Basic Explanation of Privatization
According to Sheshinski & Cavla (2003), privatization theory is a key component in a structural reform program. Its main aim is to achieve microeconomic efficiency that fosters economic growth in both developing and developed countries. It reduces public sector borrowing by eliminating unnecessary subsidies. Microeconomic theory reveals that incentives and contraction of problems create inadequacies caused by public ownerships hence calling for privatization. This is because managers of publicly owned firms peruse political agendas making less effort to ensure good management. This is different in private firms. Privatization is said to increase profitability and efficiency in both competitive and monopolistic sectors. Profitability increase is explained by productivity increase reflecting on the market power.
Q1. The United Kingdom electricity industry was privatized over twenty years ago. Explain what privatization is and describe how the industry was divided into various companies in three distinct segments
In the United Kingdom, after privatization of the great British energy two decades ago, IoS investigations conducted by H. Cox (2012) exposed British energy rip-off through privatization, which was not working for the people. This can be perceived as a failure in the implementation of energy privatization. The investigation has evidently exposed giant rip-off for British tax payers, which had been championed by Thatcher government and implemented on new labour laws focusing on nationalization for the United Kingdom to private sectors. The big six United Kingdom energy firms have been accused of holding a stranglehold two-thirds market share of the consumers in their respective regions. This is in the wake of realizing that over 70% of households in the United Kingdom have the same supplier of electricity. This number increases to 85% in some regions. This has undermined the capacity of the government and Ofgem regulator to ensure that competition in the energy market is effective leading to a closer monopoly due to domination of some regions by a single supplier. As a result of these effects, David Cameron pledged in the House of Commons to make these big six energy suppliers to reduce power tariff for households. This led to intervention by the Prime Minister, who clashed with the Liberal Democrat Energy Secretary Ed Davey with support from Efgem. They both advocated for a simplified tariff system allowing customers to easily switch between firms offering electricity (Merrick 2012).
According to Merrick (2012), energy industry in the United Kingdom has been divided into big six energy firms that have been segmented geographically into Northern Scotland, Midlands, and Southern segments. Northern Scotland SSE inherited its network from Scotland Hydro board providing retail electricity in South Wales and southern region. Midland region is further divided into east and west midlands in Yorkshire.
To solve this problem, Yate (2012) insists that the government should take back energy companies. Both suppliers and wholesale producers should be brought back into public ownership to control over exploitation of the taxpayer. Also as a recommendation for better electricity supply, the government of the United Kingdom should reverse current system and disband the premium of loyalty paid by old customers (Merrick 2012). This is an act of exploiting the tax payer obtaining excessive profits, which is not justified.
Q.2. Explain the market structure of the retail supply of electricity in the UNITED KINGDOM and discuss the impact this has on the performance of Npower and its customers. Compare this to other market structures.
British gas holding has 76% (the largest retail share) of the United Kingdom market nationwide, EDF dominant in London with 74% market share supplying 73% of homes with electricity in South East and 71% in South West. Npower, on the other hand, is a key player in West Midlands holding 65% of the retail market share. This is in reference to 65% share in Yorkshire and 64% in North East. E.ON Company has 69% in East Midlands, 68% in Easter region, and 67% in North West. Northern Scottish, SSE holds 85% of the retail market electricity in South Wales, 82% in Southern region, and overall 80% energy share. SSE has been offering exceptional service standards making it the best recognized firm in energy market. It is mainly focused on customer satisfaction and uSwitch. Scottish power holds 82% in Southern Scotland and 73% in Northern Wales. These figures do not ally to dual fuels according to Merrick (2012).
Npower had been expecting a larger market share in West Midlands favoured by its history. This is because most of the Midland electricity Board customers has remained under the newly formed name. Generally, customer turnover rate has been impressive with some leaving and others coming back showing loyalty to the company. Npower holds that many people in midland electricity board prefer Npower rather than British Gas as “the Gas Board”. Npower provides incredibly high value to its customers and also those based in the North East where it feels as members of the two communities.
Npower has also been projecting consumers' annual spending to be 208.37 pounds for 1,620 of electricity, 531.78 pounds for 11,260 kWh of gas, which was a hike of 8.8%. British gas, on the other hand, has been trying to reduce their tariffs using an automated apology for delays due to big number of customer calls. E.ON takes no frees for phone calls and takes less than a minute to respond to a client and handle his business need. It has been offering energy discounts of 3% for 12 months, but this does not apply to situations when price rises. It is similar to remortgaging a house. This standard charge is 787.93 pounds. An energy discount of 752.69 pounds and a fixed value of 776.48 pounds were offered. The fixed two for E.ON was 816.39 pounds, which was 5% above standard unit, but one is immune against price hikes. It had increased its prices in 2012 for ‘big six’ companies that announced the increases hoping to maintain their profit levels. SSE takes seven minutes to respond aiming to reduce its rates, like the British Gas, where they aim to reduce daily charges from 16.44 to 14.8 with paperless billings. The Scottish power estimates a bill of 816.57 pounds using online quotas, but when using phones it amounts to around 755 pounds.
Due to the prices and customer focus, Npower proves to be better and more economical in the United Kingdom energy sector.
Through research, evaluate whether the privatization of the electricity industry in the UNITED KINGDOM has been a success. Use a range of academic sources to justify your answer. You will need to think about this in terms of investors in the companies, customers of the companies and the Government’s divestment.
Privatization of energy industry in the United Kingdom has not been a success as opposed to privatization in other industries, like train facilities. The research conducted by various organizations revealed that there has been an exploitation of the taxpayer since privatization of the energy industry. Government official figures indicated that companies supplying electricity to homes have inherited their network from former utility boards. These companies are seen operating in a closer monopoly. The companies have been mocking customer switching to gain better deals as a justification of competitive market setting.
Department of Energy and Climate Change (DECC) has revealed that customers who have maintained their old electricity suppliers have been paying more than the newly switched ones. Home suppliers annually charge an average of 31 pounds more than non-home suppliers for electricity. This is in the effect of premium placed on customer loyalty. Energy firms have also constantly pushed up fuel bills beyond inflation rates from 80 pounds to 112 pounds. This has caused an outcry of British Energy because of increased annual average household bill. The competition that existed in 1980s has evolved to monopoly in different regions in the United Kingdom.
Government removing Ofgem controls has played a key role in encouraging monopoly of these major energy players causing its failure due to little competition among them. This has raised political concerns as the parliament has been forced to intervene. Labour was naturally capitalized, which turned to be a public suspicion, and hatred emerged towards electoral political issues. Shareholders and investors in the energy sector have been referred as fat cats by Tory press due to their returns at the expense of the taxpayer (Warner 1997).
Ms. Flint reveals that, it is no wonder that energy giants in the United Kingdom have been hiking up energy bills when they already have stranglehold over entire energy market. Citizens of the United Kingdom have been complaining about big six electricity giant suppliers and, actually, there is only one supplier in town. The fact that 70% of other citizens in other regions are served by a single supplier indicates that the market is not functioning as intended (Merrick 2012).
Reference List
Cox, GH 2013, IoS investigation: the great British energy rip-off – privatization. Does not work for the people, viewed 22 March 2013 http://www.citizenspress.org/leftnews/ios-investigation-the-great-british-energy-rip-off-privatization-does-not-work-for-the-people.
Gallagher, P 2013, Three decades after privatisation, monopoly power is still king, viewed 22 March 2013 <http://www.independent.co.United Kingdom/news/United Kingdom/politics/ios-
investigation-the-great-british-energy-ripoff-8219565.html>.
L?pez-Calva LF n.d.,Privatization and its benefits: theory and evidence. Ifo Institute for Economic Research, Munich.
Merrick, J 2012, Is investigation: the great British energy rip-off three decades after privatisation, monopoly power is still king, viewed 22 March 2013 http://ideas.repec.org/a/voj/journl/v54y2007i1p103-118.html.
Sheshinski E & L?pez-Calva, LF 2003, Department of Econmics, Universidad de las Am?ricas Puebly and Centro de Estudios Econ?micos El Colegio de M?xico, Author Affiliations Sir Isaac Wolfson Professor of Economics, Hebrew University Jerusalem.
Warner, J 1997, Why privatisation has been a success story, viewed 22 March 2013 <http://www.independent.co.United Kingdom/news/business/why-privatisation-has-been-a-success-story-1281602.html>.
Yates, J 2012, New agenda the great British energy rip-off, viewed 22 March 2013 <http://newagenda2012.blogspot.com/2012/10/the-great-british-energy-rip-off.html on 22nd March 2013>.
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