In an article on privatisation in the Fin a couple of weeks ago, I observed that
it was hoped that private ownership would impose capital market discipline on investment decisions … The public sector has been far from perfect in the planning and implementation of infrastructure investment decisions. But public sector failings pale into insignificance compared with the disastrous bubble and bust when investment decisions in the Internet and telecommunications sectors were entrusted to the wisdom of private capital markets. The energy sector has been little better. Enron was just one example of investment decisions being driven by market manipulation and rent-seeking.
In the case of monopolies the most important single regulatory decisions relate to prices charged to consumers or for third-party access. With privately owned monopolies, there is an inherent conflict here. If the price is set too high, consumers will suffer. If they are too low, investment will be inadequate. As regulator, the government has a conflict of interes. On the one hand, regulation is supposed to set efficient prices. On the other hand, as representatives of consumers, governments have an incentive to fix prices at inefficiently low levels.
Public ownership Îinternalises the externalityâ and balances the incentives facing governments. If prices are set below the socially efficient level, the benefit to consumers is offset by a loss in revenue. The converse is true if prices are set too high.
I’m just wishing I had run this last Thursday, just before the big US blackout, which appears to be due primarily to inadequate/poorly co-ordinated investment in transmission.