organizational structure. That is, to quantify the "wedge of inefficiency" due to the separation of the generation and distribution functions, requires the estimation of three separate cost models [(C(Y i, 0), C(0, Y j, p i ), and C(Y i, , Y j )]. Let: 1. C(Y i, 0) ¼ lnC_GT ¼ estimated G&T cost. 2. C(0, Y j, p i ) ¼ lnC_PP ¼ member coop's cost of electric service. 3. C(Y i , Y j ) ¼ lnC_PPs ¼ cost if vertically integrated. Note: p i Y i (Y j, p), the cost of power purchased from the G&T and sold by the member coop, must also be computed. Substituting into (8.4) yields: S ij ðyÞ ¼ ½lnC GT þ lnC PPÞ À p i Y i ðY j pÞ À lnC PPsÞ=lnC PPs ! 0 ð8:5Þ 8.10 ESTIMATION RESULTS Estimation results of the three cost models are displayed in Table 8.3. The results of the first model [C(Y i, 0)], which estimates the G&T's cost, are not as strong as those that estimate the costs for the member coops. Estimated as a single-output model (with input prices), no scale economies emerge and the adjusted R 2 is 0.6431, which is not a surprising result given that the deregulation of the wholesale market was predicated on the lack of Table 8.3 Estimation Results: Economies of Vertical Integration--Comparison of Estimates for Cost Models Employed in Vertical Economies Study Model: Model: Model: Parameter (variable) C(Y i, 0) t-stats C(0, Y j, p i ) t-stats C(Y i , Y j ) t-stats a 0 (constant) a 1 (Y 1 ) a 2 (Y 2 ) Á À 2 a 11 À Y 1 Á 2 a 22 Y 1 a 12 (Y 1 Y 2 ) b 1 (price of capital) b 2 (price of power) b 3 (price of labor) s 1 (trans lines) s 2 (density) Adjusted R 2 3007 2.244 0.0002 1.83 1.32 0.63 0.4497 0.2460 0.3043 2.27 1.20 2.02 0.6431 14.0705 2.27687 1.44718 ­0.00063 ­0.00012 0.00005 0.03810 0.85815 0.10375 0.02078 -0.05797 0.9759 4.12 10.50 10.44 ­3.85 ­2.60 0.40 0.77 19.76 3.77 4.02 ­3.37 40.7821 4.1499 2.1656 ­0.0010 ­0.0003 0.0001 0.2952 0.5475 0.1572 0.0249 ­0.0707 0.9659 5.25 15.42 11.04 ­2.49 ­2.38 0.19 7.70 23.84 4.46 4.41 ­3.16