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Tackling with Natural Monopoly in Electricity and Natural Gas Industries

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Financial Aspects in Energy

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Abstract

This chapter attempts to provide a theoretical work on natural monopoly versus perfect markets through concentrating on the energy sector. In specific we discuss the natural monopolistic structure of Turkish natural gas and electricity markets by comparing those of various countries in Europe. In this vein, our chapter starts with the introduction of natural monopoly in both electricity and natural gas markets and the tools and regulations that targets on tackling this imperfection. Furthermore we present the historical phases of regulations to tackle natural monopoly in Turkish electricity and natural gas markets. Both price-demand and income-demand relationships are important guides for developing energy efficient programs for governments and hence income and price elasticities are channels for the relevant regulations. Armed with this in order to provide comparison, our chapter concludes with discussing the extent of the natural monopoly in each country through demonstration of income and price elasticities of demand for both electricity and natural gas.

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Notes

  1. 1.

    The following papers, among others, provide evidences that electricity industry displays natural monopolies; Gunn and Sharp (1999) for New Zealand, Iliadou (2009) for Greece and finally Bagdadioglu et al. (1996) for Turkey.

  2. 2.

    The studies, among others, concluding that natural gas industries constitute natural monopoly are; Kay and Thompson (1986) for US; Hammond et al. (2005) for UK and Gordon et al. (2003) for Canada.

  3. 3.

    Vertical integration is defined by Riordan (1990) as “the organization of succesive production processes within a single firm, a firm being an entity that produces goods and services.” Verticaly integrated private network utilities have many of the drawbacks of public monopolies, with the additional disadvantage that the government no longer has the power to order their reorganization and restructuring.

  4. 4.

    Similarly, the study by Oğuz (2009) shows that the absence of a well established institutional environment reduces the potential role of competition policy in the industry and increase political meddling in all segments of the Turkish electricity market.

  5. 5.

    Subadditivity of the cost function takes place when under all conditions only one firm can perform the production of a good with a minimum cost.

  6. 6.

    It is stressed in the sector inquiry report of European Commision concerning both natural gas and electricity markets that “It is essential to resolve the systemic conflict of interest inherent in the vertical integration of supply and demand activities, which has resulted in a lack of investment in infrastructures and in discrimination. It is crucial to ensure that network owners and/or operators do not have incentives that are distorted by supply interests of affiliates. This is particularly important at a time when Europe needs very large investments to ensure security of supply and to create integrated and competitive markets.” (European Commision 2007).

  7. 7.

    Moreover, the authors mention that the percentage is expected to reach to 80 by 2030.

  8. 8.

    Vertical foreclosure is unequivocally correlated with vertical integration and it takes place when a dominant firm, which intends to extend monopoly power from the segment of the market to an adjacent segment, prevents the proper access to an essential good it produces.

  9. 9.

    Specifically, according to the law BOTAS is stipulated to transfer at least 10% of its total gas purchase through the take-or-pay contracts every year so as to reach the market share of 20% by 2009.

  10. 10.

    Henceforth, the numbers, ranging from (1) to (6), in the brackets correspond to those in Table 12.1.

  11. 11.

    The main drive in holding the financial accounts separately is to dismantle vertical integration. For details in this matter, see Sect. 12.4.2 of this study.

  12. 12.

    See among others; Riordan (2005).

  13. 13.

    It should be noted that in the natural gas industry, both production and transmission firms are dependent on a transmission company given that transmission lines have to be utilised for production companies to sell the gas they produced and for wholesale companies to supply the gas they will sell.

  14. 14.

    The major points in the criteria are whether the transmission line has a sufficient capacity, liabilities can be fulfilled once the firms are in the system, etc.

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Authors and Affiliations

  1. Hacettepe University, Ankara, Turkey

    Özgür Arslan & Hasan Kazdağli

Authors
  1. Özgür Arslan
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  2. Hasan Kazdağli
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Correspondence to Özgür Arslan .

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Editors and Affiliations

  1. , Finance, VU University Amsterdam, De Boelelaan 1105, Amsterdam, 1081 HV, Netherlands

    André Dorsman

  2. , Economics, Econometrics and Finance, University of Groningen, Nettelbosje 2, Groningen, 9747 AE, Groningen, Netherlands

    Wim Westerman

  3. , Business Administration, Hacettepe University, Beytepe Campus, Ankara, 06800, Turkey

    Mehmet Baha Karan

  4. , Business Administration, Hacettepe University, Beytepe Campus, Ankara, 06800, Turkey

    Özgür Arslan

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Arslan, Ö., Kazdağli, H. (2011). Tackling with Natural Monopoly in Electricity and Natural Gas Industries. In: Dorsman, A., Westerman, W., Karan, M., Arslan, Ö. (eds) Financial Aspects in Energy. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-19709-3_12

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  • DOI: https://doi.org/10.1007/978-3-642-19709-3_12

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