Question

1. Separating the production of electricity and the delivery of electricity has led to considerable deregulation of producers.

(a) Briefly explain which of these two aspects of the sale of electricity remains susceptible to natural monopoly problems.

(b) If a monopoly does arise, why is the idea of charging the marginal cost not ideal? What makes the average cost a more feasible solution?

(c) What two approaches can be used to implement an average cost pricing system?

(d) Which solution do you think is more effective?

Answer 1

Solution A

Distribution of electricity becomes major problem due to monopoly because if any player has fibre and wireline cable installed it becomes difficult for other players to install same again and hence fibre sharing takes place. This creates monopoly power for any one player with first mover advantages and can indulge in higher pricing  

Solution B

Charging marginal cost is not ideal because consumption of electricity varies for all households and is not definite and volatile always. Hence it is best to charge an average of 12month pricing to take weighted average and minimise losses.

Solution C

Average cost pricing will force all monopolists to charge reduced pruce where firms average total cost intersects market demand curves. Hence government will regulate pricing by implementing strict governance body to rectify any price hikes and real time checking and audits of all electricity providers to see if any sort of price rigging doesn't takes place.

Solution D

Conducting an audit is most important and fullproof method to determine any sort of predatory or premium pricing been imposed by any player. This can indulge in violation and may deemed to be punishable or probability of licenses getting cancelled can be high depending on regulatory framework in country. Hence this keeps all players in check and benefits consumers.