The ComCom session at the NZAE conference

Last week the New Zealand Association of Economists hosted a Commerce Commission themed session at its annual conference. It's become a fixture in the past few years, I'm pleased to say, after a drought period where industrial organisation, competition and regulation didn't quite get the focus they deserved.

The Commerce Commission team - Diego Villalobos, who chaired the session, Geoff Brooke and Rae Rho - talk about productivity trends in the regulated electricity lines business, the regulatory cost of capital, and the competitive effect of new unmanned petrol stations

Geoff Brooke's presentation showed the large increases in allowable revenue for the electricity lines businesses (ELBs) which the Commission has proposed for the forthcoming 5-year regulatory period (from the Commission's draft decision). They're stonking great rises - more than a billion dollars extra in what makes up about a quarter of a household's electricity bill - and they add to all that upward pressure on domestic non-tradables prices that is already giving the Reserve Bank conniptions.

But they're justified, as you can see in the graph below which shows the underlying drivers: input cost inflation, a substantially higher weighted average cost of capital ('WACC') reflecting the rise in interest rate costs as ultra-easy monetary policy has changed to the current post-Covid tightening, and provision for increased opex and capex spending.

Diego Villalobos talked about a productivity study that ComCom commissioned from Cambridge Economic Policy Associates (CEPA), and which looked at the productivity trends in the electricity distribution business (i.e. the ELBs again). As ComCom's cover note about the research said, "The productivity of Electricity Distribution Businesses (EDBs), measured as their outputs relative to inputs, is an important performance indicator. Over time, we and other stakeholders expect EDB productivity to increase as they become more efficient and able to deliver the same services using fewer inputs".

Unfortunately the exact opposite has been happening: productivity has fallen, and sharply, as this extract from the CEPA work shows. 'Non-exempt' EDBs in the table are those directly revenue-regulated by ComCom, 'Exempt' are ones owned by local consumer trusts and which are only subject to an information disclosure regime. But either way both groups have shown steadily lower productivity.

And it doesn't seem to be an oddball result of anything weird CEPA has done: Stats NZ data for a broadly comparable sector (electricity, gas, water, waste services, the yellow line in the graph below) show a similar pattern. It's still possible that both CEPA and Stats are missing a trick somewhere along the line - I'd argue that in some sectors of the economy, particularly those closest to the internet and other IT, productivity is being systematically underestimated - but the first best guess looks to be that there is something sector-specific happening.

It would be nice to say we know what's going on here, but we don't. CEPA canvas some explanations in their Section 6, so have a read for yourself and see what you think, but thus far there don't seem to be any smoking guns.

And finally Rae talked about her research on the competitive impact on incumbents of new unmanned petrol stations opening up (full thing here, summary here). Here's her key result. Look at the red dots, which are the price responses from incumbent petrol stations within five minutes' drive when a new unmanned station opens: you'll see a 2-3 cents per litre reduction in the weeks after the new competitor opens. The black* dots are the response by incumbents who are five to ten minutes' drive away: zilch,  nicely demonstrating the geographical market definition for petrol.

As well as this event study examining response to new entry, there was also a cross-section analysis comparing petrol prices where incumbents face at least one unmanned competitor within a five minute catchment: "On average, Regular 91 prices are 6.1 cpl [cents per litre] lower in local markets where at least one non-supermarket unstaffed site is present, compared to those with staffed sites only". 

There was a bit of discussion in the Q&A about whether ComCom ought to go around the country telling local authority land use planners about these results, and encouraging them to free up areas that new unmanned petrol stations could use. Quite right, too: if the councillor for a particular ward would like the credit for petrol becoming 6 cents a litre cheaper for his or her constituents, there's an easy way to help bring it about.

*A correction, I'd earlier mistakenly repeated 'red' again