Tariff Deficit, Excessive Rents, and Privatisation

Abstract

A tariff deficit and excessive rents have been the source of public discussion on energy policy in the last 25 years, and the subject of a recent inquiry by a Parliamentary Commission. The Commission concluded there were excessive rents created by policy options. The rationale for these rents, from the point of view of the policy makers, was that they would increase privatisation revenues and support industrial and environmental policies. The rationale for the tariff deficit was that it would increase price stability. In this paper the Commission’s view that there were excessive rents is initially accepted, and these explanations are discussed from the perspective of public interest and of public choice and economic theories of regulation. It is argued that the best explanation for these policies is not based on the public interest, but on vote seeking behaviour by the governments. It is also suggested that excessive rents in the energy sector might have been sustained on the grounds of public interest, based on efficiency, if complemented by credible commitments to reduce income taxes. However, some doubts remain about the relevant concept of excessive rents. The Commission’s report is ambiguous on these. Moreover, the contractual regulation arrangements adopted by Portuguese public decision‑makers in the energy sector, since the mid‑1990s, may well be the source of informational rents that should not be considered as excessive. In any case, it is argued that the Commission’s report suggests, even if implicitly, to improve public decision‑making, in the energy sector and in state intervention in general.