Monopoly in the Electricity Industry: A Case Study of AGL Energy Limited

This article discusses the concept of monopoly in the electricity industry, focusing on AGL Energy Limited. It explores the benefits and drawbacks of monopoly power, the role of government regulation, and the reasons behind the high prices of electricity. The article also highlights the impact on consumers.

Economics Assignment
Introduction about Monopoly
Monopoly refers to a situation where a single seller exists in the market
for a particular range of product or services. Generally under regulation, if
a company/ entity hold more than 25% of the market share of a product/
services, it can be said that there exists monopoly power. The monopolies
all around the globe generally exists under the utilities sector which is
majorly under the control of government. For instance in India, the
electricity sector from 1947 to 2000 was in the hands of Government of
India.
There are numerous instance of Monopoly across the globe like Windows
of Microsoft, Intel chips of Intel, Post Mail by Royal mail Group.
There are numerous reasons for formation of Monopoly. Some of the
reasons have been detailed here in below:
(a) Exclusive ownership of scarce resources. For instance, Windows of
Microsoft;
(b) Government granting Monopoly Status to certain companies like Post
Office was given by Mr. Oliver Cromwell in 1654.
(c) Patent, design, Copyrights etc;
(d) Merger or combination of Firms;
(e) Capital Expenditure of High nature and lower margin;
(f) Special technology etc.
(g) Network Externalities
Further, the monopoly is generally characterised with the following traits:
(a) Monopolies have the power and ability to maintain supernormal profits
in the long run while no other form of market structure can maintain
the same. Further, the level of Competition in such form of marker
structure is zero. Also, in these type of market structure price is
generally above Average Total Cost at equilibrium Quantity (Q). The
diagrammatic representation of supernormal profit has been
presented here-in-below:

(b) Generally, product has no substitutes (Economics Online, 2019)
(c) There exists high barrier to entry in the form of constraints placed like
regulations, copyright, capital expenditure;
(d) Price discrimination i.e. charging different set of prices from different
customer with similar product characteristics;
(e) Function of such market is cost minimisation and profit maximisation;
(f) Price Maker: Under this type of market, the prices of goods are not
determined by the free flow of market rather the same is dependent of
the price set by the seller. (Introduction to Monopoly, 2019)
Chosen Sector for Report
The chosen sector is Electricity industry where there exists a monopoly in
Australia, as electricity requires a huge amount of capital expenditure,
which is not in the reach of normal companies. Further, the Australia’s
monopoly electricity business is the most profitable business in Australia
as stated in an article published by Renew Economy. The Article went
further to highlight that the actual return earned by the Queensland
Government form the investment made in two electric grids/ networks i.e.
Powerlink Queensland and Energex is multiple times higher than the
margin earned by ASX 50 Blue chip companies. This clearly presents the
profit maximisation capability of the monopolist. The detailed
representation of multiple over the past 15 years has been tabulated as
under:
(a) 23 times – The return earned by Construction sector of Australia;
(b)15.5 times - The return earned by Tele communication sector of
Australia;
(c) 10.5 times - The return earned by Mineral and Resource sector of
Australia;
(d)10 times - The return earned by Banking sector of Australia;
(e) 3.6 times – The return earned by most profitable Super Markets.
The diagrammatic representation of the dividend and shareholder value
has been presented here in below:

The reason for such extraordinary performance of electricity sector is
attached generally to the deeply flawed regulatory network framework in
Australia whereby the companies earn extraordinary profits at the expense
of the customer. (Renew Economy, 2019)
Company Chosen for Analysis
The company chosen for the report is AGL Energy Limited. The company is
engaged in buying and selling of gas and electricity. The primary business
of the company is generation and distribution of electricity. The company
operated through subsidiaries and holds major chunk of energy market in
Australia. The company is engaged in generation of electricity through
thermal energy i.e. by use of fossil fuels, renewable energies like wind and
solar etc.
The company is trading at AUD 22.09 as on 12-04-2019 on Australian
Stock Exchange. (Reuters.com, 2019)
AGL Energy holds near about 42 % market share in the South Australian
generation market and 30 % market share in the area of NSW and Victoria
as per the article published by Financial Review. (The Australian Financial
Review, 2019)
Huge rise in the prices of electricity in South Australia have been gaming
the system and exploiting the market by charging unauthorised electricity
rent from the market according to the report published in Melbourne
Energy institute. Wholesale energy prices in the gas are rising due to
increase in the prices of gas. In addition, there has been a major increase
in the prices of electricity in terms of short wholesale spot rising to the
amount of $14,000 per megawatt hour up from the normal figure of $100
below. (Guardian News and media limited, 2019)
Some have also argued regarding the sudden spike in the prices of
electricity and exercising of monopoly power by the private institute and
said the risk of relying on the renewable energy sources. But if one do
detailed analysis of it ,it will be found that withdrawal of fossil fuel power
generators is the major reason for a saddens spike in the price of
electricity .As the withdrawal of fossil fuel generator pushed up the price
for the electricity.
It is also found that the fossil fuel generator was engaged in the practice of
economic withholding were to used to exercise their monopoly power very
significantly and charge very much money from the customers and exploit
them .They exploited the market in such a way that the prices of these
generators significantly used to rise in a very short span of time. Dylan
McConnell and Mike Sandiford from the Melbourne Energy Institute found

several times an occasions in the year 2015 when the Snowy Hydro’s
Angaston diesel generator withdrew their supply and leading to push the
prices in the market spontaneously. When combined all the different
occasions which delivered an additional revenue of $30.3 m to all the
monopoly owners of the generators across the huge market and the globe.
Benefits from Monopoly Power
There is a huge benefit, which the organisation can derive from
exercising his monopoly power .Few of the benefits can be
explained here in below:
 Research and development: Monopoly firm can make super
normal profit very easily which can be used to fund the high end
investment and can meet the extensive capital requirement in large
scale ,Successful research if done properly can be used to lower the
production and fixed cost .This is very important for such industry
with electricity and pharma industry were there is a excess high end
cost .Monopoly firm also gets a better opportunity to take in such
wide market and fund the research which may prove futile in the
near future. (Economicshelp.org, 2019)
 Monopolies can be a successful firm: A firm can only become
and exercise his monopoly power through being efficient and
dynamic throughout. A monopoly power in the market means a lot
as it is sign of success and not a sign of inefficiency. For example,
many products like Google are considered to e the best search
engine and have a monopoly power and apple has the monopoly on
terms of digital goods. (Economicshelp.org, 2019)
 Regulation of Monopoly: Government also sets up the regulation
in order to control the monopoly power and sets the regulator in
order to prevent the excess use of monopoly power and exploitation
to the consumer. For instance, like water services and gas services
are the natural monopoly so it only makes sense to have only one
provider to it. The regulator set up the government ensures that the
normal prices are only charged from the consumer and the basic
requirements and services are providing to them. The firm and
consumer both have the advantage as the firm is gaining from the
economies of scale and the consumer is protected from the
monopoly prices. (Economicshelp.org, 2019)
 To provide subsidy to the loss making services: Another main
benefit of the monopoly power is that the extra normal profit earned
by the firm can be used to subsidise socially useful but loss making
service. For instance, the train company has a monopoly power,

which can be used to set the high prices on peak time and low
prices or subsidised price on Saturday night service.
Government intervention is used to cub this power if it is exercised.
The Government regulate the monopoly in order to protect the interest of consumers. As the
monopolies have the market power to set the prices higher than the prices prevailing in the
competitive market. Through various methods and tools government regulate the monopoly market
like capping in price, yardstick competition and through preventing the growth in monopoly power.
Through all reasons, it is very much necessary for the government to regulate the monopoly power
and few herein are discussed below: (Economicshelp.org, 2019)
 Prevent excess prices: If there is no government regulation prevail in the industry than there
will be no prices set up for the consumer and they will be charged over and above leading to
decline in the welfare of the consumer. (Economicshelp.org, 2019)
 Service Quality: If a firm is exercising its monopoly power tan it has got a very little chance
to offer a very good quality service to its customer, Government ensure that at least
minimum standard of service is provide to the customer . (Economicshelp.org, 2019)
 Monopsony Power: A firm which have the monopoly selling power may also be in a position
to exploit the monopsony buying power .Fir instance the hyper city market and super mart
might use their dominant position to exploit the small farmers and takeout the profit from
them.
 Promoting Competition: In some industries it is also possible to increase the competition, so
the requirement and the need of government regulation will be very much less and meagre.
 Price Capping by regulators: For new private industries the government has set up different
bodies .These bodies regulate the price control and also limit the increase in prices .If the
regulators think that the firm can make huge amount of saving and is charging too much
from the consumer it can than set a high level of X. (Economicshelp.org, 2019)

Bibliography
Economics Online. (2019, April 15). Monopoly. Retrieved from /www.economicsonline.co.uk:
https://www.economicsonline.co.uk/Business_economics/Monopoly.html
Economicshelp.org. (2019, April 15). Advantages of monopoly. Retrieved from
www.economicshelp.org:
https://www.economicshelp.org/microessays/markets/advantages-monopoly/
Economicshelp.org. (2019, April 15). Regulation of monopoly. Retrieved from
www.economicshelp.org: https://www.economicshelp.org/microessays/markets/regulation-
monopoly/
Guardian News and media limited. (2019, April 15). Electricity price spikes caused by energy
companies 'gaming' the system, report finds . Retrieved from www.theguardian.com:
https://www.theguardian.com/australia-news/2016/aug/11/electricity-price-spikes-caused-
by-energy-companies-gaming-the-system-report-finds
Introduction to Monopoly. (2019, April 15). Retrieved from courses.lumenlearning.com:
https://courses.lumenlearning.com/boundless-economics/chapter/introduction-to-
monopoly/
Renew Economy. (2019, April 15). Why pick on banks when monopoly electricity networks make 10
time more profit? Retrieved from reneweconomy.com.au:
https://reneweconomy.com.au/why-pick-on-banks-when-monopoly-electricity-networks-
make-10-time-more-profit-16479/
Reuters.com. (2019, April 15). AGL Energy Ltd (AGL.AX). Retrieved from www.reuters.com/:
https://www.reuters.com/finance/stocks/company-profile/AGL.AX
The Australian Financial Review. (2019, April 15). ACCC has no power to force AGL Energy to cut
market share. Retrieved from www.afr.com: https://www.afr.com/news/accc-has-no-
power-to-force-agl-energy-to-cut-market-share-20180523-h10fgn