Optimal privatization of vertical public utilities

Abstract We examine restructuring, divestiture, and deregulation of a vertically integrated public utility, (e.g., electricity), from a public finance perspective. How an optimal restructuring plan for the utility depends on the cost of public funds and on the X‐efficiency gains from privatization, how the optimal degree of competition in the upstream and downstream segments are connected, and implications of privatization for consumer prices are examined. The higher the cost of public funds, the more likely the post‐privatization price will exceed the regulated public utility price. The greater the X‐efficiency gains from privatization, the more likely the post‐privatization price will fall.