Topic: Economics

Order Description

attached is a case study which cover the Monopoly in the supply of gas. please read carefully the case and put different scenario to answer to any question could be ask in this case. This case might not only talk about the Monopoly but it might also cover other part of economy such as Elasticity, inelasticity, pricing, demand, equilibrium.

Competition in the Pipeline?
Monopoly in the supply of gas

Some  of  the  best  examples  of  monopoly  in  the  UK  are  the  privatised  utilities  such  as
telecommunications, water and gas. The government, recognising the dangers of high prices
and high profits under monopoly, has attempted to introduce competition in various parts of
these industries. But in other parts there is no competition: they remain monopolies.
This  mixture  of  competition  and  monopoly  is  well  illustrated  in  the  UK  market  for  gas.
There  are three  parts  to  this  market:  production;  storage  and  transportation;  and  supply  to
customers. In production there is considerable competition, with several companies operating
in the North Sea. In storage and transportation, however, there is a monopoly. National Grid
Gas  plc,  originally  called  TransCo,  owns  the  expensive  gas  pipelines  and  storage  facilities.
TransCo  was  formed  in  1997  when  British  Gas  (BG)  was  split  into  two  parts.  Following  a
merger  with  National  Grid  (owner  of  the  electricity  transmission network)  Transco  is  now
part of National Grid plc, the UK’s largest utility. The other part of the former British Gas is
still  called  Bristish  Gas  (BG).  BG  is  involved  in  supply  to  the  customer.  BG  is  part of
Centrica,  which  also includes Dyno-Rod. The AA used to be owned by Centrica, but it was
sold  in  July  2004  to  private  investment  groups.  In  supply,  the  market  has  been  gradually
opened up to competition.
First,  in  1990,  large  industrial  consumers  of  gas  were  allowed  to  choose  their  suppliers.
This choice was extended to small industrial  consumers in 1992. By 1993, BG’s share of the
industrial  gas  market  had  fallen  to  41  per  cent  (from  virtually  100  per  cent  in 1990).  Gas
competition has encouraged over 60 gas suppliers to join the market, and between 1995 and
2000  average  prices  to  industrial  and  commercial  users  fell  by  53  per  cent  (after  taking
inflation into account).
The  market  for  domestic  consumers  in  Great  Britain  was  opened  up  to  competition
between 1996 and 1998. By 2003, there were 29 suppliers in this market. However, there has
been considerable ‘consolidation’ in the market as suppliers have merged and by 2006 there
were  just  six  major  competitors, although  there  were  several  other  smaller  ones,  some
operating in just certain areas. Nevertheless, Ofgem, the gas and electricity industry regulator,
claims that there is still plenty of competitive pressure in the market, with over 40 per cent of
customers having switched supplier. BG’s share of this market had fallen to around 60 per
cent.  Competition  had  reduced  gas  prices  to  consumers  by  over  20  per  cent  (after  taking
inflation and increased wholesale gas prices into account).
But  how  do  gas  suppliers  compete,  given that National Grid Gas has a monopoly of the
pipelines?  The  answer  is  that  National  Grid  Gas  is  required  to  allow  companies  to  use  its
pipelines. It charges them a rent for this service. Producers’ supply is metered in; the gas used
by companies supplying consumers is metered out. This enables the producing companies to
charge  the  customer-supplying  companies,  and  enables  National  Grid  Gas  to  work  out  the
amount of rent to charge. This accounts for 30 to 40 per cent of the average household bill,
depending on the wholesale price of gas from the North Sea.
One  reason  for  splitting  BG  was  the  worry  that  it  would  charge  very  high  rents  to  its
competitors,  thereby  giving  itself  an  unfair  advantage.  In  other  words,  it  would  use  its
monopoly in one part of the industry to prevent fair competition in another part.

2
One solution to this monopoly problem would be for the government to regulate the size
of the rent and to insist that BG charged itself the same rent as its competitors. This was the
policy in the early 1990s. Ofgas, the regulatory agency set up by the government at the time of
privatisation in 1986, attempted to get BG to charge all customers, including itself, the same
rent. After the split, National Grid Gas remains regulated (by Ofgem, the successor to Ofgas).
This  is  to  prevent  it  using  its  monopoly  power  to  charge  excessive  rents  or  to  discriminate
unfairly between users of its pipelines.
What about regulation on the supply side? BG was initially regulated, but as competition
was  introduced,  so  regulation  was  removed.  By  2002,  all  regulation  in  supply  had
disappeared.
With National Grid Gas’s rental charges firmly and fairly regulated, many of the new
entrants into the gas supply industry have offered prices to customers some 10 to 20 per cent
below that of BG. Not surprisingly, BG responded by reducing its own prices.
The situation seemed to have changed in 2005 and 2006, with large increases in the price
of imported gas and gas from the North Sea. BG responded by raising its prices substantially,
as  did  other  suppliers.  But  BG  was  still  concerned  to  remain  competitive,  as  switching
supplier is very easy nowadays with several agencies, such as The Energy Shop, uSwitch and
UK Power, helping consumers to swtich.