A Justification for Partial Asset Sales

Like most economists, I think, I have been critical of National’s policy to sell off non-controlling stakes in some SOEs. The argument, which I would adhere to in most circumstances, is that either there is a justification for public ownership or there is not—partial sales that allows some private ownership but without injecting the discipline of a threat of take-over would achieve nothing.
In the case of the three state-owned electricity companies, however, there might be a case. The argument is as follows: Vertical integration between the wholesale and retail sides of the electricity market essentially nullifies the market power that in principle would exist in the wholesale market with only four major generators. The close-to-balanced positions that have emerged in New Zealand, with the major gentailers each having roughly the same market share on the demand side as the supply side of the wholesale market removes the incentive for suppliers to restrict supply to inflate the wholesale-market price.

At the same time, however, vertical integration makes the retail market less contestable. If competition between retailers is not as intense as we would like, it is difficult for a new entrant to come into the market, as it would be highly exposed being a buyer and not a seller on the wholesale market, particularly in periods when low rainfall or transmission constraints gave a seller some temporary monopoly power.

Now imagine, however, that a new entrant in the retail market could simultaneously buy shares in the company that was the dominant generator in the region the entrant wanted to sell in. This would be a risk management strategy that would enable it to price to the retail market based on normal wholesale prices, knowing that losses in the event of a high wholesale price would be offset by the return on its shareholdings. Now further imagine that there are strong political reasons why the government would want to retain a controlling stake in the main electricity gentailers. In this case, these two arguments together suggest that maybe sale of a non-controlling stake is the optimal policy.

I’m not sure what I think about this, but I can’t reject the argument out of hand.