Revision presentation on competition policy and intervention in UK utility industries - designed for A2 micro

1. A2 Micro
Competition Policy and
the Utility Industries
Tutor2u, Summer 2013

2. Competition Policy Overview
Sector / Industry Price caps for
wholesale prices?
Price caps for retail
prices?
Length of price
control period
Form of price
capping used
Water and sewerage No Yes Five years RPI + K
Telecommunications Yes – caps on mobile
termination charges
(roaming fees)
No On-going – no fixed
price capping
period
Long run
incremental cost
Electricity Yes – price caps for
transmission and
distribution
No Five years, soon to
be eight years
RPI-X – soon to be
RIIO
Gas Yes – transportation
and distribution
No Five years, soon to
be eight years
RPI-X – soon to be
RIIO
Postal Services Yes – for pre-sort
services and prices
paid by non-Royal-
Mail businesses for
access to mail
network
Yes – prices capped
– periodic
increases in prices
allowed
Two-year price
freeze after a price
review – large rise
in stamp prices in
2012
RPI-X for retail
postal charges but
this price control is
set to be abolished

3. Government Intervention
Explore the effects on
different stakeholders
(workers, managers,
customers, shareholders,
environment etc.)

4. Oligopolistic Energy Market in the UK
Three million EDF Energy customers
will see their gas and electricity bills
rise by nearly 11 per cent on average
from December 7. The company, which
is blaming high wholesale energy costs
for the price rise, is the fifth major
energy firm to announce an increase in
recent months, following Scottish
Power, nPower, British Gas and SSE.
Tacit
collusion?
Price leader?
Renewables
obligations

5. Oligopolistic Energy Market in the UK
Three million EDF Energy customers
will see their gas and electricity bills
rise by nearly 11 per cent on average
from December 7. The company, which
is blaming high wholesale energy costs
for the price rise, is the fifth major
energy firm to announce an increase in
recent months, following Scottish
Power, nPower, British Gas and SSE.
Tacit
collusion?
Price leader?
Renewables
obligations

6. Oligopolistic Energy Market in the UK
Three million EDF Energy customers
will see their gas and electricity bills
rise by nearly 11 per cent on average
from December 7. The company, which
is blaming high wholesale energy costs
for the price rise, is the fifth major
energy firm to announce an increase in
recent months, following Scottish
Power, nPower, British Gas and SSE.
Tacit
collusion?
Price leader?
Renewables
obligations

7. Oligopolistic Energy Market in the UK
Three million EDF Energy customers
will see their gas and electricity bills
rise by nearly 11 per cent on average
from December 7. The company, which
is blaming high wholesale energy costs
for the price rise, is the fifth major
energy firm to announce an increase in
recent months, following Scottish
Power, nPower, British Gas and SSE.
Tacit
collusion?
Price leader?
Renewables
obligations

9. Discuss whether utilities such as train operating companies and regional
water monopolies are better left in the private sector or whether all, or
some, should be taken back into public ownership

10. Deeper evaluation (4+1 approach)
Outline (explain/analyse) and then evaluate 4 separate
points with a brief final reasoned evaluative paragraph
1/ Case for
private sector
• Profit motive
• Dynamic
efficiency
2/ State
ownership
option
• Objectives?
• Outcomes?
3/ Impact on
stakeholders
• Consumers
• Employees
• Taxpayers
4/ Alternatives
to public sector
• Competition
policy
• Business taxation

11. Evaluate the case for stronger action by governments to protect
consumers from the monopoly power of firms involved in
supplying gas and electricity to UK homes and businesses
Please note
the error in
the workbook
Significant rise in average energy bills in the UK –
this is a major policy issue – directly affects millions
of consumers and businesses.

12. Case for
Action
High prices
/allegations
of collusion
Tougher
price caps?
Create
competition
in the
wholesale
market?
Supernorma
l profits
Windfall
Tax on
profits
State
Ownership
Rising fuel
poverty /
complex
prices
Cheapest
tariff as
default
Using
windfall tax
to fund
insulation
Evaluate the case for stronger action by governments to protect
consumers from the monopoly power of firms involved in
supplying gas and electricity to UK homes and businesses
One main point per paragraph
Build an argument, support, then evaluate
Evaluation must relate to the point that has already been made
Evaluation
1. Large barriers to entry
2. Huge economies of scale
3. Limited contestability is a
feature of the market

13. Case for
Action
High prices
/allegations
of collusion
Tougher
price caps?
Create
competition
in the
wholesale
market?
Supernorma
l profits
Windfall
Tax on
profits
State
Ownership
Rising fuel
poverty /
complex
prices
Cheapest
tariff as
default
Using
windfall tax
to fund
insulation
Evaluate the case for stronger action by governments to protect
consumers from the monopoly power of firms involved in
supplying gas and electricity to UK homes and businesses
One main point per paragraph
Build an argument, support, then evaluate
Evaluation must relate to the point that has already been made
Evaluation
1. Large barriers to entry
2. Huge economies of scale
3. Limited contestability is a
feature of the market
Evaluation
1. Abnormal profits used to
fund capital investment
2. Long term energy security
3. Nationalisation &
inefficiency

14. Case for
Action
High prices
/allegations
of collusion
Tougher
price caps?
Create
competition
in the
wholesale
market?
Supernorma
l profits
Windfall
Tax on
profits
State
Ownership
Rising fuel
poverty /
complex
prices
Cheapest
tariff as
default
Using
windfall tax
to fund
insulation
Evaluate the case for stronger action by governments to protect
consumers from the monopoly power of firms involved in
supplying gas and electricity to UK homes and businesses
One main point per paragraph
Build an argument, support, then evaluate
Evaluation must relate to the point that has already been made
Evaluation
1. Large barriers to entry
2. Huge economies of scale
3. Limited contestability is a
feature of the market
Evaluation
1. Abnormal profits used to
fund capital investment
2. Long term energy security
3. Nationalisation &
inefficiency
Evaluation
1. Fewer tariffs but higher
average prices
2. Windfall tax discourages
investment & research
3. Government failure when
using revenues

15. Judging Effectiveness of Regulation
Real prices Size of profits Jobs Performance
targets
Research
spending
Productivity Environmental
indicators
Investment in
new capacity

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students, teachers and
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@tutor2u_econ