Monday, 21 November 2011

A justification for partial asset sales

A justification in the view of Seamus Hogan over at Offsetting Behaviour at least. Hogan writes,
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.

No comments: