Wednesday, 28 May 2014

Laila's no fool

If the rumour is true, and Laila Harre will indeed lead Mana/Internet into this election, then I reckon things are about to get interesting.

The Mana/Internet thing is clearly a marriage of convenience, right? But isn't that the essence
of politics? You can be pissed off when rivals do it, but that doesn't count for much if it is within the rules of the game. The enduring Epsom cuppatea thing has historically been a marriage of convenience by the National party & ACT. All that's happening here is that another bunch have cottoned on to a winning strategy. So there is zero scope for National/Act cohort to get all high & mighty about this particular marriage.

I can see why they might want to though, because selecting Laila would be a masterstroke IMHO. She is not just smart and articulate. She also has deep connections into Mana's territory and is coms-savvy.

I don't know Laila well at all, but I did work closely with her (and others, notably Paul Swain) on the design of the Telecommunications Act 2001, which was a watershed in terms of reining in the power that Telecom had been gifted when it was privatised without regulation. Based on that experience, I reckon she's got the goods.

There is also the fact that she is 1 female wedged between the well-developed egos of two men: Hone & KimDotCom. Steven Joyce reckons this will be their undoing. Maybe, but if it works the results could be pretty spectacular.

Saturday, 24 May 2014

What to do about electricity?

The Downstream conference is the biggest energy sector get together in NZ, and this year's event left me pessimistic about the outlook for NZ's electricity sector. As conference chair for the first day I was keen to understand the different perspectives, particularly on policy direction. Annoyingly, the options boil down to (a) more or the same or (b) NZ Power. I reckon we could do better than either of these.

There is one very good aspect of NZ Power: it stimulates competition in generation and in retail. That happens automatically because generators need to compete for contracts to supply the single buyer, which then has plenty of contracts to on-sell to independent retailers. Both of those would be major advances over what we have now.

As things stand now, if you want to build an electricity business you pretty much need to enter two industries at once: generation and retail. That is a barrier to competition, particularly on the retail side. NZ Power would cut the knot. Anyone with expertise in managing customers could get into electricity retailing - e.g. telcos, banks, merchandise retailers. Larger scale independent retailers would also subject the generation sector to well-informed, commercial-motivated scrutiny. I'd also expect to more progress on demand-side bidding into the wholesale market and a resulting expansion of "negawatt" firms which have no real traction in NZ.

There is a lot of obfuscation coming from those threatened by NZ Power and I don't buy most of the scare stories at all. But there are also some real concerns with the single buyer model. One is that it inserts a team of civil servants into the heart of an essential industry. That worries me because it ultimately makes a government minister look responsible for operational performance. I also doubt that Parliament will have the balls to write down generation asset values to the extent needed to deliver on the policy as announced, or even give clear guidance over which assets are of most concern.

But NZ Power definitely could work, and it could do so without compromising the really important things like efficient dispatch of power stations and setting marginal price in line with marginal costs. Insiders won't admit this, but the main reason gentailers are terrified of NZPower is that it could be very effective indeed.

For me though, the greatest pity is that those currently in charge of the electricity sector are so complacent and self-satisfied about it. If they were more ambitious, they could deliver the competitive benefits of NZ Power without taking operational control or mandating asset write-downs. This is the opportunity we are missing.

I am referring here to the Electricity Authority which is mounting something of a crusade(pdf) against NZ Power and claims to be quite happy with how the hedge market is working. The EA claims that power prices are actually too low, but they need to pull some pretty slippery moves to obtain that "result". This makes the EA look like an industry player rather than a dispassionate and independent agency. It's quite unfortunate, but let's just put it down to them being a tad defensive shall we?

Because the real issue is about the hedge market. Hedges are fixed price contracts for power. They give price certainty to retailers, so they can avoid being exposed to the volatile spot market. No-one wants to be exposed to the spot market. If this market is working well, then market forces have a decent chance of working towards the benefit of consumers.

At the Downstream conference I queried the EA about hedges for independent retailers. Their CEO was convinced that all the appropriate settings are in place. Apparently the plan is that an independent retailer will grow its customer base to the point where a gentailer has too much generation, at which point hedges will be willingly offered (rather than under threat of regulation as happens now). This is basically a chicken & egg strategy and its no surprise that potential independent retailers are generally too chicken to play along (hint: as a growing independent retail you will be winning customers off 5 different gentailers).

This looks to me like another triumph of economic theory over commercial common sense. Yes, you certainly could write down a model in which the EA's logic would lead inexorably towards a more liquid hedge market, but so what? If in the real world that process is highly uncertain and will in any case take decades, and you have alternative regulatory strategies available that could be much faster and more certain, then why are they not being actively assessed?

The only significant independent, Pulse, which is actually a tiny firm in the context of the industry, is agitating for change. Good luck to them. I hope they can change the EA's attitude. The longer the EA holds out, the more likely it is that something like NZPower will eventually be adopted.

Wednesday, 21 May 2014

Spying economics

Trust is allocated very strangely in our society. In most situations we work on the assumption that people can't be trusted and spend huge sums on monitoring and regulating them. Rule- and policy-making powers
are routinely and deliberately separated from operational management throughout the public sector. A decent chunk of a whole industry (management consulting) is devoted to monitoring workers' performance and designing contracts that give them incentives to do the "right" things. And then there's the public payroll for services like border control, road policing and health/safety, all of which are predicated on the idea that people can't be trusted.

Yet when it comes to the spooks, none of this applies. There is no transparent performance monitoring - we are expected to just trust them to be doing the right things. Beyond vague generalisations, we don't even know what "the right things" are said to be. And judging from last night's TV, the "separation of powers" dictum doesn't apply either.

This should create quite severe "incentive compatibility" problems. Agency theory predicts that spies will respond to their situation in some or all of the following ways:
  • Shirking, i.e. not doing the stuff they should be doing (whatever that is),
  • Fibbing, for example by over-stating what they've actually achieved,
  • Inventing work that feeds their own ego and sense of place in the world, and
  • Corrupting idealistic new recruits who don't understand the rort. 
This is why, whenever I think about spying my mind turns to The Tailor of Panama, the plot of which involves a spy feeding bullshit to his masters. It's all too believable when you think about the incentives involved, but its also only one of several ways in which society can be screwed over by our spies and those running them.

Monday, 19 May 2014

Quad bike helmets

The Labour department will be happy, now they finally have a prosecution for not wearing a helmet on a quad-bike. Very happy, presumably, that the farm worker was fined $15,000.

The worker was warned several times, so I guess its his own fault really. But lest anyone is inclined to get all high & mighty about it, consider the following.

First off, that's a hell of a fine. The maximum fine for drunken driving is $6000, though you might also lose your licence. If you drive recklessly/dangerously and kill someone, the maximum fine is $20,000. Compare that to this man's heinous offences, and you might agree with Kerry Robbins.

Second, guess what would have happened to the worker if his bike only had 2 wheels instead of 4. Nothing. Because actual two-wheeled farmbikes are not on WorksafeNZ's priority list.

Which might make you wonder about the legals, and they are indeed pretty interesting. Bruce Wills, the Feds President says "the law is the law", but I wonder if he knows how this one works.

In this case, what the law says (s10 of the HSE Act) is that if there is a workplace hazard that can't be fully eliminated or isolated, then employers have to take all practicable steps to protect employees from the hazard. So the reason that WorksafeNZ says quadbike helmets are compulsory is that

  • falling off a quadbike and hitting your head is a workplace hazard that can't be eliminated;
  • helmets are a practicable way of protecting against that hazard;
  • therefore not wearing helmets is illegal.

And so, following the exact same logic, workers who need to use stairs or cross the street are also exposed to a head injury hazard, which can't be eliminated. And since helmets are a practicable way of protecting against head injuries, you are hereby obliged to wear a helmet when walking down the street or using stairs.

So its fair to ask why this is all about quad-bikes on farms when such a huge range of risks fall into exactly the same category.

Sunday, 4 May 2014

J is for jobs

The NZ Initiative is trying to improve the economic literacy of Kiwis using an A-Z format. The latest is J, for jobs, and it starts off badly by referring to
"...a common mistake in voters’ understanding of economics. That is, the belief that government should create jobs. ...contrary to such popular opinion, job creation is not – and should not – be the goal of government policy."
NZI suggests there are two reasons: Bryan Caplan, and communism. Need they say more? Well, yes please, but they don't. Specifically they don't confront two obvious counterarguments.

One is about preferences. In democracies, governments are supposed to be servants of the people so they "should" do what voters want them to do. At the individual level, economic well-being is entirely subjective. Some individuals do actually want there to be more jobs either for themselves or someone dear to them.

I don't really mind if the NZI want to lecture people about what they should want. I doubt it will change minds, but if that's how they want to spend their money, fine. What does rankle though is the hook they are using: the suggestion that voters shouldn't want more jobs because "economics", when a more honest statement would be "NZI thinks you shouldn't want government to worry about jobs". Don't hijack my profession to sell your beliefs, please.

This brings us to the second counter-argument which is about what governments can and cannot do. The failure of communism does not prove that governments can't and shouldn't try to create jobs; it only proves that communism failed. But there are also examples of sensible government policies that are designed to create jobs either implicitly or explicitly.

Most generally, standard economics shows how economies can get stuck in a bad equilibrium with high unemployment and low growth and predicts that governments are the only entity than can jump-start such economies. Macro-economic predictions based on these concepts have been fully vindicated over the last five years (a demanding test period for any theory), yet the kind of "ignore the jobless" line NZI advocates is dominating the decision-making in the USA and Europe and perpetuating a horrible situation for millions of people there.

Closer to home, you've probably noticed that NZ exports logs whereas IKEA exports much more highly processed & profitable flat-packed houses and furniture. Why is that? Is it inevitable? How come we are killing forestry workers by the dozen for a low-value trade? Are we engaged in a race to the bottom?

Look at all that low-value bark edge we are shipping overseas. This is basically all we do with our trees. Even if the logs were just broken down into square section lumber, we'd save ship space and add value. But we could do so much more.

Why don't we? Well basically its because of the NZI attitude, which is in essence conservative. The status quo is aligned to log exports, and the fact that this equilibrium is bad for workers (not enough jobs and excessively hazardous jobs) is not something that "should" concern the government, or voters, because communism.

This is why I basically like what Labour are saying about the forestry industry. They are looking for ways to make the existing jobs safer, and offering business-friendly incentives for investment in further processing.

That's not to say that I endorse everything Labour says about forestry - I haven't even read all of that stuff. But economic analysis leads me to the view that there are potentially some quite big issues here, and that "caring about jobs" is one way a government might spot them.  So I dispute the view that "economics" says voters "shouldn't" want governments to care about jobs.