Friday, 4 October 2019

Good stuff

Little did I know, when I got antsy the other day about where the electricity price review had got to, that Dr Megan Woods, the Minister of Energy and Resources, was only days away from publishing the review's final report and responding to it (all the relevant documents - government decision, Cabinet minute, final review report, and the earlier options paper - are here).

The review's got extensive media coverage so no need to reinvent the wheel here - in particular there's an excellent piece by Stuff's Tom Pullar-Strecker, 'A run down on the Government power plan', that ticks all the what-you-need-to-know boxes.

Overall the review team and the government have done a fine job. I don't find myself quibbling with much, even though some of the recommendations looked a bit counterintuitive at first. Banning "win back" counter-offers from incumbents - preventing them competing back, as it were - at first blush doesn't look supportive of the competitive process, but when you think about it a bit more it is necessary for competition to work at all in this area (the thought had crossed our minds when we made our switch). Similarly the ban on prompt payment discounts, which aren't the reward to consumers they appear but effectively act as regressive late payment charges on financially stressed households. The abolition of low fixed charge plans is in the same bucket: sounded like a good pro-consumer idea, turned out (among other things) to "unintentionally shift costs to households with low incomes and high electricity consumption" (final report, p62).

Increasing the ability of electricity retailers to hedge against price volatility is an especially useful idea. Normally both buyers and sellers of commodities like energy have a joint interest in a functional futures market ( a 'contract market' in the sector terminology): they both see value in price predictability. Less so in our energy sector, when the availability of price insurance helps challenger retailers compete more effectively with the gentailers' own retail arms. Effective retail competition needs an effective hedging mechanism, and if market-making in a contract market needs to be imposed on generators, so be it.

Both regulators in this area - the Electricity Authority and the Commerce Commission - get some raps on the knuckles, particularly for lack of consumer engagement. The final report said (p12)
A frequent complaint we heard from consumers was that neither the Commerce Commission nor the Electricity Authority – but particularly the latter – listened to, or took account of, their views. Consumers need to see regulators making a concerted effort to understand their points of view. Nothing beats meeting people in person. It was disappointing, therefore, that neither regulator attended the stakeholder meeting in Te Kuiti convened by The Lines Company at our request. Both would have benefited from hearing residents’ stories, as well as understanding their expectations of regulators – the chief of which is that they focus on consumers’ long-term interests.
Oops. It hasn't helped that on several other fronts progress has been too slow. It's understandable that the Minister is now getting impatient. On the contract market, for example she said that "I want to be assured the fragility previously observed in the wholesale market at times of stress is not repeated in future, and I will make it clear I do not want to wait for a “better solution” that might never be found" (decision paper, para 96). She noted that "The Electricity Authority has been reviewing transmission pricing for more than ten years" (para 102). And she's prepared to bypass the Authority if it doesn't get on with the review recommendations (see paras 34-5).

The Authority, and the Commission, are independent agencies as the Cabinet decision recognises, and can't be told to jump to ministerial whim, and in general I'm no fan of expanding ministerial discretion in an already micromanaged and over-politicised economy. But our policymaking and regulatory processes are too slow, and on this occasion a bit of holding feet to the fire doesn't seem amiss.

Two final points. The proposed new Consumer Advocacy Council for the electricity sector could, as the decision says (para 40) "potentially be extended to cover gas, telecommunications and other utility services ... This is because consumers of those services, which are increasingly bundled with electricity, are also likely to lack an effective voice". It's not just the consumer voice issue: it's the sit there and be ripped off consumer inertia issue, too, which is liable to be just as prevalent in those sectors and which, to be honest, no country has really got its head around. The Brits and the Aussies have been equally befuddled ('Have we got the same problems?'). An early task for the Council should be to reach for some industrial strength behavioural economics research.

And finally, as both the review and the government's response acknowledge, the energy hardship some households are experiencing isn't so much down to locally high electricity prices - the review said (p1) that "residential prices on average ranked 10th lowest among 35 OECD countries in 2017" - as locally inadequate incomes to pay them. It would be nice if this, and successor, governments showed the same urgency to get on with raising living standards as they have in reforming the electricity business ('Are we serious?').

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