A point from Layton’s electricity market discussion

Brent Layton at the Electricity Authority wrote this piece (or here if that isn’t working) discussing the Labour and Greens power market policy.

I don’t know enough to comment on the specifics – outside of a recognition that the benefit to consumers being mentioned is real dodge.  All the parties say this sort of rubbish, “you will get $XXX in your pocket with no ramifications” and this vexes me – I don’t take lies and half truths particularly well.  But in terms of the specific impact of the policy, and the policy settings, I am in no way qualified to add to the debate 🙂

Now in terms of the policy, seeing these comments by economic rock stars like Brent Layton, Lew Evans, and Seamus Hogan at Offsetting (*,*) means I have set my priors such that the policy doesn’t sound like a good idea – but compelling research could see me switch sides!  I would note that I don’t use the term economic rock star lightly, so they do have a significant impact on the beliefs I have around the effectiveness of the policy regime. [Note:  I should have placed down the arguments on the other side – although I had thought they were a bit more indirect, I should have still linked to them.  Here we have John Small, and here we have Geoff Bertram – I have a lot of time for these guys but I’m not sold on the historic cost argument].

But there was something I can take out of this that I’d like to say.  Constantly, Brent Layton mentions the “long-term benefit of the consumers”.  This is the true underlying purpose of the Electricity Authority, and the central area of interest for government regulation AS WE SPEAK – economists in these roles are looking at the trade-offs involved with policies, given this underlying target.  Layton is saying that the plan is a bad one because, when he has specifically analysed those sorts of policies in the past they were “detrimental to the long-term benefit of the consumers”.

He was saying, when he’s done detailed analysis in the past – he’s found that this sort of policy actually leaves people worse off, and yet it is still explicitly being sold as offering this magical benefit based on extremely partial analysis.  Economists do this for a reason – as I wrote when I discussed rebalancing:

Economists are supposed to discuss trade-offs, and this involves making the costs to those who don’t have loud interest groups (such as the disparate interests of consumers) apparent

This is an important issue, and I like the way organisations like the Commerce Commission and Electricity Authority are very clear about this.

And deep down, I am sure most politicians, pundits, and people who are interested feel the same sort of way – they just don’t realise that economists are trying to understand these costs and changes in distribution that occur when policy is put in place!  Answers are far from simple, and even when many of these rock star economists have done piles of modeling, explaining the results to people who haven’t invested in the “language and underlying body of knowledge” (virtually everyone) is incredibly hard.

In this way, I just wanted to highlight the focus on consumer welfare, how that is a central part of what economists looking at policy are interested in, and how that is a great way for explaining stuff to people – even other people who have an economics background but aren’t in the specific industry of interest like myself 😉

  • VMC

    Thanks for the reference to Lew Evans article – very clearly writen.

    • Yes, it is a really good article on a pretty difficult issue! Really glad he did that!

      • Elinor_Dashwood

        Gosh, that Lew Evans doesn’t pull his punches does he?! If he were a real rock star he would smash a lot of guitars that’s for sure.

  • Andrew R

    My understanding is that the Layton article was in defence of criticism by economist Geoff Bertram. And given Bertram’s long experience with electricity/energy economics (remember the Coalition for Open Government) what he says is worth listening to. There is also the factor of Layton’s self interest in defending his Authority’s actions.

    • I’ve read both Layton’s article and Bertram’s articles – and I can’t really agree with your comment.

      The Layton’s article just discusses the policy itself, it only has a small section on Bertram’s specific idea about “fair pricing” (which in itself is only loosely related to the L-G policy). As a result, this isn’t a fair interpretation of the Layton piece at all!

      Furthermore. from an outside perspective from a non-expert here, wasn’t Bertram’s entire point about the idea of pricing based on historic costs – without any reference to true marginal pricing, opportunity cost, or the incentive to invest in infrastructure? As someone schooled in the very basics of economics, this doesn’t make much sense! Crap on about Hicks all you want (I love reading over old Hicks papers), but historic pricing appears viciously allocatively inefficient, and basing it on “equity considerations” ignores the ability to directly transfer income without messing with allocative efficiency.

      On top of all of this, Layton has spent the vast majority of his career analysing and discussing energy policy – when Bertram hasn’t. His focus has been development economics, combined with forays into a number of other fields (methodology, growth, energy, macro). I do not view him in the same league when it comes to energy economics as the names I’ve mentioned here, and I think this is a fair interpretation. And trust me, I think Bertram has a damned good knowledge of methodological and policy issues (which I massively appreciate and respect) – but this is very different to specialising in an industry and spending decades analysing the specifics and different types of models of it!

      Furthermore, Layton said similar things before working for the EA (when he worked for NZIER – who I will note is one of my main competitors!). Furthermore, Lew and Seamus get nothing out of defending the status quo – if anything, they could demand more in consulting fees if they offered a “magically better alternative”. Even so, they are suspicious of the alternative policies on offer.

      OK, even if we ignore all of this – what is the point of my post? That communicating our focus as being in the long-term interest of consumers is a good way to go. The only person I see willing to actually use this criterion is Layton, and even though his ex-employer is a direct competitor to me, I find it necessary to give him credit for this. What does this suggest 😉

      • OLO

        “Furthermore, Lew and Seamus get nothing out of defending the status quo”

        Not that I have any reason to think it has affected Evan’s article, but be aware that it was written under the ISCR banner. Contact and Meridian are both ISCR corporate members (http://www.iscr.org.nz/n43,36.html) – which I take it to mean they frequently contract ISCR to perform analysis.

    • Oww, although if you are implying I should have linked to Bertram and Small in this piece – you are completely correct. That was my oversight, and I’ve corrected it now 🙂

  • john small

    Thanks for the links Matt. Just to clarify, my position is that the policy needs work before it can be properly assessed.

    The lack of detail may partly explain why all of these “anti” links miss the point in places. Brent’s discussion of “pay as bid” markets is a good example – this not part of the policy as I read it. Lew has a nice discussion of the value of water but avoids acknowledging that generators get water for a zero price (i.e. free). Seamus can’t imagine that one could reduce average bills while keeping prices efficient at the margin, though that is exactly what the Greens are proposing.

    Its no surprise that lots of people hate this idea. Thats all the more reason to try to discuss it in a disciplined way.

    • Aha good comment – and to be honest that is also how I largely read your post on frog blog! Cheers!

    • Seamus Hogan

      John, as I just noted in reply to your comment at Offsetting, I can easily imagine reducing average power bills while keeping prices efficient at the margin, I just can’t see the point, and I see nothing in the supporting discussion of the single-buyer model that suggests the proposers are likely to set a marginal price anywhere near marginal cost.

      And yes, it might be *possible* to have a single buyer model that avoided most of the problems that people have raised with the model, but the problem is not that the details have not been released yet; it is that they clearly haven’t even been thought about. And yet, the policy has been released. Hence the angry reactions.

      • john small

        Are you saying that the anger is because the whole policy is not fleshed out Seamus? If that was right, wouldn’t the angry folks be screaming for more information instead of comparing the whole idea to [insert communist country here]?

        It would be very nice if innovative proposals did emerge fully formed at the time of announcement, but that doesn’t often happen (eg UFB, charter schools) and anyway there can be benefits in allowing scope for modification. This is standard practice in regulatory settings – draft decisions are followed by submissions that often change the outcome for the better.

        • Seamus Hogan

          I am paying no attention to the political responses to the political policy announcement (which takes out most of the compare-to-Albania-type comments. So maybe “angry” is not the right word. But I am saying the reason for the exasperated responses is not that whole policy is not fleshed out, but that the details clearly haven’t even been thought about, or alternatively, have been thought and hidden.

          • john small

            I wonder whether that means we are both in Matt’s camp of having an open mind on whether something along these lines could be beneficial.

            • I am sure you both are. I’d note that only one thing wound me up – and that was having “policy benefit” numbers that appeared to be very inappropriate, and used as a marketing device. The usual “missing costs” and “weakly thought out benefits” were on show all through it – and many of my friends who aren’t economists were “focused on” the annual power bill cut, as from what they could tell this is what the policy was … nothing more!

              This of course gets me inherently wound up at any piece of political advertising, I mean policy release, so it can’t be helped 😉

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