Review of Industrial Organization 19: 499–502, 2001.
Privatization, Restructuring, and Regulation of Network Utilities, David M. New-
bery. Cambridge, MA: The MIT Press, 1999, 466 pages. $47 95.
David Newbery provides a unique mix of theoretical, institutional, and empirical
consideration of issues related to both privatization and liberalization in network
industries. Readers looking for answers may come away disappointed, but those
looking for evidence and sound public policy methodology will be richly rewarded.
The book examines privatization, liberalization, and regulation in the electri-
city, telecommunications, and natural gas industries, and draws examples from
throughout the world. The basic premise is that regulation is inherently ﬂawed and
that competition may mitigate some of the inefﬁciencies of regulation of network
utilities. Privatization is necessary but not sufﬁcient for promoting competition
– they are portrayed as public policy complements. Professor Newbery does not
simplistically assume that liberalization is unambiguously good. He offers cost-
beneﬁt analyses of myriad attempts at privatization or liberalization and ﬁnds that
some of these have achieved only small social welfare gains while others have
provided signiﬁcant increases in social welfare. He also attempts to disaggregate
the social welfare changes across different interest groups, as well as considering
the distributional impediments to industry reform.
Professor Newbery begins by establishing regulatory commitment as the central
question in regulation of network utilities. When is sustained private ownership of
network utilities viable or optimal? He offers a rich analysis of regulatory institu-
tions and their abilities to constrain the opportunistic behavior of regulators (i.e.,
their effort to expropriate the proﬁts of the regulated ﬁrm). The many deﬁciencies
of rate-of-return regulation are exposed, and the potential beneﬁts of price cap reg-
ulation are elucidated although the potential for ﬁrms to earn excess proﬁts raises
new issues of who gains from regulatory change and new forms of regulatory in-
centives for expropriation. Professor Newbery’s discussion is clear and to the point,
and he offers convincing explanations on why privatization in telecommunications
is generally more successful than in electricity (the need for continued investment
in telecommunications relative to electricity helps reduce problems of regulatory