Wednesday 15 July 2009

What do alcohol and electricity have in common?

I have been spending most of the past two weeks reading the Wolak report for the Commerce Commission into electricity pricing, in preparation for a presentation on the report next Monday at the Institute for the Study of Competition and Regulation in Wellington. This was the report that found that electricity generators had earned $4.3b from exercising market power since 2001.

I'll blog a bit next week on my take on the report, but an immediate reaction was a bit of deja vu after following Eric and Matt's work on the Berl report. In both cases, we have a public institution commissioning an independent report that produces an implausibly high number that is then put out into the public domain. Both reports were subject to external review prior to being released. And both have some questionable aspects to say the least that did not seem to be spotted by the external reviewers.

I wonder if a better approach to publically commissioned reviews of this nature would be to change the order: Release a preliminary version of the report, seek public comment, and then submit both the draft and the public feedback for external review.


  1. I'm not so sure your proposed change would help much. In short, the signal to noise ratio in consultancy reports is just too low. There are a hundred reports that come out for every one that filters its way into policy. I'd seen the BERL report a while before Palmer started cited it but didn't think it was worth the time and effort of going through since it seemed unlikely to have any policy consequence. It was only after it looked like it was going to affect policy that it looked worth the effort.

    I'd wonder instead about having all RFPs and reports run through Treasury. Treasury wouldn't have to comment on any of them, but if something twigged someone's radar as being too far out (a costs-only study, for example), Treasury could ask about it. They'd also have a better idea of where bad reports are more likely to turn into costly policy mistakes.

  2. The Wolak report 6 separate docs, 16 meg in size and 515 pages in total. Its a big read, so you've done well to read it in 2 weeks.

    The Electricity, Gas and Water industry's which I assume is relatively dominated by Electricity had its current price Gross Output, valued by Stats NZ to be $10.7 bill in 2005 ( so a $4.3 bill excess rent from lack of competition over a 6.5 year period survived the "smell test". The periods aren't the same, but current price gross output from 2000-2005 was $55.9 bill

    It will be interesting to see you take on what came out of the ComCom.

    James Hogan

  3. Looking at the media release from the Commerce Commission on its electricity markets investigation, this statement stood out for me,

    "By comparing the actual wholesale prices with hypothetical competitive benchmark prices, Professor Wolak estimated that the wholesale prices charged over the period 2001 to mid-2007 resulted in an extra $4.3 billion in earnings to all generators over those that they would have earned under competitive conditions. This suggests that wholesale prices were, on average, 18 per cent higher than they would have been if the wholesale market had been more competitive, and the gentailers had not been able to exert market power."

    But what use is a comparison to a perfectly competitive market in this case?

  4. I see Grey Power is pretty keen to get the extra $4bn that has been "stolen" repaid.

    Seems like the admin (and court) costs of organising any refund (which presumably in the interests of equity and fairness would have to be adjusted according to how much power consumers had bought rather than a flat sum) would eat up a lot of the money anyway..