Recognizing the plethora of conflicting tensions under private ownership, still others (in particular socialist European governments) have argued that the best policy is in fact to retain transmission networks under public ownership. An important assumption underpinning this proposal is that the government has less incentive to hold-up private generators than a private owner of the transmission network. However, the highly politicized nature of electricity consumption in all countries makes the industry especially susceptible to government control, irrespective of the ownership structure. Indeed, under public transmission ownership, the government may find it easier to hold-up private generation firms since it has direct control over day-to-day managerial decisions than in the private ownership case where the government may have to pressure a regulatory agency to implement its preferred policy. Thus, while public ownership may allay concerns over the exercise of private market power in transmission it also exposes generation firms to greater political hazards.

Economies of scale in generation limit the potential for competition to relatively small markets. In addition to the organization of transmission, governments have several options for reform in the generation sector. Chief among these is the decision to create a competitive wholesale generation market where sellers bid against each other to supply electricity on a continuous basis, with prices determined by a market-making mechanism. Following the lead of Argentina in the 1980s, a number of jurisdictions have made competitive generation markets a central component of privatization and restructuring programs (e.g. Australia, California, Chile, Finland, Norway, Sweden, U.K., Ukraine). Although the introduction of wholesale markets is generally perceived as being a desirable policy goal, questions have been raised about the feasibility of implementing similar reforms in smaller countries where, it is argued, only a small number of generation companies can be supported, leading to an oligopolistic situation (see Table 2). Competitive markets have been established, however, in several small countries where installed capacity is a small fraction of that in larger wholesale markets, such as Bolivia, El Salvador and Guatemala.<sup>98</sup> Similarly, there have been disastrous results in some large countries; in the Ukraine, for instance, repeated attempts by the government and international aid agencies to breathe life into the spot generation market have failed since 1996, and most generation trades are now arranged on an ad hoc bilateral basis among generators and distributors or final consumers.<sup>99</sup> Legal uncertainties about the status of contracts and private property in the Ukraine, as well as strong concerns over bureaucratic corruption,<sup>100</sup> have undermined the incentives for entrants to invest in new, more efficient generation capacity, to write long-term contracts and to engage in the spot market. The experience of the Ukraine suggests that, rather than market size, the main constraint on the feasibility of wholesale markets to operate is the ability of new generation companies to enter the market, access transmission resources on a nondiscriminatory basis and enter into enforceable contracts with new or existing buyers .

**Comment [pts1]:** what’s geographic size

> 98 For further analysis of this particular issue, see Spiller, 1999.

> 99 _Power Economics_ , September 30, 1998; _East European Energy Report_ , October 25, 1996 and August 1, 1997; _Utility Week_ , June 1, 1998; _International Private Power Quarterly_ , Fourth-Quarter 1998.

> 100 The Electricity Daily, May 10, 1999.

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