Oligopoly and Possible Collusion in the UK Domestic Utilities Market - Research Paper Example

?Oligopoly and Possible Collusion in the UK Domestic Utilities Market Utilities market includes companies and firms that provide essential infrastructure for development services or provide the services themselves. Domestic utilities are the services provided to the residents. These services are either provided by the organizations run by the government or by the organizations that are privately run but they are regulated by government authorities. Services included in domestic utilities; provision of water, oil, gas and electricity. Utilities market is essential for every country and any disturbance in the utilities market can have detrimental impacts on the economy of the country. It is of utmost importance that every country ensures that the organizations involved in utilities market are operating smoothly and fairly. The following paper would analyse the domestic utilities market in UK, the organizations involved in providing domestic utilities, and the analysis of the recent hike in prices of the domestic utilities. The paper would attempt to evaluate whether the rise in price of utilities in domestic utilities market in UK is a result of oligopoly and possible collusion in the market. DOMESTIC UTILITIES MARKET IN UK Domestic utilities market in UK is a vast and diverse sector of the UK economy. It includes a number of companies that provide energy and other utility services. The UK utilities market comprises of; the oil, petroleum and gas; nuclear power and coal; water and waste management; renewable energy industries; and energy conservation organisations. The utilities market in the UK plays a significantly important in the economy of the country. The sectors of the market are highly important in the day to day operations of domestic life and if any of the utilities mentioned above becomes unavailable, it can have severe consequences on the domestic life in the UK and ultimately on the economy of the country. Since the utilities market has entry barriers due to the nature of the resources that are used in provision of the services, the number of companies and firms operating in the utilities market is less as compared to other industries in the UK (Simmonds 2002). The customers, markets traditions, products and knowledge required in order to succeed in the utilities market in the UK are considerably different than those required in other industries. In other industries, the main objective of the companies is to succeed by way of earning more and more profit. The entry in other commercial industries is comparatively easier therefore the number of firms in other industries is high. The competition within an industry is determined by the number of firms and the availability of substitutes in the market, and the level of prices is determined by the extent of competition in the industry. Therefore in the commercial industries the prices of products are determined by the extent of competitiveness of the industry. This situation is completely different from that of the utilities market. Utilities market have fewer number of companies in the market therefore there is a clear tendency for high prices for the utility services therefore regulatory authorities play an important role in the utilities market in order to ensure that the prices of services provided to the citizens are reasonable (Simmonds 2000). Even though the utilities market is different from commercial, industrial and residential markets; it is considerably a big sector in the UK economy. From the perspective of revenue, the UK utilities industry forms a significant proportion of the overall economic growth of the country. In the year 2010, the UK utilities industry had total revenue of $126.3 billion. The most successful segment in the UK utilities industry is the electricity segment. The total revenue of the electricity segment was $57.6 billion. It has been anticipated that the industry will continue to grow and the overall value of the UK utilities industry by the end of the year 2015 will be $182.9 billion. REGULATORY AUTHORITIES OPERATING IN UK The domestic utilities are highly essential and they are used in all the homes. Therefore the market has guaranteed consumers. The factors such as; less number of companies in the market, large number of consumers and low competitiveness lead towards very high profitability, however, this situation is controlled by regulatory authorities and it is ensured that the companies operating in the domestic utilities market do no exploit the consumers. There are a number of government regulators operating in the UK who are given the responsibility to ensure that the customers receive quality utility service and there is a fair competition between the companies operating in the industry. Following are some of the government regulators in the UK: Office of the Regulation of Electricity & Gas (OFREG) The Office of the Regulation of Electricity & Gas, OFREG, is an independent public body that has been set up to monitor the natural gas and electricity industries in Northern Ireland. The main functions of this regulatory body are; to resolve the conflicts between the supplier and the consumer, to protect the consumers and electricity, and to promote competition in the electricity industry. It can be inferred from the functions of this regulatory body that the government attempts to ensure that natural resources are not wasted and the customers are not exploited by the companies providing the utility services. Office of Gas & Electricity Markets (OFGEM) Office of Gas & Electricity Markets is the regulatory authority for the gas and electricity industries in the UK. The objective of this regulatory authority is to ensure that customers receive value and choice. The regulatory authority promotes competition among the companies operating within the industry and regulates monopolies. The regulatory authority controls the companies operating in the industry by the way of issuing licences to them and by monitoring them. The regulatory authority also takes actions against companies that do not comply with the quality standards prevailing in the industry. Office of Water Services (OFWAT) Office of Water Supplies is the regulatory authority responsible for ensuring that the water and waste management companies in the UK provide the customers efficient service at a reasonable price and a good quality. The functions of the regulator include controlling the amount that the companies can charge customers and ensuring that the companies operate in compliance with the Water Industry Act 1991. RECENT PRICE HIKE AND THE RESPONSIBLE FACTORS Even though there sufficient number of energy and gas suppliers in the UK, there have been significant rise in the prices by almost all of the suppliers. The trend of increase in price of the utilities has been around for the past two decades however significantly steep increases are being observed in the recent past. The prices of domestic utilities have significant impact on the overall inflation, thus on economic growth as well. Households are going through fuel poverty. The overall spending on the domestic utilities has increased by billions of pounds in the recent past. From the trend of the increasing prices and the economic conditions all around the globe, it is highly unlikely that the prices would retreat back. It has been said that the prospects of the prices of the domestic utilities in UK are not favourable for the customers as the prices are more likely to rise further. If looked into the situation sceptically, it can be asked whether competition in the industry is playing any active role regarding prices. From the significance of the hike in prices announced by the gas and electricity suppliers, it can be inferred that the companies are raising the prices irrespective of the competition in the market. There is an indication of a mutual understanding among the companies in the industries but it cannot be said conclusively since there are a number of other factors that may cause the price hike. Economic Crisis One of the most important factors to have played its role in the rising prices of UK domestic utilities is the global economic crisis. The economic crisis that hit the economies all around the globe in 2008 caused severe consequences. The worst hit was got by the oil prices and this economic crisis pushed most of the world towards fuel poverty. According to the economic experts, oil prices would remain high or increase even further as the economies recover from the economic crisis. Due to inflation and parallel rise in oil prices, the costs of producing energy have increased significantly and this may be one valid reason for the excessive price hikes in the recent past (Caste Cover). This has created such a dilemma in the UK domestic utilities market. Customers are facing steep price increases while the companies are dealing with squeezing supplies and increasing costs. Extraordinary measures have also been proposed like budget cuts through simplifying the administrative processes in the companies and by lay off of some of the workforce. Government intervention has also been sought in order to ensure that the supply of the fuel remains secure so that the oil and gas companies remain capable of producing the required quantity of utilities. However, according to the experts, the government intervention will have little impact on the overall prices of the utilities. Changing Regulations The utilities industry all around the globe is often criticized for being responsible for the global warming. The consumption of fossil fuels and other natural resources are said to have caused the increase in greenhouse gases in the atmosphere which are the leading cause of the changing climate. The regulatory authorities have taken notice of this criticism and they have introduced new regulations that require the gas and oil companies to properly dispose off their waste and to take active steps to cause minimum damage to the environment. These new requirements by the regulatory authorities cost a significant amount to the companies as the facilities required to carry out operations in conformity with the regulatory requirements are very costly. These additional requirements have increased the cost of operations of the companies operating in the UK domestic utilities market therefore the overall prices of the utilities have also increased. However, the steep rise in the prices in the recent past is more than what can be accounted for against the rise in the costs. Thus, it indicates that there are other factors at play too. Privatisation Privatisation is also said to be one of the reasons behind the hike in the price of domestic utilities. The purpose of privatisation was to reduce the price but due to the modifications in administrative processes and the refinement of the equipment, the acquiring companies have invested significant capital. The increase in costs due to privatisation has led the companies to increase the prices of the utilities. EVIDENCE OF COLLUSION AND OLIGOPOLY IN UTILITIES MARKET From the perspective of regulators, the recent hike in prices by the Big Six energy companies may be a clear indication of collusion among the companies. The companies have increased the prices and announced new tariffs in parallel with each other. This is a sign that there may have been an agreement between the companies to keep the prices high so that all the companies may be able to reap the profits. Since the customer base is enormous, the companies care less about the market share therefore there is a valid chance that the companies involve in collusion and attempt to inflate the prices unnaturally. Parallel Rise in Prices The Big Six energy companies in the UK are; British Gas, EDF, E.ON, Npower, Scottish Power Business, and Scottish & Southern. All the Big Six companies have announced a significant increase in electricity and gas prices (King, 2011). The last of the Big Six companies to announce an increase in prices was EDF and the increases in prices were by 4.5% for electricity and 15.4% for gas. The increase is price is very high from the perspective of the customers (King, 2011). EDF was the only power company that allowed the customers to have the utility services at comparatively lower prices and now the last companies that offered low prices raised its prices (UK Power 2012). This step has pushed the customers even further in the fuel poverty. This parallel increase in price can be said to be a clear indication of collusion among the UK utilities companies. Low Competition Despite a reasonably large number of firms operating in the industry, the competition in the industry is comparatively low. The regulatory authorities take active steps in order to regulate the competition and in order to ensure that the monopolistic elements do not influence the prices of the utilities. From the parallel increase in prices and the indifference by other firms in the industry for the increase in prices by other companies, it can be inferred that the companies are involved in collusion and there is an underlying agreement to not take competitive actions against any other company. According to the competition policy expert Professor Catherine Waddams, “There is not an explicit cartel. There are no hidden emails or phone calls to uncover an explicit arrangement either in pricing or market sharing. But the conditions in the market are such that we do have tacit collusion, which means they are not competing very hard. It’s a bit like a sporting event in which it is difficult to make the two sides actually compete against each other if they can get along without doing so” (Millicentmedia.com). Thus, it can be said that the circumstances of the market are such that the companies do not try to actively compete each other and show indifference regarding each other’s marketing techniques. This perspective of the argument drives us towards the oligopolistic nature of the market. It can be said that the market has oligopolistic competition where the number of firms is a few and there is some sort of difference between the firms that keeps the firms exclusive from each other’s market shares. Factors Encouraging Oligopoly A market is an oligopoly when the firms operating in the market are not affected by the actions of other firms and there is a possibility for the firms to keep a very high margin of profitability. In case of the domestic utilities market in UK, the main factor that drives the market towards oligopolistic nature is the hardship faced by the users while making a switchover for the utility services to another company. The process of making a switch is apparently simple but the customer may have to face hardships due to the agreements with the supplier or in case the customer owes money to the supplier. Another factor that shows that the domestic utilities market in UK is an oligopoly is the complexity and variety of different pricing options available to the consumer (Robinson, 2011). This factor also adds up to the effectiveness of the previous factor. Due to the complexity of the deals offered by the companies, it becomes really hard for the customer to make a switch to another company. INTEREST OF SHAREHOLDERS, CUSTOMERS, SUPPLIERS AND EMPLOYEES The UK domestic utilities market holds a vital role in the economy of the country and it is important from a number of perspectives. It is not only the overall economy that may be affected by the UK domestic utilities market it also holds the interests of shareholders, customers, suppliers and employees. Since the utilities are regulated by the government authorities in order to ensure that the customers receive the right quality of services for a reasonable price, the interest of the customers should be prioritised. The customers should be provided unhindered supply of the utilities at reasonable costs. The provision of services is not possible if the companies do not receive the required fossil fuels. The interest of suppliers should be prioritised after the customers and it should be ensured that the suppliers are given reasonable consideration for the fuels. It should also be ensured that the suppliers provide unhindered supply of fuels to the companies. The UK domestic utilities market is also a large employer. There is a large workforce employed in the industry. In order to ensure that the workforce does not draw out of the industry and that the workforce remains motivated, the interest of the employees should be prioritised after the interest of suppliers. The UK domestic utilities market requires an enormous investment to start a business in and the shareholders take the risk of business and invest in the market. Without the investment the companies may not exist. However, the utilities market has a number of higher priorities therefore the interest of shareholders should be prioritised after the interest of employees. CONCLUSION From the analysis of the UK domestic utilities market, it can be inferred that the market holds an important position in the economy of the country. The recent price hike may be due to a number of factors however there are indicators that show that the price hike may be due to the oligopolistic nature of the market and due to possible collusion. It can be said conclusively that the market is of an oligopolistic nature and the regulatory authorities need to take active steps in order to ensure the boost in the competition in the market. REFERENCES Fleming, S. (2009) British energy prices rising four times faster than other EU countries. [Internet]. Available from < http://www.dailymail.co.uk/news/article-1110867/British-energy-prices-rising-FOUR-times-faster-EU-countries.html> [10 April 2012] Parliament.uk. Energy Price Rise and Fuel Poverty. [Internet]. Available from < http://www.parliament.uk/business/publications/research/key-issues-for-the-new-parliament/green-growth/energy-price-rises/> [9 April 2012] King, M. (2011) EDF announces energy price rise. [Internet]. Available from < http://www.guardian.co.uk/money/2011/sep/15/edf-energy-price-rise> [10 April 2012] Millicentmedia.com. (2011) Are the UK’s Big Six utilities playing out 0-0 draws? [Internet]. 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(2000) The UK Gas Industry 2000/2001. [Internet]. Available from http://www.bath.ac.uk/management/cri/pubpdf/Industry_Briefs/Gas_Gillian_Simmonds.pdf [10 April 2012] Read More