Thursday, 28 May 2015

Another good seminar from LEANZ

Last night we had the latest Auckland seminar from the Law And Economics Association of New Zealand (LEANZ): Richard Meade's "Should Customer-owned Monopolies face Different Regulation than Investor-owned Firms?", based on his PhD work at the University of Toulouse. Richard, before his studies at Toulouse, had been at Victoria's Institute for the Study of Competition and Regulation (ISCR), and is now at AUT.

It was an interesting evening. I learned, for example, that New Zealand is by no means unusual in having a large number of consumer-owned electricity lines businesses, and indeed that the customer-owned or cooperative model is common internationally in other utility sectors as well, such as water and telecoms. The general motivations seem to be a consumer defence mechanism against the market power of a monopoly, and undertaking infrastructure investments in areas that would not be commercially viable for an investor-owned utility. Ideology likely plays some part in some places, but the widespread adoption of the consumer owned model is generally more down to commercial practicalities.

In New Zealand, 12 of the lines businesses have been exempted from the price-and-quality regulation they would otherwise have had, because the main incentive that customer owned lines businesses operate under (low prices for the customers) does a perfectly adequate job of keeping the monopolies to heel. Exemption from regulation is also reasonably common overseas, though not a given. Richard's theoretical work (and he kindly spared us the maths you'd expect from a Toulouse economics PhD) found, however, that in some cases a regulator can't rely completely on the consumer ownership to achieve regulatory objectives by itself, especially if an objective is to nudge the business towards an optimal price/quality combination: consumer ownership will generally deal to price. but may not hit the price/quality combo that consumers might want.

That's probably right: one thought I had was that governance of cooperatives tends to be a political process with elected boards (the bit of Part 4 of the Commerce Act that allows for exemption of consumer-owned lines businesses includes a requirement for elections by the consumers), and that can give rise to political pressures to keep prices down today even if it jeopardises needed future investment tomorrow. The longer term quality of the service may not get a good enough look in.

Richard's presentation on the challenges that regulators face in trying to hit cost efficiency and quality targets simultaneously was also interesting. The latest round of the Commerce Commission's default price/quality paths for the lines businesses includes an automatic mechanism whereby companies' allowed revenue gets a bonus or a deduction depending on whether they beat or miss certain quality targets. I gathered from Richard's presentation that this puts us up somewhere near the regulatory policy frontier when it comes to using CPI - X incentive regulation to steer towards desired quality outcomes as well, but also that the theory and practice of quality regulation is still very much in its infancy.

Another excellent evening: if you're not a member of LEANZ, you should think of joining up, as it depends, as a charity, on members' fees to keep these valuable seminars going, or supporting it in other ways, for example by giving a presentation yourself (and yes, yes I have, which I summarised here). LEANZ also depends on the generosity of a variety of businesses so thanks to Gary Hughes from Wilson Harle who did the introductions (Ed Willis from Webb Henderson would have but couldn't make it) and to Ross Patterson of Minter Ellison who provided the premises and the refreshments afterwards.

4 comments:

  1. Thanks for an interesting post Donal.

    I have recently been wondering why consumer-owned lines businesses give money back to their consumer 'shareholders' in the form of a dividend or rebate (eg http://www.aect.co.nz/aect-dividend/). Surely, charging prices high enough to generate a profit that is then returned to those paying the high prices involves more waste (deadweight loss and admin costs) than just setting lower prices to start with. The answer may be that trusts and trustees have political motivations, as you say.

    That is why I have my reservations about these points:

    "the main incentive that customer owned lines businesses operate under (low prices for the customers) does a perfectly adequate job of keeping the monopolies to heel."

    "political pressures to keep prices down today even if it jeopardises needed future investment tomorrow."

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  2. Thanks for the comment. I think you're right, the trustees get more kudos from saying 'prices would have been X, we saved you Y, here it is' than setting lower prices in the 1st place. They can show a 'result', even if it is mostly a money-go-round. And it makes it harder for critics - potential political rivals - to mount a case.
    For me the politics around deferred/delayed investment is a real issue, though you see it more in local authorities than in utility trust - the guy who says "I'll freeze the rates" gets elected, the (honest) guy who says "the sewers/roads are crumbling and here's the bill" doesn't

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  3. Thinking about membership of LEANZ I would say it useless if you're in the South Island. I was thinking of putting a motion at the next AGM to change the name to the Law and Economics Association of the North Island. It would at lest have the advantage of being accurate.

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  4. That's a very good point - never thought of that before, and you're right. I'm not even sure Auckland gets its fair share, either: LEANZ is rather Wellington-centric, which I suppose is mostly down to the regional concentration of Treasury/RBNZ/ComCom/MBIE et al. At least the NZAE makes a deliberate effort to get away from Wellington.
    That said, in my experience LEANZ is open to ideas for presentations so if you've got something you think would be a goer in ChCh, give it a go.

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