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Efficient market hypothesis

Written By: - Date published: 7:15 am, June 20th, 2012 - 87 comments
Categories: bill english, energy, privatisation - Tags:

Bill English has attacked the MED numbers showing that private electricity companies are 12% more expensive than public ones saying that argument assumes “that hundreds of thousands of New Zealanders are systematically paying more for electricity than they could?”. Um… Has English heard of Powerswitch? That multi-million dollar government campaign is based on exactly that premise.

87 comments on “Efficient market hypothesis”

  1. Gosman 1

    Some really good comments on this blog post from Kiwiblog from a commentator who works in the industry

    http://www.kiwiblog.co.nz/2012/06/debunking_the_lies_about_power_prices.html#comments

    • Zetetic 1.1

      Try looking at the actual data. I know that’s not consistent with the right’s faith based policy but give it a go

      • Gosman 1.1.1

        Do you disagree with the comments made by East Wellington Superhero? IF so what is wrong with his points?

        • ad 1.1.1.1

          Don’t always agree with you but great great link there Gosman.

          Very interesting commentator there. Makes me shed a few reasons against asset sales. But hold on to the main ones.

        • ad 1.1.1.2

          People, it’s worth looking at the unpcoming Commerce Commission hearing on airport landing charges as well.

          This Long Term Equilibrium theory has been trotted out in every submission. I honestly wonder if it only applies to utilities with massive Asset Management Plans who have really long investment plan and benefit horizons, and a really stable set of customers ie they are close to monopolies.

        • Deano 1.1.1.3

          Do you disagree with the data that shows that in most of the country, the most expensive retailers are private?

        • ghostwhowalksnz 1.1.1.4

          Superhero is obviously a staffer in Englishs office – “you wont be able to stop listening to his speech”
          A bit grandiose dont you think ? This is that Bill English hes talking about

          Anyway a lot of churn in switching retailers comes from people moving house. Plus the constant door to door sellers over the summer. That cant be cheap with commissions for each switch, doesnt mean they get cheaper prices just a deal to appear its happening

          • Gosman 1.1.1.4.1

            Oh it is quite obvious, just as it is quite obvious you are a cretin.

            • bbfloyd 1.1.1.4.1.1

              this coming from the moron who can’t grasp the concept of competition being viable only after the number of consumers has reached critical mass…. which nz hasn’t by a long chalk……. pretty much like every tory “intellectual” I have encountered in my life…..

              btw… don’t appreciate being directed to that pile of filth that seems is your natural home little durex gossomer……thank god i havn’t got smellavision on my computer…. would take days to get rid of the fecal stench…..

              • Draco T Bastard

                this coming from the moron who can’t grasp the concept of competition being viable only after the number of consumers has reached critical mass…

                Competition only works if it’s perfect:
                Everyone has perfect information (Omniscience)
                Everyone is capable of changing to any other job at a moments notice (Omnipotent?)
                There happens to be an infinite amount of resources to cater to the infinite amount of competition
                Pricing properly contains all costs

                If anyone of those things is not true then the competitive market becomes irrational.

                • NickS

                  Ah no, competition works in pretty much everything, even if there’s imperfect information, it’s just a case that the cost benefit ratio dives into the toilet in certain circumstances. Such as utilities, where the stable point of the market is local/regional monopolies which lead to rent-seeking activities.

                  And frankly, all decisions are irrational due to the impossibility of perfect knowledge /epistemology101

                  😛 😛 😛

                  What matters is in the decision rational in the context of the knowledge that’s relevant, available, true and not ignored.

                  *ahem*

                  But yeah, pricing needs much better transparency, and the electricity market in NZ really needs to go back to being a SOE with different regional branches instead of wasting money and resources competing against each other via marketing.

                  (Been absent due to helping out with support under the name The_Mess)

                  • Draco T Bastard

                    Ah no, competition works in pretty much everything, even if there’s imperfect information…

                    If that were true then we wouldn’t have had a couple of centuries of recessions intermingled with a few depressions. The only prolonged prosperous period was after WWII with heavy regulation and limited competition (the whole lot still fell down though due to capitalisms need for growth and the limits used prevented that growth).

                    And frankly, all decisions are irrational due to the impossibility of perfect knowledge /epistemology101

                    True (in fact, that was my point) but we can make them less irrational if we regulate to ensure that everyone is working with the best knowledge available whether they themselves know it or not (we should also be making the knowledge available of course so that people can know it).

              • Gosman

                So any evidence supporting the view that there has to be a critical mass in a market and NZ is nowhere near it?

          • Vicky32 1.1.1.4.2

            That cant be cheap with commissions for each switch, doesnt mean they get cheaper prices just a deal to appear its happening

            That reminds me of the angry people on Fair Go, who’ve been sold a pup and persuaded to switch…
             

      • Glg 1.1.2

        Ha ha “faith based policy” that sums it up completely

    • DH 1.2

      The usual resource for power prices is the nz quarterly survey of domestic electricity prices which can be viewed here;

      http://www.med.govt.nz/sectors-industries/energy/electricity/prices/electricity-tariff-surveys/quarterly-survey

      Strange how Treasury use the consumer website when a govt department has the full stats available. Maybe that’s because the survey shows the private providers consistently charging more.

    • Huginn 1.3

      Hi Gosman, sorry about my late response to your request for response to this.

      I read East Wellington Superhero’s comments – at your suggestion – and I think that he, or she is disingenuous.

      Electricity markets are highly complex – the most highly complex in the energy sector.

      This is the domain of uber-geeks and quants. Fortunately, I can spare you my own attempts to describe some of the issues by directing you to this powerpoint presentation from AU’s School of Engineering’s Electricity Power Optimization Center:

      http://www.epoc.org.nz/presentations/energyshowcase.ppt
      http://www.epoc.org.nz/

      One of the problems is that the way that the market doesn’t work very well. It’s not ‘well behaved’ and that’s why it’s just not good enough for an’ industry insider’ to say that electricity prices are determined by competition between providers in the retail sector in a deeply imperfect market like the electricity sector.

      Also, and this is just an aside, East Wellington Superhero is wrong when he says:
      ‘I note the NZ Herald says that electricity prices in the USA are even lower. How many government-owned power companies does the USA have? Not many I’d venture.’

      For example, almost all the electricity and gas utilities in California are community or municipality owned. The Los Angeles Department of Water and Power (LADWP), the largest municipal utility in the United States, used to be privately owned but was taken over by the State towards the end of the 20th Century because it wasn’t serving the interests of the people of that state.

  2. Afewknowthetruth 2

    In western societies the purpose of government is to facilitate the transfer wealth from ‘the people’ into the hands of a few individuals, to ensure that the money-lender scam is maintained, and to oversee the looting and polluting of the environment -whichever party is in power.

    The present government is doing spectacularly well on all counts.

    • Gosman 2.1

      Really???

      So in the sum of Western Society over the past 200 odd years, (since the development of the modern free market Capitalist system), the percentage of wealth in the hands of the few has increased by how much?

      • Colonial Viper 2.1.1

        Are you advocating a return to the high wages and high employment of the 1960’s and 1970’s?

        • Gosman 2.1.1.1

          I’m not advocating anything CV. I am merely pointing out that Afewknowthetruth’s view about the purpose of government in western societies is completely and utterly bogus.

      • freedom 2.1.2

        Global info is difficult to pin down especially over a 200 year period, but here is a rational breakdown of the US over the last century, a Country that we cannot say we are all that different from in terms of wealth distribution.

        “According to the Drum Major Institute’s 2006 Injustice Index, the ratio of the average U.S. CEO annual pay to minimum wage worker’s is 821:1 whereas twenty years ago the ratio was 40:1. The richest 0.1% are vanishing off the chart because it would take a bar graph that stretched out of the building to represent them on a societal wealth distribution chart.”

        http://www.peakprosperity.com/forum/wealth-gap-and-collapse-us/24520

      • bbfloyd 2.1.3

        what a complete ignoramus you are little durex……not a shred of historical knowledge, and you presume to lecture those do possess sense, and knowledge…..

        I’ll take pity on you….. capatalism was the driving force behind the empire building expansion that exploded out of europe when?

        let’s see… columbus discovering america was when? cortez arriving in south america was when? the feudal system was replaced over a period of a century when?

        are you trying to tell us that slavery, was still operating in britain at the beginning of the 19th century? And that the peasant population were still serfs at that time….

        i suppose the industrial revolution that started centuries before that was founded on slave labour? And that the peasants transplanted off the land to work in the factories were press ganged by their owners, and they weren’t paid a penny?

        fuck you’re an ignorant fool…..

  3. captain hook 3

    it has increased by just that amount necessary for tory idiots to think that they know everything.

  4. captain hook 4

    to the arrogant overweening narcissistic desire of the right to own and control everything.
    wise up dude.

    • Gosman 4.1

      Is this directed to any particular post?

      • Jackal 4.1.1

        Don’t you mean comment? captain hook was obviously not responding to the post by James Henderson.

        The problem with the entire powerswitch regime is that the companies that are associated with National ministers drop their prices, the government pays for a bunch of advertising to get people to switch suppliers, and then they just increase prices again. In other words it’s a con to gain more market share for the power companies that the Nats have shares in.

        • Gosman 4.1.1.1

          Do you have any evidence for this highly uncompetitive behaviour?

          I don’t know what Captain Hook is replying to. It could very well be the topic post.

          • bbfloyd 4.1.1.1.1

            Ask a few actual people about their experiences regarding this practice little durex….. I can answer for myself that that has happened to me every time i’ve changed providers to try to get ballooning costs down.. the average period it has taken to become as, or more expensive has been three months……regardless of which company i used….

            but then.. operating in the real world isn’t a tory nitwits favored option…

  5. marsman 5

    Does Bill English have an answer as to why privatisation of electricity resulted in a 75% increase in power bills for domestic consumers? English probably hasn’t noticed as one imagines the old trougher makes the tax-payer foot his bill.

    • Gosman 5.1

      When was the electricity industry privatised? As far as I am aware it is largely in the hands of the State.

  6. Colonial Viper 6

    I’d laugh out loud if it turns out that English is one of those consumers paying more for their electricity at home than he needs to be.

    • Lanthanide 6.1

      For people on his kind of income, a few hundy here and there don’t make much difference.

  7. felix 7

    Yell out when Gosman’s fucked off and the thread becomes worthwhile, will you?

    • Gosman 7.1

      Might as well find another thread felix as I’m in this for the long haul 😉

      • vto 7.1.1

        Why? Some vested interest?

        • Gosman 7.1.1.1

          Yeah vto, I’m being paid big bucks by the Private energy sector to post Pro-privatisation messages on a hard left political blog that most people in the country haven’t even heard of let alone read.

          • quartz 7.1.1.1.1

            No, You’re EW Superhero and you work for the nats.

          • vto 7.1.1.1.2

            Oh really. I thought it may have been one of the myriad other possibilities. Or that you simply believe in the divine goodness of all things right – defend to the end! So many people on all sides of the political equation are so vehement in their beliefs that it is like a religion – they are religious extremists in the exact same manner as all those people in foreign lands who get described as extremist. No difference. Shit still smells like shit.

            • Gosman 7.1.1.1.2.1

              No, unlike many people on here, (and you I suspect), I actually acknowledge that ALL policies come with both negatives and positives. Right wing policies are not the panacea for all things under the Sun. If you want to address certain ills you might have to take a more interventionist approach. However I much prefer the Free market to the Interventionist approach on most matters as I realise that Interventionist approach comes with some rather nasty hooks.

              • Pascal's bookie

                On that basis, what do you think of the MOM policy?

                Looks like a dog if you oppose state intervention in markets. Provides all of those nasty hooks, for less benefit.

                And I assume it was an oversight that you phrased your comment to imply that the free market approach doesn’t come with its own rather nasty hooks.

                • Gosman

                  Of course the free market system comes with nasty hooks. Politics is all about deciding which nasty hooks are acceptable.

                  I dislike the MOM because I see no purpose in the State having an active stake, (as a commercial player), in a competitive market and lot’s of potential opportunities for the State to be tempted to distort the market for political purposes.

                  • Pascal's bookie

                    I understand that you think total privatisation would be the best policy. But that is not actually on the table.

                    So the question for people who support total privatisation is “What’s the second best policy option?”

                    Do you think MOM is better than the status quo of state owned enterprises? What’s your reasoning on this?

                    You are making great play of your own self percieved virtue here. That you think things through more profoundly than many here with regard to policies and their alternatives.

                    So I’m asking if you’d like to grant us the benefit of your thinking.

                    Are MOMs better than SOEs? Why, or why not?

                    Not difficult, I should think.

                    .

                    • Gosman

                      I like the idea that introducing an aspect of market ownership into the SOE’s might makethem more responsive to a wider range of opinions than what the Government of the day wants or dictates. I also agree with the position expressed by the head of the Employers and Manmufactures Association ,(I think), who highlighted that listing the shares on the NZ Stock market would likely increase the attractiveness of investing there. We have a problem in NZ where people invest in unlargely unproductive assets like property rather than shares. This increases the cost of capital for NZ businesses. anything which alters this from a market perspective is good in my mind.

                    • Pascal's bookie

                      Hmmm. Not seeing any analysis of the hooks there. 🙁

                      What do you make of the fact that a bunch of large (by NZ standards) organisations will be listed on the NZX which have an implicit government guarantee?

                      Why do you think that having these former SOEs listed will attract new money to the NZX from property?

                      Do you think that institutional investors (like kiwisaver managers and the like) will adjust their weightings so that they are more invested in NZ energy stocks than previously, or do you think that over the mid to long term it will just be a reshuffling?

                      Why do you think that directors will suddenly start bringing new ideas to the companies given that most directors in NZ SOEs are also private sector players? Is this a faith based thing? Underpants gnome stuff? Or is there actual reasoning behind it? If so, could you share it please?

                      Why is it that if there is, presumably, a bunch of capital floating around in unproductive holding pens, that we need the state to float SOEs to soak it up? Is not the NZX intended as a vehicle for getting that capital to areas that the private sector thinks it would be productive? Why, I am forced to ask, does the private sector not step up with areas for investment?

                    • Pascal's bookie

                      All in all, looks more like desperate justification that the reasoned balancing of pros and cons you promised.

                      It would be sad if it wasn’t so funny.

                    • Pascal's bookie

                      *Ahem*

                    • McFlock

                      PB, he’s trying to think of some “hooks”.
                         
                      Trouble is, if your religion states that privatisation has no faults, there are no hooks to find.

                  • Huginn

                    I agree with you that the state should not hold an active stake in a competitive market.
                    Unfortunately, the electricity markets are not competitive and pretending that they are. the way that Max Bradford did, will not make them competitive – ever.

                    Here’s a hint – look at the tools used to model the electricity markets – stochastic modelling is used to look at states of uncertainty i.e. not fully informed and therefore NOT COMPETITIVE.

                    One possible consequence of making utilities operate in the naively ‘competitive’ markets is that they will build in margins to buffer against uncertainty, which feeds through to higher power bills. Another is that they will find ways to game the market to make gains on the spikes.

  8. captain hook 8

    well if you here for the long haul then rail is more efficient than road.

  9. prism 9

    Somebody on radio this morning talked about the number of times Kiwis change power supplier each year and it was in the 100,000s. So the present system does encourage competition at first glance, with some companies offering a lower price and sometimes extra short term incentives. I don’t see more privatisation being advantageous to ordinary NZs but those who have been wealth accumulators or are being paid salaries with many 000’s will be satisfied.

    • Lanthanide 9.1

      “So the present system does encourage competition at first glance, with some companies offering a lower price and sometimes extra short term incentives. ”

      Or we could just get rid of all of this useless competition and reduce prices for everyone by 15-20% permanently. We wouldn’t have ads on TV about how NZers are full of “good energy”, newsboy talking about windmills or cute pukekos running amok through people’s houses. All of that is pointless overhead that doesn’t actually make electricity any cheaper for anyone.

      • Draco T Bastard 9.1.1

        +1

        One day people will wake up to the fact that competition increases costs and thus prices.

        • Lanthanide 9.1.1.1

          Depends on the market. Often, competition reduces costs (through innovation, striving for profit) and thus prices.

          For something like power in NZ however, I don’t believe competition achieves anything.

          • Draco T Bastard 9.1.1.1.1

            Depends on the market. Often, competition reduces costs (through innovation, striving for profit) and thus prices.

            Nope, competition always increases costs due to duplication, advertising etc etc. The only thing that competition can reduce is the dead weight loss of profit and there’s better ways to do that.

            Innovation is increased when people work together and share what they’ve learned.

            For something like power in NZ however, I don’t believe competition achieves anything.

            Infrastructure is the one thing that is an obvious natural monopoly.

  10. Tangled up in blue 10

    Can Molly Melhuish’s research be considered “independent” due to her strong association with DEUN which runs an anti- privatisation of electricity assets campaign?

    • prism 10.1

      Tangled
      Oh really. She has been working with the facts for years. Unlike your interest which is apparently inclined to feelings, prejudices, obfuscating statements, and the squeezing of profit by the iron grip of private interests.

    • Deano 10.2

      the link is to MED data analysed by the parliamentary library. nothing to do with this molly person.

      Do you dispute the data? If so, why?

  11. Slartibartfast 11

    Aren’t we on a bit of a diversion here?
    Sure we have some competition in the retail sector but……
    When we adopted the Californian system of splitting up the wholesale, transmission & retail aspects of the industry and using an auction process to determine wholesale prices (they had their problems if you check the history) then don’t you have THREE lots of management, administration costs and of course profits? My guess is that these would easily account for a 75% rise in the retail price.

    • Gosman 11.1

      So I suspect it the policy of opposition parties to re-centralise and regulate the electricity sector again. Which parties have this as one of their polices?

      • Lanthanide 11.1.1

        Yip, just like how National are joining the government departments back together after they split them up to create efficiencies in the first place…

    • bbfloyd 12.1

      about as useful as tits on a bull….. in line with most of your comments…. you aren’t little durex’s flatmate are you?

      • fender 12.1.1

        Not very likely, Grossmans flatmates all end up taking their own lives, sadly. Any exceptions to this have all volunteered themselves for medical experiments or electric shock therapy.

  12. freedom 13

    for gosman, who wanted some info on wealth gaps . .

    Efficient market hypothesis

  13. BLiP 14

    .

    DFTT !!!!!

  14. lcmortensen 15

    The Government fails statistics – Contact offers a 22% discount for electronic and prompt payment, Genesis offers 10%, so you are comparing apples with oranges to start with. The MED data does not include such discounts so therefore is more accurate, and from my quick browsing, there is only one region where a private company is the cheapest – Trustpower in Waitaki.

  15. Rich 16

    NZ generates electricity from a few dozen power stations. Their costs are pretty fixed – a worker isn’t going to come up with a bright idea to make Huntly burn less coal, or the Waikato stations let less water through for the same power output.

    So a fair price for electricity reflects fuel costs and capital servicing (which is always cheapest if the government is doing the borrowing. We should have a single fair price for power and a plan that runs the generators to minimise carbon emissions.

    Instead we have a pseudo-market that exists just to keep white collar workers (like Powershop) employed and to facilitate price gouging. privatisation just adds to that.

  16. captain hook 17

    Rich, so are you saying that the market is deliberatley made inefficient to facilitate the profits to private individuals?

    • fatty 17.1

      “are you saying that the market is deliberatley made inefficient to facilitate the profits to private individuals”

      Its called capitalism, profits are the number one concern. All other issues, whether they are ethical or moral, are subjugated to ensure the prime objective is achieved. Efficiency generally results in more profit (outsourcing/flexibility/casualisation etc)…but in some cases inefficiency can create more profits. Limiting the supply will increase the price.
      Same goes for electronic goods, their technology is often held back or even taken out of some products to ensure more money will be paid for ‘high quality’ goods.
      More often than not, the invisible hand is down our pants and molesting us without us even being aware of it. There is no happy ending.

    • Draco T Bastard 17.2

      Not deliberately made inefficient – the market just so happens to be inefficient. All it’s good for is transferring wealth to the already wealthy.

    • Rich 17.3

      It’s intrinsically inefficient. Electricity is a monopoly product with fixed input costs, like I said.

      Having a pseudo-market (which is what we have) is an inefficent way to price electricity, but it’s attractive to free market zealots and it transfers money from the ordinary consumer to (mostly) electricity industry managers and (after privatisation) foreign financial institutions. Many of those beneficiaries are in the 1% for whom this country is run, and the others are amongst the ‘useful idiots’ who can be relied on to support the interests of the 1%.

  17. Matthew 18

    English claims that a lot of people have changed to a cheaper power company. This is true. However when the generators are all in private hands, there will be no such option.

    • tc 18.1

      Smoke and mirrors.

      The retailers are just clipping the ticket from power exiting the grid (transpower) through the lines companies (vector etc) after the generators create that power.

      Who owns the retailers, why the generators do, who can take a loss on the retail as they make it on the generation but with some generous cross charging can make it look ‘viable’.

      Hardly competitive or transparent.

  18. MrSmith 19

    Well Hats off to Winston, unlike Labour and the Greens he has put his money were his mouth is and said:
     
    “New Zealand First is committed to buying back the shares at no greater price than paid by the first purchaser”, 

    And until the other parties start doing the same they should be seen for what they are, just pigs with there noses in the public troth,  I suggest we start telling them Winston will be getting our vote unless they start taking the same line. 

  19. Draco T Bastard 20

    NZ Asset Sales Policy Began On Wall Street

    So what’s really behind asset sales?
    All wealth extraction is facilitated by international and national economic policies, coupled with the private banking system, which together deliver benefits to the financial elite by transferring wealth upward within and between nations.

    The state asset sales policy is just one of several reforms under the Washington Consensus, a set of monetary and economic policies designed to allow: the privatization of public resources and utilities, the removal of barriers to foreign investment and ownership, the sale of state assets, trade liberalization, deregulation, the lowering of business taxes, and cuts to public services.

    That really is all the reasoning behind the asset sales – more wealth to the few.

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