A point from Layton’s electricity market discussion

By Matt Nolan 07/06/2013 1


Brent Layton at the Electricity Authority wrote this piece (or here if that isn’t working) discussing the Labour and Greens power market policy.

I don’t know enough to comment on the specifics – outside of a recognition that the benefit to consumers being mentioned is real dodge.  All the parties say this sort of rubbish, “you will get $XXX in your pocket with no ramifications” and this vexes me – I don’t take lies and half truths particularly well.  But in terms of the specific impact of the policy, and the policy settings, I am in no way qualified to add to the debate :)

Now in terms of the policy, seeing these comments by economic rock stars like Brent Layton, Lew Evans, and Seamus Hogan at Offsetting (*,*) means I have set my priors such that the policy doesn’t sound like a good idea – but compelling research could see me switch sides!  I would note that I don’t use the term economic rock star lightly, so they do have a significant impact on the beliefs I have around the effectiveness of the policy regime. [Note:  I should have placed down the arguments on the other side – although I had thought they were a bit more indirect, I should have still linked to them.  Here we have John Small, and here we have Geoff Bertram – I have a lot of time for these guys but I’m not sold on the historic cost argument].

But there was something I can take out of this that I’d like to say.  Constantly, Brent Layton mentions the “long-term benefit of the consumers”.  This is the true underlying purpose of the Electricity Authority, and the central area of interest for government regulation AS WE SPEAK – economists in these roles are looking at the trade-offs involved with policies, given this underlying target.  Layton is saying that the plan is a bad one because, when he has specifically analysed those sorts of policies in the past they were “detrimental to the long-term benefit of the consumers”.

He was saying, when he’s done detailed analysis in the past – he’s found that this sort of policy actually leaves people worse off, and yet it is still explicitly being sold as offering this magical benefit based on extremely partial analysis.  Economists do this for a reason – as I wrote when I discussed rebalancing:

Economists are supposed to discuss trade-offs, and this involves making the costs to those who don’t have loud interest groups (such as the disparate interests of consumers) apparent

This is an important issue, and I like the way organisations like the Commerce Commission and Electricity Authority are very clear about this.

And deep down, I am sure most politicians, pundits, and people who are interested feel the same sort of way – they just don’t realise that economists are trying to understand these costs and changes in distribution that occur when policy is put in place!  Answers are far from simple, and even when many of these rock star economists have done piles of modeling, explaining the results to people who haven’t invested in the “language and underlying body of knowledge” (virtually everyone) is incredibly hard.

In this way, I just wanted to highlight the focus on consumer welfare, how that is a central part of what economists looking at policy are interested in, and how that is a great way for explaining stuff to people – even other people who have an economics background but aren’t in the specific industry of interest like myself ;)


One Response to “A point from Layton’s electricity market discussion”

  • Layton’s paper makes it clear that, if he thought it was in the long term public interest, he has the statutory power now to implement the Green/Labour suggested power policy. He went into a lot of detailed analysis to show why the proposed policy, although it may have short term benefits for the public, would have long term disadvantages.

    It was disappointing to see the left launch a Muldoon-style attach on Layton as an individual, instead of an attempt to engage with him on the issues and prove his analysis wrong.