Original 2013 edition: Basic Network Utility Economics (colour paperback) by Mark Hull

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Basic Network Utility Economics introduces students and neophyte professionals to the innate economics of the heavy utilities. This global textbook starts by explaining the basics of each industry’s value chain and proceeds to expound general tools used by professionals around the world. A consistent body of theory developed in the first 8 chapters, using minimal algebra and over 70 colour diagrams, is used to review some of the most famous global utility restructuring experiences in chapters 9-12.

To see what each chapter contains download the free Contents .pdf from the website http://banburydesigners.co.uk/basic-network-utility-economics/ and look at the Summary Contents for each chapter.

The contents of each Section of a chapter are contained in the Detailed Contents list of the Contents .pdf.

SKU: BNUE-paper Category:

Description

Publication date: 9 September 2013¦ ISBN-13: 978-0-9576990-0-7 ¦Edition: First

This 2013 First Edition has been superseded by subsequent editions, now called ‘Infrastructure and Utility Economics’, so only a few printed copies remain, and BNUE has become a collector’s item. The price of printed copies has been raised to reflect this scarcity, although the price of the ebook has not changed.

The economics of the heavy natural monopolies – electricity, gas, water and rail – is not as straightforward as most microeconomics texts assume. This book, by a professional, explains the techniques that are actually used by practitioners to analyse and advise policymakers, in simple language suitable for anyone with an understanding of basic economics. It starts by explaining the absolute basics of each industry and examining their fundamental characteristics. In the course of this “easy and informative” exposition the limitations of neoclassical models are exposed, and more general tools are gently explained, using a hundred colour diagrams and a minimum of algebra.

The contents are available as a free .pdf from the website http://professionaleconomics.net/basic-network-utility-economics/.

Details

Paperback: 480 pages

Publisher: Professional Economics Ltd Review edition 30 September 2013

Language: English

ISBN- 13: 978-0957699007

Product dimensions: 23.4 x 15.6 x 2.6 cm

 

About the author

Mark Hull (Author)

Following a career as a government economist, corporate strategist and manufacturing company CEO, Mark Hull worked as a private sector utilities economist for 13 years. During this time he worked for some of the world’s top private consultancies offering analyses and advice in the water, electricity, gas and rail industries on strategic, regulatory, cost-cutting, merger and restructuring issues in the UK, continental Europe, North America, South America, and Asia. He now teaches economics and business strategy in Universities and Business Schools.

Limited edition Review Copies of this textbook were launched on 30 September 2013 and provided to professional economists. The First Edition, with selections on the cover from professional economists’ reviews, was published in June 2014. Because of its scarcity value the price of a printed copy of the First Edition has risen substantially. If you want to compare the original 2013 text with more modern texts, why not download BNUE as an ebook? Or, if you simply want to learn about the economics of infrastructure and sunk costs you could buy the latest edition of Infrastructure and Utility Economics as a printed copy or as an e-book. Or you can buy its e-chapters; the most important and general e-chapters (Chapters 3 and 4) are completely free but specialist chapters (e.g. on the rail industry or efficiency measuring techniques) have a small positive price.

1 review for Original 2013 edition: Basic Network Utility Economics (colour paperback) by Mark Hull

  1. Rated 4 out of 5

    This useful book’s ambitions are belied by its prosaic title. Much more than basic economics, the book aims to provide an improved economic framework for the analysis of network industries; to summarize the most significant episodes in utility reform since the 1970s; and to place all this in a broad sweep of intellectual and economic history. It succeeds in most of these ambitions, though at times overreaches or strays beyond existing literature. The style is direct, clear and personable, though some readers may find it too chatty.

    After a succinct overview of the conventional textbook economics of utilities, the book proceeds to show the severe limitations of conventional theory. This is done convincingly. The description of network industry value chains, and many practical examples of network infrastructure markets, shows that real network industries bear little resemblance to simple textbook models of natural monopoly. In particular, the conventional assumption that utilities are natural monopolies because they operate in regions of increasing returns to scale is shown to be more often wrong than right. This alone should revolutionize the conventional teaching on utilities and monopolies (though whether academics are listening is another matter).

    An alternative framework analytic framework is proposed. In this framework, market structure (for example, whether a market will be a monopoly) is seen as the result of a series of sequential investment decisions by market players, each involving sunk costs. The alternative is shown to provide a practical way of understanding why in many cases, once one company has sunk the cost of a network, no others will enter.

    This approach reflects how industries really evolve. That said the framework (or at least its exposition) could be improved in two ways. First, more attention could be paid to the simple concept of sub-addivity of costs in distribution; that is, for any given quantity of service delivery it costs more to have two distribution networks running down a street than just one. Not that this point is ignored, but it would have been nice to see more analysis of how much the sequential model adds to this simpler approach. Second, readers would benefit from a stronger comparison of network infrastructure with other similar markets that do not involve sunk costs: ferries versus bridges; or the delivery of gas and water by truck, rather than pipe network. That would have illustrated how much in market structure results from sub-additivities of cost, and how much from costs being sunk.

    With basic frameworks established, the book moves on to a number of topics of practical value to regulators and policy makers (and the utility managers who have to deal with them). The chapter on marginal cost pricing in networks demonstrates the value of pricing at long run marginal cost, and steps the reader through how to calculate long run marginal costs correctly. The theory presented is one developed with care by a number of practical economists and accepted by OFWAT, the United Kingdom water regulator. By making it this methodology widely available in an intelligible form, the book should help address the problem that, while practitioners all over the world acknowledge that pricing at marginal cost makes sense, very few actually know how to calculate marginal costs (especially for network industries facing lumpy and idiosyncratic investment paths).

    The chapter on defining outputs debunks common assumptions, such as the idea that the output of an electricity distribution network is ‘kwh hours of electricity’. The author demonstrates that the output of a network is not the load delivered, but “its availability and ability to deliver its load to all final outlets at the times and places specified”. (In this sentence ‘load’ refers to what the network carries, such as electricity or water).

    With outputs defined, it is possible to assess a network provider’s efficiency. The book provides a theoretically rigorous and highly practical description of benchmarking to assess a utility’s efficiency. Regressions and Data Envelope Analysis are clearly explained, along with sophisticated additions such as Bayesian probabilities, and the correct use of stochastic frontier analysis in a variety of settings.
    Broadening its perspective, the book then surveys how regulatory models have. The author again punctures some common assumptions. He shows that ‘competition for the market’ (franchise-bidding) for long lived infrastructure services doesn’t really work, either in theory or in practice. This is because if competition is to be frequent, it cannot be extended to decisions on the long-lived assets that make up most of the cost of service. On the other hand, infrequent competition does not provide market signals on costs as they change over time, and so must collapse back into a regulatory model.

    The circularity between the regulator’s view of the value of a company’s assets, the regulated prices that result, and the company’s market value that follows, is explored, with examples from the UK water industry. Also explored are the many similarities between rate of return and price cap regulation, the essential arbitrariness of the five year price control period that has been widely adopted, and the fact that in reality the x-factor is not the industry rate of efficiency gain. All these points have been ignored by some other authors, with the unfortunate result that all around the world students and regulators are influenced by descriptions of the British approach to regulation that bear little relation to reality.

    The final, distinctive, contribution of this book is to summarize network industry reform experiences in electricity, gas, water and rail transport (chapters 9 to 12). Having been involved in some of these services myself, and studied others, I can say that (at least for the ones I know about) the accounts are accurate, highlight the most important experiences and lessons, and provide evidence and insight on a number of points that I have not seen documented elsewhere, and certainly not all pulled together in one place.

    As would be expected in a book with such ambitions in scope and originality, there are some flaws. Sometimes, ideas pop up into the narrative only to be left floating in the wake as the analysis moves. This can be distracting. The personable and breezy style sometimes risks sounding glib—though the illustrations and anecdotes are often on-point. The humorous remarks, and pop-quizzes veer between the engaging and the off-putting. More seriously, while the original economic framework presented in chapter 4 is well reasoned, many readers would feel more comfortable if they had been first developed in a peer-reviewed journal.

    Still, these flaws do not detract significantly from the value of the book. The book succeeds in combining deep knowledge of how networks really work, a new and better way of analyzing their economics, and an approachable style. All infrastructure economists, regulators and policy makers should read it. Thoughtful business strategists and investors could also benefit from this book, which has the potential to considerably improve understanding and decision-making in some of the most important sectors in the economy.

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