OUESTION 1(10)The National Energy Regulator of South Africa (NERSA) is a regulatory authority established as a juristic person in terms of Section 3 of the National Energy Regulator Act, 2004 (Act No. 40 of 2004). NERSA’s mandate is to regulate the electricity, piped gas and petroleum pipelines industries in terms of the Electricity Regulation Act, 2006 (Act No. 4 of 2006), Gas Act, 2001 (Act No. 48 of 2001) and Petroleum Pipelines Act, 2003 (Act No. 60 of 2003). Suppose the provision of natural gas, that has three-stage process (i.e. production, transportation and distribution), leads to the emergency of a natural monopoly. The long-run unit cost of output for this natural monopoly declines throughout the relevant range of output. Suppose the socially optimal level of output for this natural monopoly, is at a point where the price would be well below the average cost per unit but equal to short-run and long-run marginal cost. Also, from a social perspective, competition results in inefficiency in the form of quite high per unit cost for the competitive firm than the unit cost for the monopoly that is enjoying economies of scale (monopoly output could be say ten times larger than that of the competitive firm). However, if a monopolistic position were to exist in the absence of regulation, the monopolist would maximize profit by equating marginal revenue and marginal cost (profit maximization condition) at a monopoly output (which is smaller than the socially optimal level of output), leading to a higher price and lower output. Thus, intervention through regulation is required to achieve the benefits of the most efficient organization of production.
Discuss, in less than one hundred and fifty (150) words, any four practical problems encountered in the public utility regulation of the provision of such utilities as electricity.
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