question: In what possible advantages to the consumer could there be in British Gas regaining monopoly in the supply of gas to domestic households?
E R O P G K X C . . .. @ V B N # Concerns about the lack of effective competition in the market has led to an increasing number of people calling for the re-introduction of price controls on energy suppliers. For example, before the 2017 general election, the Conservative Party pledged to cap the standard variable tariff in relation to wholesale prices, while the Labour Party planned to introduce a wider-ranging cap that would also apply to cheaper fixed deals. However, after a two-year enquiry into the energy industry by CMA, the majority of its panel members concluded that a price cap on the standard variable tariff for all customers would undermine competition. Interestingly, when Ofgem completely abolished all price controls on energy suppliers in 2002 its chief executive at the time stated that: The evidence is overwhelming that competition is effective across all social groups and all methods of payment. Prices in the UK have actually remained relatively low compared with other developed countries, partly as a result of relatively low taxes on domestic fuel (see chart). 12 Price excluding tax Tax -IEA median 10 Pence per kwh A 0 Italy USA UK Korea Spain Turkey Japan France Ireland Canada Belgium Greece Denmark Sweden Germany Switzerland Netherlands New Zealand Figure: Domestic gas prices in selected countries (2017); Source: International Domestic Energy Prices: Table 5.9.1 Domestic gas prices in the IEA (DECC, 2018). Another interesting recent trend has been the growing market presence of smaller companies other than the 'Big Six'. Their collective market share has increased from just 1 per cent at the end of 2012 to 18 per cent in the first quarter of 2017.DI prt sc 2 home.. insert 18 O W P 12 D S P H a Z .. . X C V B N up Aug 2013 Misreporting E. On 3.0 Jan 2012 British Gas 2.5 Mishandling complaints 2.4 Failure to insulate homes Mar 2015 Scottish Power Jan 2012 2.0 Mishandling complaints Npower Oct 2016 Co-operative 1.8 Billing and complaints handling Energy Dec 2014 1.75 Failure to insulate homes SSE Figure: Ofgem gets tough: Biggest penalties for energy suppliers; Source: Ofgem Source of Case: Sloman and Garratt (2019) Questions 3 & 4: 3. What possible advantages to the consumer could there be in: (a) National Grid Gas having a monopoly over the operation of the NTS and; (b) BG regaining a monopoly in the supply of gas to domestic households? 4. What are the arguments for and against Ofgem regulating the price of gas supplied to domestic households?ab U O D enter A D G H . . . . X B N I 'V shift alt pg dn pipe network known as the distribution network, often referred to as the 'A roads' of the transportation system. There are 49 different points from which gas can leave the NTS in order to enter the gas distribution network (GDN). There are eight GDNs that cover different geographical regions: i.e. the West Midlands, the North West, etc. Each one is effectively a monopoly, although some small network owners operate Independent Gas Transporters within an area of a GDN. Originally all eight GDNs were owned and operated by National Grid plc but four were sold off on 1st June 2005. The remaining four GDNs were operated by a division of National Grid called National Grid Gas Distribution. The majority stake in this business was sold in March COR 10T 2017 to a consortium backed by Macquarie, an Australian investment bank, and China Investment Corporation. The new business was renamed Cadent in May 2017 and is responsible for the GDNs in the West Midlands, the North West, the East of England and North London. Another important part of the industry is the supply of gas to the final customer. National Grid and the companies that operate the GDNs never actually own the gas that travels through their pipes. Gas producers and importers sell their gas to licensed shippers who have to pay the operators of the infrastructure to transport the gas through the NTS and GDNs. The shippers then sell the gas to the gas suppliers who directly charge the final customer. 4 As the NTS and the GDN's are judged to be natural monopolies, the prices their owners can charge licensed shippers and suppliers are controlled by the industry regulator, Ofgem. Gas suppliers have no choice over the infrastructure they can use to transport the gas to the customer. This was one reason why BG was originally split into two parts. Policymakers were concerned that if it was left as one business it would charge high rents to its rivals, thereby giving itself an unfair advantage. In other words, it would be able to use its monopoly in the transmission and distribution part of the industry to limit effective competition between suppliers. The current system of price controls imposed on National Grid and the GDN operators is called Revenue = Incentives + Innovation + Outputs (RIIO) and has operated from 1st April 2013 andA S O P G H K X C . . .. @ B N M # will do until the 31st March 2021. The RIIO-T1 price controls specifically limit what National Grid can charge for the use of the NTS, while the RIIO-GD1 specifically limits what the four operators can charge for the use of the GDNs. The degree of competition between suppliers While competition may be undesirable between different transmission and distribution network operators, it is possible between different gas suppliers. This competition between suppliers, or perceived lack of it, has proved to be a very controversial issue. Competition was first introduced into gas supply in the UK domestic market in the late 1990s. By 2003, there were 29 different suppliers but the market then went through a period of considerable 'consolidation'. By 2006 there were just six major competitors, which had a combined market share of almost 100 per cent. British Gas was by far the largest supplier, with 55 per cent of the market, while the second biggest supplier (EON) had 12 per cent. Between 2006 and 2011 the combined market share of the six major companies did not change, although British Gas lost market share to the other five firms. Initially, competition between suppliers seemed to lead to lower prices, with new entrants offering prices some 10 to 20 per cent below that of BG. The situation seemed to change in 2005 and 2006, however, 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. The trend of rising prices continued for a number of years Between 2004 and 2014, average annual domestic gas prices rose by around 125 per cent in real terms. Wholesale prices fell between 2014-16, which led to small falls in the standard variable tariff and larger falls in the prices of the best deals for domestic customers. However, in the first half of 2017 a number of energy companies announced large price increases for dual fuel tariffs. The British Prime Minister, Theresa May, stated in March 2017 that: "Our party did not end the unjust and inefficient monopolies of the old nationalised energy corporations only to replace them with a system that traps the poorest customers on the worst deals ... it is clear to me - and anyone who looks at it - that the market is not working as it should".S D G K C . . . V B The role of the regulator Price controls may have been abolished after 2002 but Ofgem still regulates the business behaviour of the energy suppliers. It is keen to ensure that customers are treated fairly in areas such as customer service. For example, in June 2016, Scottish Power was fined $18 million for providing poor customer service following problems caused by the introduction of new computer system. In June 2017, British Gas was fined $9.5 million for sending out inaccurate bills to thousands of its business customers following an IT upgrade. The following table highlights the serious consequences of energy suppliers failing to meet their regulatory obligations. Supplier Penalty (Em) Reason Date Npower 26.0 Complaints failure Jan 2016 Scottish Power 18.0 Poor customer service Jun 2016 BES 13.2 Failure to meet contract terms Dec 2015 E.On 12.0 Broke energy sales rules May 2014 British Gas 11.1 Failure to insulate homes Dec 2014 Missed deadlines Mar 2015 British Gas 10.6 SSE 10.5 Mis-selling May 2013 British Gas 10.0 Inaccurate billing Jan 2017 British Gas 9.5 Billing and complaints handling Jun 2017 Scottish Power 8.5 Mis-selling Dec 2013 E. On 7.75 Overcharging customers Apr 2015 E. On 7.0 Failure to install advanced meters Dec 2015 British Gas 5.6 Preventing switching Apr 2014 SSE 4.6 Network connections Jul 2014 EDF 4.5 Mis-selling May 2012 British Gas 4.5 Missed deadlines Jan 2017 British Gas 4.0 Switching practices May 2014 Utilita 3.6 Overcharging pre-payment customers Dec 2017 Npower 3.5 Mis-selling Feb 2014 E.On 3.1 Missed appointments Sep 2016 EDF 3.0 Complaints handling Oct 2014
