Wolak on electricity reforms

April 22nd, 2014 at 2:00 pm by David Farrar

writes in the NZ Herald:

There is not a lot to like about residential prices in New Zealand.

According to data from the Ministry of Economic Development, average residential retail electricity prices have almost doubled since 2000. This had led to calls for drastic reforms of the industry to better serve the interests of New Zealanders.

This desire to “reboot” the electricity supply industry is understandable, but it is almost certainly not the best course of action. 

Frank Wolak is the economist and electricity expert whose earlier work is cited numerous times by Labour as rationale for their electricity nationalisation policy. His explicit rejection of their policy as undesirable, speaks volumes.

As a participant in many electricity industry restructuring processes around the world, one important lesson that I have learned is that all reforms start with significant unintended defects that can only be eliminated through a rigorous ongoing analysis of market outcomes and targeted regulatory reforms.

Unintended consequences may include running out of power, as is almost the case in California.

Many features of the current industry structure are consistent with international best-practice and a number of positive changes have been implemented since I completed my report for the Commerce Commission in 2009.

This is also a key point. Labour quote Wolak’s 2009 report, and ignore that there have been significant changes since then. This is oen reason why retail price increases are less than half under National, than occurred under Labour.

Wolak also has a number of suggestions as to how to improve the current regulatory framework to benefit consumers more. I agree with him that the focus should be on making competition work better – not on destroying the competitive generator market as Labour proposes.

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33 Responses to “Wolak on electricity reforms”

  1. CJPhoto (227 comments) says:

    National should launch a new policy called KiwiPower based on Wolaks recommendations. It would make for a hilarious debate with the Greens/Labour.

    If fact for comic relief, every new National policy should also have ‘Kiwi’ at the start of the name but thats getting off point.

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  2. ross69 (3,652 comments) says:

    there have been significant changes since then

    If by significant changes you mean significant price rises, you’d be spot on.

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  3. ross69 (3,652 comments) says:

    “Significant changes in how the industry operates and the government regulates it are necessary to ensure that consumers realise the full benefits they were promised from restructuring”. ~ Frank Wolak

    Alas the National Party does not wish or intend to make any “significant changes”.

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  4. igm (1,413 comments) says:

    ross69: Did you come back before your benefit was stopped?

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  5. Ross12 (1,456 comments) says:

    As I mentioned on W/O earlier today , I recently looked at my mother-in-law’s power account. She is with the GreyPower electricity supply scheme ( through Pulse).Their account is very detailed ( she is a low power user) — from it , it is easy to see the actual energy component of the bill is only a third of the total. The other two thirds is lines company charges and various administration charges. So the real issue is NOT with the generator but with lines companies and retailers. The Labour/Greens proposal will have no effect on that.
    My own power bill will have its daily connection rate increased from 87c/day to $1.90/day from next month. Over the weekend Shearer was going on about the large % increases coming through –it is not from the generators.

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  6. mjw (400 comments) says:

    There is pretty clearly a price bubble created from the enforcement of market power in electricity. All players are allowed to charge at the marginal rates of new generation so that renewables can be affordable. This results in windfall gains to existing suppliers. In many cases these windfall cash flows are sold off at ridiculously cheap rates to private owners. This month’s fire sale of Genesis, at an absurdly high yield, is a case in point.

    However, the industry is its own worst enemy. It assumes that demand is inelastic. That may be true in the short term, but it is unlikely to be true in the long term. Eventually demand patterns will change, and the bubble will pop. There will be a huge crash in the value of electricity assets due to oversupply, and companies that have taken on too much leverage to pay dividends will go bust.

    Not sure when this will happen. Probably at least 5 years, maybe as many as 20 years. Meanwhile, electricity prices represent a retail price bubble that supports an asset price bubble. It represents a systemic risk to the NZ economy. Far better to moderate prices and dampen the bubble.

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  7. mikenmild (11,779 comments) says:

    I’m confused. Does DPF support Wolak’s proposed approach?

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  8. Adolf Fiinkensein (2,924 comments) says:

    Milkymould

    “I’m confused.”

    Situation normal.

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  9. mandk (1,020 comments) says:

    ross69: “If by significant changes you mean significant price rises, you’d be spot on”

    Under Helen Clark consumer prices for electricity rose by more than 60% in 9 years.
    Under John Key consumer prices for electricity have increased by less than one third of that in five and a quarter years.

    That makes you either deluded or stupid. Pray tell us, which is it?

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  10. mandk (1,020 comments) says:

    mjw: “It assumes that demand is inelastic”

    It may depend on which user group you are talking about, but fyi the price elasticity of demand for residential users is between -0.1 and -0.2. You are correct, though, that the long run elasticity is likely to be different.

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  11. mjw (400 comments) says:

    mandk – you are stuck in the past. The real question is NOT what Helen Clark did, but rather what David Cunliffe will do. He has a successful track record in busting market power. In contrast, John Key has a track record in selling monopolies to Sky City. Actually, it is amazing to compare the reforming record of Labour (GST, Free Trade with China, Kiwisaver, the Cullen Fund, busting Telecom) with that of National. What have National done again? Oh yes – they had a fire sale this month, selling off the family silver for peanuts. And they are in bed with Sky city. And they have nothing to do with Oravida at all …

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  12. Elaycee (4,410 comments) says:

    mjw: …..a track record in selling monopolies to Sky City.

    Really? What monopoly was sold to Sky City?

    Do tell.

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  13. ross69 (3,652 comments) says:

    Households will be socked with power bill increases of as much as 24 per cent next month…

    http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11216031

    Consumers will be absolutely delighted that electricity prices are going up a mere 24% rather than 50%, eh mandk.

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  14. mjw (400 comments) says:

    Elaycee – there are no new casino licenses permitted under the Gambling Act. Sky City has a monopoly in Auckland, and that monopoly has been extended for 35 years in return for a convention centre.

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  15. mandk (1,020 comments) says:

    mjw: “In contrast, John Key has a track record in selling monopolies to Sky City.”

    I presume you are referring to pokies, or gambling more generally. Sky City doesn’t have anywhere near a monopoly in either.

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  16. Bob R (1,393 comments) says:

    ***According to data from the Ministry of Economic Development, average residential retail electricity prices have almost doubled since 2000. ***

    Privatising a natural monopoly is generally a bad idea, no?

    http://en.wikipedia.org/wiki/Natural_monopoly

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  17. Bob R (1,393 comments) says:

    ***According to data from the Ministry of Economic Development, average residential retail electricity prices have almost doubled since 2000. ***

    Privatising a natural monopoly is generally a bad idea, no?

    “A monopoly is a firm which is the only one producing and selling a particular product. A natural monopoly is a monopoly in an industry in which it is most efficient (involving the lowest long-run average cost) for production to be concentrated in a single firm. This market situation gives the largest supplier in an industry, often the first supplier in a market, an overwhelming cost advantage over other actual and potential competitors, so a natural monopoly situation generally leads to an actual monopoly. This tends to be the case in industries where capital costs predominate, creating economies of scale that are large in relation to the size of the market, and hence creating high barriers to entry; examples include public utilities such as water services and electricity.[1]”

    http://en.wikipedia.org/wiki/Natural_monopoly

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  18. mandk (1,020 comments) says:

    @ ross69,
    Telling us that prices are going to go up by as much as x% doesn’t actually provide much useful information.

    It’s a bit like saying that some labour supporters have IQs of as much as 80.

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  19. ross69 (3,652 comments) says:

    Telling us that prices are going to go up by as much as x% doesn’t actually provide much useful information

    Yet you did exactly that by mentioning Helen Clark, who’s been out of politics for many years. :)

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  20. Elaycee (4,410 comments) says:

    @mjw: For the record:

    In 1989, the (Labour) Government of the day decided there would be casinos in NZ and many parties ‘tendered’. In the case of Auckland, the tender was won by Harrah’s Entertainment – but I expect you’ll know that.

    The current statutory moratorium on casinos was enshrined under the Casino Control (Moratorium) Amendment Act 1997, extended in 2000 by the Casino Control (Moratorium Extension) Amendment Act 2000. The moratorium was carried forward into the Gambling Act 2003. This repealed the Casino Control Act 1990 and prohibited indefinitely further venue licences being issued.

    Between 1990 and 1st Sept 2004, casinos were ‘controlled’ by the Casino Control Authority and after the Gambling Act 2003 was passed, all casino / club / pub gambling was merged under one banner (so to speak)… the DIA and the CCA was dis-established.

    In the case of Auckland, Sky City offered to build a new (and much needed) convention centre in the Auckland CBD at no cost to the taxpayer of NZ and no capital cost to the ratepayer of Auckland. And thank goodness, common sense prevailed and this Government agreed to the trade off – SCEG builds the convention centre and in return their existing licence term was extended – by this Government.

    A total no-brainer decision. And not a decision that involved any ‘sale’ of any ‘monopoly’ to SCEG (or anyone).

    Sorted.

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  21. Albert_Ross (311 comments) says:

    Bob R, “electricity” is not a single industry or commercial activity. Electricity distribution is a natural monopoly. Electricity generation and electricity retail are not. These activities do not have to be, and most often are not, carried out by the same entities.

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  22. mandk (1,020 comments) says:

    “Yet you did exactly that by mentioning Helen Clark, who’s been out of politics for many years”

    No, I didn’t do that.
    Are you one of the labour supporters whose IQ isn’t as high as 80?

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  23. Lance (2,719 comments) says:

    Yes Ross69
    We all know power transmission across 2 large islands has no costs associated with it whatsoever. Cook straight cables don’t need replaced etc.
    So do you actually think it should be govt policy to deliberately neglect the national grid?

    Just a wee hint, do quick Google on “Pole 3 Cook Strait” and see what a bit of enhancement cost on the Cook Strait cable system alone.
    Not quite a Billion dollars but not that far off it.

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  24. Fisiani (1,048 comments) says:

    Shane Jones stepping down from politics

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  25. OneTrack (3,237 comments) says:

    bob r – “Privatising a natural monopoly is generally a bad idea, no?”

    What natural monopoly?

    Contact?
    Genesis?
    Meridian?
    Mighty River?

    If you dont like one company because it’s prices are too high, you can change to another.

    Or you could vote Labour/Green and those companies could be effectively merged into a legislated monopoly (NZPower) and you can buy your power from it. If you dont like the price, or terms, or whatever, you are screwed. You would have no other choice. And you will be at the mercy of rapacious politicians who will be able to ream you as a cash cow ( I am thinking Helen Clark and Labour between 2001 and 2008 ).

    But, if you want to vote for that, go for it. It worked for Russia.

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  26. mandk (1,020 comments) says:

    @ Fisiani,
    Maybe this is one for GD, but the idiots over at The Standard are rejoicing, despite the fact that Jones was the only one in the Labour caucus who resonated with the electorate.
    Nonetheless, it is very good news (for National).

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  27. mjw (400 comments) says:

    Elaycee said: “Sky City offered to build a new (and much needed) convention centre in the Auckland CBD at no cost to the taxpayer of NZ and no capital cost to the ratepayer of Auckland”

    The cost to the taxpayer is conservatively estimated in the Korda Mestha report at $400+ million EXCLUDING the social impact costs of additional gambling.

    To say this convention centre was ‘free’ or ‘at no cost’ is a clear statement that the victims of gambling do not count, and that the Korda Mentha report should be ignored.

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  28. Tictactoe (32 comments) says:

    “My own power bill will have its daily connection rate increased from 87c/day to $1.90/day from next month.”

    This could be explained by the fact that some areas are needing a huge capacity expansion, in particular, Auckland. So charges are going up in order to cover the capital expenditure of a new power line into the city from the south.

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  29. Elaycee (4,410 comments) says:

    mjw: The cost to the taxpayer is conservatively estimated in the Korda Mestha report at $400+ million EXCLUDING the social impact costs of additional gambling.

    Oh, bollocks.

    I have linked to the KordaMentha Report (below) and assume it is the Report you mean. Look at Page 7… note there is zero cost to the Taxpayer and $402.3 Million cost to Sky City. And there is no mention in the Report at all of any ‘social cost’. Nil. Nada. Zip. And I doubt KordaMentha would write a second Report contradicting everything contained in this Report for MBEI.

    Which only leaves one conclusion: You’re talking total crap.

    Are you a member of the Gweens?

    http://www.med.govt.nz/sectors-industries/regions-cities/pdf-docs-library/nz-international-convention-centre/NZICC-report.pdf

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  30. mjw (400 comments) says:

    Elaycee. See Table 3.1. It contains estimates of the value of the regulatory concessions and license extensions. These are opportunity costs, rather than out of pocket costs, but costs nonetheless.

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  31. Johnboy (17,018 comments) says:

    Why should poor people feel they are entitled to cheap electricity?

    They should generate their own by rubbing their frizzy hair together!

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  32. Elaycee (4,410 comments) says:

    @mjw: It contains estimates of the value of the regulatory concessions and license extensions. These are opportunity costs, rather than out of pocket costs, but costs nonetheless.

    What?

    Table 3.1 actually refers to ‘Hurdle rate NPV (Net Present Value) summary’… and you interpret this to mean the taxpayer is forking out “$400+ Million”?

    [gulp] Oh-kay….. 8O

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  33. mjw (400 comments) says:

    Elaycee – yes, if you know how to read the entries in the table.

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