PART IV

State of Monopolism and Competition in Certain Spheres of the Economy

of Ukraine

Comprehensive Reading

(Based on the Annual Report of the Antimonopoly Committee of Ukraine)

Unit 25

Natural Monopolies

The Draft Law of Ukraine On Natural Monopolies, to which the second reading was given by the Supreme Rada (Parliament) of Ukraine, defines that natural monopoly is the state of a product market which takes place when satisfaction of the demand existing on the market is more effective if there is no competition as a result of such technological peculiarities of the production that predetermine both the significant reduction in production costs in terms of a unit of product and the increase in the volume of production and when products (services) made by economic entities being subject of natural monopolies cannot be substituted, in the course of their consumption, with other products (services).

The following markets, in particular, can be considered as those of natural monopolies: markets of rendering services in the sphere of transportation of petroleum products, and other substances by means of pipelines; markets of transmission and distribution of electric energy; markets of the use of such units of infrastructure that insure movement of railroad transport of general use; markets of air transport control; markets of communications of general use; markets of centralized water supply, sewerage, and heat supply; markets of specialized services in the sphere of transport terminals, ports, and air- ports.

The existence and inevitability of natural monopolies are explained by the fact that gains insured by the availability of competition on those markets do not cover significant spending of the society for its introduction and maintenance because of the considerable capital capacity of subjects of natural monopolies.

Subjects of natural monopolies, however, due to their monopoly position with respect to which there is no threat on part of competition in the nearest prospects are not inclined to increase the volume of their services, to raise the quality and productivity of their work, to introduce innovations. That is why the increase in the demand for services of subjects of natural monopolies, as a rule, causes growth in prices.

In addition, as a result of the absolute monopoly position and of the simultaneous activities on monopolized and competitive markets, there are significant objective difficulties in terms of making the real assessment and the validity of costs paid by subjects of natural monopolies, setting the efficient mechanisms of exercising control over those costs, and defining the necessity and amount of investments etc.

Ex. 1. Read and translate the text.

Ex. 2. Answer the following questions:

1. What is natural monopoly?

2. Which markets can be considered as those of natural monopolies?

3. How can you explain the existence and inevitability of natural monopolies?

4. Why does the increase in the demand for services of subjects of natural monopolies cause growth in prices?

5. Where do significant objective difficulties arise as a result of the absolute monopoly position?

Ex. 3. Read the following false statements and correct them:

1. The products (services) made by economic entities being the subjects of natural monopolies can be easily substituted in the course of their consumption with other products (services).

2. Markets of specialized servicies in the sphere of transport terminals, ports and airports cannot be considered as those of natural monopolies.

3. The existence of natural monopolies covers significant spending of the society.

4. The demand for servicies of subjects of natural monopolies never causes growth in prices.

5. There have never been significant objective difficulties in validity of costs paid by subjects of natural monopolies as a result of the absolute monopoly position.

Ex. 4. Translate into Ukrainian:

Reforms in the sphere of the electric energy industry which began in 1992 have been carried out most consecutively. The twenty-seven joint-stock companies which operate on the markets of transmission of electric energy by means of local electric networks and on the markets of electric energy supply at a regulated tariff and one state enterprise, namely the Electric Company «Elektroperedacha» which operates on the national market of transmission of electric energy by means of main and interstate electric networks, (subjects of natural monopolies) have been established on the basis of the eight energy amalgamations which had simultaneously insured production, transportation, and sale of electric energy in the relevant territories. In addition, four energy producing companies were established on the basis of thermoelectric power stations, two energy producing companies were established on the basis of hydroelectric power stations, one state energy producing station was established on the basis of atomic power stations, enterprises of the building complex were separated, the work associated with the establishment of the State Enterprise «Energorynok» on the basis of the National Controllers’ Center on Electric Energy is to be completed in the nearest future.

The structural changes, the adoption of the Law of Ukraine On the Electric Energy Industry and of other normative and legal acts, the establishment of the regulatory body, namely the National Commission on Regulating Electric Energy Industry laid the foundation of the transition to forming wholesale prices for electric energy on a competitive basis.