yardstick competition

Two women sell pepper soup on the same street in Enugu. If one starts charging ₦3,000 for a bowl that used to be ₦1,500, customers simply cross the road to her neighbour, and she is forced to explain herself or lose business. That is competition doing its calm policing work.

Now think of the Enugu Electricity Distribution Company. There is no neighbour to cross the road to. If your area falls under their wire, you take what they give you, at whatever price and whatever quality of supply they decide, because building a second set of poles and cables across the same city to create a rival would be wasteful and almost impossible.

This is the problem regulators face with monopolies that exist for good reason, like power distributors, water utilities, or railway operators. There is only one sensible provider in a given area, so the usual trick of comparing prices with a rival next door will not work.

Yardstick competition is the workaround. The regulator, say the Nigerian Electricity Regulatory Commission, looks at how similar distribution companies in Kano, Lagos, or Port Harcourt are performing on cost, losses, and service, and uses that comparison as the ruler for judging any one of them. A company that performs worse than its peers without good reason gets pressured or penalised, even though it has no direct competitor breathing down its neck locally.

The United Kingdom's water industry runs on almost the same logic. Ofwat compares Thames Water, United Utilities, and Severn Trent against each other on efficiency and leakage, even though none of them competes for the same customer, because a household in Manchester cannot switch its water supplier the way it might switch phone networks.

For the ordinary person, this matters because it is often the only thing standing between a monopoly and lazy, overpriced service. It will not feel like a market, because it is not one, but it borrows the spirit of one.