Thursday, 27 September 2018

As expected

The NZME/Fairfax Court of Appeal judgement is out and contained few surprises.

The Court had been widely anticipated to rebuff the appeal against the Commerce Commission's refusal to authorise the proposed merger of NZME (the Herald, radio stations, and a herd of other North Island media businesses) and Fairfax (DomPost, Press, S-ST, herd of other media things nationwide). So it did. Rather, the interest was always going to be in what it said about the Commerce Act and how it is supposed to operate.

In particular, was the Commission allowed to count non-economic things in the balancing of benefits and detriments that goes on in a merger authorisation? In this case, the big non-economic detriment was the social loss of media plurality (a very large share of the take on the news would be in one pair of hands).

There was also a likely degradation of the quality of journalism (due to the merged entity laying off journalists) which was also treated as a non-economic detriment. That always seemed odd to me, as a loss of product quality is easily accommodated within the usual economic framework. But never mind: what did the Court say?

It said, count all benefits, count all detriments, whether occurring in the markets affected or not, and whether economic or not. Completely sensible. Key bits (footnotes omitted here and later):
[69] ... The High Court held that the Commission has jurisdiction to consider a loss of plurality resulting from the transaction. It accepted that out of market considerations may seldom arise and the Commission may be susceptible to challenge on the merits if it takes them into account, but as a matter of construction Parliament cannot have intended to exclude such considerations where a proposed transaction is likely to cause them. We agree generally with these conclusions ...
[71] ... Section 3A further presumes that efficiency gains may benefit the public and prescribes that regard must be had to them when assessing public benefit. But as a matter of construction the Act treats efficiency as a subset of public benefit; put another way, efficiency is a mandatory consideration but others are not excluded. To paraphrase AMPS-A (HC), efficiency matters but it does not exhaust society’s interest in the  transaction ...
 [73] ... the Act is not exclusively concerned with efficiency but rather allows it to be balanced alongside other public benefits that may include anything of importance to the community as a whole. Nothing in the legislation requires that public detriments be defined less comprehensively. The identification and weighting of public benefits, including efficiency gains, and detriments is left to the Commission’s judgement.
Perhaps sarcastically, along the way the Court said at [61] that the Commission must have been doing it wrong all these years when it had already been counting a whole bunch of non-economic consequences - "reduced pollution, health benefits of breastfeeding, safer handling of hazardous substances, reduced stigma for psychiatric patients, and social effects of plant closures".

There was one interesting thing in the part of the judgement dealing with balancing benefits and detriments. While it may be tempting, for the Commission or for the merger parties, to chuck in low probability outcomes with high impact - "cure for cancer", "world peace", "Armageddon", you get the idea - you can't do that. As the Appeal Court said (rapping the High Court's knuckles, though otherwise affirming where the High Court had got to):
[92] In our opinion the High Court erred to the extent that it took into account what it considered a remote risk that a single owner would exploit the merged entity for political purposes. We agree that even a remote risk of this kind is a matter of public concern. Post-transaction, NZME’s substantial presence in relevant markets would create a vulnerability that ought to worry policymakers. But unless the risk is thought “likely” it should not enter the balance ...
Had the Commission and the High Court got the facts wrong? No.
[134] We consider that quality and plurality detriments are very likely to result from the transaction. We have examined quality effects first ... We agree with the High Court that quality detriments are very likely and substantial. We consider that they are sufficient in themselves to outweigh the transaction’s benefits.
[135] Additional plurality losses are also very likely and substantial. We agree with the High Court and the Commission that plurality is a characteristic of media markets that is vitally important to the community. We also agree with the High Court that the loss of plurality attributable to the transaction would very likely be irreparable ...
[137] In the result, we find that detriments clearly outweigh benefits, and not by a small margin. It follows that authorisation was properly declined 
My overall take? The jurisprudence has landed in a good place. If a merger has a mix of good and bad stuff, it may get messy: as the judgement says at [80], "We accept that non-economic detriments may complicate merger analysis and introduce an additional element of unpredictability, which is undesirable". But that's the way it is: "Some measure of uncertainty is inherent in the legislative decision to permit authorisation on widely-defined public benefit grounds ... Parliament made efficiencies a mandatory consideration but it did not exclude others or say anything about the weight to be assigned to them".

So count them all (excluding the unlikely ones) best you can, and balance them. That aligns economics, the law, and common sense. Not a bad day's work by the Court at all.

Wednesday, 26 September 2018

We take the plunge...

...and in the interests of scientific inquiry our household has a go at changing electricity retailers.

Time, in short, to stop being the competition equivalent of an unmarried marriage counsellor, and actually use the tools available to increase competition in electricity retailing.

We haven't been averse to switching in the past, but I'd got disillusioned by the first wave of retail competition. The phone would go - it was usually telephone marketing then - and we'd get an offer. Of sorts: a lower fixed daily rate but a higher cents per unit usage rate, or a lower cents per unit usage rate and a higher fixed daily rate. No offer at that time was unambiguously better than your incumbent's tariff, with lower fixed and lower usage rates. You were reduced to getting out a calculator and figuring out whether you'd actually be better off.

So we ended up in the large number of people who didn't switch - somewhere between 400,000 to 750,000 households, according to our recent Electricity Price Review - and helped provide a captive base for the retailers to exploit. As this graph from the Review shows, the gap between the best and worst price plan, and the gap between the best plan and the incumbent's in a a particular area, have been widening, suggesting (Review, p38) that "those consumers who don’t or can’t easily shop around are paying more and more than they need to".

It's been a bit of a mystery - in the UK, in Australia, here - why consumers just sit there and apparently let themselves be exploited. You can't - and shouldn't - ever rule out the possibility that their decisions are entirely rational: when a lot of people do something, there tends to be a reason. But equally the conventional wisdom is more down the lines of low switching reflecting some form of problem in the switching market.

So I set out, with our sample of one, to see if I could figure out what it might be.

I went for Consumer's Powerswitch though I could as easily have used the Electricity Authority's What's My Number. It went easily enough, though I discovered two little wrinkles.

One was that our incumbent - who I'll call Oldco - didn't make it obvious what pricing plan we were currently on (unlike our broadband or mobile suppliers, who do). I figured it out from the wording of the charge for unit usage, and by matching our charges (after grossing up for GST) with those shown (GST inclusive) in the drop-down menu of Oldco pricing plans that appears on Powerswitch.

The other was that Oldco didn't show annual electricity consumption, which you need to get the best plan for you. Powerswitch says that your retailer will tell you if you ask, but it isn't volunteered (or not anywhere I could find on the bill or using Oldco's online app). You can however add up your last twelve months' bills manually, so I did (a little over 9,000 kWh).

Powerswitch came up with a wide range of competitive alternatives, with annual savings of around $500 to $600, or roughly 20%. Well worth having, so I pressed the 'Switch' button and signed up with Newco.

And it's at that point that I unearthed at least one of the reasons for consumer reluctance to switch. Putting aside the associated free and frank discussion on lack of intra-household consultation, what most concerned my better half was, "what if something goes wrong?"  (in our case enlivened by recollection of a previous attempt to change broadband supplier, which had gone phut). This is (I gather from para 9.210 on p504 of the UK electricity review) quite a common fear, though higher among those who haven't switched than among those who've actually given it a go:
We agree with the views expressed by some parties that the perception of problems by those who had not attempted to switch appears to be somewhat greater than the experience of problems by those who had. In contrast to the experience of those who shopped around or switched, 66% of those who did not shop around or switch in the last three years agreed that ‘switching is a hassle I do not have time for’ (compared with 40% of those who had shopped around or switched in the last three years) and 57% agreed ‘I worry things will go wrong if I switch’ (compared with 37% of those who had shopped around or switched in the last three years).
In the end the spirit of pro-competitive market discipline prevailed over fears of a cock-up, and Newco got the tick.

When Newco contacted us, they said that "During this process you may get a call from the previous power company", and rather disarmingly added, "that’s what we’d do". And Oldco indeed e-mailed us, offering a cash rebate, a bigger prompt payment discount, a two-year price guarantee (which was also part of the Newco offer), and - belatedly - the offer of a better pricing plan (with an element of lock-in for two years).

No deal. We're gone to Newco. Some critical mass of people need to follow through on switching, or the system won't work. And - accepting that our own inertia let them get away with it - we're not feeling especially charitable to Oldco. A short term profit focus may well lead the Oldcos of this world to offer poor default plans, anticipating (often correctly) that you won't jib. But if I were in a corner suite at Oldco and thinking strategically about longer-term customer goodwill and regulatory risks, I think I'd be questioning the wisdom of the old way of running the whelk stall.

Friday, 21 September 2018

We've scrubbed up well

Last week MBIE published the first report of the Electricity Price Review - you can find it and its supporting documents here. If it's all new to you, you might want to start with the 'at a glance' summary. If you'd like an eminently sensible media think piece on the review, try Pattrick Smellie's 'Electricity review a smoking pop-gun'. And if you'd like a pot pourri of select items of interest, read on.

First of all, full marks for plain English. The review said (p3) that "The panel was very conscious of the need to ensure this first report was succinct and easily understood by the public", and it shows. The review team credits Peter Riordan of THINKWRITE - well done, that man. Economics, regulation, public policy analysis in general - all can, and should, be made more lucid than they usually are.

On substance, I especially liked this bit of analysis prepared for the review by Concept Consulting.

The logic here, from p32 of the review, is that
Contract prices that were above costs on a sustained basis would suggest weak competition among generators, and that the entry, or threatened entry, of new generators was not restraining prices. On the other hand, prices that were well below costs on a sustained basis would suggest looming problems with reliability of supply because new investment would not be able to keep pace with demand. The comparison suggests competition has been effective in restraining prices. Figure 14 shows how wholesale prices have moved broadly in line with the cost of adding more capacity. Importantly, there is no evidence contract prices have been above costs on a sustained basis in recent years.
That's good to know, because an alternative analysis in the review (pp45-6, with more detail on pp7-8 of the Technical Paper) which attempted to gauge whether the gentailers are earning excessive profits was not convincing. Granted, there were data issues for the review in trying to figure it out. In the end it used a proxy for profits - net cash from operations, ex tax ex interest, adjusted for inflation and the amount of electricity generated -  which showed little change in recent years.

But even if you accept that the proxy is okay, the exercise doesn't answer the 'excessive profits' question at all. Steady net cash flows could mean excessive profits, or, equally, inadequate profits, all the way through. The important question is, what are the profits relative to some measure of the capital employed in the business? That went unanswered.

Something else left a bit up in the air in the review was exactly why the distribution lines businesses went from overcharging business customers to (somewhat) overcharging residential customers for their shares of the distribution costs. There's no arguing about what went on: as the review says (p21), "Shifting costs from businesses to householders was the biggest factor in residential price increases between 1990 and 2018 (a development that began in the early 1980s). During this period, distribution charges for householders rose 548 per cent, while those for commercial and some industrial businesses fell 58 per cent", and here's the graph if you prefer graphs. But, why?

Maybe everyone in the electricity game already knows that the re-apportionment of costs was actually a move from a rort on businesses to something more rational (even if it has now overshot a bit the other way). As MBIE's 'Chronology of New Zealand electricity reform' says (p2), "In 1985 local distribution and supply were the responsibility of sixty-one electricity supply authorities (ESAs) - (there were ninety-three [!] in 1945). These were electorally oriented, statutory monopolies. Inefficiency, lack of customer choice and cross-subsidies resulted". But this may no longer be obvious to the reader in the street, and the review could usefully have given a bit more of the historical context against which this subsequent reallocation has occurred.

Before the review came out, I'd speculated that "there's a good chance that we may have made a better go of publicising and facilitating switching [by retail electricity customers from one supplier to another] than either the UK or Australia with initiatives like the Electricity Authority's WhatsMyNumber". In the end the review wasn't able to come to a conclusive answer (partly because it got a big data dump very late in the piece), but it's still possible we're making a better fist of it than others are (p39):
Overall, some stakeholders consider retail competition is stronger here than in Australia and the United Kingdom, based on measures such as switching rates and savings available from switching. However, some stakeholders consider that, like Australia and the United Kingdom, a two-tier retail market is developing, in which those who actively shop around enjoy the benefits of competition, and those who don’t pay higher prices.
There's heaps more interesting stuff in the review, which broadly comes to the conclusion that we're not too shabby at all when it comes to organising our electricity affairs. There are certainly things to work on - make a decision on transmission pricing methodology, figure out how to incorporate more renewables and accommodate all the new solar cell and battery technologies, do something about raising the lines businesses' efficiency, get a better grip on what's behind consumer switching inertia, and dig into why retailers' costs seem to be unusually high - but by international standards we're pretty hot stuff.

You might perhaps feel otherwise if you focussed on the 'energy hardship' issues for poorer households that made the headlines. But to my mind, that's got a lot less to do with allegedly excessive power prices - "New Zealand’s average residential price was in the lower half of all OECD countries in 2016" (review, p23) - and a good deal more to do with our internationally challenged level of absolute income, and with its distribution. The answers to energy hardship - and food, housing, clothing, medical, and educational hardship - lie more in the realm of raising national productivity and operating a more effective tax and welfare system.

And it's not just this review taking an upbeat view of how we're travelling. It went under my radar when it came out first, but the International Energy Agency has been trekking its way through the energy policies of its member countries, and here are some quotes from the executive summary of its 2017 New Zealand review:
New Zealand has an effective energy-only market. It is a world leading example of a well-functioning electricity market [I think they mean the wholesale generation market here], which continues to work effectively ... New Zealand has the highest penetration of geothermal energy and a significant contribution from hydro. Without any direct subsidies or public support, their share in electricity and heat supply has grown in recent years ... This [renewables] performance is a world-class success story among IEA member countries ... To date, New Zealand’s market design and operation of an energy-constrained system offer a high degree of operational variability, and the system has managed peak and seasonal demand variability successfully for decades. The transmission system operator Transpower is experienced and adept at managing supply and demand adequacy, and the power system demonstrates considerable flexibility and resilience. Other IEA member countries could learn from this experience
We've got a well-established knock-em-down commentariat in New Zealand, and I've done a bit of it myself. So for a change it's nice to be able to say we're doing things a good deal better than your average bear.

Wednesday, 5 September 2018

Regulation done right

From overseas I've caught up with the news that the Telecommunications Commissioner Dr Stephen Gale has decided not to deregulate the market for national mobile roaming.

The current regime (summarising a bit) is that the incumbent mobile network operators (Spark, Vodafone, 2degrees) have to provide wholesale network access to any serious new entrants. That way the new entrant is able to offer a national service from day one: offering patchy network coverage would otherwise be a big turnoff to potential customers and realistically would all but nobble a new entrant's prospects.

National roaming is a 'specified' service, which in telco regulatory jargon means that it must be made available, but on commercial terms struck between an incumbent and an entrant. A more stringent form of regulation would be a 'designated' service, at a price set by the Telecommunications Commissioner.

I liked this decision from at least five perspectives.

One, it was correct.

Two, it was short (38 paragraphs). Maybe that was inherent in the relative simplicity of the issue under consideration. But in any event it was mercifully concise: well done.

Three, plain English, or at least as plain as as you can be when grappling with telco acronyms.

Four, an appropriate bit of "behave yourselves or else" ("We remain of the view that 2degrees’ commercial roaming arrangements with Vodafone were only secured against the threat of regulation. We consider that similar difficulties could potentially arise for a new entrant as have affected 2degrees"). Effective outcomes without actually reaching for bigger sticks: good one.

Five - and this is down to the overall design of the telco regulatory regime - there is a working mechanism where the Telco Commissioner has to regularly check whether regulation of 'specified' or 'designated' services is still needed. They have to be revisited no later than five years after they've been regulated. An excellent idea that stops the sector being littered with redundant rules.

Though you are immediately left with the thought: why isn't this done with regulation more generally?

Case in point - on the latest episode of The Block (no, I don't watch either) apparently two contestants "won't be able to market their property as a four-bedroom house for sale (or rent), because it  contravenes the Government's Housing Improvement Regulations 1947".

That makes regulatory sense. Let's face it, not much has changed since 1947.