The Economics of Regulated Prices: mapping the issue Catherine Waddams Centre for Competition Policy, University of East Anglia & Centre on Regulation in Europe CREG Annual Conference, Brussels, 28 th September 2015 competitionpolicy.ac.uk competitionpolicy.ac.uk
The Economics of Regulated Tariffs 1. Raison d être 2. History 3. Geography 4. Relative (partial) regulation in retail markets 5. Distributional issues 6. Protection or Empowerment?
Regulated tariffs with monopoly Protection against monopoly exploitation (higher prices) Often not explicit with public ownership Fundamental trade off of privatisation/modernisation: Greater efficiency (better incentives from profit maximising) vs Greater potential exploitation (from profit maximising) Hence focus on reducing current price in real terms moving down the demand curve
Regulated tariffs in intermediate and final markets retained in monopolistic markets, Phases initial gains and subsequent rigidity? revisions to address asymmetric information (re)engagement of consumers in regulation cf consumer voice Regulation removed in contestable markets, wholly or partly Often in stages: most competitive first Often with some relative regulation
USA Norway Hungary Turkey Czech Rep Poland Finland France Switzerland Slovakia Sweden Greece Belgium Netherlands Japan UK Austria Portugal Ireland Italy Germany Denmark pence per kwh Experience: How did early liberalisations compare, eg UK? 30 Average IEA Domestic Electricity Prices in 2014 Tax Component 25 Price (excl tax) IEA Median (including taxes) 20 15 10 5 0
Early (comparative) gains then losses (IEA data from DECC) Domestic electricity prices before taxes, p/kwh 16,00 14,00 12,00 10,00 8,00 6,00 4,00 2,00 0,00 Regulatory interventions 2009, 2013; understand recent concern and CMA investigation UK IEA Median
Relative regulation Tying prices in one market to another, especially as competition develops Often less competitive to more competitive (eg prepayment prices in UK 2000-2002) Balance of handicapping competition (disincentive to compete, particularly if regulated markets more profitable) protecting those in less competitive markets vs
Relative constraints after price caps removed Eg non discrimination requirements: can have pro or anticompetitive effects, depends on relation of markets Usually concern of dominant companies: competition law Typically semi dominant companies, unclear obligations Is it fair that some consumers should get energy more cheaply? Fairness vs lowest (average) price? Particular concern because of relation of expenditure to income
Low income households spend a high proportion on energy (UK living costs and food survey)
and so (on average) do low income countries (Eurostat) which exacerbates the problem given unequal income distributions within these states as well
Competition can lower average prices but is at best distributionally neutral and participation is not even Many consumers are disengaged, don t get the best deals Because can t switch regulators should remove barriers won t switch preference not to participate? or More vulnerable groups don t participate Despite value of gains potentially greater Why? Different expectations, preference for control?
Gains drive switching, but many don t switch despite large gains From collective switch, opted in, savings known, easy switching
Predicted probability of switching Older consumers are less active but not when expected gains are taken into account
Does this matter? CMA thinks so In its provisional remedies it seeks (CMA 2015): (a) Remedies to provide a framework for effective competition between retail energy suppliers. (b) Remedies to facilitate widespread engagement by domestic and microbusiness customers. (c) Remedies to safeguard the interests of disengaged customers and encourage longer-term engagement.
Empowerment or protection? Need headroom (=profits) to attract entrants Are disengaged consumers expressing preference or disadvantage? More understanding needed For consumers, short term pain vs long term gain? UK experience discouraging? but are higher prices because of competition or regulatory intervention? Can we get the best (or worst?) of both worlds Is the decision economic or political?