There has been a 38% increase in profit margins made by energy companies in the last 2 months and it is this which has prompted an investigation by Ofgem, the electricity and gas market regulator in the UK. Alistair Buchanan, Ofgem’s chief executive, said:
“With Britain facing an investment bill of £20bn over the next 10 years, consumers have the right to expect that the energy retail market is providing them with value for money. Our analysis published today shows an increase in company margins from £65 to £90 at a time of rising energy prices, which causes Ofgem to rightly ask if companies are playing it straight with consumers.”
Three of the big six suppliers have recently announced price rises and the fast-track review by Ofgem will consider whether consumers should be better protected. Scottish Power has increased gas prices by 2% and electricity prices by nearly 9%, meaning some customers may pay an extra £138 per year. British Gas is also planning on raising prices from December 10th, with gas and electricity bills expected to increase by 7%. Scottish and Southern Energy said it will increase domestic gas tariffs by 9.4%. EDF has promised a price freeze – at least until after the winter and nPower and E.ON are yet to announce their plans, but we can expect some form of a price rise.
While the review won’t make any difference to customer bills in the short term, Ofgem does have the power to make some changes to the way the companies are run. It is also expected that Ofgem will ask for more legislative support from the government and the Competition Commission. Although there are several suppliers in the energy market, each has market power and their dominance is preventing new firms from entering. As Adam Scorer, Director of Reputation and Impact at Consumer Focus, said:
“They do not feel the hot breath of competition on their necks.”
Articles
Energy firms facing gas and electricity price review BBC News (26/11/10)
Energy firms face new Ofgem enquiry over price rises and increased profits Telegraph, Andrew Hough (26/11/10)
Ofgem promises review as energy firms boost profit margins 38% Guardian, Jill Treanor (26/11/10)
Fuel bills: turning up the heat Guardian (27/11/10)
Energy firms face profit rise probe The Press Association (26/11/10)
Scepticism greets energy price probe Financial Times, David Blair (26/11/10)
UK utilities face review after recent price hikes Reuters (26/11/10)
UK to review retail energy market after price rises Bloomberg, Business Week, Kari Lundgren (26/11/10)
Has the toothless energy regulator learnt how to bite? Independent on Sunday, Julian Knight (28/11/10)
How to beat the energy price rise Telegraph (20/11/10)
Ofgem must mean business this time Herald (27/11/10)
Ofgem Press Release
Ofgem to review the effectiveness of the retail energy market to see if further action is needed to protect consumers Ofgem (26/11/10)
Questions
- What type of market structure is the UK energy market?
- The BBC News article talks about barriers preventing new competitors from entering the market. What types of barriers exist in this sector?
- What is a profit margin?
- What is likely to be the impact on family income following such price rises? Illustrate this on a diagram.
- Britain faces a £200 billion bill to invest in updating the energy network. What sort of updates are being referred to?
- What power do regulators such as Ofgem actually have? Why won’t they be able to change the amount that consumers pay?
You might think that small environmentally-friendly companies would be moving into the green energy market: that setting up a wind farm, for example, would be a perfect business opportunity for a small company. In fact, the big companies are taking over this market. As the Der Spiegel article below states:
Europe’s wind energy sector is currently experiencing a major transformation. New massive offshore wind parks are soon expected to crop up off Europe’s coastline. Big companies like Siemens and General Electrics are increasing their stakes in a market worth billions. But experts warn that a new energy oligopoly may soon emerge.
So what is it about the wind energy market that makes it suitable for an oligopoly to develop? The two articles explore this question.
Winds of Change Der Spiegel, Nils-Viktor Sorge (1/11/10)
GE and Siemens Outpacing Wind Pioneers, Becoming Clean Energy’s “New Oligopoly” Fast Company, David Zax (2/11/10)
Questions
- What market failures are there in the wind energy market?
- What barriers to entry are there in the wind energy market?
- What economies of scale are there in this market?
- How are changes in this market affecting the minimum efficient scale of companies?
- Would there be room in the market for enough competitors to prevent collusion?
- How might the authorities prevent (a) open and (b) tacit collusion in the wind energy market?
- Do small wind energy companies have any market advantages?
Competition authorities across the world are in a constant battle against the abuse of monopoly power and the collusion of oligopolists to gang up against the consumer. They are also concerned with mergers where these result in a reduction in competition. The following articles look at market power in Australia and at some high profile cases of oligopolist collusion. Examples include the big four banks in Australia and the two supermarket giants, Coles and Woolworths, which dominate the sector.
The articles also examine the role of the Australian Competition and Consumer Commission, Australia’s equivalent to the UK’s Competition Commission and Office of Fair Trading (soon to be merged).
Articles
Get out of monopoly free cards can’t be left to the roll of the dice Sydney Morning Herald, Jessica Irvine (27/10/10)
Australia watchdog adds voice to criticism of banks Reuters (22/10/10)
Major banks to beat wage rise The Australian, Blair Speedy (6/10/10)
Analysis: Australian firms forced into deals abroad Reuters, Michael Smith and Sonali Paul (21/10/10)
Hockey outlines plan for banking reform Business Spectator (25/10/10)
Banks are laughing all the way to… the bank Sydney Morning Herald, Josh Gordon (24/10/10)
Xenophon: ACCC Allows Woolworths & Lowes to Hurt Consumers & Competition Mathaba (27/10/10)
Woolies still the target of Coles firepower Sydney Morning Herald, Michael Baker (27/10/10)
Competition authority in Australia
Australian Competition and Consumer Commission
Questions
- In what ways can competition authorities bring about greater competition in oligopolistic industries?
- Explain the distinction between a demand-side and a supply-side approach to competition policy.
- Why do Australian airlines find it more difficult than Australian banks to pass on cost increases to consumers?
- Are highly competitive markets always better for consumers than oligopolistic ones? Explain.
As part of its drive to reduce the number of ‘quangos’ (quasi-autonomous, non-governmental organisations), the government has decided to merger the two main competition authorities: the Competition Commission and the Office of Fair Trading. The aim is to streamline the investigation of mergers, restrictive practices and the abuse of monopoly power, thereby saving costs and reducing the time taken before a decision is made. At present an initial OFT investigation can take many months before a reference is then made to the Competition Commission, which then starts the process of investigation from the beginning again.
Business leaders have welcomed the announcement, seeing the merger as a means of simplifying and speeding up investigations. But will the proposal be more effective in preventing the abuse of market power and encouraging competition? The following articles look at some of the issues.
OFT merger to shake up competition regime in UK Belfast Telegraph (15/10/10)
Competition lawyers gear up for merger of OFT and Competition Commission Legal Week, Friederike Heine (14/10/10)
Labour’s antitrust system dismantled Financial Times, Michael Peel (13/10/10)
Watchdog merger that merits review Financial Times (14/10/10)
Merged competition agency divides opinion Financial Times, Michael Peel (14/10/10)
Office of Fair Trading and Competition Commission to merge Guardian, Julia Kollewe (14/10/10)
Concerns at merger of OFT and Competition Commission Telegraph, Alistair Osborne (15/10/10)
Questions
- What are the current roles and responsibilities of the OFT and the Competition Commission?
- What types of market abuse are the two agencies designed to reduce or prevent? What instruments do they have at their disposal for enforcing their findings?
- What are the arguments in favour of the merger of the two agencies?
- What are the dangers of the merger?
- How will consumer protection be provided under the new regime?
Lord Browne of Madingley, the former chief executive of BP, has been conducting a review of higher education and its funding in England. The report was published on Tuesday 12 October. At present, student fees are capped at £3290 per year. From the academic year 2012/13 Browne recommends that the cap be removed, allowing universities to charge what they like (or what the market will bear). It is anticipated that, under these circumstances, universities would typically charge around £7000 per year, but some universities could charge much more – perhaps more than £12,000 for courses in high demand at prestigious universities. Universities would receive reduced funding from the government, through a new Higher Education Council, and the funding would vary by subject, with ‘priority’ subjects, such as science, technology and medicine, being given more. It is anticipated that total government funding for teaching to universities in England would be only just over 20% of the current level.
Browne recommends that universities that charge more than £6000 a year would have to pay a proportion of the extra income to the government as a levy for supporting poorer students. Those that charge more than £7000 would have to demonstrate that they were widening access.
Students would not need to pay any of the fees upfront (although they could do if they chose). Instead, they would receive a loan to cover the full fee. They would also be eligible for an annual loan of £3750 to cover living expenses. In addition, students from households with incomes below £25,000 would be eligible for a cost-of-living grant of £3250 on top of the loan. with household incomes above £25,000 the size of this grant would diminish, and disappear with household incomes above £60,000.
Students would begin paying back their loan after they graduate and are earning more then £21,000 per year (the current figure is £15,000). The amount that graduates would be required to pay back would rise sharply as earnings increase. For example, with an income of £30,000 per year, the graduate would be required to pay back £68 per month; with an income of £60,000 the monthly payment would be £293. Interest would accumulate on the unpaid balance at a rate equal to inflation plus 2.2%. For those earning below £21,000 threshold, it would accumulate at the rate of inflation only.
Not surprisingly, there have been mixed reactions to the recommendations from universities. Some universities have argued that competition will mean that they would not be allowed to charge the approximately £7000 fee that would be necessary to make up for the reduction in direct government funding. Predictions of closures of university departments or closures or mergers of whole universities are being made. Other universities have welcomed the ability to charge significantly higher fees to help their financial position.
The reactions from prospective students have been less mixed. With students starting in 2012 set to graduate with debts in excess of £30,000 and many with much higher debts, the Browne Review report makes bleak reading.
So who are the gainers and losers and what will be the benefits to higher education? The following articles look at the issues.
Note that the government has subsequently decided not to follow Browne’s recommendations fully. Annual fees will be capped at £9000 and the government expects that fees will typically be £6000.
Articles
Lord of the market: let competition and choice drive quality Times Higher Education, Simon Baker (14/10/10)
In the shake-up to come, no guarantees for anyone Times Higher Education (14/10/10)
Browne review: Universities must set their own tuition fees Guardian, Jeevan Vasagar and Jessica Shepherd (12/10/10)
Cable ‘endorses’ tuition fee increase plan BBC News (12/10/10)
Browne review at a glance Guardian, Jessica Shepherd (12/10/10)
Foolish, risky, lazy, complacent and dangerous NUS news, Aaron Porter (12/10/10)
Student debt: the £40k question for Lord Browne (includes two videos) Channel 4 News, Aaron Porter (8/10/10)
Blind spots in education proposals Financial Times letters, Philip Wales (14/10/10)
Tuition fees: securing a future for elitism Guardian, comment is free, Carole Leathwood (13/10/10)
NUS Scotland president Liam Burns condemns English tuition fee plans Courier (13/10/10)
Lord Browne review: round-up of reaction Telegraph (12/10/10)
University of Leeds responds to Lord Browne’s review of university funding Academia News (12/10/10)
Browne Review: Scrap university fees cap Chemistry World (12/10/10)
Invisible hand of market takes hold Financial Times (12/10/10)
A personal perspective on the Browne Review Progress Online, David Hall (12/10/10)
Tuition fee increases will be capped, says Nick Clegg BBC News (24/10/10)
Webcasts and podcasts
Students to face ‘unlimited fees’ BBC News, Nick Robinson (12/10/10)
Lord Browne interviewed by Nick Robinson BBC News (12/10/10)
Aaron Porter and Steve Smith on university funding and fees BBC Daily Politics (12/10/10)
University proposals create ‘two-tier system’ BBC Today Programme, Professors Roger Brown and Nicholas Barr (13/10/10)
The report and the NUS and IFS responses
Securing a sustainable future for higher education Independent Review (12/10/10)
Browne Review home page Independent Review
Initial Response to the Report of the Independent Review of Higher Education Funding and Student Finance (the Browne Review) NUS, Aaron Porter (10/10/10)
Graduates and universities share burden of Browne recommendations Institute for Fiscal Studies (12/10/10)
Questions
- To what extent will the proposals in the Browne review result in a free market in university courses?
- To what extent will competition between universities drive up teaching quality?
- Identify any market failures that might prevent an efficient allocation of university resources?
- To what extent will Browne’s proposals result in a fair allocation of resources between graduates and non-graduates, and between those who graduate under the new system and those who graduated in the past?
- Identify any externalities involved in university education. In what ways might these externalities be ‘internalised’?