gdata.io.handleScriptLoaded({"version":"1.0","encoding":"UTF-8","feed":{"xmlns":"http://www.w3.org/2005/Atom","xmlns$openSearch":"http://a9.com/-/spec/opensearchrss/1.0/","xmlns$gd":"http://schemas.google.com/g/2005","xmlns$georss":"http://www.georss.org/georss","xmlns$thr":"http://purl.org/syndication/thread/1.0","xmlns$blogger":"http://schemas.google.com/blogger/2008","id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600"},"updated":{"$t":"2021-12-02T05:35:42.965+13:00"},"category":[{"term":"Electricity Networks"},{"term":"UAV"},{"term":"Unison Networks"},{"term":"IEGA"},{"term":"Buller Electricity"},{"term":"Review"},{"term":"News"},{"term":"Cost-Benefit Analysis"},{"term":"Electra"},{"term":"White Paper"},{"term":"Transmission Pricing"},{"term":"drone"},{"term":"Emissions Trading"},{"term":"Distributed Generation"},{"term":"WACC"},{"term":"KCE"},{"term":"Callaghan Innovation"},{"term":"Pulse Energy"},{"term":"TENCO-EBS"}],"title":{"type":"text","$t":"Andrew Shelley Economic Consulting Ltd"},"subtitle":{"type":"html","$t":"Economic regulation of network, energy-intensive, and infrastructure industries. "},"link":[{"rel":"http://schemas.google.com/g/2005#feed","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default?alt\u003djson-in-script\u0026orderby\u003dpublished"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default?alt\u003djson-in-script\u0026orderby\u003dpublished"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/"},{"rel":"hub","href":"http://pubsubhubbub.appspot.com/"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}],"generator":{"version":"7.00","uri":"https://www.blogger.com","$t":"Blogger"},"openSearch$totalResults":{"$t":"17"},"openSearch$startIndex":{"$t":"1"},"openSearch$itemsPerPage":{"$t":"25"},"entry":[{"id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600.post-6797444343982113777"},"published":{"$t":"2018-08-31T21:16:00.000+12:00"},"updated":{"$t":"2018-10-11T21:18:32.082+13:00"},"category":[{"scheme":"http://www.blogger.com/atom/ns#","term":"UAV"},{"scheme":"http://www.blogger.com/atom/ns#","term":"drone"},{"scheme":"http://www.blogger.com/atom/ns#","term":"White Paper"}],"title":{"type":"text","$t":"Counter-UAS Regulation"},"content":{"type":"html","$t":"\u003cdiv style\u003d\"float:right; margin-left:1em; margin-bottom:1em;\"\u003e\u003cimg border\u003d\"0\" src\u003d\"https://4.bp.blogspot.com/-UTNFqm-TA7c/W4jIOhbgYOI/AAAAAAAADM0/3p8dgqYxFd4Us57FRoi5jSUjTMn4jbtYwCLcBGAs/s320/iStock-864435404_high.jpg\" width\u003d\"320\" height\u003d\"202\" data-original-width\u003d\"1600\" data-original-height\u003d\"1008\" /\u003e\u003c/div\u003eThe malicious or negligent use of drones gives rise to significant risks. While the risky behaviours are subject to existing legal sanctions, the apprehension of perpetrators can be difficult.\u003cbr\u003e\n\u003cbr\u003e\nLicensing is sometimes proposed as a means of controlling drone operations. However, licensing, even when coupled with surveillance and enforcement, does not prevent unlicensed individuals from engaging in the activity, or licensed individuals from undertaking the activity in an unsafe manner. Notwithstanding the prohibition on using a hand-held cellphone while driving, in the 2017 calendar year the New Zealand Police recorded 23,412 offences of using a hand held device for calling or texting while driving (New Zealand Police, 2018).\u003cbr\u003e\n\u003ca name\u003d'more'\u003e\u003c/a\u003e\u003cbr\u003e\n“Counter UAS” (C-UAS) systems that defend against unmanned aerial systems are emerging internationally as a way to address the latent threat. Potential legal issues with the implementation of C-UAS in New Zealand are briefly surveyed. I propose the adoption of a licensing system for C-UAS similar to that already adopted in civil aviation regulation.\u003cbr\u003e\n\u003cbr\u003e\nThe most troublesome legal difficulty with adopting C-UAS in New Zealand is the prohibitions against destroying an “aircraft in service\" or causing “damage to an aircraft in service which renders the aircraft incapable of flight\" contained in the Aviation Crimes Act 1972. While these prohibitions are based on the Montreal Convention, New Zealand failed to include the qualification that these actions are only prohibited if performed “unlawfully”.\nOther legal difficulties include the anti-hacking provisions of the Crimes Act 1961, which would make it difficult to utilise or sell systems that manipulate the drone’s control system, such as “protocol manipulation”, to control the drone or force it to land in a specific location. The Radiocommunications Act 1989 prohibits the use of intercepted communications, which creates legal difficulties for people other than law enforcement officials to utilise the drone control signal.The Radiocommunications Regulations (Prohibited Equipment - Radio Jammer Equipment) Notice 2011 also provide a general prohibition against jamming, although the Department of Corrections can utilise jamming within the boundaries of a prison.\u003cbr\u003e\n\u003cbr\u003e\nThe legal issues described above suggest that specific legislative authority may be required for C-UAS, as has occurred in the United States. The relevant legislative changes need not be “all or nothing”. As with other potentially hazardous activities, the ability to operate could be restricted to those that have been licensed to do so. The standard licensing model employed by the CAA is an appropriate model. The relevant regulations generally specify a minimum level of safety, but complying with those regulations do not absolve the licence holder from liability arising under the Civil Aviation Act 1990, the Health and Safety at Work Act 2015, or tort. Furthermore, the licence must specify how they will comply with the relevant regulations, which enables the licence holder to elect operating procedures that are most efficient for their specific circumstances.\u003cbr\u003e\n\u003cbr\u003e\nThe same approach could be adopted for the operation of C-UAS systems: a regulation for obtaining a licence for the operation of C-UAS systems could be promulgated, with potential operators of C-UAS systems being required to submit operating procedures for approval in order to obtain a licence. The licensing process adopted by the CAA issues operator licences for a maximum period of 5 years, ensuring that the licensed entity is subject to regular regulatory scrutiny. As C-UAS technology matures the need for licences may be obviated, or alternatively the increasing capabilities of C-UAS systems may reinforce the need for such systems.\u003cbr\u003e\n\u003cbr\u003e\n\u003cb\u003eSource:\u003c/b\u003e\nThis article summarises key aspects of the recent paper:\u003cbr\u003e\n\u003cdiv style\u003d\"margin-left:2em;\"\u003eShelley, Andrew (2018) “A Framework for Counter-Unmanned Aircraft System Regulation in New Zealand”, Policy Quarterly, 14(3):74-80, August.\u003c/div\u003e\n\u003cbr\u003e\nA copy of the full paper can be downloaded from \u003ca href\u003d\"http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id\u003d1318856\"\u003eAndrew’s author page on SSRN\u003c/a\u003e.\u003cbr\u003e"},"link":[{"rel":"edit","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/6797444343982113777"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/6797444343982113777"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/2018/08/counter-uas-regulation.html","title":"Counter-UAS Regulation"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https://4.bp.blogspot.com/-UTNFqm-TA7c/W4jIOhbgYOI/AAAAAAAADM0/3p8dgqYxFd4Us57FRoi5jSUjTMn4jbtYwCLcBGAs/s72-c/iStock-864435404_high.jpg","height":"72","width":"72"}},{"id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600.post-1319875142652218458"},"published":{"$t":"2016-12-06T11:31:00.000+13:00"},"updated":{"$t":"2016-12-06T11:44:50.914+13:00"},"category":[{"scheme":"http://www.blogger.com/atom/ns#","term":"Distributed Generation"},{"scheme":"http://www.blogger.com/atom/ns#","term":"Electricity Networks"},{"scheme":"http://www.blogger.com/atom/ns#","term":"News"}],"title":{"type":"text","$t":"Electricity Authority decisions demonstrate High Court reasoning was incorrect"},"content":{"type":"html","$t":"The Electricity Authority (EA) has been consulting on changes to electricity transmission pricing, removing the pricing principles under which distributed generation connects to the distribution network, and removing the avoided cost of transmission payments received by many distributed generators.  No owners of distributed generation accepted the EA’s proposals regarding distributed generation, and the transmission pricing proposals received widespread condemnation from across the industry (accept from certain major industrial customers, who were set to benefit significantly because the Authority chose measures of “use” that would significantly favour those entities).\u003cbr\u003e\n\u003cbr\u003e\nTo everyone participating in the consultation process on the EA’s proposals it was evident that the EA had a pre-determined position.  Consultation papers used terms like “subsidy” and “cross-subsidy” in a perjorative and political manner, using measures of “fairness” based on the EA’s heavily flawed analysis.  Unfavourable responses to consultation were met by the Authority trying again, from a different angle, or by trying to slice off a smaller sliver of an issue that it might be able to win in isolation.  The consultation process has been long, complicated, expensive for industry participants, and seemingly designed to wear everyone down.\u003cbr\u003e\n\u003cbr\u003e\nTrustpower took exception to the EA’s pre-determined position, and filed an application for a Judicial Review in the High Court.  On Friday 2 December 2016 the Court declined Trustpower’s application\u003csup\u003e\u003ca href\u003d\"#_1\"\u003e[1]\u003c/a\u003e\u003c/sup\u003e, with the decision being made public on Monday 5 December.\u003cbr\u003e\n\u003cbr\u003e\nIn reaching his decision, Cull J stated:\u003cbr\u003e\n\u003cdiv style\u003d\"margin-left:2em;\"\u003e\n\u003ci\u003eThe stage that has been reached in the process is that the [EA] has not made a final decision on the submissions it has received, but is still in the process of considering them.\u003c/i\u003e\u003csup\u003e\u003ca href\u003d\"#_2\"\u003e[2]\u003c/a\u003e\u003c/sup\u003e\u003c/div\u003e\n\u003cbr\u003e\nJudge Cull went on to state:\u003cbr\u003e\n\u003cdiv style\u003d\"margin-left:2em;\"\u003e\n\u003ci\u003eIt is also inappropriate for this Court to undertake a merits-based review of the [EA]'s consultation process, when the [EA] is currently undertaking an analysis of all the submissions... both as to substance and as to process, and has yet to reach a decision.\u003c/i\u003e\u003csup\u003e\u003ca href\u003d\"#_3\"\u003e[3]\u003c/a\u003e\u003c/sup\u003e\u003c/div\u003e\n\u003cbr\u003e\nThe EA gave the lie to the Judge Cull’s reasoning the very next day, announcing two decisions\u003csup\u003e\u003ca href\u003d\"#_4\"\u003e[4]\u003c/a\u003e\u003c/sup\u003e that had quite clearly already been made:\u003cul\u003e\n\u003cli\u003eFirst, the EA has decided not to progress the removal of the distributed generation pricing principles, a decision that was forced upon it given widespread condemnation of its proposals.\u003csup\u003e\u003ca href\u003d\"#_5\"\u003e[5]\u003c/a\u003e\u003c/sup\u003e\u003c/li\u003e\n\u003cli\u003eSecond, the EA has decided to progress the removal of ACOT payments.\u003c/li\u003e\n\u003c/ul\u003e\nThe decision to remove ACOT is hardly a surprise, being a decision that the EA made clear when it first consulted on ACOT back in 2013.\u003csup\u003e\u003ca href\u003d\"#_6\"\u003e[6]\u003c/a\u003e\u003c/sup\u003e  The decision was pre-determined and the EA was not going to let any amount of analysis stand in its way.\u003cbr\u003e\n\u003cbr\u003e\n\u003cfont size\u003d-2\u003e\n\u003cb\u003eEndnotes\u003c/b\u003e\u003cbr\u003e\n\u003ca name\u003d\"_1\"\u003e[1]\u003c/a\u003e Trustpower v Electricity Authority [2016] NZHC 2914. Available on the Electricity Authority website at \u003ca href\u003d\"http://www.ea.govt.nz/dmsdocument/21511\"\u003ehttp://www.ea.govt.nz/dmsdocument/21511\u003c/a\u003e.\u003cbr\u003e\n\u003ca name\u003d\"_2\"\u003e[2]\u003c/a\u003e At 116(b).\u003cbr\u003e\n\u003ca name\u003d\"_3\"\u003e[3]\u003c/a\u003e At 122.\u003cbr\u003e\n\u003ca name\u003d\"_4\"\u003e[4]\u003c/a\u003e Electricity Authority, \"Authority Decision on the review of DGPPs and ACOT\", 6 December 2016. Available from \u003ca href\u003d\"http://www.ea.govt.nz/development/work-programme/pricing-cost-allocation/review-part-6-dg-pricing-principles/development/authority-decision-on-the-review-of-dgpps-and-acot/\"\u003ethis link\u003c/a\u003e.\u003cbr\u003e\n\u003ca name\u003d\"_5\"\u003e[5]\u003c/a\u003e See the \u003ca href\u003d\"http://www.ea.govt.nz/dmsdocument/21513\"\u003esummary of submissions\u003c/a\u003e published by the EA.\u003cbr\u003e\n\u003ca name\u003d\"_6\"\u003e[6]\u003c/a\u003e For more on the original consultation, see \u003ca href\u003d\"http://www.asec.co.nz/2014/02/avoided-cost-of-transmission-acot.html\"\u003eASEC Report finds Benefits from Distributed Generation and ACOT Payments\u003c/a\u003e, 9 February 2014.\n\u003c/font\u003e"},"link":[{"rel":"edit","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/1319875142652218458"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/1319875142652218458"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/2016/12/electricity-authority-decisions.html","title":"Electricity Authority decisions demonstrate High Court reasoning was incorrect"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}]},{"id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600.post-8727061607412557237"},"published":{"$t":"2016-05-13T20:53:00.000+12:00"},"updated":{"$t":"2016-11-30T08:10:36.056+13:00"},"category":[{"scheme":"http://www.blogger.com/atom/ns#","term":"UAV"},{"scheme":"http://www.blogger.com/atom/ns#","term":"drone"},{"scheme":"http://www.blogger.com/atom/ns#","term":"White Paper"}],"title":{"type":"text","$t":"Application of New Zealand Privacy Law to Drones"},"content":{"type":"html","$t":"\u003cdiv style\u003d\"float:right;\"\u003e\u003ca href\u003d\"http://www.heraldsun.com.au/news/victoria/mt-martha-woman-snapped-sunbaking-in-gstring-by-real-estate-drone/news-story/c3eaaeb6318d7f01dcb4394da968340a\" imageanchor\u003d\"1\" \u003e\u003cimg border\u003d\"0\" src\u003d\"https://3.bp.blogspot.com/-CfAPDso4TyM/VzU_pOTMIeI/AAAAAAAACsI/qNSG5iaUgUk1yHji7nSpeQcnoxec7c8ugCLcB/s320/Sunbathing.png\" /\u003e\u003c/a\u003e\u003cdiv class\u003d\"caption\" style\u003d\"font-size:80%\"\u003e\nAn Australian woman discovered that real estate advertisements,\u003cbr\u003e\nincluding a large billboard, carried an image of her sunbathing in her\u003cbr\u003e\nbackyard.  Would New Zealand privacy law provide adequate\u003cbr\u003e\nprotection?\u003cbr\u003e\nSource: \u003ca href\u003d\"http://www.heraldsun.com.au/news/victoria/mt-martha-woman-snapped-sunbaking-in-gstring-by-real-estate-drone/news-story/c3eaaeb6318d7f01dcb4394da968340a\"\u003e“Mt Martha woman snapped sunbaking in g-string by real\u003cbr\u003eestate drone”, Herald Sun, 17 November 2014\u003c/a\u003e.\n\u003c/div\u003e\u003c/div\u003e\nNew Zealand privacy law encompasses the torts of wrongful publication of private facts and intrusion on seclusion, the Privacy Act 1993, and various provisions in the Crimes Act 1961 and the Summary Offences Act 1981.  The privacy torts set a high threshold, requiring a privacy violation to be “highly offensive”, a test that is highly dependent on the circumstances of the individual case. There is considerable uncertainty over whether the privacy torts provide any effective cause of action against privacy violations by drone.\u003cbr\u003e\n\u003cbr\u003e  \nThe Privacy Act creates an offence of an “interference with privacy”.  One of the most likely causes of an interference with privacy involving drones is that personal information has been “collected by means that, in the circumstances of the case … intrude to an unreasonable extent upon the personal affairs of the individual concerned”.\u003cbr\u003e\n\u003cbr\u003e\nThe Privacy Act appears to provide an avenue for redress for a person who believes that they have suffered a privacy violation, but there are significant hurdles to overcome.  Two particular problems are:\u003cul\u003e\n\u003cli\u003eThe victim may not be able to see the pilot, and there are unlikely to be any identifying characteristics on the drone, meaning that it will be very difficult to hold a specific individual accountable.\u003c/li\u003e\n\u003cli\u003eIn a test case in 2015, the Privacy Commissioner held that if a drone is not recording then there is no information collected, so no information privacy principle can be violated and there is no interference with privacy.\u003c/li\u003e\n\u003c/ul\u003e\nThere are sufficient uncertainties in the application of the current body of tort and statute that a person upset by unwelcome surveillance cannot be sure of an acceptable resolution, even when that surveillance takes place in a location where they have a reasonable expectation of privacy.\u003cbr\u003e\n\u003cbr\u003e\nNew Zealand’s current privacy framework requires clarification to better accommodate the challenges posed by drones. Some of the modifications could potentially be achieved by way of a code of practice issued under the Privacy Act, which may provide a relatively low-cost means of setting the standard of acceptable behaviour. Challenges will still remain because the characteristics of drone technology make it difficult to identify the operator, which in turn makes it difficult to obtain any legal remedy. Such challenges may mean that in some instances an alternative, more direct means of intervening to protect one’s right to privacy would be efficient.\u003cbr\u003e\n\u003cbr\u003e\n\u003cb\u003eSource:\u003c/b\u003e\u003cbr\u003e\nThis article summarises key aspects of the recent paper:\u003cbr\u003e\n\u003cdiv style\u003d\"margin-left:2em;\"\u003eShelley, Andrew (2016) “Application of New Zealand Privacy Law to Drones”, \u003ci\u003ePolicy Quarterly\u003c/i\u003e, 12(2):73-79, May.\u003c/div\u003e\n\u003cbr\u003e  \nA copy of the full paper can be downloaded from the \u003ca href\u003d\"http://igps.victoria.ac.nz/publications/publications/show/368\"\u003ePolicy Quarterly website\u003c/a\u003e or \u003ca href\u003d\"http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id\u003d1318856\"\u003eAndrew’s author page on SSRN\u003c/a\u003e.\u003cbr\u003e\n"},"link":[{"rel":"edit","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/8727061607412557237"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/8727061607412557237"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/2016/05/application-of-new-zealand-privacy-law.html","title":"Application of New Zealand Privacy Law to Drones"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https://3.bp.blogspot.com/-CfAPDso4TyM/VzU_pOTMIeI/AAAAAAAACsI/qNSG5iaUgUk1yHji7nSpeQcnoxec7c8ugCLcB/s72-c/Sunbathing.png","height":"72","width":"72"}},{"id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600.post-7970991735641640031"},"published":{"$t":"2015-08-11T16:58:00.000+12:00"},"updated":{"$t":"2015-08-21T09:52:04.140+12:00"},"category":[{"scheme":"http://www.blogger.com/atom/ns#","term":"KCE"},{"scheme":"http://www.blogger.com/atom/ns#","term":"IEGA"},{"scheme":"http://www.blogger.com/atom/ns#","term":"Distributed Generation"},{"scheme":"http://www.blogger.com/atom/ns#","term":"Electricity Networks"},{"scheme":"http://www.blogger.com/atom/ns#","term":"Transmission Pricing"},{"scheme":"http://www.blogger.com/atom/ns#","term":"Electra"},{"scheme":"http://www.blogger.com/atom/ns#","term":"News"}],"title":{"type":"text","$t":"TPM Options Review"},"content":{"type":"html","$t":"On 16 June 2015 the Electricity Authority (EA) released that latest in its series of working papers: the Transmission Pricing Methodology Review: TPM options working paper (the “TPM Options Paper”).  It is understood that the EA intends the TPM Options paper to be the last of the working papers, with the results of the current consultation enabling it to move to selecting a specific TPM option to assess against the current TPM.\nIn a somewhat unusual situation, ASEC prepared three responses to the TPM Options Paper:\u003cul\u003e\n\u003cli\u003e\u003ca href\u003d\"http://tinyurl.com/pxoux5t\"\u003eA report for the Independent Electricity Generators Association\u003c/a\u003e (IEGA);\u003c/li\u003e\n\u003cli\u003e\u003ca href\u003d\"http://tinyurl.com/oz99k4t\"\u003eA report for Electra\u003c/a\u003e (a distributor) \u003ca href\u003d\"http://tinyurl.com/oz99k4t\"\u003eand King Country Energy\u003c/a\u003e (a small generator and retailer and member of the IEGA); and\u003c/li\u003e\n\u003cli\u003e\u003ca href\u003d\"http://tinyurl.com/q76wgtt\"\u003eA letter from ASEC on the treatment of the Loss and Constraints Excess\u003c/a\u003e (LCE).\u003c/li\u003e\n\u003c/ul\u003e\n\u003cbr\u003e\nThe EA’s proposals created sufficient alignment of interest between the parties that the three responses could be prepared without risk of arguing at cross purposes.\u003cbr\u003e\n\u003cbr\u003e\nTraditional analyses of embedded generation are typically focussed on short-run effects, concerned to ensure that pricing does not provide incentives to avoid or reduce use of the current transmission system.  A long-term view, on the other hand, suggests that this approach may not be correct and may result in being locked in to existing technologies and existing network structures.\u003cbr\u003e\n\u003cbr\u003e\nThe report for the IEGA develops a theoretical framework for embedded generation within the construct of a planner seeking to optimise the mix of local generation, local transmission, and remote generation for a distribution network.  The same framework readily allows energy efficiency and other demand management initiatives.\u003cbr\u003e\n\u003cbr\u003e\nBoth the IEGA and Electra/KCE reports address a wide range of issues that arise with the various proposed TPM Options.  Perhaps the greatest concern is that the allocation of the proposed Residual charge results in an under-allocation of approximately $52m to the directly-connected industrial customers, which will instead be paid by the consumers connected to distribution networks.  The same allocations provide an incentive for larger industrial consumers to disconnect from distribution networks and connect to the transmission network.\u003cbr\u003e\n\u003cbr\u003e\nThe letter on the treatment of the Loss and Constraints Excess reinforces the submission made in March 2014.  The EA proposes to credit the LCE that arises on Connection and Deeper Connection assets to the parties that pay for those assets, but credit the remainder of the LCE in bulk against Transpower’s revenue requirement.  The treatment of LCE on Connection and Deeper Connection assets is appropriate, but the treatment of the remainder is not.  The proposed TPM Options also include an “Area of Benefit” charge to recover the cost of specific transmission investments.  The parties that pay for those new assets should also receive the LCE generated on those assets.\u003cbr\u003e\n\u003cbr\u003e\nFor more detail on these issues and more, see the relevant submissions:\u003cul\u003e\n\u003cli\u003e\u003ca href\u003d\"http://tinyurl.com/pxoux5t\"\u003ereport for the Independent Electricity Generators Association\u003c/a\u003e;\u003c/li\u003e\n\u003cli\u003e\u003ca href\u003d\"http://tinyurl.com/oz99k4t\"\u003ereport for Electra and King Country Energy\u003c/a\u003e; and\u003c/li\u003e\n\u003cli\u003e\u003ca href\u003d\"http://tinyurl.com/q76wgtt\"\u003eASEC submission on the Loss and Constraints Excess\u003c/a\u003e.\u003c/li\u003e\n\u003c/ul\u003e\n\n"},"link":[{"rel":"edit","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/7970991735641640031"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/7970991735641640031"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/2015/08/tpm-options-review.html","title":"TPM Options Review"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}]},{"id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600.post-3673048564898056478"},"published":{"$t":"2015-05-28T16:36:00.000+12:00"},"updated":{"$t":"2015-08-11T20:26:18.613+12:00"},"category":[{"scheme":"http://www.blogger.com/atom/ns#","term":"Electricity Networks"},{"scheme":"http://www.blogger.com/atom/ns#","term":"TENCO-EBS"},{"scheme":"http://www.blogger.com/atom/ns#","term":"News"}],"title":{"type":"text","$t":"Review of Secondary Networks"},"content":{"type":"html","$t":"\u003cdiv style\u003d\"float:right; margin-left:1em; margin-bottom:1em;\"\u003e\u003ca href\u003d\"http://tenco-ebs.co.nz\" imageanchor\u003d\"1\" \u003e\u003cimg border\u003d\"0\" width\u003d240 src\u003d\"http://2.bp.blogspot.com/-rnuj5RTdMnw/Vcl5p3tOyFI/AAAAAAAACj8/UhPb4Bn2vtA/s320/logo-tenco-2.png\" /\u003e\u003c/a\u003e\u003c/div\u003eTENCO EBS (\u003ca href\u003d\"http://tenco-ebs.co.nz\"\u003ehttp://tenco-ebs.co.nz\u003c/a\u003e) commissioned Andrew Shelley Economic Consulting Ltd (ASEC) to prepare a \u003ca href\u003d\"http://tinyurl.com/q77grka\"\u003ereport\u003c/a\u003e in response to the Retail Advisory Group’s \u003ca href\u003d\"http://tinyurl.com/ox5ltoa\"\u003eIssues and Options Paper\u003c/a\u003e on Secondary Networks.\u003cbr\u003e\n\u003cbr\u003e\nNetworks for conveying electricity to consumers are categorised by their level of connection to the transmission network.  Those that are directly connected to the transmission network are local distribution networks (“Local Networks”).  Secondary networks are indirectly connected to the transmission network by way of another electricity network.\u003cbr\u003e\n\u003cbr\u003e\nSecondary networks typically service consumers in a specific multi-tenant location such as multi-tenanted office blocks, residential apartment buildings, retirement villages, shopping centres, airports, industrial/commercial parks, residential subdivisions, and permanent camping sites.  Secondary networks may be:\u003cul\u003e\n\u003cli\u003eCustomer Networks, which is typically represented by a single Installation Control Point (ICP) in the registry, and individual consumers on that network do not have an ICP but are billed for their electricity consumption by the network owner;\u003c/li\u003e\n\u003cli\u003eEmbedded Networks, where each consumer has an ICP and can obtain retail services from retailers that operate on that Embedded Network (which in theory requires a use-of-system agreement (UoSA) to be negotiated); and\u003c/li\u003e\n\u003cli\u003eNetwork Extensions, where the network operates as an extension of the Local Network, and each consumer has an ICP and obtains retail services from retailers that operate on the Local Network.\u003c/li\u003e\n\u003c/ul\u003e\n\u003cbr\u003e\nThe Retail Advisory Group has identified that certain competition, reliability, and efficiency issues may arise with secondary networks.  The issues identified include:\u003cul\u003e\n\u003cli\u003eConsumers on Customer Networks do not have a choice of retailer;\u003c/li\u003e\n\u003cli\u003eRetailers claim that it is difficult to negotiate UoSAs with Embedded Networks;\u003c/li\u003e\n\u003cli\u003eRetailers claim that it is difficult to maintain relationships with Embedded Networks;\u003c/li\u003e\n\u003cli\u003eInteractions between retailers, distributors, and secondary networks could be improved, for example during the conversion of a secondary network from one type to another; and\u003c/li\u003e\n\u003cli\u003eInteractions between retailers, distributors, secondary networks and consumers could be improved to reduce costs of performing market functions and providing retail and network services.\u003c/li\u003e\n\u003c/ul\u003e\n\u003cbr\u003e\nOf particular note, ASEC analysis of registry data on ICPs shows that Embedded Networks have a Herfindahl-Hirschman Index (HHI) of 1,562, significantly lower than the estimate of \u003e3,000 calculated by the Electricity Authority for the national residential retail market.  Embedded Networks also have significantly lower Concentration Ratios.  This data strongly suggests that there is not a problem with competition on Embedded Networks, but rather that Embedded Networks are the network environment with the highest level of competition.\u003cbr\u003e\n\u003cbr\u003e\nA range of measures are proposed to reduce transaction costs and enhance the efficiency and competitiveness of retail competition on Secondary Networks.\nMore Information:\u003cul\u003e\n\u003cli\u003eThe Retail Advisory Group’s \u003ca href\u003d\"http://tinyurl.com/ox5ltoa\"\u003eIssues and Options Paper\u003c/a\u003e; and\u003c/li\u003e\n\u003cli\u003eThe \u003ca href\u003d\"http://tinyurl.com/q77grka\"\u003eASEC Report\u003c/a\u003e.\u003c/li\u003e\n\u003c/ul\u003e\n"},"link":[{"rel":"edit","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/3673048564898056478"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/3673048564898056478"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/2015/05/review-of-secondary-networks.html","title":"Review of Secondary Networks"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"http://2.bp.blogspot.com/-rnuj5RTdMnw/Vcl5p3tOyFI/AAAAAAAACj8/UhPb4Bn2vtA/s72-c/logo-tenco-2.png","height":"72","width":"72"}},{"id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600.post-4133996149518482571"},"published":{"$t":"2015-03-06T13:24:00.000+13:00"},"updated":{"$t":"2016-11-30T08:11:27.072+13:00"},"category":[{"scheme":"http://www.blogger.com/atom/ns#","term":"Callaghan Innovation"},{"scheme":"http://www.blogger.com/atom/ns#","term":"UAV"},{"scheme":"http://www.blogger.com/atom/ns#","term":"drone"},{"scheme":"http://www.blogger.com/atom/ns#","term":"Cost-Benefit Analysis"},{"scheme":"http://www.blogger.com/atom/ns#","term":"News"}],"title":{"type":"text","$t":"Study Quantifies Benefits from Beyond-Line-of-Sight use of UAVs"},"content":{"type":"html","$t":"\u003cdiv style\u003d\"float:right; margin-left:1em; margin-bottom:1em;\"\u003e\u003ctable width\u003d\"240\"\u003e\u003ctr\u003e\u003ctd\u003e\n\u003cimg border\u003d\"0\" width\u003d240 src\u003d\"http://3.bp.blogspot.com/-GMnLdiRH1gk/VPj3ULg9h9I/AAAAAAAACc4/VsmX4r8J5M8/s320/RQ20A-130304-M-DE426-001_crop.jpg\" /\u003e\n\u003c/td\u003e\u003c/tr\u003e\u003ctr\u003e\u003ctd\u003e\u003cfont size\u003d-2\u003e\n\u003cb\u003eAeroVironment Puma being hand-launched\u003c/b\u003e\u003cbr\u003e\nPhoto: Sgt. Bobby Yarbrough - \u003ca rel\u003d\"nofollow\" class\u003d\"external free\" href\u003d\"http://www.marines.mil/Photos.aspx?igphoto\u003d2000010661\"\u003ehttp://www.marines.mil/Photos.aspx?igphoto\u003d2000010661\u003c/a\u003e Crop of 130304-M-DE426-001.JPG. Licensed under Public Domain via \u003ca href\u003d\"//commons.wikimedia.org/wiki/\"\u003eWikimedia Commons\u003c/a\u003e.\u003c/font\u003e\n\u003c/td\u003e\u003c/tr\u003e\u003c/table\u003e\u003c/div\u003eAndrew Shelley Economic Consulting Ltd teamed with Aviation Safety Management Systems Ltd to quantify the potential economic benefits to New Zealand from allowing beyond-line-of-sight use of Unmanned Aerial Vehicles (UAVs) for pasture management, forestry, and monitoring electricity infrastructure.  The report, commissioned by Callaghan Innovation, estimates that benefits to New Zealand could be in the order of $151m - $189m per year.\u003cbr\u003e\n\u003cbr\u003e\nThe Civil Aviation regulatory framework in New Zealand currently requires the pilot of a UAV to maintain visual contact with the aircraft at all times, or otherwise to have an observer who maintains visual contact, to ensure that appropriate action can be taken to avoid collision with any manned aircraft.  Beyond-line-of-sight use provides opportunities for additional economic benefits to be realised, but that will require additional measures to be in place to ensure that collisions do not occur.  Research and practical experience suggest that line of sight is restricted to a distance of from 500m to approximately 1.4km.\u003cbr\u003e\n\u003cbr\u003e\nThe largest gains from beyond line-of-sight use of UAVs arise in the forestry sector, where the use of UAVs for pest and disease monitoring and control has the potential for gains of at least $72m-$95m per year.  The nature of forest plantations is such that line-of-sight use of UAVs is highly restricted and little benefit can be gained.  When beyond-line-of-sight use is adopted, benefits from enhanced control of \u003ci\u003eDothistroma\u003c/i\u003e in radiata pine plantations could be as much as $69m per year, and improved control of the eucalyptus tortoise beetle could generate a further net benefit of $26m.  Control of other pests and diseases would generate further benefits.\u003cbr\u003e\n\u003cbr\u003e\nThe gains from UAV use in pasture management are potentially very large, but the majority of those benefits can be obtained from line-of-sight use.  Given assumed high take-up rates in dairy, but relatively small farm sizes that can be covered relatively efficiently with line-of-sight operation, the gains from beyond-line-of-sight use in dairy are estimated to be approximately $29m per year.  Sheep and beef farming is assumed to have limited take-up rates (approximately 20% of farms), but the much larger size of these farms means that the gains are larger at an estimated $38m per year.\u003cbr\u003e\n\u003cbr\u003e\nThe use of UAVs in electricity infrastructure inspection allows for more frequent inspections, better targeted maintenance and reduced outage times.  Reduced outage times on the electricity distribution system could provide economic benefits to consumers of from $4m to $19m per year.  Reductions in the cost of maintenance would yield approximately another $7m per year.  Additional safety benefits occur from avoiding having inspections conducted by low-flying helicopters and reducing the amount of time that linesmen may have to work at height, but these have not been quantified.\u003cbr\u003e\n\u003cbr\u003e\nFor more information:\u003cul\u003e\n\u003cli\u003eRead the \u003ca href\u003d\"http://callaghaninnovation.govt.nz/news-events/uav-report-shows-beyond-line-sight-benefits\"\u003eCallaghan Innovation press release\u003c/a\u003e;\u003c/li\u003e\n\u003cli\u003eThe \u003ca href\u003d\"http://www.nzherald.co.nz/economy/news/article.cfm?c_id\u003d34\u0026objectid\u003d11412496\"\u003eNew Zealand Herald article\u003c/a\u003e;\u003c/li\u003e\n\u003cli\u003eThe same article on the \u003ca href\u003d\"http://www.nbr.co.nz/article/nz-could-reap-190myear-benefit-becoming-first-nation-allow-beyond-line-sight-drones-bd\"\u003eNational Business Review\u003c/a\u003e;\u003c/li\u003e\n\u003cli\u003eVisit the \u003ca href\u003d\"http://www.asms.co.nz\"\u003eAviation Safety Management Systems website\u003c/a\u003e;\u003c/li\u003e\n\u003cli\u003eDownload the report \u003ca href\u003d\"http://tinyurl.com/ketflzy\"\u003ehere\u003c/a\u003e or from the \u003ca href\u003d\"https://www.callaghaninnovation.govt.nz/sites/all/files/UAV-benefits-study.pdf\"\u003eCallaghan Innovation website\u003c/a\u003e.\u003c/li\u003e\n\u003c/ul\u003e\n"},"link":[{"rel":"edit","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/4133996149518482571"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/4133996149518482571"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/2015/03/study-quantifies-benefits-from-beyond.html","title":"Study Quantifies Benefits from Beyond-Line-of-Sight use of UAVs"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"http://3.bp.blogspot.com/-GMnLdiRH1gk/VPj3ULg9h9I/AAAAAAAACc4/VsmX4r8J5M8/s72-c/RQ20A-130304-M-DE426-001_crop.jpg","height":"72","width":"72"}},{"id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600.post-3518338557651326094"},"published":{"$t":"2014-05-08T11:14:00.000+12:00"},"updated":{"$t":"2015-08-11T20:26:18.610+12:00"},"category":[{"scheme":"http://www.blogger.com/atom/ns#","term":"WACC"},{"scheme":"http://www.blogger.com/atom/ns#","term":"Unison Networks"},{"scheme":"http://www.blogger.com/atom/ns#","term":"Electricity Networks"},{"scheme":"http://www.blogger.com/atom/ns#","term":"News"}],"title":{"type":"text","$t":"Selecting the Regulated WACC in the Presence of Market and Catastrophic Risks"},"content":{"type":"html","$t":"A new report by Andrew Shelley Economic Consulting Ltd (ASEC) analyses issues relevant to the choice of the Weighted Average Cost of Capital (WACC) for regulated Electricity Distribution Businesses (EDBs) in the context of risks faced by those entities.\u003csup\u003e\u003ca href\u003d\"#_1\"\u003e[1]\u003c/a\u003e\u003c/sup\u003e  The report demonstrates that given key technological and catastrophic risks faced by EDBs, the economic costs of setting the WACC too high are likely to be less than the costs of setting it too low.\u003cbr\u003e\n\u003cbr\u003e\nKey risks facing electricity distribution are technological change, which could render existing networks obsolete, and catastrophic events such as earthquakes, volcanic eruptions, and an increase in storm damage due to climate change.  The regulatory regime currently in place means that In the best case scenario, EDB making investments now can expect that from regulatory period to regulatory period it will earn its WACC, such that in approximately 45 years’ time it will break even on the investment.  These risks mean that it is not appropriate to set the regulated WACC at its mid-point value unless the risks are explicitly addressed through another mechanism.  Absent such a mechanism, it is likely to be necessary to set the WACC at above its mid-point (above the 50\u003csup\u003eth\u003c/sup\u003e percentile).\u003cbr\u003e\n\u003cbr\u003e\nASEC estimates that setting the WACC at the 75\u003csup\u003eth\u003c/sup\u003e percentile of the WACC distribution results in average delivered electricity prices around 1.4% to 1.8% higher than if the WACC is set at the 50\u003csup\u003eth\u003c/sup\u003e percentile.  Given a price elasticity of demand of -0.4, the difference in average delivered electricity prices will result in a deadweight loss of between $174,000 and $214,000 per year.\u003cbr\u003e\n\u003cbr\u003e\nThe same economic cost would arise with a loss of supply of just 14.36MWh per year, equivalent to an increase in SAIDI\u003csup\u003e\u003ca href\u003d\"#_2\"\u003e[2]\u003c/a\u003e\u003c/sup\u003e of 15 just seconds over the weighted average SAIDI of 111 minutes and 35.5 seconds.  This is a trivial increase compared to the higher long term SAIDI rate that could occur if EDBs did not undertake discretionary non-essential capital expenditure such as undergrounding or network reinforcement to build resilience.\u003cbr\u003e\n\u003cbr\u003e\nFacing a lower WACC, EDBs could also increase the level of capital contributions required, shifting capital expenditure to customers who have a higher WACC.  In aggregate, EDBs would only need to increase capital contributions by $18m to achieve the same economic cost as the deadweight loss from higher prices.\u003cbr\u003e\n\u003cbr\u003e\nRefinement of the above estimates into a loss function requires considerable additional analysis, including the development of engineering studies on network performance under various catastrophic events given different levels of discretionary investment. Other complex issues will also require resolution and agreement, such as the relationship between the regulatory WACC and discretionary capital expenditure by EDBs, and how reductions in\ndiscretionary capital expenditure would translate into economic costs.\u003cbr\u003e\n\u003cbr\u003e\nA copy of ASEC’s report can be downloaded \u003ca href\u003d\"http://www.comcom.govt.nz/dmsdocument/11859\"\u003ehere\u003c/a\u003e.\u003cbr\u003e\n\u003cbr\u003e\n\u003cfont size\u003d-2\u003e\n\u003cb\u003eEndnotes\u003c/b\u003e\u003cbr\u003e\n\u003ca name\u003d\"_1\"\u003e1.\u003c/a\u003e  ASEC was retained by Unison Networks Ltd to prepare this report for submission to the New Zealand Commerce Commission's current process considering the appropriate WACC.  The Commerce Commission's project page is \u003ca href\u003d\"http://www.comcom.govt.nz/regulated-industries/input-methodologies-2/further-work-on-wacc/\"\u003ehere\u003c/a\u003e.\u003cbr\u003e\n\u003ca name\u003d\"_2\"\u003e2.\u003c/a\u003e  The System Average Interruption Duration Index or SAIDI is a commonly used measure of reliability for electricity networks.  SAIDI measures the average outage duration for each customer served.\u003cbr\u003e\n\u003c/font\u003e\n"},"link":[{"rel":"edit","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/3518338557651326094"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/3518338557651326094"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/2014/05/selecting-regulated-wacc-in-presence-of.html","title":"Selecting the Regulated WACC in the Presence of Market and Catastrophic Risks"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}]},{"id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600.post-5890451413731681888"},"published":{"$t":"2014-03-24T23:28:00.000+13:00"},"updated":{"$t":"2016-11-30T08:11:27.078+13:00"},"category":[{"scheme":"http://www.blogger.com/atom/ns#","term":"Buller Electricity"},{"scheme":"http://www.blogger.com/atom/ns#","term":"Pulse Energy"},{"scheme":"http://www.blogger.com/atom/ns#","term":"Electricity Networks"},{"scheme":"http://www.blogger.com/atom/ns#","term":"Cost-Benefit Analysis"},{"scheme":"http://www.blogger.com/atom/ns#","term":"News"}],"title":{"type":"text","$t":"ASEC Calculates Value of Pulse Energy to Buller Consumers"},"content":{"type":"html","$t":"\u003cdiv style\u003d\"float:right; margin-left:1em; margin-bottom:1em;\"\u003e\u003cimg border\u003d\"0\" width\u003d240 src\u003d\"http://3.bp.blogspot.com/-Ty-NB4J7Eyg/U2zBNC8GKWI/AAAAAAAAB3M/6xzYHrKDk84/s320/logo_PulseEnergy.png\" /\u003e\u003c/div\u003eBuller Electricity Ltd (BEL) is the small trust-owned electricity distribution network serving the Buller region.  Andrew Shelley Economic Consulting Ltd (ASEC) was retained by BEL to estimate the value to BEL's consumer-owners of the company's ownership stake in Pulse Energy.\u003cbr\u003e\n\u003cbr\u003e\nFrequent congestion or constraints on the transmission lines providing power to the region means that retailers operating in the area face high levels of wholesale electricity price risk.  ASEC's analysis considers the risk management options that are available to a retailer, and how this leads to a regional retail electricity market.  Limited risk management options for those retailers without generation increases risk and is likely to reduce competition,\u003cbr\u003e\n\u003cbr\u003e\nPulse Energy entered the retail electricity market in Buller region after Buller Electricity entered a recapitalisation agreement with Pulse Energy in 2010.  BEL currently owns 59.47% of Pulse Energy.  In the space of two years, Pulse Energy gained a market share of over 25% of Installation Control Points (ICPs), and currently maintains a market share of 23%-24% of ICPs.  The process of competition would be expected to result in lower retail prices, providing BEL's consumer-owners with a benefit that is unlikely to have occurred absent the entry of Pulse Energy.\u003cbr\u003e\n\u003cbr\u003e\nThe actual market share of retailers is known, as are their actual prices.  Estimates are developed of the market share and weighted average retail price that might have prevailed but for the entry of Pulse Energy.  Comparing this \"counterfactual\" weighted retail price with the actual retail price provides an estimate of the benefit per kWh.  Average annual loads for consumers on the BEL network then allow the calculation of an annual benefit.  This is converted to a net present value over the period 5-15 years, using a social discount rate.  The period 5-15 years is the timefame over which independent generation might be expected to enter the regional electricity market, providing opportunities for retailers to hedge their exposure to transmission constraints.\u003cbr\u003e\n\u003cbr\u003e\nA copy of the ASEC report can be downloaded from the Buller Electricity website \u003ca href\u003d\"http://www.bullerelectricity.co.nz/assets/About-us/Value-of-Pulse-Energy-Final-14-February-2014.pdf\"\u003ehere\u003c/a\u003e.\u003cbr\u003e\nView the Buller Electricity press release \u003ca href\u003d\"http://www.scoop.co.nz/stories/BU1403/S00768/benefits-to-buller-consumers-from-pulse-investment.htm\"\u003ehere\u003c/a\u003e.\n"},"link":[{"rel":"edit","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/5890451413731681888"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/5890451413731681888"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/2014/03/asec-calculates-value-pulse-energy-to.html","title":"ASEC Calculates Value of Pulse Energy to Buller Consumers"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"http://3.bp.blogspot.com/-Ty-NB4J7Eyg/U2zBNC8GKWI/AAAAAAAAB3M/6xzYHrKDk84/s72-c/logo_PulseEnergy.png","height":"72","width":"72"}},{"id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600.post-992544159686177890"},"published":{"$t":"2014-03-04T17:00:00.000+13:00"},"updated":{"$t":"2015-08-11T20:28:13.739+12:00"},"category":[{"scheme":"http://www.blogger.com/atom/ns#","term":"Electricity Networks"},{"scheme":"http://www.blogger.com/atom/ns#","term":"Transmission Pricing"},{"scheme":"http://www.blogger.com/atom/ns#","term":"News"}],"title":{"type":"text","$t":"ASEC Disagrees with Electricity Authority Proposals"},"content":{"type":"html","$t":"\u003cdiv style\u003d\"float:right; margin-left:1em; margin-bottom:1em;\"\u003e\u003cimg border\u003d\"0\" width\u003d240 src\u003d\"http://3.bp.blogspot.com/-ZDiydmKsI6Y/UxQ1pLn_scI/AAAAAAAABwk/R5qC0dsWdQs/s320/Transmission_DesertRd.jpg\" /\u003e\u003c/div\u003eAndrew Shelley Economic Consulting Ltd (ASEC) has submitted on its own behalf to the Electricity Authority's (\"the Authority's\") consultation on the use of the \"loss and constraints excess\" (LCE) to offset transmission charges.\u003ca href\u003d\"#_Note\"\u003e*\u003c/a\u003e\u003cbr\u003e\n\u003cbr\u003e\nThe Authority issued its working paper, \u003ci\u003eTransmission pricing methodology: Use of LCE to offset transmission charges\u003c/i\u003e, on 21 January 2014.  ASEC made this submission because the Authority's working paper lacked the intellectual rigour that should reasonably be expected from professional economists.  In a letter to the Authority, Andrew Shelley states that \"it is important to distinguish between conjectures that seem logical and robust demonstrations of fact.\"\u003cbr\u003e\n\u003cbr\u003e\nMr Shelley's letter demonstrates that the LCE should be returned to the party paying for transmission. If this is not done then locational marginal pricing creates a distortion in favour of market participants owning transmission assets (and thereby keeping them out of the wholesale electricity market).  Mr Shelley also argues that the resulting “muting” of the marginal price signal is not a concern from an economic perspective, with a price equal to marginal cost only being optimal in a narrow set of circumstances such as perfect competition.\u003cbr\u003e\n\u003cbr\u003e\nIt has been claimed that payment of LCE to parties that pay for transmission could introduce a risk that generators would \"game\" the LCE.  Mr Shelley examines this claim and concludes that it is unlikely that generators will have such an incentive, with an increase in LCE normally being associated with a decrease in generation and decrease in profitability.\u003cbr\u003e\n\u003cbr\u003e\nASEC's letter to the Authority can be downloaded \u003ca href\u003d\"http://tinyurl.com/mmw98vw\"\u003ehere\u003c/a\u003e.\u003cbr\u003e\n\u003cbr\u003e\n\u003ca name \u003d \"_Note\"\u003eNote\u003c/a\u003e: The LCE arises from the pricing system used in the wholesale electricity market.  Locational marginal prices are set based on the marginal cost of electrical losses and constraints, whereas the average cost of losses is the cost actually incurred.  A fundamental characteristic of the physics of electricity is that electrical losses are proportional to the square of current, which means that marginal losses are greater than average losses.  In the wholesale electricity market this means that more money is collected from customers than is paid to generators, and the difference is termed the \"loss and constraints excess\".  This does not represent a super-profit, but is instead currently returned to consumers by way of a reduction in lines charges.\u003cbr\u003e \n\u003cbr\u003e\n"},"link":[{"rel":"edit","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/992544159686177890"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/992544159686177890"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/2014/03/asec-disagrees-with-electricity.html","title":"ASEC Disagrees with Electricity Authority Proposals"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"http://3.bp.blogspot.com/-ZDiydmKsI6Y/UxQ1pLn_scI/AAAAAAAABwk/R5qC0dsWdQs/s72-c/Transmission_DesertRd.jpg","height":"72","width":"72"}},{"id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600.post-5437906053107784213"},"published":{"$t":"2014-02-09T14:56:00.001+13:00"},"updated":{"$t":"2016-11-30T08:11:27.075+13:00"},"category":[{"scheme":"http://www.blogger.com/atom/ns#","term":"IEGA"},{"scheme":"http://www.blogger.com/atom/ns#","term":"Distributed Generation"},{"scheme":"http://www.blogger.com/atom/ns#","term":"Electricity Networks"},{"scheme":"http://www.blogger.com/atom/ns#","term":"Transmission Pricing"},{"scheme":"http://www.blogger.com/atom/ns#","term":"Cost-Benefit Analysis"},{"scheme":"http://www.blogger.com/atom/ns#","term":"News"}],"title":{"type":"text","$t":"ASEC Report finds Benefits from Distributed Generation and ACOT Payments"},"content":{"type":"html","$t":"A new report by Andrew Shelley Economic Consulting Ltd (ASEC) finds that distributed generation (DG) provides significant benefits, and that Avoided Cost of Transmission (ACOT) payments made to distributed generation embedded within distribution networks also provide benefits.  ACOT payments are made to generators embedded within a distribution network and which generate at peak periods, thereby avoiding transmission charges based on peak.\u003cbr\u003e\n\u003cbr\u003e\nIn November 2013 the Electricity Authority issued a \"working paper\" which, in essence, claims that there are little or no benefits obtained from distributed generation that is embedded within distribution networks, and indicating that such payments should be eliminated.  Andrew Shelley Economic Consulting Ltd (ASEC) was retained by the Independent Electricity Generators Association (IEGA) to examine the Authority's analysis and, where relevant, to provide estimates of benefits derived from distributed and embedded generation and from ACOT payments themselves.\u003cbr\u003e\n\u003cbr\u003e\u003ca name\u003d'more'\u003e\u003c/a\u003e\nASEC finds that:\u003cul\u003e\n\u003cli\u003eA focus on the \"Long Term Benefit of Consumers\", which is the Authority's statutory purpose, requires a focus on dynamic efficiency and long term investment incentives rather than the Authority's apparent concern with short-run concepts of productive efficiency;\u003c/li\u003e\n\u003cli\u003eRetail electricity markets are regional, and distributed generation has an important role to play in enhancing the competitiveness of those markets;\u003c/li\u003e\n\u003cli\u003eTransmission investment does take account of distributed generation, and distributed generation does have the effect of reducing or deferring transmission investment.  If the Authority has concerns about the transmission investment process then the appropriate forum would be to engage with the Commerce Commission in the review of the Transpower Capital Expenditure Input Methodology;\u003c/li\u003e\n\u003cli\u003ePrevious studies have shown that embedded generation does have positive net benefits in the distribution network, but the Authority's analysis completely ignores this work;\u003c/li\u003e\n\u003cli\u003eA model of transmission investment suggests that there can be significant positive benefits from distributed and embedded generation avoiding transmission investment.\u003c/li\u003e\n\u003c/ul\u003e\nGiven a simple model, low levels of DG penetration may result in net benefits from avoided transmission investment of between $3.94 and $7.58 per Installation Control Point (ICP), whereas high levels of DG penetration may result in net benefits of between $15.50/ICP and $29.82/ICP. To the extent that ACOT prevents market failure by enabling DG to internalise the benefits of reduced future transmission investment and reducing the relative risk of DG cash flows, at high levels of DG penetration the benefits induced by ACOT exceed the $10.29 per household cost calculated by the Authority. This suggests that if the Authority’s focus is on long term benefits to consumers, it should be seeking to reduce the barriers to increased DG penetration rather than reducing or removing ACOT payments.\u003cbr\u003e\n\u003cbr\u003e\nTo read more of the ASEC report, download the report \u003ca href\u003d\"http://www.ea.govt.nz/dmsdocument/16366\"\u003ehere\u003c/a\u003e. The IEGA's covering submission is available \u003ca href\u003d\"http://www.ea.govt.nz/dmsdocument/16368\"\u003ehere\u003c/a\u003e.  "},"link":[{"rel":"edit","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/5437906053107784213"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/5437906053107784213"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/2014/02/avoided-cost-of-transmission-acot.html","title":"ASEC Report finds Benefits from Distributed Generation and ACOT Payments"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}]},{"id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600.post-7447829754645196199"},"published":{"$t":"2014-02-02T13:56:00.001+13:00"},"updated":{"$t":"2014-02-09T15:04:22.531+13:00"},"category":[{"scheme":"http://www.blogger.com/atom/ns#","term":"White Paper"}],"title":{"type":"text","$t":"The Social Discount Rate"},"content":{"type":"html","$t":"When calculating the value of an investment, or determining whether to undertake a certain project or action, future costs and benefits are reduced (or \"discounted\") into an equivalent value today.  The reason for discounting is that a dollar received in a year's time is worth less than a dollar received today: over the course of the year inflation will degrade the purchasing power of that dollar, delayed consumption intrinsically has less value to us than consumption now, and a dollar received today could also be invested and earn a return over that year.\u003cbr\u003e\n\u003cbr\u003e\n\u003ch3\u003eDiscounting and the Importance of the Right Discount Rate\u003c/h3\u003e\nThe discount rate is the percentage rate that is used to convert future values to present values.  A discount rate of 4% (0.04) means that one dollar received in one year is worth $1/1.04 \u003d 96 cents today.  A discount rate of 10% (0.10) means that one dollar received in one year is worth $1/1.10 \u003d 91 cents per day.  Due to the geometric nature of discounting, the difference in present values becomes increasingly significant the further into the future that the dollar is received.  For example, one dollar received in 15 years' time is worth $1/1.04\u003csup\u003e15\u003c/sup\u003e \u003d 56 cents with a discount rate of 4%, but only $1/1.10\u003csup\u003e15\u003c/sup\u003e \u003d 24 cents with a discount rate of 10%.  The choice of discount rate clearly makes a very significant difference to the present value of future costs and benefits.\u003cbr\u003e\n\u003cbr\u003e\u003ca name\u003d'more'\u003e\u003c/a\u003e\nDiscount rates can be categorised into investor discount rates and social discount rates.  Investor discount rates are used for calculating the value of an investment to an investor.  Social discount rates are used for calculating the value of a project or course of action to society as a whole, such as an investment in a public hospital, or public transport or other infrastructure.  Using a discount rate that is too high will result in under-investment in socially beneficial projects.\u003cbr\u003e\n\u003cbr\u003e\n\u003ch3\u003eSocial Rate of Time Preference\u003c/h3\u003e\nWhen the calculation is for a private investment, then all costs associated with the investment will be displacing other investment that could be undertaken by the investor, and the appropriate discount rate is the opportunity cost of private investment.  When the calculation is for a social net benefit assessment, the costs may be displacing (“crowding out”) private investment, or they may be displacing private consumption. When private consumption is displaced, the appropriate social discount rate is the \"social rate of time preference\"; when private investment is displaced the appropriate social discount rate is the \"social opportunity cost\".\u003cbr\u003e \n\u003cbr\u003e\nThe rate at which individuals are willing to trade consumption now for consumption in the future is the individual consumer’s marginal rate of time preference.  Just as the rate at which investors are willing to trade value now for value in the future is the appropriate discount rate for their decisions, the appropriate discount rate for an individual is the rate at which they are willing to trade consumption now for consumption in the future (i.e., the marginal rate of time preference).\u003cbr\u003e\n\u003cbr\u003e\nThere are two main ways for calculating the SRTP:\u003cul\u003e\n\u003cli\u003eCalculating an estimate of an individual’s marginal rate of time preference from observed interest rates; and\u003c/li\u003e\n\u003cli\u003eCalculating the “consumption rate of interest” from more fundamental data.\u003c/li\u003e\n\u003c/ul\u003e\nFor an example of both methods of calculation, see the report in footnote \u003ca href\u003d\"#_3\"\u003e[3]\u003c/a\u003e below.\u003cbr\u003e\n\u003cbr\u003e\n\u003ch3\u003eThe Effect of Uncertainty\u003c/h3\u003e\nSuppose that we did not know which of the earlier discount rates, 4% or 10%, was the \"correct\" rate, and therefore assign an equal likelihood to them both. The resulting implied discount rate is \u003ci\u003enot\u003c/i\u003e the arithmetic mean of the two values (which would be 7%).  Instead, it is closer to the lower of the two estimates.  Take, for example, the calculation over 15 years: the mean present value is (56c + 24c)/2 \u003d 40c, which implies a discount rate of 6.3%.  The effect is even more pronounced over long time periods, with the average discount rate over 50 years being just 5.3%. \nAs the chart below shows, the further into the future that benefits and costs occur, the more that uncertainty over the right discount rate suggests that a low discount rate is more correct than a high discount rate.\u003cbr\u003e\n\u003cbr\u003e\n\u003cb\u003eChart: Uncertainty Means that Future Discount Rates should be Lower than the Average\u003c/b\u003e\u003cbr\u003e\n\u003ca href\u003d\"http://4.bp.blogspot.com/-0dNPfM5PAf8/Uu2LCkjZCQI/AAAAAAAABtQ/k6hhhMPmZ8Q/s1600/Average+Discount+Rate.png\" imageanchor\u003d\"1\" \u003e\u003cimg border\u003d\"0\" src\u003d\"http://4.bp.blogspot.com/-0dNPfM5PAf8/Uu2LCkjZCQI/AAAAAAAABtQ/k6hhhMPmZ8Q/s400/Average+Discount+Rate.png\" /\u003e\u003c/a\u003e\u003cbr\u003e\n\u003cbr\u003e\n\u003ch3\u003eThe Social Discount Rate in New Zealand\u003c/h3\u003e\nThe New Zealand Treasury recommends a default discount rate of 8%, including \"for projects that are difficult to categorise including regulatory proposals.\"\u003csup\u003e\u003ca href\u003d\"#_1\"\u003e[1]\u003c/a\u003e\u003c/sup\u003e  The New Zealand Institute of Economic Research (NZIER) considers that this default discount rate is probably too high, and that a lower rate consistent with the above concepts should be used.\u003csup\u003e\u003ca href\u003d\"#_2\"\u003e[2]\u003c/a\u003e\u003c/sup\u003e\u003cbr\u003e\n\u003cbr\u003e\nIn 2007, Andrew Shelley co-authored a paper that examined the social discount rate for New Zealand in detail.\u003csup\u003e\u003ca href\u003d\"#_3\"\u003e[3]\u003c/a\u003e\u003c/sup\u003e  That study estimated a post-tax real discount rate for New Zealand of 3.5%, with a range of 2% to 6%. This range incorporates both the “social rate of time preference” approach to the discount rate and the more conventional (from an investor’s perspective) opportunity cost approach.\u003cbr\u003e\n\u003cbr\u003e\n\u003ch3\u003eInternational Practice\u003c/h3\u003e\nA social discount rate of 3.5% is consistent with practice in other advanced economies. In the United Kingdom, the “Green Book” recommends a real social discount rate of 3.5% based on a calculation of the social rate of time preference, for application in “all policies programmes and projects”.\u003csup\u003e\u003ca href\u003d\"#_4\"\u003e[4]\u003c/a\u003e\u003c/sup\u003e   The social discount rate adopted by France is 4% and by Germany is 3%.\u003csup\u003e\u003ca href\u003d\"#_5\"\u003e[5]\u003c/a\u003e\u003c/sup\u003e  In the United States the rate currently mandated by the Department of Energy for certain federal programmes is 3%.\u003csup\u003e\u003ca href\u003d\"#_6\"\u003e[6]\u003c/a\u003e\u003c/sup\u003e\u003cbr\u003e\n\u003cbr\u003e\n\u003ch3\u003eConclusion\u003c/h3\u003e\nCost-benefit analysis for public good projects should be conducted using a social discount rate.  The current default rate of 8% suggested by the NZ Treasury is too high.  A more suitable value for New Zealand is 3.5%, within a range of 2% to 6%, based on the social rate of time preference.  This rate is consistent with the rate used in other advanced economies for social cost-benefit analyses.  Uncertainty over the \"correct\" discount rate also suggests that a lower rather than higher rate should be used for long-horizon analyses.\u003cbr\u003e\n\u003cbr\u003e\n\u003cfont size\u003d-2\u003e\n\u003cb\u003eEndnotes\u003c/b\u003e\u003cbr\u003e\n\u003ca name\u003d\"_1\"\u003e[1]\u003c/a\u003e New Zealand Treasury, \u003ci\u003eCost Benefit Analysis including Public Sector Discount Rates\u003c/i\u003e, \u003ca href\u003d\"http://www.treasury.govt.nz/publications/guidance/planning/costbenefitanalysis\"\u003ehttp://www.treasury.govt.nz/publications/guidance/planning/costbenefitanalysis\u003c/a\u003e, page updated 29 October 2010, accessed 2 February 2014.\u003cbr\u003e\n\u003ca name\u003d\"_2\"\u003e[2]\u003c/a\u003eChris Parker, “Economics like there’s no tomorrow”, NZIER Insights 32, 2011, \u003ca href\u003d\"http://nzier.org.nz/system/files/NZIER%20Insight%2032%20-%20Economics%20like%20there%27s%20no%20tomorrow.pdf\"\u003ehttp://nzier.org.nz/system/files/NZIER Insight 32 - Economics like there's no tomorrow.pdf\u003c/a\u003e\u003cbr\u003e\n\u003ca name\u003d\"_3\"\u003e[3]\u003c/a\u003eAndrew Shelley, Jeremy Hornby, and Michael Thomas, \u003ci\u003eDiscount Rate for the Grid Investment Test\u003c/i\u003e, CRA International, 29 March 2007, available online at \u003ca href\u003d\"http://www.ea.govt.nz/dmsdocument/3429\"\u003ehttp://www.ea.govt.nz/dmsdocument/3429\u003c/a\u003e.\u003cbr\u003e\n\u003ca name\u003d\"_4\"\u003e[4]\u003c/a\u003e HM Treasury (2003) \u003ci\u003eThe Green Book: Appraisal and Evaluation in Central Government\u003c/i\u003e, Treasury Guidance: London\u003cbr\u003e\n\u003ca name\u003d\"_5\"\u003e[5]\u003c/a\u003e Evans, D.J. (2006) \u003ci\u003eSocial Discount Rates for the European Union\u003c/i\u003e, Working Paper n. 2006-20, Università degli Studi di Milano, October, pp. 1-2.\u003cbr\u003e\n\u003ca name\u003d\"_6\"\u003e[6]\u003c/a\u003e Rushing, A.S., J.D. Kneifel and B.C. Lippiatt (2013) \"Energy Price and Discount Factors for Life-Cycle Cost Analysis – 2013 Annual Supplement to NIST Handbook 135 and NBS Special Publication 709\", NISTIR 85-3273-21, Prepared for United States Department of Energy Federal Energy Management Program, National Institute of Standards and Technology, U.S. Department of Commerce, June, p. 1.\n\u003c/font\u003e"},"link":[{"rel":"edit","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/7447829754645196199"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/7447829754645196199"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/2014/02/the-social-discount-rate.html","title":"The Social Discount Rate"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"http://4.bp.blogspot.com/-0dNPfM5PAf8/Uu2LCkjZCQI/AAAAAAAABtQ/k6hhhMPmZ8Q/s72-c/Average+Discount+Rate.png","height":"72","width":"72"}},{"id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600.post-4217877118771536197"},"published":{"$t":"2013-09-28T08:13:00.000+12:00"},"updated":{"$t":"2013-09-28T08:19:27.582+12:00"},"category":[{"scheme":"http://www.blogger.com/atom/ns#","term":"White Paper"}],"title":{"type":"text","$t":"The Perils of Price Fixing"},"content":{"type":"html","$t":"Business is subject to cut-throat competition and margins are tight.  Except, that is, when competitors are tempted to agree on prices or the division of customers so that profits are maintained or expanded.  Either way, this is a price fixing arrangement or cartel and is illegal under the Commerce Act 1986.\u003cbr\u003e\n\u003cbr\u003e\nThis Paper sets out:\u003cul\u003e\n\u003cli\u003ethe prohibition against price fixing in the Commerce Act;\u003c/li\u003e\n\u003cli\u003ethe enforcement actions available to the Commerce Commission, with examples of both high-level and low-level enforcement actions;\u003c/li\u003e\n\u003cli\u003esome practical advice on how to avoid price-fixing.\u003c/li\u003e\n\u003c/ul\u003e\n\u003cbr\u003e\u003ca name\u003d'more'\u003e\u003c/a\u003e\n\u003ch3\u003eProhibition in Commerce Act\u003c/h3\u003e\nUnder section 27 of the Commerce Act 1986 any contract, arrangement, or understanding that has the purpose or effect of substantially lessening competition is prohibited. Section 30 of the Commerce Act states that:\u003ca href\u003d\"#_1\"\u003e\u003csup\u003e1\u003c/sup\u003e\u003c/a\u003e\u003cbr\u003e\n\u003cdiv style\u003d\"margin-left:1em; margin-top:1em; margin-bottom:1em;\"\u003e\u003ci\u003e\na provision of a contract, arrangement, or understanding shall be deemed … to have the purpose [or effect] of substantially lessening competition in a market if the provision has the purpose [or effect] of fixing, controlling, or maintaining, or providing for the fixing, controlling, or maintaining, of the price for goods or services, or any discount, allowance, rebate, or credit in relation to goods or services.\u003c/i\u003e\n\u003c/div\u003e\nTaken together, these two sections mean that any agreement between competitors to fix, control, or maintain prices is prohibited.  Enforcement under the Commerce Act is carried out by the Commerce Commission (\"the Commission\").\u003cbr\u003e\n\u003cbr\u003e\n\u003ch3\u003eEnforcement Actions Available\u003c/h3\u003e\nThe Commission has a wide range of enforcement actions available, from \"high level\" enforcement through the Courts to \"low level\" actions including issuing compliance advice letters or warnings to businesses and people to remind them of their obligations. The full range of enforcement responses available to the Commission are shown in the Compliance Pyramid below.  For further information on these responses see the Commission’s publication \u003ci\u003eEnforcement Response Guidelines\u003c/i\u003e, November 2012.\u003ca href\u003d\"#_2\"\u003e\u003csup\u003e2\u003c/sup\u003e\u003c/a\u003e\u003cbr\u003e\n\u003cbr\u003e \n\u003cdiv\u003e\n\u003ca href\u003d\"http://2.bp.blogspot.com/-NWjEkbcNYhs/UkFbT0mJxqI/AAAAAAAABow/Ol6QYMAPRVo/s1600/ComCom+Compliance+Pyramid.jpg\" imageanchor\u003d\"1\" \u003e\u003cimg border\u003d\"0\" src\u003d\"http://2.bp.blogspot.com/-NWjEkbcNYhs/UkFbT0mJxqI/AAAAAAAABow/Ol6QYMAPRVo/s400/ComCom+Compliance+Pyramid.jpg\" alt\u003d\"Commerce Commission Compliance Pyramid\" /\u003e\u003c/a\u003e\u003cbr\u003e\n\u003cdiv style\u003d\"font-size:9pt;\"\u003e\nThe Compliance Pyramid, part of the Commission’s Enforcement Response Model\u003cbr\u003e\nSource: Commerce Commission, \u003ci\u003eEnforcement Response Guidelines\u003c/i\u003e, November 2012\u003c/div\u003e\n\u003c/div\u003e\n\u003cbr\u003e\n\u003cb\u003eHigh Level Enforcement\u003c/b\u003e\u003cbr\u003e\nThe most significant instance of price fixing in New Zealand is the series of cases brought by the Commission against 13 airlines for colluding to impose fuel and security surcharges for cargo shipments to and from New Zealand.  In the last of the cases to be settled, in June 2013 Air New Zealand was ordered to pay $7.5 million plus additional costs to the Commission of $559,079.\u003ca href\u003d\"#_3\"\u003e\u003csup\u003e3\u003c/sup\u003e\u003c/a\u003e  In other judgements in this series of cases, a total of $35 million was awarded against British Airways, Cargolux, Cathay Pacific, Emirates, Korean Air, MASKargo, Qantas, Japan Airlines, Singapore Airlines Cargo and Thai Airways.\u003ca href\u003d\"#_4\"\u003e\u003csup\u003e4\u003c/sup\u003e\u003c/a\u003e\u003cbr\u003e\n\u003cbr\u003e\nIn December 2011 the High Court at Auckland imposed a penalty of $3 million against refrigerator compressor manufacturer Empresa Brasileira de Compressores S.A (Embraco) for entering into an agreement to maintain or increase prices.  Embraco was also ordered to pay a further $50,000 in costs  to the Commission.  The Court noted that the agreements “were intended to enable Embraco and Panasonic to pass on rising input costs, without the risk that they might lose sales to a competitor which had lower steel or copper costs, or was prepared to accept a lower margin.”\u003ca href\u003d\"#_5\"\u003e\u003csup\u003e5\u003c/sup\u003e\u003c/a\u003e  The ultimate purpose of the agreements were to control or maintain prices, which is illegal.  Most notable, the penalties were imposed despite the Court noting that “the arrangements were neither sophisticated nor rigorously enforced or implemented.”\u003ca href\u003d\"#_6\"\u003e\u003csup\u003e6\u003c/sup\u003e\u003c/a\u003e\u003cbr\u003e\n\u003cbr\u003e\nThe Commerce (Cartels and Other Matters) Amendment Bill 2011 is currently before parliament to strengthen the penalties surrounding price fixing.  The Ministry of Business Innovation and Employment states:\u003ca href\u003d\"#_7\"\u003e\u003csup\u003e7\u003c/sup\u003e\u003c/a\u003e\u003cbr\u003e\n\u003cdiv style\u003d\"margin-left:1em; margin-top:1em; margin-bottom:1em;\"\u003e\u003ci\u003e\nOne of the principle objectives of the amendment Bill is to introduce criminal sanctions for hard-core cartel behaviour.\u003cbr\u003e\n\u003cbr\u003e\nHard-core cartels are formed when rival firms agree to not compete with each other by fixing prices, restricting output, allocating markets or rigging bids. Cartels allow firms to raise their prices above the competitive level without fear of losing customers to rivals. This increases the profits of cartel participants but does not benefit consumers.\u003c/i\u003e\n\u003c/div\u003e\n\u003cbr\u003e\n\u003cb\u003eLow Level Enforcement\u003c/b\u003e\u003cbr\u003e\nThe Commission states that low level options “may be suitable where the harm is minimal, the conduct is accidental or the result of a limited understanding of the law, there is a willingness to comply, or the public interest does not favour a more severe response.”\u003ca href\u003d\"#_8\"\u003e\u003csup\u003e8\u003c/sup\u003e\u003c/a\u003e As an example of low-level enforcement response, in May 2013 the Commission issued a formal warning to flooring company Ansell Flooring Limited (Ansell) for attempting to fix prices for sanding and polishing services in the Taranaki region.  Because of Ansell’s co-operation in the Commission’s investigation, the Commission decided a warning was appropriate.\u003ca href\u003d\"#_9\"\u003e\u003csup\u003e9\u003c/sup\u003e\u003c/a\u003e\u003cbr\u003e\n\u003cbr\u003e\nEven when the Commission does elect to adopt a low-level response, a firm faces a range of potential costs including: time responding to Commission enquiries, including requests for information; and the costs of obtaining legal advice.\nIf you are tempted, don’t do it.  Price fixing is like tax evasion: you might not get caught today, you might not get caught tomorrow, but when you do get caught the penalties can be severe.  And when the Amendment Bill is passed into law those penalties will include potential criminal prosecution for wilful offenders.\u003cbr\u003e\n\u003cbr\u003e\n\u003ch3\u003ePractical Advice\u003c/h3\u003e\nA competitor is another party that supplies the same or similar service or product to the same group of customers. Make sure that you do not discuss pricing with a competitor, not even a general discussion to \"be on the same page\" or a simple exchange of prices.  If prices are pubished on a website or otherwise made public for customers then your competitor can obtain pricing information from there. If you do not publish prices then they should under no circumstances be provided to competitors.\u003cbr\u003e\n\u003cbr\u003e\nIf the other entity supplies the same or similar service or product but to a \u003cb\u003edifferent group of customers\u003c/b\u003e, e.g. geographically distinct customer groups, ensure that the reason why different groups of customers are served is due to cost or strategy and not due to an agreement to divide up customers in a particular way.  When firms are geographically dispersed it will be cheaper for them to provide service to customers who are geographically close by.  Prices to recover the cost of supplying distant customers may be too high to be considered as an option by those customers, naturally leading to geographically distinct markets.\u003cbr\u003e\n\u003cbr\u003e\nConversely, potential competitors may be located in the same geographical area, but have a strategy of targetting a particular type of customer, e.g. mass market consumer or business.  The strategies and infrastructure needed for these different customer types can be markedly different, and what is effective for one customer segment may be completely ineffective for another.  Ensure that the distribution of customers is indeed based on strategy and not because of any agreement - whether explicit or tacit - to target different segments of the market.\u003cbr\u003e \n\u003cbr\u003e\nThe Commission's own advice to avoid inadvertently falling into the trap of illegal price fixing is:\u003ca href\u003d\"#_10\"\u003e\u003csup\u003e10\u003c/sup\u003e\u003c/a\u003e\u003col\u003e\n\u003ci\u003e\n\u003cli\u003eMake sure that you and your staff are familiar with the requirements of the Commerce Act. Keep records of who has attended training.\u003c/li\u003e\n\u003cli\u003eThink carefully about who you are, or may be, in competition with, especially if sub-contracting is involved.\u003c/li\u003e\n\u003cli\u003eDo not agree prices, discounts or any matters relating to price with your competitors (unless it is a specific sub-contract you are discussing).\u003c/li\u003e\n\u003cli\u003eDo not exchange pricing information with your competitors.\u003c/li\u003e\n\u003cli\u003eIf you are approached by another business to discuss pricing, allocating customers, bids for contracts or restricting outputs you should raise an objection straight away. Leave the discussion immediately.\u003c/li\u003e\n\u003cli\u003eReview internal documents, policies and procedures for compliance with the Commerce Act.\u003c/li\u003e\n\u003cli\u003eIf you become aware of anti-competitive conduct, contact the Commerce Commission straight away.\u003c/li\u003e\n\u003c/i\u003e\n\u003c/ol\u003e\n\u003cfont size\u003d-2\u003e\n\u003cb\u003eEnd Notes\u003c/b\u003e\u003cbr\u003e\n\u003ca name\u003d\"_1\"\u003e[1]\u003c/a\u003e \u003ca href\u003d\"http://www.legislation.govt.nz/act/public/1986/0005/latest/DLM87623.html \n\"\u003eCommerce Act 1986\u003c/a\u003e\u003cbr\u003e\n\u003ca name\u003d\"_2\"\u003e[2]\u003c/a\u003e Available for download from the \u003ca href\u003d\"http://www.comcom.govt.nz/the-commission/commission-policies/enforcement-response-guidelines/\"\u003eEnforcement Response Guidelines webpage\u003c/a\u003e.\u003cbr\u003e\n\u003ca name\u003d\"_3\"\u003e[3]\u003c/a\u003e Commerce Commission v Air New Zealand Ltd, Judgement of Venning J, 13 June 2013, para 55.\u003cbr\u003e\n\u003ca name\u003d\"_4\"\u003e[4]\u003c/a\u003e Commerce Commission, “\u003ca href\u003d\"http://www.comcom.govt.nz/business-competition/business-competition-media-releases/detail/2013/air-new-zealand-final-airline-to-settle-with-commerce-commission-in-air-cargo-case\"\u003eAir New Zealand final airline to settle with Commerce Commission in air cargo case\u003c/a\u003e”, Media Release, 13 June 2013\u003cbr\u003e\n\u003ca name\u003d\"_5\"\u003e[5]\u003c/a\u003e Commerce Commission v Embraco, Judgement of Allan J, 19 December 2011, para 22.\u003cbr\u003e\n\u003ca name\u003d\"_6\"\u003e[6]\u003c/a\u003e Commerce Commission v Embraco, Judgement of Allan J, 19 December 2011, para 25.\u003cbr\u003e\n\u003ca name\u003d\"_7\"\u003e[7]\u003c/a\u003e http://www.med.govt.nz/business/competition-policy/cartel-criminalisation \u003cbr\u003e\n\u003ca name\u003d\"_8\"\u003e[8]\u003c/a\u003e Commerce Commission, \u003ca href\u003d\"http://www.comcom.govt.nz/the-commission/commission-policies/enforcement-response-guidelines/\"\u003eEnforcement Response Guidelines webpage\u003c/a\u003e, 22 November 2012\u003cbr\u003e\n\u003ca name\u003d\"_9\"\u003e[9]\u003c/a\u003e Commerce Commission, “\u003ca href\u003d\"http://www.comcom.govt.nz/business-competition/business-competition-media-releases/detail/2013/taranaki-flooring-company-warned-over-attempts-to-fix-prices\"\u003eTaranaki flooring company warned over attempts to fix prices\u003c/a\u003e”, Media Release, 28 May 2013.\u003cbr\u003e\n\u003ca name\u003d\"_10\"\u003e[10]\u003c/a\u003e Commerce Commission, \"\u003ca href\u003d\"http://www.comcom.govt.nz/business-competition/fact-sheets-3/price-fixing-and-cartels/\"\u003ePrice Fixing and Cartels\u003c/a\u003e\", Fact Sheet. \n\u003c/font\u003e"},"link":[{"rel":"edit","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/4217877118771536197"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/4217877118771536197"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/2013/09/the-perils-of-price-fixing.html","title":"The Perils of Price Fixing"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"http://2.bp.blogspot.com/-NWjEkbcNYhs/UkFbT0mJxqI/AAAAAAAABow/Ol6QYMAPRVo/s72-c/ComCom+Compliance+Pyramid.jpg","height":"72","width":"72"}},{"id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600.post-4370982054043849987"},"published":{"$t":"2013-09-16T16:52:00.000+12:00"},"updated":{"$t":"2013-09-28T08:19:47.775+12:00"},"category":[{"scheme":"http://www.blogger.com/atom/ns#","term":"White Paper"}],"title":{"type":"text","$t":"Of Consumer Ownership and Regulatory Intervention"},"content":{"type":"html","$t":"\u003ch2\u003eIntroduction\u003c/h2\u003e\nThis Paper considers the potential rationale for regulatory intervention in an industry and the alternatives that are available.  The concept of pareto-efficiency is introduced, and then some of the real world conditions which prevent this optimal state from being achieved are discussed.  Alternatives for overcoming problems of consumer bargaining power are discussed, focussing on consumer ownership options and regulatory intervention.\u003cbr\u003e\n\u003cbr\u003e\n\u003ch2\u003ePareto-Efficiency\u003c/h2\u003e\nThe gold standard of welfare economics is the pareto-efficient allocation of resources.  Pareto efficiency occurs when it is impossible to make any one individual better off without making at least one other individual worse off.  This may require that anyone who is made worse off is compensated by those who are made better off: if the loss is less than the gain then an improvement in pareto efficiency will occur.\u003cbr\u003e\n\u003cbr\u003e\u003ca name\u003d'more'\u003e\u003c/a\u003e\nAbsent transaction costs and with equal bargaining power, all potential pareto-improvements can be expected to occur, meaning that there are no further ways to make any one individual better off without making at least one other individual worse off.  In such a world, politics and regulation are solely concerned with the redistribution of income and wealth.  This conclusion is also implied by the Coase Theorem, which effectively states that the distribution of property rights has no effect on production, and by implication that the only effect of regulatory intervention is the redistribution of wealth.\u003cbr\u003e\n\u003cbr\u003e\n\u003ch2\u003eThe Real World\u003c/h2\u003e\nThe assumptions of no transaction costs and equal bargaining power are important to the conclusion that regulatory intervention only redistributes wealth (and hence is a political issue).  Bargaining power is often unequal, and if that is the case the proper role of regulatory intervention is to ensure that parties have equal bargaining power so that they can effectively negotiate the distribution of wealth.\u003cbr\u003e\n\u003cbr\u003e\nA monopoly exists when only one firm produces a product that consumers demand, and it is not possible for other firms to enter the market and provide competing products.  Compared to the pareto-optimal level of output and price, the monopoly can restrict output and drive up prices.  In the real world, true monopolies seldom exist, but there are many situations which have monopoly characteristics (a “near monopoly”).  A common example is that of energy supply networks: within a certain price range, energy is more cheaply delivered by a given network rather than relying on alternative energy sources.\nNot dissimilar to the near-monopoly problem is the imbalance of bargaining power between a large firm and many small consumers.  Individually the consumers may have little or no bargaining power, because the impact of their actions on the firm is small, and they incur transaction costs because the time and effort involved in such negotiations cannot be used for other purposes. [These purposes may include income earning, leisure, or information search, all of which have economic value.]\u003cbr\u003e\n\u003cbr\u003e \nJust as Coase observed that the firm as an entity exists because a hierarchical system of control can be lower cost than relying on the market to co-ordinate production, some form of collective organisation may be required to overcome the transaction costs and lack of bargaining power that impedes consumers ability to negotiate effectively.  \u003cbr\u003e\n\u003cbr\u003e\nVarious arrangements can overcome these bargaining problems:\u003cul\u003e\n\u003cli\u003econsumer ownership\u003c/li\u003e\n\u003cli\u003econsumer representation\u003c/li\u003e\n\u003cli\u003eregulatory intervention\u003c/li\u003e\n\u003c/ul\u003e\n\u003cbr\u003e\n\u003ch2\u003eConsumer Ownership\u003c/h2\u003e\nIn the first instance, transaction costs and monopoly behaviour can be overcome if consumers self-organise and own the company, so any trade-offs are internalised because the owners of the firm and the consumers are the same individuals.  This form of organisation gives rise to the co-operative company.\u003cbr\u003e\n\u003cbr\u003e  \nCo-operative companies are very popular within rural industries, where the returns to the agricultural producer are heavily influenced by the performance of the party directly purchasing the agricultural product.  In New Zealand co-operative companies are also prevalent where there are significant economies of scale to be realised by having a centralised wholesaler, such as with the Foodstuffs chain of supermarkets and the Mitre10 chain of hardware stores. A list of New Zealand's 40 largest co-operatives is provided in \u003ca href\u003d\"#_Table1\"\u003eTable 1\u003c/a\u003e: this list includes some of New Zealand's best known companies.\u003cbr\u003e\n\u003cbr\u003e\nIn New Zealand a further form is the Consumer Trust-owned company, which is prevalent in the electricity distribution industry.  The Consumer Trust specifies the powers of the Trustees and the requirement to act in the interest of consumers.  Trustees are elected by consumers.\u003cbr\u003e\n\u003cbr\u003e\nBoth versions of consumer ownership effectively rely on the election of representatives who then act on behalf of the larger group.  There are transaction costs involved in the co-ordination among consumers, e.g. the cost of publicising and running elections for Directors or Trustees.\u003cbr\u003e\n\u003cbr\u003e\n\u003ch2\u003eConsumer Representation\u003c/h2\u003e\nAn alternative is for various representative groups to negotiate on behalf of consumers; this model is often employed in utility regulation in the United States, with agreements subject to approval by a regulatory body.  This model has not generally been adopted in Australia, New Zealand, or the United Kingdom.\u003cbr\u003e\n\u003cbr\u003e\n\u003ch2\u003eRegulatory Intervention\u003c/h2\u003e\nA further alternative for overcoming the problem of co-ordination among consumers is for a regulatory agency to intervene and “represent” consumers.  In the United States this model often involves the adoption of an “Office of the Consumer Advocate” within the regulatory body, but separate from the decision-making authority.  In Australia, the United Kingdom, and New Zealand, this function is often subsumed within the decision-making authority.\u003cbr\u003e\n\u003cbr\u003e\nThe problems of a regulatory agency representing consumers include the standard problem of a bureaucratic organisation justifying its own existence: staff within the bureaucratic body will argue that the role of the body is essential, and even if “consumers” of its “service” do not hold that view, that is only because they do not know what they are being saved from.  This is particularly problematic when the consumer advocacy function is subsumed within the decision making authority in the regulatory agency.  Particular care must be taken to avoid conflicts of interest in the decision-making process, with consumer advocacy and analysis potentially being conflated within any given decision or report.\u003cbr\u003e\n\u003cbr\u003e\nUnder this model consumers will normally bear the costs of the regulatory agency, either by direct levies or consumers, or by levies on the regulated firms which are then passed on to consumers.  Consumers also lack a direct means to influence the regulator, thereby giving rise to agency problems and potentially higher costs.\u003cbr\u003e\n\u003cbr\u003e\n\u003ch2\u003eConcluding Comments\u003c/h2\u003e\nIn addition to the issues identifie above, a regulatory agency cannot solve the problem of information asymmetries: neither consumer owners nor regulators are likely to have full information about the firm, its costs, and the opportunities available.  Regulators can hire professional consultants to provide advice, but so too can a consumer-owned Board of Directors or a Consumer Trust.  If there are any benefits to the firm from the information asymmetries, those benefits ultimately accrue to the consumers when there is consumer ownership, and if the firm has been pushed too hard, then under consumer ownership the costs are born by the consumer owners who made the decisions.  But if the model is one of reliance on a regulator, any benefits and costs will accrue to someone else, and there are insufficient incentives for discovering an optimal outcome.\u003cbr\u003e\n\u003cbr\u003e\nAs a final concluding thought, in the New Zealand electricity distribution industry, ownership by Consumer Trusts and the regulatory model represented by the Commerce Commission are at opposite ends of a spectrum of potential ways to address the problem of organising a large number of small consumers to effectively bargain with a large supplier.  A rise in one necessarily implies a decline in the other.  Given the tendency of bureaucratic organisations to justify their own existence, we should expect that over time the Commerce Commission will seek to curtail the independence of Consumer Trust owned companies, and seek to find reasons to further regulate these entities.\u003cbr\u003e\n\u003cbr\u003e\n\u003cdiv style\u003d\"float:center; width:400px; margin-bottom:1em; font-size:9pt; background-color:Gainsboro;\"\u003e\n\u003cb\u003e\u003ca name\u003d\"_Table1\"\u003eTable 1\u003c/a\u003e: New Zealand's 40 Largest Co-operatives by Turnover 2010-11\u003c/b\u003e\u003ca href\u003d\"#_*\"\u003e\u003csup\u003e*\u003c/sup\u003e\u003c/a\u003e\u003cbr\u003e\u003chr style\u003d\"height: 1px solid black;\"/\u003e\n\u003ctable\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e1 \u003c/td\u003e\u003ctd\u003eFonterra Cooperative Group\u003c/td\u003e\u003ctd align\u003dright\u003e19,871,000,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e2 \u003c/td\u003e\u003ctd\u003eFoodstuffs (Auckland)\u003c/td\u003e\u003ctd align\u003dright\u003e3,490,823,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e3 \u003c/td\u003e\u003ctd\u003eFoodstuffs South Island Cooperative\u003c/td\u003e\u003ctd align\u003dright\u003e2,399,141,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e4 \u003c/td\u003e\u003ctd\u003eFoodstuffs (Wellington) Cooperative Society\u003c/td\u003e\u003ctd align\u003dright\u003e2,270,945,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e5 \u003c/td\u003e\u003ctd\u003eSilver Fern Farms\u003c/td\u003e\u003ctd align\u003dright\u003e2,096,672,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e6 \u003c/td\u003e\u003ctd\u003eAlliance Group\u003c/td\u003e\u003ctd align\u003dright\u003e1,498,385,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e7 \u003c/td\u003e\u003ctd\u003eCombined Rural Traders Society (CRT)\u003c/td\u003e\u003ctd align\u003dright\u003e1,093,000,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e8 \u003c/td\u003e\u003ctd\u003eRavensdown Fertiliser Cooperative\u003c/td\u003e\u003ctd align\u003dright\u003e933,152,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e9 \u003c/td\u003e\u003ctd\u003eBallance Agri-Nutrients\u003c/td\u003e\u003ctd align\u003dright\u003e760,148,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e10 \u003c/td\u003e\u003ctd\u003eSouthern Cross Medical Care Society\u003c/td\u003e\u003ctd align\u003dright\u003e684,279,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e11 \u003c/td\u003e\u003ctd\u003eFarmlands Trading Society\u003c/td\u003e\u003ctd align\u003dright\u003e683,279,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e12 \u003c/td\u003e\u003ctd\u003eWestland Cooperative Dairy Co\u003c/td\u003e\u003ctd align\u003dright\u003e514,979,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e13 \u003c/td\u003e\u003ctd\u003eMitre 10 (New Zealand)\u003c/td\u003e\u003ctd align\u003dright\u003e504,161,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e14 \u003c/td\u003e\u003ctd\u003eMarket Gardeners t/as MG Marketing\u003c/td\u003e\u003ctd align\u003dright\u003e277,462,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e15 \u003c/td\u003e\u003ctd\u003eNZPM Group\u003c/td\u003e\u003ctd align\u003dright\u003e283,083,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e16 \u003c/td\u003e\u003ctd\u003eAshburton Trading Society (ATS)\u003c/td\u003e\u003ctd align\u003dright\u003e210,000,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e17 \u003c/td\u003e\u003ctd\u003eTatua Cooperative Dairy Co\u003c/td\u003e\u003ctd align\u003dright\u003e200,000,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e18 \u003c/td\u003e\u003ctd\u003eRabobank New Zealand\u003c/td\u003e\u003ctd align\u003dright\u003e198,000,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e19 \u003c/td\u003e\u003ctd\u003eCapricorn Society\u003c/td\u003e\u003ctd align\u003dright\u003e180,000,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e20 \u003c/td\u003e\u003ctd\u003eCDC Pharmaceuticals\u003c/td\u003e\u003ctd align\u003dright\u003e175,995,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e21 \u003c/td\u003e\u003ctd\u003eLivestock Improvement Corporation (LIC)\u003c/td\u003e\u003ctd align\u003dright\u003e165,600,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e22 \u003c/td\u003e\u003ctd\u003ePharmacy Wholesalers (Bay of Plenty)\u003c/td\u003e\u003ctd align\u003dright\u003e128,364,551\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e23 \u003c/td\u003e\u003ctd\u003eThe Co operative Bank\u003c/td\u003e\u003ctd align\u003dright\u003e122,000,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e24 \u003c/td\u003e\u003ctd\u003eNew Zealand Association of Credit Unions\u003c/td\u003e\u003ctd align\u003dright\u003e119,640,126\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e25 \u003c/td\u003e\u003ctd\u003eFarmers Mutual Group (FMG)\u003c/td\u003e\u003ctd align\u003dright\u003e117,138,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e26 \u003c/td\u003e\u003ctd\u003eDairy Goat Cooperative\u003c/td\u003e\u003ctd align\u003dright\u003e88,000,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e27 \u003c/td\u003e\u003ctd\u003ePharmacy Wholesalers (Central)\u003c/td\u003e\u003ctd align\u003dright\u003e81,821,287\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e28 \u003c/td\u003e\u003ctd\u003eWorld Travellers\u003c/td\u003e\u003ctd align\u003dright\u003e41,000,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e29 \u003c/td\u003e\u003ctd\u003eEastpack\u003c/td\u003e\u003ctd align\u003dright\u003e40,000,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e30 \u003c/td\u003e\u003ctd\u003eElectricity Ashburton\u003c/td\u003e\u003ctd align\u003dright\u003e33,700,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e31 \u003c/td\u003e\u003ctd\u003eComposite Retail Society\u003c/td\u003e\u003ctd align\u003dright\u003e27,800,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e32 \u003c/td\u003e\u003ctd\u003eIndependent Timber Merchants Cooperative\u003c/td\u003e\u003ctd align\u003dright\u003e23,640,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e33 \u003c/td\u003e\u003ctd\u003eHealth 2000\u003c/td\u003e\u003ctd align\u003dright\u003e22,100,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e34 \u003c/td\u003e\u003ctd\u003eCredit Union North t/as NZCU North\u003c/td\u003e\u003ctd align\u003dright\u003e20,636,835\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e35 \u003c/td\u003e\u003ctd\u003ePaper Plus New Zealand\u003c/td\u003e\u003ctd align\u003dright\u003e17,161,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e36 \u003c/td\u003e\u003ctd\u003eNew Zealand Honey Producers Cooperative\u003c/td\u003e\u003ctd align\u003dright\u003e15,016,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e37 \u003c/td\u003e\u003ctd\u003eNew Zealand Hops\u003c/td\u003e\u003ctd align\u003dright\u003e12,000,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e38 \u003c/td\u003e\u003ctd\u003eSeasonal Solutions Cooperative\u003c/td\u003e\u003ctd align\u003dright\u003e11,500,000\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e39 \u003c/td\u003e\u003ctd\u003eFruit Packers (HE) Cooperative\u003c/td\u003e\u003ctd align\u003dright\u003e11,207,754\u003c/td\u003e\u003c/tr\u003e\n\u003ctr\u003e\u003ctd align\u003dright\u003e40 \u003c/td\u003e\u003ctd\u003eProvelco Cooperative\u003c/td\u003e\u003ctd align\u003dright\u003e7,500,000\u003c/td\u003e\u003c/tr\u003e\n\u003c/table\u003e\u003chr style\u003d\"height: 1px solid black;\"/\u003e\n\u003ca name \u003d\"_*\"\u003e*\u003c/a\u003e Source: Cooperative Business New Zealand, \u003ca href\u003d\"http://www.nz.coop/top-40/\"\u003eNew Zealand Cooperative and Mutual Top 40\u003c/a\u003e\u003c/div\u003e\n"},"link":[{"rel":"edit","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/4370982054043849987"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/4370982054043849987"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/2013/09/of-consumer-ownership-and-regulatory.html","title":"Of Consumer Ownership and Regulatory Intervention"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}]},{"id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600.post-2199011428566347396"},"published":{"$t":"2013-09-07T16:15:00.000+12:00"},"updated":{"$t":"2013-09-16T17:00:30.805+12:00"},"category":[{"scheme":"http://www.blogger.com/atom/ns#","term":"News"}],"title":{"type":"text","$t":"Ronald Coase"},"content":{"type":"html","$t":"On 2 September 2013, one of the great economists of the 20th Century, Ronald Coase, passed away.  Coase is particularly remembered for two seminal contributions to economics:\u003cbr\u003e\n\u003cbr\u003e\nThe \u003cb\u003etransaction cost theory of the firm\u003c/b\u003e, which states that firms exist because a hierarchical system of organisation has lower costs than relying on the market to co-ordinate production.\u003cbr\u003e\n\u003cbr\u003e\nThe \u003cb\u003eCoase Theorem\u003c/b\u003e, which effectively states that absent transaction costs when there are well defined property rights, the distribution of those property rights has no effect on production.  By direct implication the only effect of regulatory intervention is the redistribution of wealth; it does not affect production.  In later years Coase described this result as “an obvious point”: “all [the theorem] says is that people will use resources in the way that produces most value”.\u003ca href\u003d\"_1\"\u003e\u003csup\u003e1\u003c/sup\u003e\u003c/a\u003e\u003cbr\u003e\n\u003cbr\u003e\u003ca name\u003d'more'\u003e\u003c/a\u003e\nCoase argued as a consequence of this result that rights to radio spectrum should be auctioned rather than administratively allocated.  Many decades later, Coase’s approach is accepted as the most appropriate approach for allocating radio spectrum. \nThe same principle underpins modern carbon credit trading, where the creation of a tradable property right to emit carbon dioxide (or a carbon dioxide equivalent) allows the market mechanism to function to determine the optimal level of pollution.  Coase’s view of pollution was that:\u003cbr\u003e\n\u003cdiv style\u003d\"margin-left:2em; font-style:italic;\"\u003e\n“People don't pollute because they like polluting. They do it because it's a cheaper way of producing something else. The cheaper way of producing something else is the good; the loss in value that you get from the pollution is the bad. You've got to compare the two.”\u003cspan style\u003d\"font-style:normal;\"\u003e\u003ca href\u003d\"_1\"\u003e\u003csup\u003e1\u003c/sup\u003e\u003c/a\u003e\u003c/span\u003e\u003c/div\u003e\n\u003cbr\u003e\nAnother major contribution of Coase was the founding of the discipline of Law and Economics.  The Coase Theorem was a major contributor to the early development of this field, drawing as it did on both economic analysis and analysis of the underpinning legal arrangements.  Coase became the author of the Journal of Law and Economics from 1964 to 1982, perhaps one of the most influential journals of its time.\u003cbr\u003e\n\u003cbr\u003e\nFor more obituaries and summaries of Coase’s work see:\u003cul\u003e\n\u003cli\u003eBrendan Greeley, “\u003ca href\u003d\"http://mobile.businessweek.com/articles/2013-09-03/ronald-coases-lifes-work-the-real-world-exists\"\u003eRonald Coase's Life's Work: The Real World Exists\u003c/a\u003e”, \u003ci\u003eBloomberg Business Week\u003c/i\u003e, 3 September 2013\u003c/li\u003e\n\u003cli\u003eAnon., “\u003ca href\u003d\"http://www.econlib.org/library/Enc/bios/Coase.html\"\u003eRonald H. Coase\u003c/a\u003e”, \u003ci\u003eThe Concise Encyclopedia of Economics\u003c/i\u003e, retrieved 6 September 2013\u003c/li\u003e\n\u003cli\u003eRobert L Formiani and Thomas F. Siems, “\u003ca href\u003d\"http://www.dallasfed.org/assets/documents/research/ei/ei0303.pdf\"\u003eRonald Coase: The Nature of Firms and Their Costs\u003c/a\u003e”, \u003ci\u003eEconomic Insights\u003c/i\u003e, Federal Reserve Bank of Dallas, Vol 8 No. 3\u003c/li\u003e \n\u003cli\u003eThomas W. Hazlett, “\u003ca href\u003d\"http://reason.com/archives/1997/01/01/looking-for-results/singlepage\n\"\u003eLooking for Results: Nobel laureate Ronald Coase on rights, resources, and regulation\u003c/a\u003e”, \u003ci\u003eReason.com\u003c/i\u003e, January 1997\u003c/li\u003e\n\u003cli\u003eMark Littlewood, “\u003ca href\u003d\"http://www.theguardian.com/education/2013/sep/04/ronald-coase\"\u003eRonald Coase obituary: Nobel prize winning economist behind the principle of carbon credit trading\u003c/a\u003e”, \u003ci\u003eThe Guardian\u003c/i\u003e, 4 September 2013\u003c/li\u003e\n\u003cli\u003eJacob Gershman, “\u003ca href\u003d\"http://blogs.wsj.com/law/2013/09/03/ronald-coase-author-of-most-cited-law-review-article-dead-at-102/\"\u003eRonald Coase, Author of ‘Most-Cited Law Review Article,’ Dead at 102\u003c/a\u003e”, \u003ci\u003eWall Street Journal\u003c/i\u003e, 3 September 2013\u003c/li\u003e \n\u003cli\u003eVuk Vukovic, “\u003ca href\u003d\"http://www.adamsmith.org/research/think-pieces/the-life-and-legacy-of-ronald-coase\"\u003eThe life and legacy of Ronald Coase\u003c/a\u003e”, Adam Smith Institute, 4 September 2013\u003c/li\u003e\n\u003c/ul\u003e\n\u003cbr\u003e\nReferences:\u003cbr\u003e\n\u003ca name\u003d\"#_1\"\u003e1\u003c/a\u003e. See interview in \u003ca href\u003d\"http://reason.com/archives/1997/01/01/looking-for-results/singlepage\n\"\u003eHazlett (1997)\u003c/a\u003e"},"link":[{"rel":"edit","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/2199011428566347396"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/2199011428566347396"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/2013/09/ronald-coase.html","title":"Ronald Coase"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}]},{"id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600.post-9145709565487672560"},"published":{"$t":"2013-08-16T21:05:00.000+12:00"},"updated":{"$t":"2013-09-28T08:20:06.836+12:00"},"category":[{"scheme":"http://www.blogger.com/atom/ns#","term":"White Paper"},{"scheme":"http://www.blogger.com/atom/ns#","term":"Review"}],"title":{"type":"text","$t":"Physics, Financial Models, and Predicting the Unpredictable"},"content":{"type":"html","$t":"This essay is principally a review of the book \u003ci\u003eThe Physics of Wall Street: A Brief History of Predicting the Unpredictable\u003c/i\u003e, 2012, James Owen Weatherall.  The first part of the review summarises the key individuals from physics that have made a contribution to financial economics.  I then touch briefly on a negative review of Weatherall’s book, noting the complete omission of the important contributions made by non-physicists.  The review then turns to a controversial topic – whether models can or should be used when there are extreme and seemingly unpredictable events (“Black Swans”).  The thesis of the book is that the assumptions underlying models need to be understood, the models need to be regularly tested, and that better models can be built.  Rupture models have been empirically shown to predict when crises will occur, turning the unpredictable Black Swans into predictable “Dragon Kings”).  I conclude with some personal comments.\u003cbr\u003e\n\u003cbr\u003e\n\u003ch3\u003eSelected Contributions by Physicists to Financial Economics\u003c/h3\u003e\nIn The Physics of Wall Street: A Brief History of Predicting the Unpredictable, 2012, James Owen Weatherall provides a very interesting, if selective, history of the contribution of physicists to quantitative finance.  Key contributors covered in the book are:\u003cul\u003e\u003ca name\u003d'more'\u003e\u003c/a\u003e\n\u003cli\u003e\u003cb\u003eLouis Bachelier\u003c/b\u003e – a French physicist who was forced by circumstances to find work at the Paris Bourse and identified that prices are subject to a random walk and are normally distributed.  Bachelier used his analysis to calculate the price of options.\u003c/li\u003e\n\u003cli\u003e\u003cb\u003eMaury Osborne\u003c/b\u003e – who agreed that markets are random, subject to “Brownian motion”, but it is returns rather than prices that are normally distributed, which means that prices are log-normally distributed.  Osborne seems to have considered that there was no way to profit from the stock market and did not extend his work to option pricing until the late 1970s. (p. 45)  Osborne also explored the phenomena of mean-reversion or conditional probability in stock prices, where from moment to moment a stock or the market is more likely to reverse itself than continue in a given direction.\u003c/li\u003e\n\u003cli\u003e\u003cb\u003ePaul Samuelson\u003c/b\u003e – although Samuelson is a Nobel prize winning economist in his own right,\u003ca href\u003d\"#_1\"\u003e\u003csup\u003e1\u003c/sup\u003e\u003c/a\u003e Samuelson’s role in this account is his re-discovery of Bachelier’s work.\u003c/li\u003e\n\u003cli\u003e\u003cb\u003eSzolem Mandelbrot\u003c/b\u003e – financial markets are complex systems exhibiting wild randomness and fractal patterns, and this wild randomness means that distributions have much fatter tails than the normal distribution, meaning that extreme events occur much more often than these distributions predict.  This in turn means that options priced using a based on the normal distribution will not correctly price in extreme events.  Mandelbrot argued that rather than being “normal”, distributions are “Lévy-stable” distributions, of which the normal distribution is one extreme and the Cauchy distribution is another extreme.\u003ca href\u003d\"#_2\"\u003e\u003csup\u003e2\u003c/sup\u003e\u003c/a\u003e Current research indicates that although distributions of financial market returns exhibit fat tails, they are not Lévy-stable (p. 74).\u003c/li\u003e\n\u003cli\u003e\u003cb\u003eJohn Kelly\u003c/b\u003e – who established the “Kelly criterion” for betting, that the proportion of your capital that should be “invested” in a bet is equal to the ratio of your advantage (due to superior information) to the payout.\u003ca href\u003d\"#_3\"\u003e\u003csup\u003e3\u003c/sup\u003e\u003c/a\u003e\u003c/li\u003e\n\u003cli\u003e\u003cb\u003eEdward Thorp\u003c/b\u003e – responsible for important advances in information theory.  In conjunction with Professor Claude Shannon, the father of information theory, and utilising the Kelly criterion, Thorp devised a scheme for beating casinos at blackjack and roulette, and demonstrated the success of these schemes.  Thorp then turned his attention to the stock market and warrants (a form of option).  Thorp was able to calculate the “true” price for a warrant using Bachelier’s approach and Osborne’s observation of log-normal prices.  As with gambling, Thorp then applied the Kelly criterion to decide how much of his funds to invest.  More importantly, Thorp essentially invented delta hedging: the right mix of warrants and stocks can provide a guaranteed profit unless the stock price moves dramatically.\u003c/li\u003e\n\u003cli\u003e\u003cb\u003eFisher Black\u003c/b\u003e – in conjunction with Myron Scholes, the development of the Black Scholes option pricing model (more accurately, derivation of the option pricing model using a new approach).  The Black Scholes model relies on the efficient market hypothesis and the assumption that returns are normally distributed.  While equivalent to the approach developed by Thorp, the Black-Scholes derivation opened the way for dynamic hedging – the sale of options and purchase of other assets in a way that is, provided certain conditions hold, risk-free.  Weatherall argues that this gave the tools that investment banks to manufacture options without (knowingly) taking on huge amounts of risk.\u003c/li\u003e\n\u003cli\u003e\u003cb\u003eDidier Sornette\u003c/b\u003e – the application of rupture / catastrophic failure models to predicting market crashes.  I discuss this in considerable more detail below.\u003c/li\u003e\n\u003cli\u003e\u003cb\u003eEric Weinstein\u003c/b\u003e and \u003cb\u003ePia Malaney\u003c/b\u003e – the application of gauge theory to the index number problems such as the derivation of a better measure of inflation.\u003c/li\u003e\n\u003c/ul\u003e\n\u003ch3\u003eReviewer Comments and the Contributions of Non-Physicists\u003c/h3\u003e\nWeatherall’s book has received a large number of reviews, both positive and negative.  One of the most negative is Aaron Brown, who over the course of a \u003ca href\u003d\"http://www.minyanville.com/business-news/editors-pick/articles/The-Physics-of-Wall-Street-physics/12/17/2012/id/46719\"\u003elengthy 18 part series\u003c/a\u003e takes exception to many statements made in the book.  For example, he notes that Weatherall attributes all advances in modern financial economics to physicists, when pure economists have also made important contributions.  Brown comments:\u003ca href\u003d\"#_4\"\u003e\u003csup\u003e4\u003c/sup\u003e\u003c/a\u003e\u003cbr\u003e\n\u003cbr\u003e\n\u003cdiv style\u003d\"margin-left:2em;\"\u003e\n\u003ci\u003eThe problem for The Physics of Wall Street is few physicists were involved in the process at all until the latter years of the 1980s… . Given that it took a few years to gain much influence, it’s fair to say that the role of physicists was largely restricted to the period of expansion [from 1995 to 2010]. This was not a period of major innovation, the basic ideas, tools and institutions were in place by 1995. And even [during this] period, physicists were not over-represented compared to people in other quantitative fields, nor were ideas imported from physics particularly important.\u003c/i\u003e\u003cbr\u003e\u003c/div\u003e\n\u003cbr\u003e\nSome of this “glossing over” of the contributions of others is inherent to telling the story that Weatherall is trying to tell, which is really the contribution that physics has made to financial economics.  But when acknowledging that techniques and models have been developed for pricing options that better allow for fat-tailed distributions and extreme events, Weatherall could have gone further and explicitly recognised some of the contributors.  For example, Robert Merton receives mention as a collaborator in the Black-Scholes model, but he provided an important contribution to adjusting the model for non-normal price behaviour: in 1976 he extended the Black-Scholes model to account for “jumps” in prices.\u003ca href\u003d\"#_5\"\u003e\u003csup\u003e5\u003c/sup\u003e\u003c/a\u003e\u003cbr\u003e\n\u003cbr\u003e\nWeatherall mentions in passing in the epilogue that Black acknowledged the potential problems with the simplifying assumptions in the Black-Scholes model, in 1988 authoring an article “The Holes in Black-Scholes” in Risk magazine.\u003ca href\u003d\"#_6\"\u003e\u003csup\u003e6\u003c/sup\u003e\u003c/a\u003e In that article Black discusses a range of issues that will result in the Black-Scholes model mis-pricing options: volatility changes, interest rate changes, borrowing penalties, short-selling penalties, transaction costs, taxes, dividends, and takeovers.  Certainly Black was well aware of the short comings of the model, and these would have been well understood within the investment community.\u003cbr\u003e\n\u003cbr\u003e\n\u003ch3\u003eBlack Swans and Dragon Kings: Predicting the Unpredictable\u003c/h3\u003e\nAlthough the investment community clearly had some understanding of the problems of the models, it seems that they were largely unprepared for large-scale correlated events, such as the cascading defaults that led to the sub-prime mortgage crisis in 2008.\u003ca href\u003d\"#_7\"\u003e\u003csup\u003e7\u003c/sup\u003e\u003c/a\u003e This was an error of assuming that defaults would always remain independent (and hence small scale) and potentially not taking the time to think through the structure of the relevant parts of the financial system.\u003cbr\u003e\n\u003cbr\u003e\nThe crash provided fertile ground for Nassim Taleb who became a celebrity with his book “The Black Swan: The Impact of the Highly Improbable”, 2007.  Black Swan events are high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology.  By their very nature, Black Swan events have a disproportionately large impact on society and history.\u003ca href\u003d\"#_8\"\u003e\u003csup\u003e8\u003c/sup\u003e\u003c/a\u003e The essential thesis of Taleb’s book is that Black Swan events occur more frequently than we commonly think, have a very large effect and consequence, and cannot be predicted.  In particular, Taleb has championed the view that because Black Swan events cannot be predicted by traditional models (essentially those assuming normally distributed returns) those models should essentially be discarded.  For a good review of Taleb see the 2009 review by David Aldous.\u003ca href\u003d\"#_9\"\u003e\u003csup\u003e9\u003c/sup\u003e\u003c/a\u003e\u003cbr\u003e\n\u003cbr\u003e\nIt is very clear that Weatherall has no time for Taleb’s conclusion that models should be discarded:\u003cbr\u003e\n\u003cdiv style\u003d\"margin-left:2em;\"\u003e\n\u003ci\u003e… the process of building and revising models that I have described here is the basic methodology underlying all of science and engineering.  It’s the best tool we have for understanding the world.  We use mathematical models cut from the same cloth to build bridges and to design airplane engines, to plan the electric grid and to launch spacecraft.  What does it mean to say that the methodology behind these models is flawed – that since it cannot be used to predict everything that could ever happen, it should be abandoned altogether?  If Taleb is right about mathematical models, then you should never drive over the George Washington Bridge or the Hoover Dam.  After all, at any moment an unprecedented earthquake could occur that the bridge builder’s models didn’t account for, and the bridge could collapse under the weight of the cars.  You should never build a skyscraper because it might be hit by a meteor.  Don’t fly in an airplane, lest a black swan collide with one of its engines.\u003c/i\u003e\u003cbr\u003e\n\u003cfont size\u003d-2\u003eJ Weatherall, \u003ci\u003eThe Physics of Wall Street\u003c/i\u003e, p. 215\u003c/font\u003e\u003cbr\u003e\u003c/div\u003e\n\u003cbr\u003e\nIndeed, part of the very reason for The Physics of Wall Street is to counter the message of Taleb and others who decry the use of sophisticated mathematical models (for example, Wall Street Journal reporter Scott Patterson in his book \u003ci\u003eThe Quants\u003c/i\u003e\u003ca href\u003d\"#_10\"\u003e\u003csup\u003e10\u003c/sup\u003e\u003c/a\u003e).  Weatherall argues that models should be used with full knowledge of the underlying assumptions and the circumstances in which those assumptions might not hold, and that models should continually be tested to determine whether they are performing as intended.\u003cbr\u003e\n\u003cbr\u003e\nThe part that I found most fascinating in The Physics of Wall Street was the discussion of Sornette’s work, from the application of rupture models to the Kevlar pressure vessels used in Ariane space rockets, to earthquakes, and then to financial markets.  In contrast to Taleb’s “Black Swans”, Sornette calls these events “Dragon Kings”, and has proven that at least some of these events can be predicted. Sornette had sufficient faith in the predictions generated by his analysis that he bought cheap out-of-the-money put options and profited from the October 1997 market crash.  Importantly, Sornette turns Taleb’s thesis on its head and, while acknowledging that there are extreme events that are completely outside what can be captured within financial models, other models can be built to identify when crashes are likely to occur.  These models essentially identify when conditions within the financial system are aligning so that a perturbation will precipitate a crisis.  Knowing this, regulators, policy makers, and even financial market participants may be able to intervene or at least find ways to  mitigate the effects of pending crises.\u003cbr\u003e\n\u003cbr\u003e\nAs an interesting aside, when I visited Taleb’s website, he now also refers to a \"Mandelbrotian Grey Swan\", which he defines as:\u003ca href\u003d\"#_11\"\u003e\u003csup\u003e11\u003c/sup\u003e\u003c/a\u003e\u003cbr\u003e\n\u003cdiv style\u003d\"margin-left:2em;\"\u003e\n\u003ci\u003eBlack Swans that we can somewhat take into account – earthquakes, blockbuster books, stock market crashes – but for which it is not possible to completely figure out their properties and produce precise calculations.\u003c/i\u003e\u003cbr\u003e\u003c/div\u003e\n\u003cbr\u003e \nOne is tempted to conclude that the work of Sornette and others has had such a marked impact that Taleb has had to invent this new classification so that the essence of his thesis remains unchanged.\u003cbr\u003e\n\u003cbr\u003e\nFor those that want to read more of Sornette’s work, the following 98 page paper gives comprehensive coverage:\u003cbr\u003e\n\u003ca href\u003d\"http://www2.math.uu.se/cim/seminars/CriticalMarketCrashes.pdf\"\u003eDidier Sornette, “Critical Market Crashes”, \u003ci\u003ePhysics Reports\u003c/i\u003e 378(2003):1-98.\u003c/a\u003e\u003cbr\u003e\n\u003cbr\u003e\nA shorter, more accessible paper is\u003cbr\u003e\n\u003ca href\u003d\"http://ssrn.com/abstract\u003d1470006 and http://arxiv.org/abs/0907.4290\"\u003eDidier Sornette, “Dragon Kings, Black Swans and the Prediction of Crises”, \u003ci\u003eInternational Journal of Terraspace Science and Engineering\u003c/i\u003e 2(1): 1-18\u003c/a\u003e\u003cbr\u003e\n\u003cbr\u003e\nA more recent paper summarising the work on explaining and predicting Dragon Kings is\u003cbr\u003e\n\u003ca href\u003d\"http://www.er.ethz.ch/Reprint_Dragon-King_Sornette-Ouillon.pdf\"\u003eDidier Sornette and Guy Ouillon, “Dragon Kings: Mechanisms, statistical methods and empirical evidence”, \u003ci\u003eEuropean Physics Journal Special Topics\u003c/i\u003e, 205(2012):1-26\u003c/a\u003e\u003cbr\u003e\n\u003cbr\u003e\nDidier also gave a TED talk on the same topic \u003ca href\u003d\"http://pragcap.com/didier-sornette-how-we-can-predict-the-next-financial-crisis\"\u003ehere\u003c/a\u003e or \u003ca href\u003d\"http://reszatonline.wordpress.com/2013/06/18/dragon-king-beats-black-swan-ted-talk-with-didier-sornette/\"\u003ehere\u003c/a\u003e with some supporting commentary.\u003cbr\u003e\n\u003cbr\u003e\n\u003ch3\u003eClosing\u003c/h3\u003e\nI found that Weatherall’s book resonated with me.  It was not intended to be a history of the development of financial modelling; it was intended to be a selected history of how physicists (and mathematicians with some physics background) have contributed to financial economics.  I came to economics not with a PhD in physics, but with a strong enough background in mathematics and physics that I was granted direct entry into a second year physics paper requiring advanced mathematical skills.  My Master’s thesis was in an area of economics other than financial markets, but did include substantial mathematical modelling, and the matrix algebra was solved using a computer programme I wrote myself.\u003cbr\u003e\n\u003cbr\u003e  \nI also have an interest in economic history, so the mix of physics, mathematical modelling, and economic history was a fascinating mix of topics for me.  That it might be selective is the nature of any historical work; the real contribution of this book is to advance the position that advanced mathematical modelling has more to offer to finance and economics, and that ideas from other mathematically-based disciplines such as physics may be able to provide new ways of understanding economic problems.\u003cbr\u003e\n\u003cbr\u003e\n\u003cfont size\u003d-2\u003e\n\u003cb\u003eEndnotes\u003c/b\u003e\u003cbr\u003e\n\u003ca name\u003d\"_1\"\u003e[1]\u003c/a\u003e For more on Paul Samuelson see Wikipedia article \u003ca href\u003d\"http://en.wikipedia.org/wiki/Paul_Samuelson  \"\u003ehttp://en.wikipedia.org/wiki/Paul_Samuelson\u003c/a\u003e\u003cbr\u003e\n\u003ca name\u003d\"_2\"\u003e[2]\u003c/a\u003e For more on Lévy-stable distributions see the article \"Stable Distribution\", Wikipedia \u003ca href\u003d\"http://en.wikipedia.org/wiki/Stable_distribution\"\u003ehttp://en.wikipedia.org/wiki/Stable_distribution\u003c/a\u003e\u003cbr\u003e\n\u003ca name\u003d\"_3\"\u003e[3]\u003c/a\u003e See \"Kelly criterion\", Wikipedia, \u003ca href\u003d\"http://en.wikipedia.org/wiki/Kelly_criterion\"\u003ehttp://en.wikipedia.org/wiki/Kelly_criterion\u003c/a\u003e\u003cbr\u003e\n\u003ca name\u003d\"_4\"\u003e[4]\u003c/a\u003e \u003ca href\u003d\"http://www.minyanville.com/business-news/editors-pick/articles/The-Physics-of-Wall-Street-physics/12/17/2012/id/46719?page\u003dfull#ixzz2azZI5RoO\"\u003ehttp://www.minyanville.com/business-news/editors-pick/articles/The-Physics-of-Wall-Street-physics/12/17/2012/id/46719?page\u003dfull#ixzz2azZI5RoO\u003c/a\u003e\u003cbr\u003e\n\u003ca name\u003d\"_5\"\u003e[5]\u003c/a\u003e Robert C. Merton “Option Pricing when Underlying Stock Returns are Discontinuous”, \u003ci\u003eJournal of Financial Economics\u003c/i\u003e 3(1976):125-144. Available online at \u003ca href\u003d\"http://www.people.hbs.edu/rmerton/optionpricingwhenunderlingstock.pdf\"\u003ehttp://www.people.hbs.edu/rmerton/optionpricingwhenunderlingstock.pdf\u003c/a\u003e\u003cbr\u003e\n\u003ca name\u003d\"_6\"\u003e[6]\u003c/a\u003e Fisher Black, “The Holes in Black-Scholes”, \u003ci\u003eRisk magazine\u003c/i\u003e, available online at \u003ca href\u003d\"http://www.risk.net/digital_assets/5955/The_holes_in_Black-Scholes.pdf\n\"\u003ehttp://www.risk.net/digital_assets/5955/The_holes_in_Black-Scholes.pdf\u003c/a\u003e\u003cbr\u003e\n\u003ca name\u003d\"_7\"\u003e[7]\u003c/a\u003e See, for example, \u003ca href\u003d\"http://en.wikipedia.org/wiki/Subprime_mortgage_crisis\"\u003ehttp://en.wikipedia.org/wiki/Subprime_mortgage_crisis\u003c/a\u003e\u003cbr\u003e\n\u003ca name\u003d\"_8\"\u003e[8]\u003c/a\u003e \"Black Swan Theory\", Wikipedia, \u003ca href\u003d\"http://en.wikipedia.org/wiki/Black_swan_theory\"\u003ehttp://en.wikipedia.org/wiki/Black_swan_theory\u003c/a\u003e\u003cbr\u003e\n\u003ca name\u003d\"_9\"\u003e[9]\u003c/a\u003e David Aldous, \u003ca href\u003d\"http://www.stat.berkeley.edu/~aldous/157/Books/taleb.html\"\u003ehttp://www.stat.berkeley.edu/~aldous/157/Books/taleb.html\u003c/a\u003e\u003cbr\u003e\n\u003ca name\u003d\"_10\"\u003e[10]\u003c/a\u003e Scott Patterson, \u003ci\u003eThe Quants\u003c/i\u003e, is given a non-critical review in the Wall Street Journal at \u003ca href\u003d\"http://online.wsj.com/article/SB10001424052748704509704575019032416477138.html\"\u003ehttp://online.wsj.com/article/SB10001424052748704509704575019032416477138.html\u003c/a\u003e\u003cbr\u003e\n\u003ca name\u003d\"_11\"\u003e[11]\u003c/a\u003e \u003ca href\u003d\"http://www.fooledbyrandomness.com/glossary.pdf\"\u003ehttp://www.fooledbyrandomness.com/glossary.pdf\u003c/a\u003e\u003cbr\u003e\n\u003c/font\u003e"},"link":[{"rel":"edit","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/9145709565487672560"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/9145709565487672560"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/2013/08/physics-financial-models-and-predicting.html","title":"Physics, Financial Models, and Predicting the Unpredictable"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}]},{"id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600.post-7967298456804468629"},"published":{"$t":"2012-09-08T18:43:00.000+12:00"},"updated":{"$t":"2016-11-30T08:10:50.268+13:00"},"category":[{"scheme":"http://www.blogger.com/atom/ns#","term":"Emissions Trading"},{"scheme":"http://www.blogger.com/atom/ns#","term":"News"}],"title":{"type":"text","$t":"ASEC ETS Study Quoted in Fletcher Building Submission"},"content":{"type":"html","$t":"Andrew Shelley Economic Consulting Ltd (ASEC) recently conducted a study for Fletcher Building, the \u003cem\u003eImpact on NZ Steel Manufacturing of the Australian and New Zealand Emissions Trading Schemes\u003c/em\u003e.  This study was cited in Fletcher Building's \u003ca href\u003d\"http://www.parliament.nz/NR/rdonlyres/4880B317-D352-466E-A211-C178ED7E9509/242821/50SCFE_EVI_00DBHOH_BILL11566_1_A274701_FletcherBui.pdf\"\u003eSubmissions on the Climate Change Response (Emissions Trading and Other Matters) Amendment Bill\u003c/a\u003e, submitted to the Finance and Expenditure Select Committee.  The executive summary from the ASEC report is included as an annex to Fletcher Building's submission.\u003cbr /\u003e\n\u003cbr /\u003e\nThis study compared the impacts of the NZ ETS and the scheme proposed for steel manufacturing under Australia's Clean Energy Futures Plan.  The relatively favourable treatment received by Australian steel manufacturers would make steel production in New Zealand less attractive, possibly resulting in the long-term run-down of the Pacific Steel plant.  The potential shift in production to either Australia or Asia would result in consequential increases in greenhouse emissions.  Given the difference in emissions intensity, the increase in global emissions from production in Australia rather than New Zealand would be in the order of 125,000 tCO2 given projected production volumes in 2015.\u003cbr /\u003e\n\u003cbr /\u003e\nThe Fletcher Building submission also cites two early studies conducted by Mr Shelley while working for CRA International.  Those studies, conducted for the Ministry for the Environment, analysed the impact of the (then proposed) NZ ETS on Golden Bay Cement and on Pacific Steel."},"link":[{"rel":"edit","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/7967298456804468629"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/7967298456804468629"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/2012/09/asec-ets-study-quoted-in-fletcher.html","title":"ASEC ETS Study Quoted in Fletcher Building Submission"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}]},{"id":{"$t":"tag:blogger.com,1999:blog-1586534291819613600.post-4900666334428666573"},"published":{"$t":"2011-04-07T06:35:00.000+12:00"},"updated":{"$t":"2016-11-30T08:10:50.264+13:00"},"category":[{"scheme":"http://www.blogger.com/atom/ns#","term":"Emissions Trading"},{"scheme":"http://www.blogger.com/atom/ns#","term":"News"}],"title":{"type":"text","$t":"Studies by Andrew Shelley cited in Fletcher Building ETS Submission"},"content":{"type":"html","$t":"In 2008 Andrew Shelley conducted two studies for the Ministry for the Environment concerning the effect of the (then proposed) emissions trading scheme (ETS) on the competitiveness of two of New Zealand's large trade-exposed emissions-intensive industries: Pacific Steel, a large steel recycling plant; and Golden Bay Cement.\u003cbr /\u003e\n\u003cbr /\u003e\nMr Shelley's studies were cited by Fletcher Building in their \u003ca href\u003d\"http://www.climatechange.govt.nz/emissions-trading-scheme/ets-review-2011/consultation/submission076.pdf\"\u003eSubmissions on the Review of the New Zealand Emissions Trading Scheme\u003c/a\u003e, submitted to the Emissions Trading Scheme Review Panel.\u003cbr /\u003e\n\u003cbr /\u003e\nThe first study was the \u003cem\u003eImpact of the NZ ETS on Cement Manufacturing\u003c/em\u003e, prepared by CRA International for the Ministry for the Environment, 2008.  This study analysed the potential impact of the ETS on Golden Bay Bay Cement.  The analysis indicated that the ETS would create significant incentives to switch to the import of lower-cost clinker\u003ca href\u003d\"#_ftnte_1\"\u003e\u003csup\u003e1\u003c/sup\u003e\u003c/a\u003e, particularly with high exchange rates.  Importing clinker could result in emissions leakage, i.e. an increase in global emissions.\u003cbr /\u003e\n\u003cbr /\u003e\nThe second study was the \u003cem\u003eImpact of the NZ ETS on Pacific Steel\u003c/em\u003e, prepared by CRA International for the Ministry for the Environment, 2008.  This analysis indicated that under some plausible scenarios the NZ ETS could provide the incentive for Pacific Steel to cease production. If that occurred, then Pacific Steel's production of rebar and steel wire would switch to more emissions-intensive plants, and further emissions would be generated as scrap steel (e.g. old car bodies) were shipped offshore rather than recycled locally. \u003cbr /\u003e\n\u003cbr /\u003e\nSummaries of both reports are provided in the annex to Fletcher Building's \u003ca href\u003d\"http://www.climatechange.govt.nz/emissions-trading-scheme/ets-review-2011/consultation/submission076.pdf\"\u003esubmission\u003c/a\u003e.\u003cbr /\u003e\n\u003cbr /\u003e\nNote: \u003cbr /\u003e\n\u003ca name\u003d\"_ftnte_1\"\u003e1\u003c/a\u003e. Clinker is a key intermediate product in the manufacture of Portland cement.  It is produced in a high temperature kiln from the raw materials (limestone plus additives).  Clinker is easily stored and transported, and is traded internationally."},"link":[{"rel":"edit","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/4900666334428666573"},{"rel":"self","type":"application/atom+xml","href":"https://www.blogger.com/feeds/1586534291819613600/posts/default/4900666334428666573"},{"rel":"alternate","type":"text/html","href":"http://www.asec.co.nz/2011/04/studies-by-andrew-shelley-cited-in.html","title":"Studies by Andrew Shelley cited in Fletcher Building ETS Submission"}],"author":[{"name":{"$t":"Andrew Shelley"},"uri":{"$t":"https://www.blogger.com/profile/05873848443926006773"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"35","height":"35","src":"//www.blogger.com/img/blogger_logo_round_35.png"}}]}]}});