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Costs and benefits of market regulators

In 2004, Oxera developed a framework for assessing the costs and benefits of market regulators (including competition authorities) for the Dutch Ministry of Economic Affairs. This arose from questions in the Dutch Parliament about the justification for the various agencies. The framework that Oxera developed first sets out the basic principles of cost–benefit analysis, and then identifies the main categories of costs and benefits that need to be considered. It points to the importance of identifying the right counterfactual for each analysis: the costs and benefits of having an additional regulatory agency are determined against a counterfactual in which that agency did not exist (eg, private litigation in the absence of a competition authority). In addition, the framework discusses when and how some of the costs and benefits could be quantified. It applies quantitative techniques to some costs and benefits of the Dutch Competition Authority (NMa) and the postal and telecoms regulator (OPTA).

To view part I of the report, click here .
To view part II of the report, click here .

Please note that the Executive Summary in Part 1 is in Dutch.

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Energy market competition in Europe and the G7

The study applied Oxera’s existing competitiveness ranking methodology to investigate whether the Department of Trade and Industry had met its Public Service Agreement target in relation to energy market competitiveness.

This required the creation and interrogation of a detailed dataset of energy market indicators for both gas and electricity for European Union and G7 countries to determine the UK’s ranking and how this ranking had changed from the previous year. In addition, the project included a forward projection of competitiveness taking account of the likely developments in liberalisation across the EU and of industrial and domestic energy prices.

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Security of supply, energy investment requirements and cost implications

Oxera was commissioned by Centrica to review the necessary infrastructure investment to ensure a given level of security of supply in the GB electricity and gas markets over the period to 2010.

Using publicly available information on projected annual and peak demand levels, the shortfall of supply from existing infrastructure capacity was calculated and necessary new investment was identified. The study found that the cost of the necessary investment would be between £10 billion and £18 billion but that, while there is sufficient capacity available, the major concern is whether market signals are sufficiently strong to ensure that this investment would be operational when it is required.

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A strategic and economic overview of municipal waste management

Oxera was commissioned by The Norlands Foundation in March 2003 to undertake a strategic, overview economic analysis of municipal waste management in the UK. The aims of the project were to identify any immediate problems in the delivery of the government’s waste strategy and to uncover long-term obstacles, so that these might be addressed by the waste management industry, government and interested third parties. The report, published in August 2004, provided data and scenarios showing what might happen if waste management developed in a particular way. The theme of the report was consistency—it examined whether the policy measures were consistent with the targets, whether the financing and funding arrangements were consistent with the investment required, and whether the targets were consistent with public attitudes to recycling and to land-use planning.

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CO2 emissions trading: how will it affect UK industry?

On behalf of The Carbon Trust, Oxera examined the potential impact of the EU Emissions Trading Scheme (EU ETS) on the competitiveness of a sample of UK industry sectors, with particular focus on the profitability of firms within those sectors. The impact of the EU ETS was simulated using an economic model of oligopoly behaviour, suitable for markets with a small number of firms and high capital intensity. The model predicts the impact on earnings before interest, taxes, depreciation, and amortisation; volume of sales; number of firms; and investment in energy efficiency and emissions abatement. Notably, it also predicts the degree of cost pass-through that may be expected in a particular market, based on the fundamental characteristics of that market. Scenarios are used to reflect the EU ETS trading periods (2005–07, 2008–12, and beyond 2012).

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What are the implications of different agency options for the sale of distribution networks?

In April 2004, Ofgem produced a Regulatory Impact Assessment on agency and governance arrangements for the provision of shipper services following the proposed sale of one or more of Transco’s gas distribution networks. Ofgem’s analysis is mostly qualitative in nature, and Oxera was commissioned by the Gas Forum to quantify the potential benefits and costs of including a greater number of shipper services within the scope of an agency.

A survey of shippers suggested that moving from a narrow to a broad agency would reduce shipper costs from £98.8m to £43m in net present value terms. By contrast, Oxera modelling indicated that the forgone benefits arising from the creation of an agency due to reduced scope for comparative regulation might be in the region of £8.1m to £12.6m in net present value terms, with the incremental reduction associated with moving from a narrow to a broad agency being even smaller. Overall, the analysis suggested that a broad agency might maximise overall consumer benefits.

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Corporate action processing: what are the risks?

Sponsored by the Depository Trust and Clearing Corporation, this study presented Oxera’s analysis of the risks involved in corporate action processing in the global securities markets. Despite progress towards straight-through processing of securities transactions, corporate action processing has remained an area where there has been only limited automation. Several industry initiatives have acknowledged the potential impact of this on the risks to which intermediaries and investors are exposed. The aim of the Oxera research was to provide a first systematic attempt to quantify the major risks involved in processing corporate actions. This was achieved by defining a typology of corporate action failures and the associated risks faced by intermediaries, and estimating the value of funds at risk with regard to each type of risk. The results presented in the report highlighted that the potential monetary value of the risks is indeed high, not only for the back office but also for firms’ trading strategies.

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Rail and bus consumer survey analysis

This Oxera study was undertaken at the request of the Competition Commission, to examine evidence from previous studies on bus and train elasticities, and to analyse data collected during the course of the Commission’s inquiry into the proposed acquisition by FirstGroup of the ScotRail franchise.

The aim of the study was to produce estimates of elasticities relevant to the merger situation, including bus and rail own- and cross-price elasticities with respect to fares, journey times and frequency.

The report presented the results of the analysis, drawing together the two strands of research, highlighting how the results of Oxera’s analysis compared with the results of the literature review.

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Are UK households over-indebted?

This study, prepared by Oxera on behalf of the Association of Payment Clearing Services, the British Bankers’ Association, the Consumer Credit Association and the Finance & Leasing Association, examined UK consumer debt. The aim of the study was to provide a realistic assessment of the scale of the debt situation in the UK, based on existing reports and available data. Having established a conceptual framework for analysing over-indebteness, the study provided a compendium of statistics on the subject and an understanding of the scale of the debt situation in the UK against a background of the current economic climate.

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