Evn Monopoly

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Individual Assignment

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ASSIGNMENT COVER PAGE

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Subject Code: BUSM 3244

Subject Name: Business Economic Analysis

Location where you study: RMIT Vietnam City Campus

Title of Assignment: Individual Assignment

File(s) Submitted: EVN Monopoly Power and ItsInefficiency

(Soft and Hard copy)Student name: XX

XX

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XX

Student Number: s3160733

Learning Facilitator in charge: Dr. Hannarong Shamsub


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TABLEOF CONTENTS

Table of Contents ....................................................................................................... 2

I/ Introduction ............................................................................................................. 3

II/ EVN Electricity Supplied Monopoly ....................................................................... 3

2.1 Literature Review .............................................................................................. 3

2.2 Identification of EVNs Monopoly Power ............................................................ 3

III/ Price Elasticity of EVN Electricity .......................................................................... 4

III/ Marginal Cost of EVN and Its Inefficiency ............................................................... 5

IV/ Policy Implications ................................................................................................. 8

V/ Conclusion .............................................................................................................. 9

VI/ References ............................................................................................................ 9

VII/ Appendix ........................................................................................................... 13

Appendix 1: Electricity Prices ................................................................................ 13

Appendix 2: Long Run Marginal Cost ..................................................................... 14

Appendix 3: Data Set for Regression Analysis ...................................................... 15

Appendix 4: Summary Output of Regression Analysis ........................................... 15

Appendix 5: Reasons for EVNs Inefficiency 16


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I/ INTRODUCTIONThis report is written to analyze Electricity Vietnam EVN and its monopoly power.Price elasticity of electricity will be calculated to see whether EVN can increase itsprice or not. We also examine how the Government of Vietnam can regulate thismarket to enhance economic activities & protect domestic consumption. A normalmonopoly firm will have marginal cost lower than its price. However, in the case ofEVN, MC is exceeding the price which led to losses over the last few years. Reasons

for such inefficiency will be discussed providing with some possible methods toreduce the company MC. Lastly, some implication drawn from those findings will besuggested to create a more competitive market in the future.

II/ EVN ELECTRICITY SUPPLIED MONOPOLY

2.1 LITERATURE REVIEWA monopoly is the only supplier of a good for which there is no close substitute. Amonopoly can set its price - it is not a price taker like a competitive firm. (Perloff2007, p345)

A monopolys output is the market output. The demand curve that a Monopoly faces is the Market Demand curve Because the market demand curve is downward sloping, the monopoly

(unlike competitive firms) doesnt lose all its sales if it raises its price

2 2 IDENTIFICATION OF EVNS MONOPOLY POWER


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plant is the most expensive with average set-up cost of USD11.3 billion (Barta & Vu2009)

Secondly, Government has created monopoly as an efficient means of supplyinggoods or services, e.g. public utilities. The Government actually prohibits new firmsto transmit power supplied but allows them to invest in power plants calledIndependent Power Producer project IPP, to increase total production capacity(Prime Minister Decision 26/2006/QD-TTg). Recently, PetroVietnam, Vinacomin,Song Da Corporation actually invested in many hydro-plants projects. However, inreality, with tendency to control the market, EVN has bought back those new plantsand remains 100% monopoly (VietnamNet Bridge 2008).

III/ PRICE ELASTICITYOF EVN ELECTRICITYPrice elasticity of demand is the percentage change in the quantity demanded Qd, in response to a given percentage change in the price P (Perloff 2007, pg48).

Price Elasticity1 of EVN Electricity: | | = |Log (Household Price)| = |-0.7754| < 1. When the price of EVEN Electricity increases by 1 VND, Qd just drops by 0.7754.

The reason for this situation is that electricity has NO close substitute Machines

Inelastic Significant


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2008VND

1102.

8

Residential 2139.7 1481.3 - 658.4Industrial 2172.6 1800 - 372.6

2009VND

891.1Residential 1835.6 1291.3 - 544.3Industrial 1670.8 1875 204.2

Interesting case of EVN with MC > P:

It is true that a monopoly is a price maker and MC must be less than Price: MC < P(Perloff 2009). Marginal cost of EVN in term of power generation was VND1102.8 in2008 which is below the selling price of VND2139.7 for residential use andVND2172.6 for industrial use. However, due to EVNs action in purchasing electricityfrom other countries such as Laos, Cambodia, China, etc. to copy with electricityshortage, actual MC (or adjusted MC) has been pushed up even higher than sellingprice. In 2008, electricity imported from China alone reached 3.5billion kWh (Clough

2008 & Hickey 2008). Since the price must be approved by the Government and theMC has been increased so dramatically, it is inevitable that EVN is making losses.2009 was a better year since EVN has one new coal power plant running whichbrings MC down to VND891.1 and partly reduces the amount of electricity bought.However, reliance on imported electricity has not been lifted. Industrial MC of 2009is VND1670.8 just slightly lower than the selling price of VND1875 while residentialMC is VND1835.6 still extremely high compared to the selling price of VND1291.3.

EVN has been recognized as one of the most inefficient power producer in the AsiaPacific region which, in fact, puts restrain on the national development & growth.Reasons for inefficiency are outlined below (refer to Appendix 5 for details):

Figure 2: Marginal Cost of EVN in 2008 & 2009Source: Business Monitor International (2009) & EUROCHAM


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Slow in decision making due to bureaucratic culture of a State-ownedcompany.

In order to reduce MC, EVN has started many projects on coal-based plants toincrease current capacity, expecting to have total 17 plants completed by the endof 2020. Those plants can generate more stable outputs and require less cost toadministrate. However, coal-fired plants are criticized to be environmentalunfriendly because of high level of CO2 emission. Such pollution is recognized asnegative externality (Perloff 2009). In the near future, EVN aim to lower the

adjusted MC to $0.75, equivalent to VND13910.3 (EUROCHAM 2009). In early2009, EVN also requested the Government to gradually increase the price byminimum of 20% and maximum of 30% by the end of 2010 (VietnamNet Bridge2009).


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IV/ POLICY IMPLICATIONSSince marginal cost is high and EVN is not making any profit, the price, therefore, asbeing proposed by the company, must be allowed to increase gradually by theGovernment. However, if the price is higher than the current regulated price, it willhurt the economy. There are 2 options to resolve this problem:

(1) Allow EVN remain monopoly but must help them to reduce inefficiency in

order to lower down the MC. Since EVN has invested substantial amount ofmoney to build up coal-fired plants, as mention in the previous section, it willincrease the total output and reduce the amount of electricity purchased. MC,therefore, will go down gradually. However, there are still number of thingsmust be considered such as investment in transmission line to increase thetransmission rate and secure the line from electricity theft, installation ofthermal base in hydro plants to ensure stable output during dry season,restructure EVN so that the decision making process can be fostered.

(2) As set out in Prime Ministerial Decision 26/2006/QD-TTg, the competitivemarket can be created with the Government control over transmissionnetwork3 to regulate the market and provide market stability. The changingperiod to create competitive market will be divided into 3 phases:

1st Phase: Allow new firms to enter the market of power generation. EVN

will no longer bear the risk resulted from controlling the market productionof electricity. This will also provide more opportunity for great marketoutputs.


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to provide sufficient level of electricity for market consumption and liftGovernmental burden in looking after this industry.

V/ CONCLUSIONIt is obvious that EVN staying as a monopoly is not a desirable because the marketis not producing at the level where it should be. Not to mention, its inefficiencycould hurt the economy as a whole. Reducing MC has become the prioritized taskfor the Government. It is suggested that a competitive market should be promotedso that consumers & producers will be better off and there will be no longer a needfor Government interference or subsidy to stabilize this market.

VI/ REFERENCES Barta, P & Vu, KT 2009, Vietnam Assembly approves Nuclear Plants, The Wall

Street Journal, viewed on 27th December 2009,.

Clough, LD 2008,Energy profile of Vietnam, Energy Information Administration

2008, viewed on 19th

December 2009,.
http://online.wsj.com/article/SB125913876138763683.htmlhttp://www.eoearth.org/article/Energy_profile_of_Vietnamhttp://online.wsj.com/article/SB125913876138763683.htmlhttp://www.eoearth.org/article/Energy_profile_of_Vietnam


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Dapice, D 2008, Case Study: Vietnam Electricity, Fulbright Economics TeachingProgram (FEPT) 2008, viewed on 19th December 2009,

.

EVN Homepage 2009, viewed on 20th Dec 2009, .

Electricity Vietnam EVN 2009,ADB bo lnh cho EVN khon vay 342 triu USDnng cp h thng in, EVN Investment & development,.

EUROCHAM 2009, 2010: Trade issues & recommendations, European Chamber

of Commerce in Vietnam 2009, viewed on 19

th

December 2009, pp 55-62,.

General Statistics Office GSO 2009, Monthly average income per employee instate sector at current prices by kind of economic activity, General StatisticsOffice, viewed on 26th December 2009, .
http://www.fetp.edu.vn/exed/2008/HaNoi/Docs/Readings/Day%202-1-Vietnam%20Electricity%20Case-E.pdfhttp://www.fetp.edu.vn/exed/2008/HaNoi/Docs/Readings/Day%202-1-Vietnam%20Electricity%20Case-E.pdfhttp://www.evn.com.vn/http://www.evn.com.vn/Default.aspx?tabid=60&TopicId=11&language=vi-VNhttp://www.evn.com.vn/Default.aspx?tabid=60&TopicId=11&language=vi-VNhttp://www.eurochamvn.org/Downloads/EuroCham-2010-Trade%20Issues%20and%20Recommendations.pdfhttp://www.eurochamvn.org/Downloads/EuroCham-2010-Trade%20Issues%20and%20Recommendations.pdfhttp://www.gso.gov.vn/default.aspx?tabid=503&ItemID=9171http://www.gso.gov.vn/default.aspx?tabid=503&ItemID=9171http://www.fetp.edu.vn/exed/2008/HaNoi/Docs/Readings/Day%202-1-Vietnam%20Electricity%20Case-E.pdfhttp://www.fetp.edu.vn/exed/2008/HaNoi/Docs/Readings/Day%202-1-Vietnam%20Electricity%20Case-E.pdfhttp://www.evn.com.vn/http://www.evn.com.vn/Default.aspx?tabid=60&TopicId=11&language=vi-VNhttp://www.evn.com.vn/Default.aspx?tabid=60&TopicId=11&language=vi-VNhttp://www.eurochamvn.org/Downloads/EuroCham-2010-Trade%20Issues%20and%20Recommendations.pdfhttp://www.eurochamvn.org/Downloads/EuroCham-2010-Trade%20Issues%20and%20Recommendations.pdfhttp://www.gso.gov.vn/default.aspx?tabid=503&ItemID=9171http://www.gso.gov.vn/default.aspx?tabid=503&ItemID=9171


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Ha, P 2009, Electricity price increase plan submitted to Government, VietnamNetBridge, viewed on 26th December 2009,.

Hickey, N 2008, Vietnams Ongoing Power Shortage, Energy Tribune 2009,viewed on 19th December 2009, .

Infos Connector 2009, Electricity tariff Vietnam, Electricity Vietnam (EVN) 2009,viewed on 19th December 2009,

Institutes of Energy Economics Japan 2008, Peer review on energy efficiency inVietnam, APEC Coordination, IEEJ 2009, viewed on 19th December 2009,

Nguyen, KQ 2008, Impacts of a rise in electricity tariff on prices of other

products in Vietnam, Energy Policy, vol. 36, pp 3135-3139, Elsevier, Factiva.

O S 2009 i i i i ( ) 2009
http://english.vietnamnet.vn/biz/2009/01/822435/http://www.energytribune.com/articles.cfm?aid=923http://www.energytribune.com/articles.cfm?aid=923http://www.icon.evn.com.vn/Home/News/tabid/55/TopicId/91/language/vi-VN/Default.aspxhttp://www.icon.evn.com.vn/Home/News/tabid/55/TopicId/91/language/vi-VN/Default.aspxhttp://www.ieej.or.jp/aperc/PREE/PREE_Vietnam.pdfhttp://english.vietnamnet.vn/biz/2009/01/822435/http://www.energytribune.com/articles.cfm?aid=923http://www.energytribune.com/articles.cfm?aid=923http://www.icon.evn.com.vn/Home/News/tabid/55/TopicId/91/language/vi-VN/Default.aspxhttp://www.icon.evn.com.vn/Home/News/tabid/55/TopicId/91/language/vi-VN/Default.aspxhttp://www.ieej.or.jp/aperc/PREE/PREE_Vietnam.pdf


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Prime Miniter Decision 26/2006/QD-TTg, EVN Legislation, viewed on 27th

December 2009, .

Thai, V 2008, Meeting rapid electricity demand growth, presented inConsultation on MRCs Hydropower Program, Vientiane, Laos Sept 2008.

The Economist 2009, Vietnam: Energy and electricity background, ExecutiveBriefing, The Economist Intelligence Unit 2009, viewed on 19th December 2009,.

Viet Dragon Securities Corporation VDSC, 2009, Report on electricity, VDSC2009, viewed on 19th December 2009,.

VietnamNet Bridge 2009, Ministry proposes government to delay electricity priceincrease, VietnamNet Bridge, viewed on 26th December 2009,.

VietnamNet Bridge 2009, Work on hydro-power plant begins, VietnamNet Bridge,viewed on 27th December 2009,

htt // li h i t t /bi /2007/01/653962/
http://www.evn.com.vn/Portals/0/CMSFiles/hanhpb/Thi%20truong%20dien.pdfhttp://www.evn.com.vn/Portals/0/CMSFiles/hanhpb/Thi%20truong%20dien.pdfhttp://www.eiu.com/index.asp?layout=ib3PrintArticle&article_id=25996802&printer=printer&rf=0http://www.eiu.com/index.asp?layout=ib3PrintArticle&article_id=25996802&printer=printer&rf=0http://media.vdsc.com.vn/vdsc_news/BaocaonganhdienThang032009.pdfhttp://english.vietnamnet.vn/biz/2009/01/822097/http://english.vietnamnet.vn/biz/2007/01/653962/http://www.evn.com.vn/Portals/0/CMSFiles/hanhpb/Thi%20truong%20dien.pdfhttp://www.evn.com.vn/Portals/0/CMSFiles/hanhpb/Thi%20truong%20dien.pdfhttp://www.eiu.com/index.asp?layout=ib3PrintArticle&article_id=25996802&printer=printer&rf=0http://www.eiu.com/index.asp?layout=ib3PrintArticle&article_id=25996802&printer=printer&rf=0http://media.vdsc.com.vn/vdsc_news/BaocaonganhdienThang032009.pdfhttp://english.vietnamnet.vn/biz/2009/01/822097/http://english.vietnamnet.vn/biz/2007/01/653962/


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VII/ APPENDIX

APPENDIX 1: ELECTRICITY PRICESPrice charged by EVN has 7 different price steps (EVN 2009). The higher the level of consumption, the higher pricewill be charged. This is for the purpose of power saving because Vietnam is currently in the shortage of electricitysupplied. The prices collected below are average price of each period. (Note: Applied Price used to calculate the billis different from quoted price provided by EVN is because the exchange rate has been taken into account since EVNhave to purchase electricity from nearby countries to supply for high domestic consumption).

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From March 2009, new laws imposed onelectricity consumption during rush hour,businesses will be charged 10% more on appliedindustrial rate in rush hours (meaning totally

From August 2009, businesses willbe charged 10% more on appliedindustrial rate in rush hours(totally applied rate = 1980 *

Rush hours:

Mon Sat: 9h30 to 11h3017h00 to 20h00

Sunday: No rush hours

Table 1: Total Electricity Consumption, Applied Rates, Quoted Prices and Exchange Rate used by EVNSource: Clough 2008; Community Party of Vietnam Central Committee 2009; Dapice 2008; EUROCHAM 2009; Infos Connection 2009;Institutes of Energy Economics Japan 2008; Nguyen 2008; Omoteyama 2009; Thai 2008; The Economist 2009; Viet Dragon Securities

Corporation 2009 .


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APPENDIX 2: LONG RUN MARGINAL COSTBased on BMI projection, if EVN does not alter its current operation, MC will continue to rise in the future due tolarger purchase of electricity from other countries.

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Table 2: EVNs Long-run Marginal CostSource: Business Monitor International BMI 2009.


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APPENDIX 3: DATA SETFOR REGRESSION ANALYSIS

APPENDIX 4: SUMMARY OUTPUTOF REGRESSION ANALYSIS


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supply of electricity at a more stable price and with China in order to preventshortfall of power in Northern areas (Clough 2008; Hickey 2008).

Lagging technology is another factor that contributes to EVN inefficiency. Hydroplants normally have thermal base to guarantee production output in dryseasons (Dapice 2008). Nuclear power has been become very popular in westerncountry that can produce green electricity but in case of Vietnam we have towait until 2020 (Clough 2007). Not to mention, wind power or solar energy aresome abundant resources which have not been utilized. Government should

consider those means of producing electricity to remove dependency on hydroand thermal plants.

Lastly, internal problem results from the management of EVN. State-ownedenterprises are said to have bureaucratic culture which make them not veryadaptive to environmental changes and slow in decision making process (Daft2001). This had been proven by their reaction strategy when the level ofelectricity felt short and delay in expansion strategy to increase their productioncapacity.

APPENDIX 6: EVNS VALUE CHAIN

RetailingProduction

Hydro

Plants

Othe

Oilbase

d

Transmission

High Voltage Line

Medium VoltageLine

CoalBase

dPlant

s

Gasbase

dPlants

Residential

Industrial


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kWh6 From 301 to 400

kWh

1740

7 401 and after 1790Table 4: Price Steps applied for household usage in Dec

2009Source: Electricit Vietnam EVN 2009.


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APPENDIX 8: AVERAGE INCOMEFROM DIFFERENT ECONOMIC SECTORS

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Table 5: EVNs Long-run Marginal CostSource: Government Statistical Office GSO 2009.


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Assessment Possible

marks

Marks allocated

Overall Presentation

Heading on the first page

Structure-Intro, sections,

conclusion

Presentation

Attention to detail/proff

reading

Spelling and grammar

Referencing

-10

Innovative application of

theory to a real world

business strategy

20 XX

Analysis & Synthesis

Description of business

being analyzed

Cateorization of this conduct

into one of the relevant

strategy

Synthesis of concepts from

across a range other topic

60 XX

The paper is well written. The analysis is well

executed. It uses a regression analysis to identify price

elasticity of demand for electricity. It covers majors

topics under monopoly; such as, inefficiency, policy

implication to solve the problem.

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Evn Monopoly

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