Price Control: investigation (P.165/2011) - comments

STATES OF JERSEY

PRICE CONTROL: INVESTIGATION (P.165/2011) – COMMENTS

Presented to the States on 31st October 2011 by the Minister for Economic Development

STATES GREFFE

2011   Price code: A  P.165 Com.

COMMENTS

If  accepted,  this  proposition  would  require  me  to  investigate  the  possibility  of controlling prices of goods in Jersey by regulation, and to report on this to the States by September 2012.

The Jersey Competition Regulatory Authority (JCRA) is the body most experienced in regulation  and  price  control  and  therefore  I  have  asked  that  it  comment  on  the proposition.

The JCRA have responded as follows

"The JCRA's position on this proposition is clear. It is neither practical nor beneficial to attempt to regulate the entire Jersey market in this way. It would also be unprecedented in any developed economy that we are aware of. We also are not convinced, even if it was practical which we do not think it is that the outcome would be ·in the long term best interest of consumers. We would, in the strongest terms, advise the Minister that this proposal should not be considered for the reasons set out below.

1. Price regulation is normally undertaken where a firm has a dominant position  in a  market  and  possibly  has  incentives  to abuse  that dominance.  In  such  circumstances  the  customers  of  the  dominant provider have little or no alternative to but to take the service offered at the price and quality determined by the provider. It is for this reason that price controls are commonly used in regulating· certain utility prices (such as some telecoms or postal prices in Jersey or like water and electricity charges in other jurisdictions). It is recognised that  even  if  alternative  service  providers  are  available  for  these services  there  may  be  a  cost  involved  in switching  that  makes  it unlikely  for  the  customer  to so  do.  Therefore  regulation  offers  a degree of protection for consumers that the market is not providing.

Clearly  in  Jersey  for  the  vast  majority  of  services,  there  is  no dominant provider and even where a local firm may occupy a position of  some  strength,  consumers  can  generally  source  services  or products from alternative markets. Therefore it is not immediately clear how price regulation would put the consumer in any better position than is currently the case.

2. Deputy Southern relies on the findings from the recent JCRA Road Fuels Market Study to support his call for regulation. However, that report has a very clear conclusion; that the JCRA does not believe direct price regulation is needed nor isitin consumers' interest. The road fuel market has a large number of retail outlets selling fuel, with a wide range of prices on offer to consumers. Because of the size of the overall market, the number of participants in the wholesale market is less than one might find elsewhere. However that in itself is not evidence of market failure. The key issue with the road fuel market is the need to improve price transparency so that consumers can make an informed choice.
3. However, even if one was minded to consider price regulation it needs to be borne in mind that to do so for all services in Jersey is a

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monumentally large task. Put simply the staffing resources required to even collect the information (never mind analyse it) would be huge.

To  give  an  example, to  put in  place  price  regulation  (or  a  price control as it is normally referred to) for Jersey Telecom requires the JCRA to have the company's business plans assessed and analysed, requires an efficiency review of the company to be undertaken to ensure services are being provided efficiently and to determine what its capital expenditure and cost of capital should be. Each of these steps requires experts in regulating the telecoms sector to form a judgement  on  what  level  of  revenue  the  company  needs  over  the period of a price control to deliver its services efficiently. Even with this  level  of  oversight,  the  JCRA  only  directly  regulates  a  small proportion  of  Jersey  Telecom's  business.  The  majority  of  Jersey Telecom's services (such as mobile telephony for example) are not directly price controlled. There is competition in the mobile market and we believe this is more effective longer term at delivering better prices,  more  innovative  services  and  better  quality  than  direct regulation.

4. Price regulation of utility services works because one normally has, in relative terms, fairly defined businesses with long term plans where an assessment· can be made of the market and likely trends. These circumstances do not exist in the majority of consumer markets where the markets move at a faster pace and consumers' tastes and trends are more responsive to developments in the market outside Jersey.
5. If the object of the proposition is to ensure consumers get better value and more competitively priced services, then it is the market structure that should be assessed rather than the price levels for any specific service. This is where Competition Law can be used, as was the case with  the  recent  road  fuels  market  study.  This  is the  more proportionate tool to use and the tool that is more likely to deliver benefits  for  consumers  longer  term.  By  removing  barriers  to competition,  by  promoting  greater  transparency  in  the  cost  and quality of services and by taking action against those found to breach the competition law, consumers In Jersey will gain the benefits of a more dynamic competitive market.
6. Price regulation on the other hand will come at a cost which the JCRA  strongly  believes  would  be  disproportionate  to the  benefits likely to be gained, may stymie innovation and market activity (being increasing the risk of doing business in Jersey) and would position Jersey as an outlier to every major developed economy by imposing such direct control on business activity.

Conclusion

The JCRA strongly cautions against this proposition. We would also suggest that the cost of even investigating this proposition fully is likely to be high and in our view not a valuable use of what is undoubtedly a scarce resource within the States of Jersey.

I fully endorse the position of the JCRA and urge members to reject this proposition.

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