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Privatisation, competition aren't magic solutions for energy woes
Publication Date : 26-04-2012
Taiwan Power Co. (Taipower) and CPC Corp. recently announced that if electricity rates and oil prices remain stagnant, the two companies will suffer losses that they will not be able to bear. Thus, the two firms demanded price increases of oil and electricity in March.
The announcement of rising oil and electricity prices put these national enterprises under tight scrutiny. Criticism of fat cats, low efficiency and expensive contracts soon became headlines in newspapers. Opposition parties criticized the rising oil and electricity prices as a way to make people pay for the inefficiency of these state-run firms.
Legislators demanded an overhaul of the two national enterprises before implementing new prices for fuel and power. A committee for improving the efficiency of Taipower and CPC was formed and privatization was proposed.
Following precedents, the government will privatise national companies and bring in competitors for companies to compete with to force the state-run firms to become more efficient. This procedure, however, might not be a panacea.
If CPC and Taipower become privatised, the government will no longer be obligated to provide them any form of bailout. This would result in the firms being more willing to cut unnecessary costs and employees.
Privatisation, however, comes with costs. The government might lose the power to implement its policies via Taipower and CPC in the future. The two companies are currently responsible for stabilising electricity and oil prices, as well as providing power and the nation's oil reserves. After privatization, although several back-up plans for the power and oil reserves are on the table, the electricity and oil prices may fluctuate according to the market prices. Households and business owners will be subject to a higher risk of price fluctuations.
When competitors are brought into the market, companies will compete for profit by lowering costs or providing better services. Consumers can choose products from different companies and thus competitors need to be more sensitive to the needs of consumers if they want to survive. If the competition is severe enough, companies will try to get rid of their fat cats, make good bargains when signing contracts and improve efficiency. If this was the case, the government would only need to provide basic regulations so that people might enjoy better-quality products.
Competition in real life, however, might not always be as severe as stated in economics theory. After becoming privatized, Chunghwa Telecom was still criticised for its high prices and slow transmission speeds. Complaints from consumers are posted on many websites and printed in newspapers, but telecommunication companies are reluctant to make changes. A better option does not currently exist in the market. Competition among telecommunication companies does not provide enough incentives to drive down prices and provide faster services.
Therefore, if the government finally decided to privatise CPC and Taipower and introduce new competitors, it must first consider the costs and benefits of privatisation and make sure there will be enough competition in the market.
Since the two firms would be responsible for providing electricity and oil, even after they become privatised the government and public would still need to keep an eye on them. Therefore, it is necessary for the government to transform CPC and Taipower into more transparent entities.
In order to win support for the new energy prices, Taipower and CPC have already proposed transforming the system of giving out bonuses and providing copies of their contracts on their websites. This serves as proof that national enterprises can be changed under pressure.
The government should seize the moment and fully utilise the committee for improving efficiency to transform CPC and Taipower and make them more transparent. Legislators should also focus more on national enterprises, examining whether they fulfill their obligations to the citizenry.