Friday 11 October 2013

A Failed Market?

I am puzzled by this opinion piece by Rod Oram in last weekend's Sunday Star Times. Two quotes that caught my eye are the following:
Electricity demand fell 2.5 per cent last year but retail electricity prices rose 3 percent; over the past five years, demand has fallen 1.6 per cent but retail prices have risen by 27 per cent, according to figures released by the Government last week.  
Only a failed market delivers such perversely uneconomic outcomes. 
And then
Meridian's ... earnings are the most volatile because it is so dependent on rain to drive its hydro plants. ....Fiscal 2012 was an exceptionally dry year. Transpower's long-term data for New Zealand's hydro assets show that dry years are becoming more frequent and more severe. 
I can ony guess that the Government has not released figures on some careful instrumental variables regression estimate of NZ demand curves, but rather has published figures on the quantity demanded. So what I take from the two quoted paragraphs is that supply curves have shifted up, price has risen and the quantity demanded has fallen. Isn't that exactly what ECON 101 S&D would predict? How, exactly is this evidence of a failed market? Furthermore, there have been only slight changes in the structure of the market over the past five years. How does a level of market structure explain a change in prices and quantities?

Now the electricity market presents its own unique characteristics that make market design difficult, and any system will have imperfections, so certainly evidence can be found to suggest that the market is not perfect; the difficult policy question is whether alternatives would be better. But evidence consistent with ECON 101 S&D theory is not the place I would be looking to suggest that a particular market has failed. What am I missing?


  1. Remember this is the same Rod Oram who Sunday on Q&A was arguing, seriously, that a higher minimum wage would have no cost to employers.

    Because everyone getting the increase would be magically happier therefore more productive.

  2. I, on the other hand, am puzzled by nearly every article Rod Oram writes.

  3. He could just be making the argument that things should be getting better over time, not worse—better measured by supply curves shifting right (=more productivity).

    That's how I read it, without knowing much of the context.

  4. Exactly the same thing in Victoria: everyone talking demand decreases while we've had huge retail price growth for electricity. I think this must be an energy-market analyst thing.

  5. THe thing to remember about almost all financial commentators, especially 'skilled and trained' journalists is typically know feck all about how markets work and the fundamentals of economics.

    As it happens most of the increase in retail prices has been the price of distribution (local lines companies) and not generation - also Transpower has been ramping up its prices in recent years...

    Meridian runs long on generation (produces more than it requires for its own customers) because it is subject to dry year risk... so it has capacity to spare 'in case'...

    Sigh... Oram was described by a former colleague to me as a 'genuinely nice man'... if that is the best one can say about his skills then don't expect anything he writes to make any sense.

  6. There are some pretty complicated dynamics in delivered electricity prices, including the fact that almost half a residential bill is monopoly lines and transmission charges which don't really adjust just because demand falls. In addition the price statistic collection in electricity is poor. For example, most of the stats are related to reported prices, as such they miss cash or other inducements. The EA is looking into how it collects info that is more representative of what customers actually get.

    Having said all of that, competition is okay, and tends to be below the line, door knocking etc. The competition is therefore quite targeted. The wholesale market end is very competitive, industrial and commercial quite competitive and mass market in a relative sense the least. The overall market and pricing is complicated and this adds to costs, meaning that effective margins in mass market are quite small.

    There are a number of design issues that could be addressed, but it is not always clear what will be a winner and what will not.

    The "market" has delivered new plant additions over the last 10 years, with a mix of fuel sources and all funded by internally generated cashflow and debt. Old plant is being withdrawn when it is not economic and supply is being maintained. Sounds like a relatively well functioning market to me.