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.One would have to say that any such market power arguments have to be trade-off against efficiency and relationship-specific investment arguments as pointed out by Oliver Williamson et al many years ago. And why can't you deal with such problems via a long-term contract?
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.I can't help but think this is a better argument for the sale of 100% of the shares in an SOE.