This story in yesterday’s Press suggested that the SOE, Meridian Energy, is being restructured in preparation for being privatised after the next election, although this has been denied by John Key.He goes on,
The reaction of the regular “public finance” economist in me to the suggestion that an electricity company will be privatised is to cheer loudly: the government has no business owning shares in companies providing private goods while at the same time maintaining a large portfolio of debt. The “public choice” economist in me, however, hopes that Meridian and the other two SOE electricity generators (Mighty River Power and Genesis) will remain government owned.The theory of the firm economist in me says yes to privatisation.
Hart, Shleifer and Vishny ("The Proper Scope of Government: Theory and an Application to Prisons", Quarterly Journal of Economics, 112(4): 1127-61, November 1997) argue that the case for government provision of goods or services is generally stronger when non-contractible cost reductions have large deleterious effects on quality, when quality innovations are unimportant and when corruption in government procurement is a severe problem. It has been argued that the case for government production is strong in such services as the conduct of foreign policy, police and armed forces. The case can also be made reasonably persuasively for the case of prisons. Electricity doesn't look much like these services to me.
The case for private sector provision is stronger when quality reducing cost reduction can be controlled through contract or competition, when quality innovations are important and when patronage and powerful unions are a severe problem inside the government.
On these grounds I can not see why the government needs to be involved in the production of electricity. The incentives look better under private ownership. Electricity production is not a area where cost reductions come at the expense of quality - its difficult to see what low quality electricity would be; where innovation is unimportant - we always want better, more efficient, environmentally friendly ways of producing power; or where there are any problem with government procurement - its not clear that we need government procurement in this case. So why have the government owning Meridian, Mighty River Power or Genesis? It is hard to see competition lessening under private ownership, having the government owning three of the big players in the industry doesn't look like a highly competitive market place. Also privatisation maximises the "distance" between the government and the industry. This makes political interference more obvious and thus more politically costly than under state ownership.
For electricity production, private provision makes sense to me.