Free «Canadian Utility Industry» Essay
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This paper aims to analyze the utilities industry structure of Canada by trying to determine the existing market structure and defining the factors that affect such a state of affairs. The analysis of the public goods market is performed from the point of microeconomic theory.
The Active Companies in the Utility Industry of Canada
The specifics of the utility industry lies in the fact that to examine the market structure, one should first divide the active companies based on the services provided. The utility industry of any country consists of three departments - companies that provide the consumers with water, electricity, and gas. Thus, the Canadian utilities companies should also be distributed in three categories. The list of the active companies in the Canadian utilities business is presented in Appendix 1.
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The list of utilities includes municipal and private organizations that provide public services. The share of state-owned enterprises is different in these categories of the public goods business. The water distribution share of the Canadian utilities market is mainly owned by the state and municipal companies. The history of the creation of such companies is mainly based on the state capital. Municipal or state governing bodies define the broad structure of such companies. For the electricity and gas distributors, the market share of the private business is more significant. Most of the private companies on the Canadian utilities market are international businesses operating on the Canadian territory. The level of the utilities industry privatization varies, depending on the particular area of the country. Thus, the area with the highest level of public services’ privatization is Alberta. Here, the majority of utilities companies are private.
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The big amount of utilities companies can be explained by the existence of similar municipal enterprises in different regions of the country. Thus, most of the presented companies provide similar services and act only in terms of their own area of the country. This fact determines the considerably low level of competition in the industry. However, the presence of a large number of firms must not mislead anyone performing a research. The real competition is present only in relations between the municipal and private companies in separate areas. It should also be pointed out that in some parts of Canada, there is a monopoly of the state for the provision of public services.
The Reasons for the Formation of the Existing Market Structure
The specific of the discussed industry is its unique importance for society as a whole. This fact leads to the special attention given to the business by the state and municipal authorities. This circumstance becomes a significant factor that affects the structure of the utilities market in any country, especially in Canada. The government, as a guarantor of fulfillment of social obligations to the population and the formal owner of the country's natural resources, rightly disposes the distribution of natural resources among the citizens in the form of public services. The state authorities strive to implement price controls on utilities as a part of their social policy. In this case, the appearance of private business in this industry can be explained by the municipal authorities’ ambition to improve the effectiveness of the companies’ activity. At the same time, the current utilities market structure exhibits some drawbacks, requiring authorization. For example, the scandal involving the TransAlta Company that has been guilty of using its monopoly position to maximize profits shows that there are clear contradictions and imperfections of the existing market of public services (The Globe and Mail, 2015).
According to microeconomic theory, there are a plenty of factors that determine the specific market’s structure and its level of competitiveness. Among these factors are the amount of equal producers and consumers of the selected goods on the market, the degree of homogeneity and substitutability of the product, the presence of barriers for the company to enter the market, the level of mobility of the factors of production, and the access to information of all participants. As for the Canadian utilities industry, the key factor in the formation of the current structure of the market is the level of government commitment to the privatization of this sector. Indeed, in the beginning, the state figures out to be the exclusive owner of the country's natural resources - raw materials for the public goods industry. The state's position in this case defines the opportunity for the private sector to drive a wedge into the existing structure of the market. In many countries, the state has the monopoly on the provision of public services. However, if a private business ensures higher quality of service, its market share may be improved.
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As a result, the low initial level of goods accessibility for private business, the presence of moderate barriers for the private company to enter the market, and the low level of the mobility of factors of production determined the existing structure of the utilities industry in Canada. In the regions where municipal authorities do not appreciate private utilities business, the private market share is low. The more politically liberal regions have a higher proportion of private businesses, which also leads to some problems in the industry. In general, the state's private business policy of containment in public services has led to the presence of the limited number of utility companies in each area of the country. Such a situation, on the one hand, reduces the risk of abuse on the part of private business. For municipal companies, such an abuse is impossible due to its dependence on the state pricing policy. However, it also reduces the positive effect of the high competition level in the industry – the goods quality.
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The result of this research is the definition of the microeconomic factors that affect the formation of the current Canadian utilities market structure. The discussion of the advantages and disadvantages of the existing market structure allows considering the effectiveness of the state policy in the sphere of the public goods industry.
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