Following concerns about the market power of the Big Six energy suppliers in the UK and high prices for gas and electricity, the industry regulator, Ofgem, referred the industry to the Competition and Markets Authority (CMA) in June 2014. The CMA published its final report in June 2016. This argued that while there was sufficient potential for competition, consumers nevertheless needed further encouragement to switch suppliers. This would strengthen competition in the market.
To encourage switching, the CMA proposed the creation of a database that would include the details of customers who have been on a supplier’s standard variable tariff (SVT) for three or more years. Competitor energy suppliers would have access to this database to offer better deals for these customers.
There had already been calls for price caps to be imposed on suppliers. For example, in the run-up to the 2015 general election, the then Labour leader, Ed Miliband, proposed imposing a price freeze. This was criticised by the Conservatives for being too anti-market, that it would encourage energy companies to raise prices prior to the freeze and that it would be of no benefit in times of falling wholesale energy prices (which was the position in 2015).
Indeed, in its 2016 report, the CMA recommended price caps only for the 16% of people on prepayment meters and these would be variable caps not freezes. This was followed in February 2017, by Ofgem’s announcement that a temporary price cap for such customers would come into effect in April 2017. The level of the cap would vary by meter type and region. It would also be reviewed every six months to reflect changes in costs and remain in place until 2020. There would be no cap on other customers.
But in the run-up to the 2017 election, the Conservatives announced that they would, after all, introduce a price cap on SVTs – 66% of customers are on such tariffs. Before the details were announced, there was much speculation as to what form such a cap would take? It would not be a simple freeze. But there was debate as to whether caps would vary with wholesale costs or whether they would be relative to the company’s lowest tariffs or to those of its rivals.
As it turned out, the proposal was for a cap on standard variable tariffs. It would be set by Ofgem and reviewed every six months. The cap would be based on the cheapest standard variable tariffs in each part of the UK, taking into account the variable costs for transporting energy there. Ofgem will adjust the cap every six months to reflect changes in the wholesale cost of energy.
Articles before details were anniunced
U.K. Energy Industry Faults May’s Election Pledge to Cap Prices Bloomberg, Rakteem Katakey (23/4/17)
Conservatives promise to cap prices in UK energy market Financial Times, Jim Pickard and Nathalie Thomas (23/4/17)
How might an energy price cap work? BBC News, Brian Milligan (24/4/17)
UK government vows strong action to rein in energy companies The Guardian, Adam Vaughan (19/4/17)
Energy bills: what’s the difference between Tory cap and Miliband freeze? The Guardian, Adam Vaughan (23/4/17)
Capping energy prices? Still a bad idea Adam Smith Institute blogs, Sam Dumitriu (25/4/17)
Bulb becomes ‘first’ provider to cut energy prices this year Moneywise (24/4/17)
Experts slam Conservative plans to cap energy bills as ‘clumsy and counterproductive’ The Telegraph, Lauren Davidson (23/4/17)
Capping energy tariffs isn’t a one-way ticket to Venezuelan-style economic ruin Independent, Ben Chu (25/4/17)
Articles after details were anniunced
Conservatives defend plans to cap UK energy bills Financial Times, Jim Pickard and Nathalie Thomas (9/5/17)
What is the energy price cap – and what does it mean for bills? The Telegraph, Jillian Ambrose (9/5/17)
The new energy price cap con? The Telegraph, Jillian Ambrose (9/5/17)
May defends plan to cap ‘rip-off energy bills’ BBC News (9/5/17)
Q&A: The Tory plan to cap energy prices BBC News, Brian Milligan (9/5/17)
Energy prices could still go up under Theresa May’s price cap plans, admits Business Secretary Greg Clark Independent, Rob Merrick (9/5/17)
Tory claims over energy price cap are just hot air The Guardian, Nils Pratley (9/5/17)
Video and audio
UK government energy price cap ‘sheer politics’: Bernstein CNBC, Deepa Venkateswaran and Andrew Sentance (25/4/17)
Energy UK: price cap could backfire Sky News, Lawrence Slade (24/4/17)
Scottish Power: Capping prices ‘damages customers’ BBC News, Keith Anderson (24/4/17)
Tories to pledge energy bill cap BBC News, Michael Fallon (24/4/17)
Tories: Energy cap will protect vulnerable people BBC Today Programme, Business Secretary Greg Clark (9/5/17)
Energy cap: good or bad for consumers? Sky News, Stephen Fitzpatrick and James Kirkup (9/5/17)
- What scope is there for tacit collusion between the Big Six energy suppliers?
- What is meant by the RPI–X price cap? How does it differ from proposals being considered by the government?
- Why are people often reluctant to switch energy supplier?
- How could people be encouraged to switch supplier?
- What are the advantages and disadvantages of imposing a price cap for SVTs (a) relative to costs; (b) relative to lower-priced tariffs?
- Comment on Centrica’s chief executive officer Iain Conn’s statement that “price regulation will result in reduced competition and choice, and potentially impact customer service”.
- Comment on the statement by Lawrence Slade, chief executive officer of Energy UK, that intervention would create “huge uncertainty around government intentions, potentially putting at risk the billions in investment and jobs needed to renew our energy system”.
- Would an announcement of the introduction of a price cap in the near future necessarily encourage energy companies to raise their price now?
Cloud computing is growing rapidly and has started to dominate many parts of the IT market. Cloud revenues are rising at around 25% per year and, according to Jeremy Duke of Synergy Research Group:
“Major barriers to cloud adoption are now almost a thing of the past, especially on the public-cloud side. Cloud technologies are now generating massive revenues for technology vendors and cloud service providers, and yet there are still many years of strong growth ahead.”
The market leader in cloud services (as opposed to cloud hardware) is Amazon Web Services (AWS), a subsidiary of Amazon. At the end of 2016, it had a market share of around 40%, larger than the next three competitors (Microsoft, Google and IBM), combined. AWS originated cloud computing some 10 years ago. It is set to have generated revenue of $13 billion in 2016.
The cloud computing services market is an oligopoly, with a significant market leader, AWS. But is the competition from other players in the market, including IT giants, such as Google, Microsoft, IBM and Oracle, enough to guarantee that the market stays competitive and that prices will fall as technology improves and costs fall?
Certainly all the major players are investing heavily in new services, better infrastructure and marketing. And they are already established suppliers in other sectors of the IT market. Microsoft and Google, in particular, are strong contenders to AWS. Nevertheless, as the first article states:
Neither Google nor Microsoft have an easy task since AWS will continue to be an innovation machine with a widely recognized brand among the all-important developer community. Both Amazon’s major competitors have an opportunity to solidify themselves as strong alternatives in what is turning into a public cloud oligopoly.
While Amazon dominates cloud infrastructure, an oligopoly is emerging. Which will buyers bet on? diginomica, Kurt Marko (16/2/17)
Study: AWS has 45% share of public cloud infrastructure market — more than Microsoft, Google, IBM combined GeekWire, Dan Richman (31/10/16)
Cloud computing revenues jumped 25% in 2016, with strong growth ahead, researcher says GeekWire, Dan Richman (4/1/17)
Press releases Synergy Research Group
- Distinguish the different segments of the cloud computing market.
- What competitive advantages does AWS have over its major rivals?
- What specific advantages does Microsoft have in the cloud computing market?
- Is the amount of competition in the cloud computing market enough to prevent the firms from charging excessive prices to their customers? How might you assess what is ‘excessive’?
- What barriers to entry are there in the cloud computing market? Should they be a worry for competition authorities?
- Are the any network economies in cloud computing? What might they be?
- Cloud computing is a rapidly developing industry (for example, the relatively recent development of cloud containers). How does the speed of development impact on competition?
- How would market saturation affect competition and the behaviour of the major players?
Record fines have been imposed by the European Commission for the operation of a cartel. Truck makers, Volvo/Renault, Daimler, Iveco and DAF have been fined a total of €2.93bn. The fines were considerably higher than the previous record fine of €1.7bn on banks for rigging the LIBOR rate.
Along with MAN, they were found to have colluded for 14 years over pricing. They also colluded in passing on to customers the costs of compliance with stricter emissions rules. Together these five manufacturers account for some 90% of medium and heavy lorries produced in Europe.
The companies have admitted their involvement in the cartel. If they had not, the fines might have been higher. MAN escaped a fine of €1.2bn as it had revealed the existence of the cartel to the Commission.
A sixth company, Scania, is still in dispute with the Commission over its involvement. Thus the final total of fines could be higher when Scania’s case is settled.
In addition, any person or firm adversely affected by the cartel can seek damages from any of the companies in the national courts of member states. They do not have to prove that there was a cartel.
The Commission hopes that the size of the fine will act as a disincentive for other firms to form a cartel. ‘We have, today, put down a marker by imposing record fines for a serious infringement,’ said Margrethe Vestager, the EU’s competition commissioner.
Also, by being able to exempt a cartel member (MAN in this case) from a fine if it ‘blows the whistle’ to the authorities, it will help to break existing cartels.
There are some other major possible cartels and cases of abuse of market power currently being considered by the Commission. These include Google and whether unfair tax breaks were given to Apple and Amazon by Ireland and Luxembourg respectively.
Price-Fixing Truck Makers Get Record E.U. Fine: $3.2 Billion New York Times, James Kanter (19/7/16)
Truckmakers Get Record $3.23 Billion EU Fine for Cartel Bloomberg, Aoife White (19/6/16)
EU fines truckmakers a record €2.93bn for running 14-year cartel Financial Times, Peter Campbell, Duncan Robinson and Alex Barker (19/7/16)
Truckmakers fined by Brussels for price collusion The Guardian, Sean Farrell (19/7/16)
Europa Press Release
Antitrust: Commission fines truck producers € 2.93 billion for participating in a cartel European Commission (19/7/16)
Competition DG European Commission
- How have the various stakeholders in the truck manufacturing industry been affected by the operation of the cartel?
- What incentive effects are there, (a) for existing cartel members and (b) for firms thinking of forming a cartel, in the fining system used by the European Commission?
- Unlike the USA, the EU cannot jail managers for oligopolistic collusion. Compare the relative effectiveness of large fines and jail sentences in deterring cartels.
- What determines the profit-maximising price(s) for a cartel?
- Apart from the threat of action by the competition authorities, what determines the likely success of a cartel in being able to fix prices?
- Choose two other cases of possible cartels or the abuse of market power being examined by the European Commission. What is the nature of the suspected abuse?
In the following article, Joseph Stiglitz argues that power rather than competition is a better starting point for analysing the working of capitalism. People’s rewards depend less on their marginal product than on their power over labour or capital (or lack of it).
As inequality has widened and concerns about it have grown, the competitive school, viewing individual returns in terms of marginal product, has become increasingly unable to explain how the economy works.
Thus the huge bonuses, often of millions of pounds per year, paid to many CEOs and other senior executives, are more a reflection of their power to set their bonuses, rather than of their contribution to their firms’ profitability. And these excessive rewards are not competed away.
Stiglitz examines how changes in technology and economic structure have led to the increase in power. Firms are more able to erect barriers to entry; network economies give advantages to incumbents; many firms, such as banks, are able to lobby governments to protect their market position; and many governments allow powerful vested interests to remain unchecked in the mistaken belief that market forces will provide the brakes on the accumulation and abuse of power. Monopoly profits persist and there is too little competition to erode them. Inequality deepens.
According to Stiglitz, the rationale for laissez-faire disappears if markets are based on entrenched power and exploitation.
Monopoly’s New Era Chazen Global Insights, Columbia Business School, Joseph Stiglitz (13/5/16)
- What are the barriers to entry that allow rewards for senior executives to grow more rapidly than median wages?
- What part have changes in technology played in the increase in inequality?
- How are the rewards to senior executives determined?
- Provide a critique of Stiglitz’ analysis from the perspective of a proponent of laissez-faire.
- If Stiglitz analysis is correct, what policy implications follow from it?
- How might markets which are currently dominated by big business be made more competitive?
- T0 what extent have the developments outlined by Stiglitz been helped or hindered by globalisation?
In June 2014, the Gas and Electricity Markets Authority (which governs the energy regulator, Ofgem) referred Great Britain’s retail and wholesale gas and electricity markets to the Competition and Markets Authority (CMA). The market is dominated by the ‘big six‘ energy companies (British Gas, EDF, E.ON, npower, Scottish Power and SSE) and Ofgem suspected that this oligopoly was distorting competition and leading to higher prices.
The CMA presented its report on 10 March 2016. It confirmed its preliminary findings of July and December 2015 “that there are features of the markets for the supply of energy in Great Britain that result in an adverse effect on competition”. It concludes that “the average customer could save over £300 by switching to a cheaper deal” and that “customers could have been paying about £1.7 billion a year more than they would in a competitive market”.
It made various recommendations to address the problem. These include “requiring the largest suppliers to provide fuller information on their financial performance” and strengthening the role of Ofgem.
Also the CMA wants to encourage more people to switch to cheaper suppliers. At present, some 70% of the customers of the big six are on default standard variable tariffs, which are more expensive than other tariffs available. To address this problem, the CMA proposes the setting up of “an Ofgem-controlled database which will allow rival suppliers to contact domestic and microbusiness customers who have been stuck on their supplier’s default tariff for 3 years or more with better deals.”
Another area of concern for the CMA is the 4 million people (16% of customers) forced to have pre-payment meters. These tend to be customers with poor credit records, who also tend to be on low incomes. Such customers are paying more for their gas and electricity and yet have little opportunity to switch to cheaper alternatives. For these customers the CMA proposed imposing transitional price controls from no later than April 2017 until 2020. These would cut typical bills by some £80 to £90 per year. In the meantime, the CMA would seek to remove “restrictions on the ability of new suppliers to compete for prepayment customers and reduce barriers such as debt issues that make it difficult for such customers to switch”.
Despite trying to address the problem of lack of competition, consumer inertia and barriers to entry, the CMA has been criticised for not going further. It has also been criticised for the method it has chosen to help consumers switch to cheaper alternative suppliers and tariffs. The articles below look at these criticisms.
Competition and Markets Authority Energy Report BBC You and Yours (10/3/16)
Millions could see cut in energy bills BBC News (10/3/16)
Shake-up of energy market could save customers millions, watchdog says The Telegraph, Jillian Ambrose (10/3/16)
UK watchdog divided over energy market reforms Financial Times, Kiran Stacey (10/3/16)
How the CMA energy inquiry affects you Which? (10/3/16)
UK watchdog accused of bowing to pressure from ‘big six’ energy suppliers The Guardian, Terry Macalister (10/3/16)
CMA sets out energy market changes CMA press release (10/3/16)
Energy Market Investigation: Summary of provisional remedies Competition and Markets Authority (10/3/16)
- Find out the market share of the ‘big six’ and whether this has changed over the past few years.
- What, if any, are the barriers to entry in the gas and electricity retail markets?
- Why are the big six able to charge customers some £300 per household more than would be the case if they were on the cheapest deal?
- What criticisms have been made of the CMA’s proposals?
- Discuss alternative proposals to those of the CMA for dealing with the problem of excessive prices of gas and electricity.
- Should Ofgem or another independent not-for-profit body be allowed to run its own price comparison and switching service? Would this be better than the CMA’s proposal for allowing competitors access to people’s energy usage after 3 years of being with the same company on its standard tariff and allowing them to contact these people?