Question

With 5 key readons, justify the Regulation of the Electricity sector

Answer 1

The Energy Sector, in most economies is governed by some set of laws that help in setting its price as it is a necessary good which is provided by both, the government as well as private players.

Like any other industry, this should also be subjected to by laws which do not allow for complacency to occur and avoid the existence of monopolies in the market place. Further, price regulations in this sector are important so as to maintain the demand and supply equilibrium. Being a necessary item, any form of monopoly and over charging by players would mean that the access to the resource would become highly limited.

The following are 5 Critical Reasons for enabling regulation in the energy sector: -

1) The presence of regulations in any industry restricts monopolies from existence. The electricity industry is absolutely essential for both consumers as well as producers in any economy. Having monopolies reduce market efficiency and tend to increase prices which may have a larger impact on inflation and unemployment in the economy. For example, as electricity is a constant source of cost for a manufacturing firm, if the prices remain high due to the existence of monopolies, this cost would be passed over to the consumers, thus increasing inflation.

2) The efficiency of companies which do operate in monopolies is extremely low. Creating a situation wherein competition is prevalent in the market initiates innovativeness and pressure on companies to bring value addition to the service which they are providing. In return complacent nature of monopoly companies end and efficiency in the sector increases.

3) Another reason is to have a platform for consumers whereby they can complain against any shortfall in service, bills etc. Over the years, complaints like this kept piling for countries which do not have regulations in place. The emergence of regulations provides a framework in which consumers can complain in case of any shortfall by the electricity provider. Thus, Consumer redressal mechanism gets created with the presence of regulations.

4) One critical reason to allow for regulations is to encourage profit making in these companies. Government owned companies do not perform well financially and the end result is that these need to spend substantial amounts of government funds to keep them operational. Employees largely turn redundant in government owned companies and it effects the health of the economy.

5) The last reason is because electricity is sourced from various regions in a country, allowing regulations help in increasing overall coordination among various stake holders such as distributors, those that create electricity and other operational players.

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