tag:theconversation.com,2011:/columns/economic-surplus-36Economic surplus – The Conversation2016-06-26T23:36:06Ztag:theconversation.com,2011:article/616582016-06-26T23:36:06Z2016-06-26T23:36:06ZFor the English, Brexit will mean economic pain<p>The naiveté of the English!</p>
<p>They have voted for Brexit. Now the debate has <a href="http://www.theguardian.com/politics/2016/jun/24/britain-has-voted-to-leave-the-eu-what-happens-next">turned to</a> the ‘conditions’ of exit. But the English are talking <a href="http://www.independent.co.uk/voices/brexit-what-next-reasons-to-be-positive-eu-referendum-jeremy-corbyn-a7104016.html">as if they will have a choice</a>. They won’t. Let me use a bit of game theory to explain.</p>
<p>Put yourself in the position of the non-English EU leaders. The Brexit vote is simply the first step of an on-going process. The third and successive steps may be more exit votes – for <a href="https://next.ft.com/content/12aeb6df-cc96-3c8f-95fd-dcded701a197">Frexit, Nexit</a>, and so on.</p>
<p>But before there are any more votes to leave the EU, the EU leaders have their turn. These leaders will set the exit terms for the English. And the success of future ‘exit’ referendums will depend on the expected conditions that face an exiting country. The worse these conditions, the less likely it is that a future exit vote in another member country will succeed. So EU leaders have an incentive to make these ‘exit conditions’ as onerous and costly as possible.</p>
<p>And it is England that will set the precedent.</p>
<p>As the <a href="http://www.dailymail.co.uk/news/article-3659609/It-s-not-going-amicable-divorce-wasn-t-exactly-tight-love-affair-EU-leaders-hold-emergency-talks-desperate-bid-save-European-project-continental-breakfast.html">Daily Mail put it</a>:</p>
<p>“There are fears the EU will not offer a good deal to the UK in a bid to deter other Eurosceptic countries following Britain out the exit door”.</p>
<p>Too right! Now that the “leave” vote has won in the UK, EU leaders have a strong incentive to make Brexit as costly as possible. While this <a href="http://www.bbc.com/news/business-36596060">may hurt the EU as a whole</a>, the EU leaders will be willing to impose a high cost on England to avoid the much higher cost of a sequential breakdown of the EU. </p>
<p>So what does this mean for the UK?</p>
<p>First, Scotland will have a strong campaign to leave the UK and stay with the EU. The campaign will be jointly organised by the independence movement and the continental EU leaders. It will have “sticks”: stay with the UK and join England in an economic downturn. It will also have “carrots”. Expect the EU to provide generous benefits to Scotland if it chooses to take its independence as part of the EU. </p>
<p>And after Scotland, the EU will target Northern Ireland. From the EU perspective, breaking up the UK will be seen as a significant form of punishment for English defection.</p>
<p>Second, expect England, and what ever else is left of the UK, to face significant barriers with the EU for both trade and the movement of people. </p>
<p>The EU leaders will need to “punish” the UK. This means that pre-vote talk of a <a href="http://www.telegraph.co.uk/business/2016/06/18/safe-harbour-why-the-norway-option-could-take-the-risk-out-of-br/">Norwegian’ type of solution</a> is going to rapidly evaporate. The EU may offer this type of solution: free movement of goods and services with free movement of people. However, it is clear that the UK cannot accept this. The “leave” vote in England was a vote against EU “migrants”. However, the EU will not offer free trade without the free movement of people. So England will face the highest level of default restrictions on trade with the EU and will have a hard time trying to negotiate any sort of UK-EU free trade agreement.</p>
<p>Third, expect a recession in England and a significant reduction in the standard of living, particularly in the midlands and northern parts of England that <a href="https://www.washingtonpost.com/news/worldviews/wp/2016/06/24/this-map-shows-britains-striking-geographical-divide-over-brexit/">strongly supported Brexit</a>. This process has started. The drop in the value of <a href="http://www.bbc.com/news/business-36636853">the pound</a> means that every imported product bought by the English has just gone up in price. That means that the wages of workers have gone down in terms of real spending power. </p>
<p>The depth and length of any recession will significantly depend on <a href="http://www.theguardian.com/politics/2016/jun/24/what-does-brexit-mean-for-eu-citizens-in-britain-and-brits-in-europe">how the UK treats its existing EU “migrants”</a>. If it let’s them stay permanently, then this will moderate any downturn. But if it insists that they leave, expect major disruption to key industries that depend on this “migrant” labour. And English workers will quickly learn that these “migrants” are a source of demand for the goods and services that they want to sell. </p>
<p>Finally, expect this process of English “punishment” to be extremely popular in the EU. It is already starting with the issue of refugees and <a href="http://www.telegraph.co.uk/news/2016/06/25/calais-mayor-calls-for-migrant-camps-to-be-moved-to-britain-foll/">border-protection in Calais</a>. </p>
<p>Ironically, this may work against the right-wing anti-EU parties in France and elsewhere. After all, nothing unites more than a common enemy and, for the next few years, the citizens of the EU will delight in uniting against England. </p>
<p>So expect a rocky economic road ahead for England. To paraphrase Winston Churchill, the trouble with committing economic suicide is that you live to regret it.</p><img src="https://counter.theconversation.com/content/61658/count.gif" alt="The Conversation" width="1" height="1" />
The naiveté of the English! They have voted for Brexit. Now the debate has turned to the ‘conditions’ of exit. But the English are talking as if they will have a choice. They won’t. Let me use a bit of…Stephen King, Professor, Department of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/558792016-03-08T02:25:16Z2016-03-08T02:25:16ZOur electricity network regulation is in trouble<p>Want to check if Australia’s utility regulation is working? To highlight the problems, you need look no further than the recent <a href="http://www.competitiontribunal.gov.au/decisions">decisions by the Australian Competition Tribunal</a> on four electricity network businesses.</p>
<p>Don’t get me wrong. These are fine legal decisions. But they also highlight the underlying failure of Australia’s utility regulation.</p>
<p>The decisions relate to earlier work by the Australian Energy Regulator (AER), covering three NSW state-government-owned companies, Ausgrid, Endeavour Energy and Essential Energy, as well as ActewAGL, a joint venture between private and ACT government-owned companies. The AER decisions were meant to set prices for the 2014-19 period. However, the Tribunal has decided to “set aside the AER’s decisions and have the AER make them again.”</p>
<p>So even if the AER rattles through a new set of decisions, the 2014-19 prices will not be implemented until at least the middle of 2016, two-years late.</p>
<p>This delay is not the fault of the Tribunal, the AER or even the companies. It is symptomatic of a dysfunctional regulatory system that is desperately in need of major reform.</p>
<p>The evidence?</p>
<p>Well let’s start with this quote from the Tribunal’s summary document:</p>
<p>“<em>The hearing of oral submissions by those opposing the AER’s decisions and from the AER occupied three weeks. The review-related material which the parties drew on in making their submissions was said to extend to more than one million pages. Lengthy written submissions were presented to the Tribunal – on but one issue (the AER’s opex allowances) the parties’ written submissions were over 460 pages and their oral submissions occupied three and a half days filling over 250 pages of transcript.</em>”</p>
<p>The Tribunal is not alone in facing a mountain of lawyer and consultant generated information. The AER faced the same problem in reaching its initial decisions. And, as a result, the AER’s original decisions were equally lengthy. As the Tribunal notes the AER’s original Ausgrid decision “comprised an overview of 66 pages and 20 attachments totalling 1,470 pages”. The other AER decisions were of “similar size”.</p>
<p>This explosion in the size of regulatory decisions is not new. As <a href="https://business.monash.edu/economics/research/research-collaborations/monash-business-policy-forum/mbpf-papers">recent research by Joe Dimasi and Peter Lambert</a> of the Monash Business Policy Forum makes clear, the Tribunal is simply continuing a twenty-year trend.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/114188/original/image-20160308-15315-1am2bft.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/114188/original/image-20160308-15315-1am2bft.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/114188/original/image-20160308-15315-1am2bft.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=499&fit=crop&dpr=1 600w, https://images.theconversation.com/files/114188/original/image-20160308-15315-1am2bft.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=499&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/114188/original/image-20160308-15315-1am2bft.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=499&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/114188/original/image-20160308-15315-1am2bft.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=627&fit=crop&dpr=1 754w, https://images.theconversation.com/files/114188/original/image-20160308-15315-1am2bft.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=627&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/114188/original/image-20160308-15315-1am2bft.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=627&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Index of length of regulatory decisions for electricity distribution and transmission.</span>
<span class="attribution"><span class="source">Monash Business Policy Forum</span></span>
</figcaption>
</figure>
<p>This graph, from the Research, shows the increase in the size of regulatory decisions in electricity since 1998. The graph is based on data from the AER’s website. ‘t’ refers to a transmission company while ‘d’ refers to a distribution company. In simple terms, some recent regulatory decisions are roughly twenty-to-thirty times longer than twenty years ago.</p>
<p>This problem is well known in regulation. Initially, a regulatory scheme is apparently simple and clear. But there are always loopholes and differences of opinion. These get debated and exploited. The rules are expanded to fix up the flaws. But this simply creates more debate and potentially new loopholes. These are exploited, and so on.</p>
<p>The increasing complexity means that it takes longer and longer to make a decision. As the Research notes:</p>
<p>“<em>Queensland’s distribution sector has seen a 6.5 fold increase in time taken to arrive at a final decision. Victoria’s distribution sector saw the time taken roughly double after each five year regulatory period from 2000 to 2010. The most recent NSW/ACT decisions governing a five-year period took three years four months to complete. Appeals extend these timelines further.</em>”</p>
<p>The increased complexity not only means more time and resources are wasted. It also means that decisions are likely to be worse. Current regulatory decisions are all but unintelligible to anyone outside a small group of specialists. And as the Research notes, the size of the regulated networks (called the regulatory asset base) has been allowed to grow exactly at the same time as the demand for electricity transmission has been falling.</p>
<p>So how do we get out of this problem?</p>
<p><a href="https://theconversation.com/ending-the-arms-race-at-the-centre-of-utilities-regulation-54164">One alternative approach</a> is based on negotiated settlements rather than judgements by all-powerful regulators and tribunals. Often regulation covers large businesses selling to other large businesses. In such situations, a better regulatory solution may involve ‘mediated bargaining’. The businesses negotiate to try and reach a solution. If they fail, then the regulator is called in. But if the business supplier and business customer agree on a deal, then it stands.</p>
<p>This ‘negotiate/arbitrate’ model is low cost and has been successfully used in Australia and overseas. But it is not generally used in our energy sector. The recent Tribunal decisions show that it should be.</p><img src="https://counter.theconversation.com/content/55879/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Stephen King is a Member of the Economic Regulation Authority of WA which has a role in utility regulation.</span></em></p>Want to check if Australia’s utility regulation is working? To highlight the problems, you need look no further than the recent decisions by the Australian Competition Tribunal on four electricity network…Stephen King, Professor, Department of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/541682016-02-04T02:35:39Z2016-02-04T02:35:39ZSimplifying payment card regulation<p>Payment card fees are ridiculously complex.</p>
<p>When you pay by a card, the merchant pays a fee to its bank. Sometimes it will pass some, all, or more of the fee through to you, the customer, through a surcharge on the price of the product you are buying. But only a few merchants surcharge, meaning that the merchant’s costs of customers using cards are often spread over all transactions - credit, EFTPOS and cash. The result is that customers who do not use cards may subsidise those who do.</p>
<p>Even where there is a surcharge, it rarely reflects the actual card costs. Banks set a wide range of card fees and it is often impossible for merchants to know exactly what cost they pay when they accept a customer’s card. And some merchants just set a flat fee for card payments, meaning that customers with small transactions pay more than the cost of the card.</p>
<p>The fee paid by a merchant reflects a range of underlying fees. The largest of these is the interchange fee paid by the merchant’s bank to the card holder’s bank. And this fee is sometimes turned into reward points for the cardholder.</p>
<p>These fees can be gamed. Most obviously, if there is no surcharging, the cost of the card is shared over all consumers, while individual banks can manipulate fees and bonus points to encourage customers to use their card even if it is not the cheapest or most efficient payment method. The end result is bigger profits for the banks and the card systems.</p>
<p>So since the early 2000s, the <a href="http://www.rba.gov.au/publications/bulletin/2012/mar/pdf/bu-0312-7.pdf">fees have been subject to regulation</a>.</p>
<p>But the regulations have only been partly successful. So the Reserve Bank of Australia (RBA) <a href="http://www.rba.gov.au/media-releases/2015/mr-15-24.html">is reviewing the rules</a>. This is likely to result in tighter regulation. The problem, however, is that the current approach to card regulation is completely backwards.</p>
<p>The aim of the regulation is to make sure that the customer who chooses to pay by card faces the true costs of using that card. So the obvious answer is to impose the cost on the customer.</p>
<p>This is the system we use for ATM transactions. If you want to use an ATM that is not part of your bank’s network, then you get told the fee and given the option to continue or cancel your transaction. The fee is set by your bank and part of the fee is used to compensate the owner of the ATM machine for its costs. There are no other hidden fees.</p>
<p>So the customer’s bank charges the customer and the customer makes the decision.</p>
<p>We can do the same for credit and debit cards. If you have a card from bank X and bank X decides to make you pay a fee, then this is disclosed when you swipe, insert or tap your card. You get the right to continue or switch payment instruments. There is no merchant surcharge, and the merchant does not pay or get paid a separate fee when you pay by card. Your bank uses part of the fee to pay the costs of the merchant’s bank.</p>
<p>Why is this a good idea? Because it solves most of the regulatory problems with almost no need for explicit regulatory intervention.</p>
<p>No more excessive surcharging. Indeed, there is no merchant surcharge. Any charge is set by your bank and if the charge is too high, then you complain to your bank or switch cards or switch banks. If you don’t want to pay high fees then banks and other finance companies will pretty quickly develop low (or no) fee cards. Really want frequent flyer points? Fine - but you will now see the true cost of those points every time you use your card.</p>
<p>What about the interchange fee? Well - who cares? It is an interbank fee. The banks and card schemes can negotiate what they like. But it doesn’t change merchant costs because the merchants will not pay any transaction fee when you use a card.</p>
<p>So competition between the numerous card issuers protects card holders and a simple ‘no fee’ rule protects merchants.</p>
<p>We know that this system is possible because it already is in operation for ATMs. And we know that this system works because we have seen it work for ATMs. So ‘direct customer charging’ solves the RBA’s regulatory problems.</p>
<p>The RBA may allow merchants to pay an annual fee (or receive an annual payment) from their bank. But the merchant’s do not get to choose the payment instruments on a transaction-by-transaction basis. The customers make that choice. So there should be no transaction fee for merchants.</p>
<p>The banks and card schemes may not like direct customer charging. But it is simple, transparent regulation that removes the current hidden card fees. It empowers the customers. But the choice is with the RBA.</p><img src="https://counter.theconversation.com/content/54168/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Stephen King has previously provided advice to Visa on competition matters. </span></em></p>Payment card fees are ridiculously complex. When you pay by a card, the merchant pays a fee to its bank. Sometimes it will pass some, all, or more of the fee through to you, the customer, through a surcharge…Stephen King, Professor, Department of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/532762016-01-18T00:34:49Z2016-01-18T00:34:49ZACCC settlement will empower petrol consumers<p>The ACCC has <a href="https://www.accc.gov.au/media-release/petrol-price-information-sharing-proceedings-resolved">settled the ‘Informed Sources’ case</a> and this will help empower petrol customers.</p>
<h2>How does this help petrol buyers?</h2>
<p>Let’s start with the economics. If businesses exchange price information in a way that is not available to the general public, then competition regulators should be concerned. Businesses can use this information to signal each other about their pricing intentions. The aim is to reach a ‘tacit agreement’ to generally raise prices, share a market or otherwise limit competition in order to raise profits and rip off consumers.</p>
<p>The ACCC has been concerned about petrol retailers sharing price information through a third-party company called Informed Sources (IS). IS was set up to save time and effort for petrol retailers. By connecting the subscribing retailers, IS enables them to exchange their price information on a location-by-location basis, in real time. So, no more sending out staff to check rivals’ price boards.</p>
<p>However, the <a href="http://www.accc.gov.au/publications/petrol-prices-and-australian-consumers-report-of-the-accc-inquiry-into-the-price-of-unleaded-petrol">2007 ACCC inquiry into the price of unleaded petrol</a> raised concerns that the IS price exchange was being used by the retailers to signal price rises. The price information was not available to the public. Only subscribing retailers could get the information. So the IS system did not increase general price transparency. But it did seem to be what economists call a ‘collusive device’ or a ‘facilitating practice’: helping petrol retailers to raise the price when (from the retailers’ perspective) the price is too low.</p>
<p>The ACCC launched a case under the anti-competitive contract provisions of Australia’s competition laws. The case was settled just before Christmas. The main change will be that the data distributed by IS will also be available to consumers and third-parties who want to use the data to inform consumers. So expect a flurry of real time petrol price phone Apps, and other types of real-time updates.</p>
<h2>Why is this important?</h2>
<p>First, because petrol prices are important to many Australian households. Improving the flow of information will help the market to work better with more competition and lower prices. Consumers can quickly punish any retailer who tries to lead a price rise. And if one brand of retailer tends to keep higher prices it will simply lose custom to its rivals.</p>
<p>Second, the IS settlement sets a useful precedent for future competition cases involving ‘concerted practices’. The Competition Policy Inquiry (Harper inquiry) recommended that the competition laws be extended to make illegal business practices that help dampen competition and facilitate collusion if they substantially lessen competition. The government has <a href="http://treasury.gov.au/harperreview">agreed to introduce</a> such a law. But in many ways the IS case is a first example of a facilitating practices case.</p>
<h2>Can households expect a big fall in petrol prices?</h2>
<p>No.</p>
<p>The IS settlement will only affect retail margins. But most of the cost of a litre of petrol is the international cost of importing petrol (yes - Australia is a net importer of the fuel we use in our cars) and government taxes. As the <a href="https://www.accc.gov.au/publications/fuel-facts/fuel-facts-unleaded-petrol">ACCC fuel facts</a> note, for unleaded petrol:</p>
<p><em>“The international price and taxes make up around
88 per cent of the retail petrol price and are effectively
fixed components that are out of retailers’ control.
This leaves around 12 per cent of the retail price, which
refiners, wholesalers, distributors and retailers use to
cover their costs and make a profit.”</em></p>
<p>So the ACCC’s settlement will, at best, lower petrol prices by a couple of cents per litre over the price cycle. It may also change the cycles that are common in Australian cities.</p>
<p>The big factors that will move petrol prices this year are the <a href="https://www.accc.gov.au/consumers/petrol-diesel-lpg/about-fuel-prices">Singapore “US dollar price”</a> of refined unleaded petrol and the Australian dollar exchange rate. And unfortunately for petrol buyers, while world oil prices are dropping, so too is the exchange rate. </p>
<p>So if Australians want lower prices at the petrol bowser, they should hope that the world price of oil keeps dropping - and does so faster than our currency!</p>
<p>The key impact of the settlement in the Informed Sources case will not be lower prices but consumer control. The more we can access easy-to-use information about petrol prices, the smarter we can buy. And for many consumers, the knowledge that they are not being ripped off is as important as a dollar or so a week saving on the petrol bill. Fortunately, the ACCC settlement should deliver both.</p><img src="https://counter.theconversation.com/content/53276/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Stephen King was a Member of the 2007 ACCC inquiry into the price of unleaded petrol. He provides occasional advice to the ACCC on petrol matters. </span></em></p>The ACCC has settled the ‘Informed Sources’ case and this will help empower petrol customers. How does this help petrol buyers? Let’s start with the economics. If businesses exchange price information…Stephen King, Professor, Department of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/529482016-01-10T20:02:18Z2016-01-10T20:02:18ZWhy Uber’s surge pricing is naive economics<p>Economists love Uber’s surge pricing. But it is doomed, because customers hate it. </p>
<p>Why? </p>
<p><a href="http://www.forbes.com/sites/kalevleetaru/2016/01/02/the-200-uber-ride-and-the-realtime-data-driven-sharing-economy/">Surge pricing occurs</a> when the supply and demand for Uber vehicles becomes unbalanced, for example, due to inclement weather, a public holiday such as New Years Eve or some other event (public transport failure, terrorist attack, …). Supply is low (who wants to drive in a snow storm?). However, demand is high (how do I get home when the rail network is down?). So, by raising the price (sometimes very substantially), Uber aims to encourage more drivers to pick up passengers and to ration the available supply to the customers who value the service the most.</p>
<p>The result is a New Year filled with negative Uber articles, both in <a href="http://www.news.com.au/finance/business/travel/uber-users-share-their-pricesurge-horror-stories-from-new-years-eve/news-story/27db8a49e318b199e44c635780883f91">Australia</a> and <a href="http://www.cbc.ca/news/canada/montreal/uber-price-surge-new-ears-montreal-1.3395623">overseas</a>. </p>
<p>In the <a href="https://hbr.org/2015/12/everyone-hates-ubers-surge-pricing-heres-how-to-fix-it">Harvard Business Review</a>, Utpal Dholakia suggests that the near universal dislike of surge pricing is due to a lack of transparency and customers’ lack of understanding about its benefits. He suggests education and transparency. But Uber is already embracing these strategies, trying to warn customers when surge pricing is likely and to make sure customers understand and agree to the surge price when requesting a car. </p>
<p>So Dholakia misses the key point.</p>
<p>It is not ignorance that leads to customer annoyance with surge pricing. Customers understand exactly what surge pricing does. <em>And that is why they do not like it</em>.</p>
<p>From the customers’ perspective, surge pricing does two things. First, it encourages more drivers and so makes it more likely that the customer can get home (or where ever else they are going) in less time (albeit at a higher - and possibly much higher - monetary price). </p>
<p>This is the economic ‘plus’ from surge pricing. Economists call this an allocative gain. It means that more mutually beneficial trade occurs because there are drivers who are only willing to drive for the higher price but there are also customers willing to pay that price. Setting a lower ‘normal’ price would just mean that the drivers stay at home and the customers don’t get home.</p>
<p>Second, however, surge pricing creates a transfer.</p>
<p>When I jump into the Uber car I don’t know if my driver only decided to work because of the surge pricing. He or she might have been out there anyway. And in that case, I just pay more even though the driver would have been there anyway. Of course, the driver also gets more. The money doesn’t disappear. It is a transfer. My loss through paying the higher surge price is the driver’s gain. So from an economic perspective, this transfer is neutral. But that doesn’t make the customer feel any happier.</p>
<p>So economists love surge pricing because it improves ‘allocative efficiency’. Customers tend to dislike it because it means all customers pay more, even if their driver would have been working regardless.</p>
<p>Surge pricing, and customers’ dislike of it, is simply one example of a common phenomena. When ever there is a shortage of a good or service and the market has a chance to work, the price rises and both rations existing supplies and encourages new supplies.</p>
<p>If a cyclone disrupts petrol supplies to Cairns, the price rises and those petrol retailers who just happened to have supplies in their storage tanks get a wind-fall gain. Customers pay more but this encourages petrol companies and private entrepreneurs to try and increase supplies.</p>
<p>Of course, if the same happened due to a hurricane in Florida, then “gas” prices could not rise. It would be illegal due to <a href="http://myfloridalegal.com/pages.nsf/Main/5D2710E379EAD6BC85256F03006AA2C5?OpenDocument">price gouging laws</a>. So sellers with supplies don’t raise the (advertised) price. And it will take longer to get more supplies in (why hurry - there is no economic gain because the law has stopped the price from rising).</p>
<p>Some politicians in the US want to <a href="http://www.theguardian.com/technology/2015/jan/26/uber-surge-pricing-new-york-snowstorm">limit surge pricing</a> claiming that it is ‘price gouging’. However, a ban is a poor way to deal with surge pricing. It just hides the price rise or leads to non-monetary payments to ration the good or service. For example, if the monetary price can’t rise, and other forms of payment to sellers are avoided, then there will be long queues and a lot of wasted time. Customers pay in time rather than dollars. And paying an entrepreneurial student to wait in line for you rather than just paying more for the relevant product is a pure waste of resources.</p>
<p>So surge pricing is hated by consumers and is likely to lead to legal intervention over time. But banning surge pricing just leads to queues and inefficiency. </p>
<p>So what is the solution?</p>
<p>In many markets, ‘opportunistic’ price changes don’t occur because ‘regular’ sellers and buyers recognise the long-term nature of their relationship.</p>
<p>Customers often have long memories. So if a regular seller raises the price today because of a temporary shortage then customers may boycott that seller when normal times resume tomorrow. And sellers, knowing this, will try to respond to the shortage by more sophisticated pricing and information to customers. So the seller may make it clear that the price is kept lower to ‘regular’ customers even though it is higher to everyone else during the crisis. Or the seller may ration supplies to a ‘fair’ level for each buyer. </p>
<p>It is the short-term entrepreneurs, who only supply during the crisis, who charge more. But the higher price only applies to their product and is needed to give them the incentive to overcome the abnormally high cost of supply. So the market leads to allocative efficiency while it limits the transfer for sellers who ‘would have been there anyway’. </p>
<p>How does this relate to Uber?</p>
<p>Individual Uber drivers and customers are not in a long term supply relationship with each other. But Uber has a long term relationship with both its drivers and its customers. If Uber is to avoid being damaged by surge pricing, then it needs a more nuanced approach. </p>
<p>For example, instead of surge pricing everyone, the price rise could depend on the customers history. Regulars get a lower price than those who have just downloaded the App due to the crisis. Of course, to encourage drivers, they would need to receive a uniform higher price. So Uber would have to sit in the middle and manage payments. This will most likely lead to lower profits for Uber in the short run. However, it will be a long run investment in goodwill.</p>
<p>And if Uber does not come up with a better alternative to its hated surge pricing, one of its competitors will. </p>
<p>At the moment Uber’s surge pricing reflects naive economics. If Uber is going to thrive long term, particularly as new ride sharing Apps emerge and flourish, then it is going to need a more sophisticated economic approach to pricing.</p><img src="https://counter.theconversation.com/content/52948/count.gif" alt="The Conversation" width="1" height="1" />
Economists love Uber’s surge pricing. But it is doomed, because customers hate it. Why? Surge pricing occurs when the supply and demand for Uber vehicles becomes unbalanced, for example, due to inclement…Stephen King, Professor, Department of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/516472015-12-02T00:47:36Z2015-12-02T00:47:36ZThree of many: problems for the evolving electricity industry in Australia<p>Technological change and the move to renewable energy is creating a series of challenges to the electricity sector in Australia. Here are three of them. </p>
<h2>Managing the generation transition</h2>
<p>In November this year, the UK <a href="http://www.ft.com/intl/cms/s/0/b395d762-83cb-11e5-8095-ed1a37d1e096.html#axzz3t6g3yJ00">faced a power crunch</a>. The lights were kept on. Just. </p>
<p>The problem is that the UK gets most of its power from ageing coal-fired generators. These generators are becoming increasingly unreliable.</p>
<p>Renewable energy sources have taken up part of the slack but they cannot be ‘ramped up’ at short notice if the coal plants stop producing. Gas fired plants can be quickly brought into use. But these plants are expensive and are <a href="http://www.theguardian.com/big-energy-debate/2014/oct/14/-sp-how-close-uk-power-blackout-energy-data">not economic to build</a> if they are just used when coal plants fail the system. </p>
<p>In contrast, diesel generation is cheap and can quickly start up if needed. It is becoming the ‘<a href="http://www.ft.com/intl/cms/s/0/0f664c78-821b-11e5-8095-ed1a37d1e096.html#axzz3t6g3yJ00">back up power of choice</a>’. But it is also the worst polluter. </p>
<p>So the transition to cleaner fuel in the long term in the UK may lead to more polluting power being used in the short term. </p>
<p>Oooooppppps.</p>
<p>The UK is not alone. We face exactly the same types of problem here in Australia. How do we provide cheap, reliable, base load generation and flexible generation to deal with peak loads as we transition from current energy sources based on coal to cleaner sources in the future? </p>
<h2>Pricing of networks and the death spiral</h2>
<p>The NSW government just sold its main electricity transmission business. <a href="http://www.smh.com.au/business/energy/overpaying-fear-on-transgrid-prompts-sell-call-20151126-gl8jp3.html">It got a good price.</a>. This is a problem.</p>
<p>The transmission networks face a regulatory death spiral. Local generation (such as roof top solar) and battery storage reduces the amount of power being transported on the transmission network. But regulators set the revenues for the networks by dividing their 'regulated asset base’ (RAB) by the volume of power. So as demand drops, the price rises. This pushes more people towards local solutions to avoid network charges, lowering volumes further and creating a vicious cycle.</p>
<p>We know how to start to fix this problem. <a href="https://theconversation.com/why-wrong-pricing-has-caused-the-electricity-death-spiral-19508">Change the prices</a>. The transmission network is a big asset with a fixed capacity. The efficient prices set a fixed fee for most consumers, with an extra charge for power used at the peak. <a href="http://www.radioaustralia.net.au/international/2015-12-01/solar-panel-owners-big-users-to-be-slugged-under-fairer-wa-electricity-prices/1520906">Western Australia is starting to move in this direction</a> and the rest of Australia needs to follow. While people who have invested in roof-top solar to lower their power bills will be upset, the alternative is to make our network prices look like Australia Post - falling demand, higher prices, more falling demand, more higher prices, ….</p>
<p>Pricing alone cannot fix the issue long term. Local generation and storage may mean that there is less need for long distance transmission in the future. If that happens then the transmission networks will face more competition and have less value. Governments will either have to continue regulation, but with a much reduced RAB, or deregulate and allow competition between local and long distance sources of power to determine network prices. </p>
<p>So why is the Transgrid price a problem? <a href="http://www.smh.com.au/business/energy/overpaying-fear-on-transgrid-prompts-sell-call-20151126-gl8jp3.html">As the SMH notes</a>: </p>
<p>“Stripping out the stamp duty and the non-regulated businesses, indicates the winning consortium paid around 1.55 times the regulated asset base for Transgrid.”</p>
<p>Good news in the short term for NSW taxpayers. But a worrying long term signal. </p>
<p>If network regulation is effective then the assets should be worth about the same as the RAB. Ratios of 0.8 to 1.2 times the RAB are common. But 1.5 times the RAB?</p>
<p>It appears that the buyers are betting that the New South Wales government will not address the long term viability of the transmission network anytime soon. And they must believe that the Australian Energy Regulator is being (and will continue to be) very generous (i.e. consumers are paying too much). </p>
<p>Or they just paid too much!</p>
<h2>Smart pricing and products for consumers</h2>
<p>The electricity market is unusual. For most consumers the retail price they pay for power is disconnected from the wholesale price. On a hot summer’s day, the wholesale price of power in eastern Australia can soar to <a href="http://www.energymatters.com.au/energy-efficiency/electricity-demand-price/">above $12 per kWh</a>. Consumers pay ‘averaged’ prices and never see these peaks. So they have little incentive to conserve power at times of peak demand. </p>
<p>However, the whole system is geared to meet these peaks and avoid blackouts on hot summer days. Because consumers have no incentive to conserve power when the wholesale price is high, we have to build bigger networks and more power stations. </p>
<p>The solution is to allow consumers to both see the high prices and to respond to those prices. Smart meters were meant to do this. They would allow retailers to design products to save consumers money while managing peak loads. But <a href="https://theconversation.com/smart-meters-dumb-policy-the-victorian-experience-47685">Victoria bungled its smart meter roll out</a> and other states are lagging behind. </p>
<p>The annoying thing here is that smart meters can be driven by retailers and consumers so long as the market rules allow them. While there is progress in this area, it is slow. </p>
<h2>We need a debate</h2>
<p>These are only three of the problems. There are a range of others. These problems will only be solved by governments, regulators, relevant businesses and the public engaging in robust debate. But, with a few exceptions, such as the work of the <a href="http://grattan.edu.au/report/fair-pricing-for-western-australias-electricity/">Grattan institute</a> and the moves by Synergy in WA, there seems to be little debate or action.</p><img src="https://counter.theconversation.com/content/51647/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Stephen King is a member of the Economic Regulation Authority of WA. The views in this article are (as always) his own, and not those of the Authority.</span></em></p>Technological change and the move to renewable energy is creating a series of challenges to the electricity sector in Australia. Here are three of them. Managing the generation transition In November this…Stephen King, Professor, Department of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/495112015-10-21T09:34:37Z2015-10-21T09:34:37ZCredit card surcharging: what is it and how is it changing?<p>Credit card surcharging is in the news. Apparently consumers are going to benefit by <a href="http://www.abc.net.au/news/2015-10-20/government-releases-response-to-financial-systems-inquiry/6868232">new surcharge limits</a> that will be imposed on retailers. But what is surcharging? And why does it need limits? And is surcharging a <a href="http://www.smh.com.au/business/banking-and-finance/man-who-fomented-surcharge-outrage-says-ban-makes-it-worse-20151020-gkdj8k.html">good or a bad</a> thing for customers?</p>
<h2>What is a credit card surcharge?</h2>
<p>When you buy something from a retailer, you usually have a choice of payment instruments. You can pay by cash, direct debit (EFTPOS), credit card, or sometimes more exotic options like BPAY or PayPal. </p>
<p>These different payment options have different costs for the retailer. When you pay by credit card the retailer pays its bank a percentage fee. This ‘merchant service fee’ can vary by card. It is often higher for American Express than for Visa or MasterCard. The fee also varies between retailers. </p>
<p>It generally costs retailers more when you pay by credit card than use, say, direct debit. As the Reserve Bank of Australia (RBA) notes, the “main factor here is the higher merchant service fees”. (See “<a href="http://search.rba.gov.au/search?q=Payment+costs+in+australia&btnG.x=0&btnG.y=0&entqr=0&sort=date%3AD%3AL%3Ad1&output=xml_no_dtd&client=newRBA&ud=1&oe=UTF-8&ie=UTF-8&proxystylesheet=newRBA&site=RBA-all">Payment costs in Australia</a>”).</p>
<p>If the retailer cannot surcharge (i.e. it has to set the same price regardless of how a customer pays) then it will recover the cost of payments through the price. Put another way, the retailer’s price will include a margin to cover the ‘average’ payment cost. This means that if you use a high cost payment instrument, like a credit card, you pay the same as someone who uses a low cost payment instrument, like a debit card. So without surcharging, credit card customers are effectively being ‘cross subsidised’ by customers who don’t use credit cards. The non-credit card-customers save the retailer money, but the customers do not get any benefit from this.</p>
<p>Surcharging is where the retailer adds on an extra fee to a credit card customer. This means that a credit card customer will pay more than other customers for the same goods or services. But remember, the credit card customer also costs the retailer more than other customers. </p>
<h2>Have we always had credit card surcharging?</h2>
<p>No. <a href="http://www.rba.gov.au/payments-system/reforms/review-of-card-payments-regulation/banks-card-system.html">Prior to 2004</a>, the major credit card companies prohibited surcharging. </p>
<p>In 2003, the RBA introduced a series of payment system reforms. These included the elimination of no-surcharge rules. This meant that retailers could recover the cost of accepting a credit card from the customer who chose to use the credit card. But there was no limit on the size of surcharge that a retailer could set. </p>
<p>The RBA reforms, including the elimination of no-surcharge rules, have been followed around the world (<a href="http://www.rba.gov.au/payments-system/reforms/review-of-card-payments-regulation/banks-card-system.html">see Box B</a>). </p>
<h2>What is the economic logic behind surcharging?</h2>
<p>Under a no-surcharge rule, there will <a href="http://profile.nus.edu.sg/fass/ecsjkdw/edelman_wright_20150312-post.pdf">be excessive use of credit cards</a>. Customers will choose to use a credit card even when the total cost of using that card (including the cost to the retailer) exceeds the benefit to the customer. This is because the customer doesn’t face the true cost of using the credit card. The no-surcharge rule ensures the cost is ‘shared’ with other customers who do not pay by credit card. </p>
<p>Surcharging changes this. Instead of spreading the credit card cost among all customers, a surcharge means that the customer who uses the credit card (and creates the cost for the retailer) also pays the extra cost. </p>
<p>Because credit cards are relatively expensive payment instruments, forcing consumers to face the true cost of credit cards will discourage them from using these cards. Consumers will substitute to less costly payment instruments like direct debit. </p>
<p><a href="http://www.rba.gov.au/payments-system/reforms/review-of-card-payments-regulation/developments-card-payments-mkt.html">RBA data</a> suggests that this substitution has happened. Since 2004 the use of both credit and debit cards has significantly increased. But before 2004 they increased at about the same rate. Since 2004 the use of debit cards has grown significantly faster than credit cards. While other factors may also have influenced this change (e.g. Visa and MasterCard both introduced debit cards) it looks like surcharging did have its desired effect. </p>
<h2>The no-surcharge rule is also unfair</h2>
<p>Why?</p>
<p>Well think about the reward points or frequent flyer miles or other benefits you get when you use your credit card. The banks do not give you these because they like you. They make profits from the fees they receive every time you use your credit card. And under a no-surcharge rule, these fees get hidden in the retail price and paid by all consumers. So under a no-surcharge rule, customers who pay by direct debit, cash or some other non-credit means, also pay for your reward points. Credit card users may like to force other consumers to pay for their reward points. But I doubt that such a hidden cross subsidy passes too many people’s concept of fairness.</p>
<h2>Hate surcharging?</h2>
<p>If you dislike credit card surcharging, you are not alone. A <a href="http://www.fairtrading.nsw.gov.au/ftw/About_us/Have_your_say/Have_your_say_archive/2010/Credit_card_surcharging_in_australia_2010.page">survey by Choice</a> for Fair Trading NSW found that 68% of respondents “believe that retailers and other businesses should not be allowed to charge customers extra when they pay with their credit card”. </p>
<p>And if you use a credit card a lot, you should hate surcharging. Banning surcharging means that every time you use your credit card you get a little subsidy from customers who do not use credit cards. These subsidies add up – partially as reward points!</p>
<p>People also hate surcharging because it looks like a new fee. It isn’t. Surcharging just makes the cost of using a credit card transparent. The costs have always been there. But without surcharging it is hidden in the price.</p>
<p>People dislike surcharges because they are not sure if the charge is ‘fair’. I suspect that more people would put up with a surcharge on a credit card if they really knew that it reflected the actual extra cost to the retailer. However, how do we know the retailer isn’t overcharging us through the surcharge?</p>
<p>And the credit card companies hate surcharging, because it means they make less profit. </p>
<h2>Are surcharges excessive?</h2>
<p>Both the <a href="http://www.rba.gov.au/payments-system/reforms/review-of-card-payments-regulation/issues-for-review.html">RBA data</a> and Choice report show that some surcharges appear to be greater than the extra cost to the retailer. In economic-speak, the retailer is price discriminating against the credit card customer, by adding a bit extra into the surcharge above the retailer’s costs.</p>
<p>The fact that surcharging on credit cards could lead to price discrimination was always a possibility. I <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=352220">did research on this</a> with Joshua Gans in 2002. </p>
<p>In March 2013 the RBA tightened the rules on surcharging to try and limit excessive surcharging. But, as the RBA recognises, the problem of excessive surcharging has not gone away. </p>
<h2>What is the Murray Recommendation and will it work?</h2>
<p><a href="http://fsi.gov.au/publications/final-report/chapter-3/interchange-fees/">Recommendation 17</a> from the Financial System Inquiry (the Murray report) states that the government should “Improve surcharging regulation by expanding its application and ensuring customers using lower-cost payment methods cannot be over-surcharged by allowing more prescriptive limits on surcharging”.</p>
<p>The <a href="http://www.treasury.gov.au/%7E/link.aspx?_id=194A2D59EB6F4F9A8B09ACC059978F47&_z=z%22">government response </a>is:</p>
<p>“We will increase the efficiency of the payments system and ensure it achieves fairer outcomes for consumers, merchants and system providers by phasing in a legislated ban on excessive card surcharges. The ACCC will be responsible for enforcing these rules.</p>
<p>The Payments System Board will pursue policies to address problems with interchange fees and provide clarity around what constitutes excessive customer surcharges on card payments. The Payments System Board released a consultation paper on these issues in March”.</p>
<p>So we need to wait to see the Payment System Board investigation and the resulting legislation to know the final answer.</p><img src="https://counter.theconversation.com/content/49511/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Stephen King has provided advice on credit cards to the NAB and has provided advice on competition issues to Visa.</span></em></p>Credit card surcharging is in the news. Apparently consumers are going to benefit by new surcharge limits that will be imposed on retailers. But what is surcharging? And why does it need limits? And is…Stephen King, Professor, Department of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/461392015-10-13T23:15:39Z2015-10-13T23:15:39ZThe ACCC and potholes on the path away from regulation<p>Over time, a successful regulator makes themselves redundant. The regulator is not needed when competition in the market is working. But the path away from regulation and towards competition is uncertain. </p>
<h2>The ACCC’s Telstra decision</h2>
<p>For example, consider the recent <a href="https://www.accc.gov.au/regulated-infrastructure/communications/fixed-line-services/fixed-line-services-fad-inquiry-2013/final-decision">ACCC’s pricing decision</a> for Telstra’s fixed line services. </p>
<p>In the 1990s, Telstra’s ‘last mile’ network was clearly monopoly infrastructure, both for telephone calls and for data services. Most people made fixed line calls and the only way to access most businesses and households was through the Telstra ‘copper pairs’. And no-one relied on analogue and 2G digital mobile connections for the internet.</p>
<p>But technology has changed. People are <a href="http://www.acma.gov.au/theACMA/engage-blogs/engage-blogs/Research-snapshots/Australians-get-mobile">switching off their fixed line phones</a> and moving to mobile. And as the NBN is rolled out it takes over the old Telstra network. In NBN areas, Telstra is just another telecommunications company. </p>
<p>Unfortunately, our regulations haven’t changed. But they need to.</p>
<p>The ACCC has “<a href="http://www.theaustralian.com.au/business/technology/accc-orders-telstra-to-cut-access-prices/story-e6frgakx-1227562986665">demanded</a> the telco cut the price it charges for access to its ageing copper network by almost 10 per cent.” There are good reasons for this. Interest rates are low and this means that the cost of capital to Telstra – which is the regulatory compensation for its investment in a big, sunk asset like its copper network – should also be low. Telstra might complain but this just reflects other regulatory decisions, for <a href="https://www.aer.gov.au/news-release/aer-expects-decisions-to-lower-electricity-bills-for-queensland-customers">example in electricity</a>. </p>
<p>However, the real issue is in the user numbers. How does the ACCC deal with falling demand? Does it fix the value of the network and raise the price to remaining users? This can lead to a <a href="https://theconversation.com/why-wrong-pricing-has-caused-the-electricity-death-spiral-19508">potential death spiral</a>, as higher prices chase users away from the regulated network. </p>
<p>Or does the regulator recognise that competition has made at least some of the regulation redundant? </p>
<p>Unfortunately the ACCC has done neither. It recognises the problem. But it has two solutions. </p>
<p><em>For the NBN</em>: “the ACCC does not consider that it is appropriate for access seekers to bear the costs of declining demand due to the migration of services to the NBN” (p.xii).</p>
<p><em>For mobile competition</em>: “the effect on unit costs of declining demand for fixed line services that is due to substitution of mobile services will be shared proportionally across all users of the network” (p.xii).</p>
<p>Further, the ACCC has increased, not decreased, its regulatory reach in recent years.</p>
<p>“In April 2014, … [i]n respect of [two services], the ACCC decided that [access obligations] would apply to all access providers nationally, extending the declaration to [the two services] supplied in CBD areas” (p.210).</p>
<p>These CBD areas had been exempt from this telecommunciations regulation for more than a decade.</p>
<p>So as competition is increasing, so too is the scope of regulation. And the ACCC’s approach is inconsistent between the NBN and other forms of competition.</p>
<h2>The problem for the regulator</h2>
<p>How do regulators deal with change that increases competition over time? When does a regulator put itself out of a job so that competition can do its job in former monopoly markets?</p>
<p>In the longer term, for telecommunications and the ACCC, the answer is easy. Leave it to the NBN. As the NBN is rolled out, the ‘Telstra problem’ disappears. The size of the regulated Telstra assets falls as the assets will be allocated to the NBN instead. </p>
<p>Unfortunately, technology and competition is not just a problem for telecommunications. It is also an issue in electricity. Embedded generation and renewables may make Australia’s long stringy transmission networks redundant. And there is no NBN equivalent to pick up the slack. Rather the regulated assets will just become less valuable and, as competition grows, the price for using these assets should fall. But how does the Australian Energy Regulator manage this path to obsolescence?</p>
<h2>Using light-handed regulation</h2>
<p>One alternative is to look at gas. Interfuel competition means that gas distribution pipelines may not present a regulatory problem. And the National Competition Council has recently determined that some <a href="http://ncc.gov.au/application/application-for-light-regulation-of-the-allgas-gas-distribution-network/5">distribution networks</a> can be moved from ‘heavy handed’ regulation to ‘light handed’ regulation. This means that if competition is doing its job, these networks can avoid arduous and expensive price determinations. But if competition doesn’t work, then access seekers can seek an arbitrated decision. </p>
<p>The negotiate/arbitrate framework of light-handed regulation allows regulators to have ‘a bit each way’. If competition works, then regulatory costs are low. But if access seekers – who are often large companies themselves – think they are getting ripped off, they can bring in an umpire.</p>
<p>However, timing is a critical issue. Earlier attempts at negotiation and arbitration in telecommunications led to long, expensive fights. There really was no alternative to Telstra and they had little incentive to negotiate for anything less than a monopoly price. Conversely, it has worked for gas pipelines. And it has <a href="https://www.tigerair.com/news/TT_20140916_20140811.pdf">worked for airports</a>, where even the threat of regulatory intervention has brought parties to the bargaining table. </p>
<p>We can see the future, where current energy and telecommunications regulators are redundant. However, to get there we need to work out a transition path away from current heavy-handed regulation. And we need to time these regulatory changes with appropriate safeguards for consumers. What we cannot do is to maintain the status quo.</p><img src="https://counter.theconversation.com/content/46139/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Stephen King is a member of the National Competition Council. </span></em></p>Over time, a successful regulator makes themselves redundant. The regulator is not needed when competition in the market is working. But the path away from regulation and towards competition is uncertain…Stephen King, Professor, Department of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/480882015-09-24T00:41:39Z2015-09-24T00:41:39ZThe myGov future is here – but can they please let us know!<p>I logged into <a href="https://my.gov.au/mygov/content/html/about.html">myGov</a> last night. </p>
<p>This is the federal government website that brings all your government services together. Tax, medicare, centrelink and so on. In my less than 24 hour experience, it seems to work well. I had to fish out my login details from last year’s tax records. I also immediately registered for <a href="http://www.theage.com.au/it-pro/security-it/security-bolstered-on-mygov-website-after-dire-warnings-20141230-12fm2l.html">myGov mobile phone security</a> codes to help avoid identity theft. </p>
<h2>The problem</h2>
<p>However, on logging in, I had a problem. </p>
<p>Among the 17 unopened ‘letters’ sitting in my inbox, I had a tax bill from last financial year. Or rather, I had a tax bill issued in June, a reminder to pay issued in early August, and a demand for payment issued in late August.</p>
<p>I also had a notice from the Australian Tax Office dated April 2:</p>
<p>“<em>Dear STEPHEN</em></p>
<p><em>Welcome and thank you for joining ATO communications online. You will now start to receive some of your ATO mail in your myGov Inbox.</em> …”</p>
<p>By ‘some’, the ATO, apparently means ‘all’. </p>
<p>Apparently all my correspondence from the ATO has now gone electronic and I have to access it through myGov. This has probably occurred to everyone who lodged their annual income tax electronically last year (and had to set up a myGov account to do so).</p>
<p>I have no problems with going paperless. But to automatically shift people to paperless, informing them by the paperless system of this new policy, is a long way from best practice. </p>
<h2>Benefits if handled correctly</h2>
<p>There are big potential benefits from having an integrated federal government data base. It saves us time and money in record keeping and leads to fewer errors.</p>
<p>There are also big potential benefits from a single electronic government portal. It can save time, paper and personnel. The federal government has highlighted that it has a <a href="http://www.abc.net.au/news/2015-09-23/government-says-they-have-a-spending-problem/6798110">‘spending problem’</a>. Internet-based products like myGov can lead to long-term lower expenditure with higher levels of service. </p>
<p>The technology needs to be handled carefully to ensure that people are not left behind. For example, I wonder if the <a href="http://www.humanservices.gov.au/customer/subjects/mygov">indigenous child pictured at the top</a> of the DHS myGov page has access to the internet? The government needs to make sure that there is not a two-track level of service: high for those online and low for those who, for whatever reason, cannot access online resources.</p>
<h2>Implementation is key</h2>
<p>Rolling out new technology, like myGov, requires four things.</p>
<p>First, the product must work and be stable. </p>
<p>If in doubt, use beta versions to get customer feedback. And stress test the product to make sure that it will survive high and variable levels of use. </p>
<p>Unfortunately, this was not done for myGov and the ATO interface. So in early July, the <a href="http://www.smh.com.au/technology/technology-news/taxpayers-it-expert-slam-atos-appalling-mygov-integration-20150706-gi6bru.html">site crashed</a>.</p>
<p>“<em>An internal source said the network link connecting myTax with MyGov was a "standard connection” which couldn’t handle traffic above 2500 users at any given time, and had “never passed pressure testing”</em>.“</p>
<p>Second, the product must be secure. The federal government appears to have responded to early criticism about security on the myGov site. But is it secure? I will leave that to the IT experts. I am simply giving a user’s perspective!</p>
<p>Third, it must provide a good ‘in product’ experience. If the interface is difficult to follow, if it is hard to find information, or, even worse, if <a href="http://www.smh.com.au/it-pro/government-it/human-services-computers-keep-disabled-out-of-work-20150901-gjc9iy.html">it locks people out</a> for ‘no good reason’, then the product will create <a href="http://www.smh.com.au/it-pro/government-it/theyre-in-denial-mygov-users-vent-anger-20150810-givgmv.html">user resentment</a>. Instead of being a benefit, it will simply pass costs from the government back to individuals as they waste their scarce time trying to work out how to use the system or waiting for a helpdesk to answer their queries.</p>
<p>Finally, the product must be sold. People must be informed about the platform; what it can offer and why they should engage with it. </p>
<p>A private company that released new technology without covering off these four points would face financial loss. </p>
<p>Of course, government departments, such as the ATO do not face market pressure if they make new product mistakes. But the government will face voter pressure. Voters who have been forced to use myGov and have had a a less-than-adequate experience will remember this. </p>
<h2>A 21st centry government?</h2>
<p>MyGov – or something like it – is part of a 21st century government. It is the way of the future. But it needs careful development, testing, and selling. </p>
<p>In my case the cost of ‘discovering’ that all my tax letters were now in myGov was small. I spent about an hour on the ATO help line. The person who answered my queries was fantastic. It took a while because even he had not realised that <em>all</em> correspondence was now only via myGov. He also had to check if I could change back to snail mail. Apparently I can’t! And if given the choice, I probably would have chosen ‘all electronic’ anyway.</p>
<p>But that is the problem. I was not given the choice. I was disenfranchised. And I wonder how many others are in the same boat – or are yet to realise that they have a tax bill sitting in their myGov account.</p>
<p>A 21st century government needs more than 21st century technology. It also needs 21st century deployment. And it needs a 21st centry public service who understand this task.</p><img src="https://counter.theconversation.com/content/48088/count.gif" alt="The Conversation" width="1" height="1" />
I logged into myGov last night. This is the federal government website that brings all your government services together. Tax, medicare, centrelink and so on. In my less than 24 hour experience, it seems…Stephen King, Professor, Department of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/476852015-09-17T00:13:24Z2015-09-17T00:13:24ZSmart meters, dumb policy: the Victorian experience<p>Smart electricity meters are a great idea. They offer opportunities for consumers and electricity retailers to develop innovative programs to save both power and money. Tied into smart appliances and the internet, smart meters are the way of the future.</p>
<p>Except in Victoria.</p>
<p>Unfortunately, in 2006 the Victorian government decided that it would mandate the roll out of smart meters. It would force every Victorian household to have, and pay for, a smart meter, whether it wanted it or not. It decided that we would all have the same type of meter, whether it suited our needs or not. It was a piece of central planning that would have made the old Soviet Union (or modern North Korea) proud.</p>
<p>The Victorian Auditor-General has just <a href="http://www.audit.vic.gov.au/publications/20150916-Smart-Meters/20150916-Smart-Meters.pdf">released a report</a> that shows the flaws of this centralised roll out. Add a bit of economics, and it is easy to see why this policy is a disaster for Victorian consumers.</p>
<h2>Background</h2>
<p>Smart meters (called AMI) have replaced the old-style ‘accumulation meters’ that simply registered your total electricity use. The distributor – the company that owns the wires bringing power to your house - owned the old meters. The distributor is (generally) different from the retailer, which is the company you purchase your power from.</p>
<p>The distributor needs accurate measurement of your electricity use so it can correctly charge the retailer who, in turn, needs to correctly bill you.</p>
<p>In contrast smart meters can register and transmit data about your electricity use in real time. This information can then be used by you and your retailer to manage your electricity usage. You can do this yourself or delegate the task to another party, such as your retailer. </p>
<p>This benefits you, your retailer and the economy. You gain by lower average bills. The retailer gains by not having to buy as much power at the expensive peaks. We all gain by having less idle electricity plant and network sitting around to operate at the peaks. The regulated networks - such as distributors - lose. They don’t get paid for the (now) redundant excess capacity on their networks.</p>
<h2>Who has got the benefits?</h2>
<p>Smart meters do everything that the old meters did plus they have two big advantages. </p>
<p>First, they allow for remote reading, so your electricity distributor does not need to have someone physically read your meter. Second, they can allow customers and retailers to use the real-time information to design innovative tariffs to save power use and reduce household bills.</p>
<p>Under the Victorian program, all households received and had to pay for the same type of meter. The meter continued to be owned by the distributor, even though the consumer has to pay for it. The auditor-general (AG) notes that:</p>
<p>“<em>By the end of 2015, Victoria’s electricity consumers will have paid an estimated $2.239 billion for metering services, including the rollout and connection of smart meters.</em>”</p>
<p>Retailers can (and do) offer innovative tariffs to consumers that make use of the smart meter data. But the take-up of these products is low. This means that most of the gains have been to the distributor in terms of reduced meter reading costs. Again, as the AG notes:</p>
<p>“<em>The single largest benefits category of the AMI program relates to the avoided cost of replacing and manually reading the old accumulation meters. However, accumulation meter costs have been replaced with smart meter costs that are much higher.</em>”</p>
<p>Further:</p>
<p>“<em>… benefits associated with the uptake of innovative tariffs and demand management―which has achieved only 2.5 per cent of expected benefits to be realised by 2014</em>”</p>
<p>So to date the main beneficiaries of the smart meters have been the distribution companies. The main payers are the consumers.</p>
<h2>The economics of smart meters</h2>
<p>The benefits of smart meters are uncertain. See page 9 of the AG’s report. </p>
<p>There are two possibilities. The first is that the savings to the distributor, by themselves, justify the smart meters. This may be the case in rural areas with low populations, such as rural Western Australia where Horizon power is <a href="http://horizonpower.com.au/about-us/our-projects/meter-exchange-project/">rolling out smart meters</a>. But it is unlikely to be the case for Melbourne. </p>
<p>Further, if it was the case, then the distributor should roll out the meters without the customers bearing any cost. If the savings to a distributor outweigh the costs then the rollout should be its decision and it gets the benefits and pays the cost. But that is clearly not what happened in Victoria.</p>
<p>The alternative is that smart meters are only economic if they lead to customers changing their behaviour. </p>
<p>But in that case, the decision about whether or not to have a smart meter, and the type of smart meter, <a href="http://economics.com.au/?p=9498">should be made by the customer</a>. Retailers should compete to offer the best meter/management packages to consumers. The meters would need to be certified to ensure that they are compatible with the electricity network. And the regulator should require that the distributor passes the windfall savings that it makes from reduced meter reading costs back to customers. But the retailers or consumers would formally own the meters. </p>
<p>Leaving the decision about smart meters to consumers and the market (like, for example, mobile telephones) would empower consumers, make sure the party who benefits also faces the relevant costs, lead to innovation and encourage competition. </p>
<p>Indeed, it is such a good idea that:</p>
<p>“<em>the Australian Energy Market Commission (AEMC) is currently considering a rule change proposal to introduce competition in smart meter services to small customers</em>” (p.9). </p>
<p>Hopefully, for the rest of Australia, this will occur and they will be spared the Victorian-Soviet solution.</p>
<h2>What do we learn from the Victorian smart-meter fiasco?</h2>
<p>The Victorian roll-out of smart meters is a textbook case of bad public policy. </p>
<p>It came about because the local regulator, the Essential Services Commission, decided that the market would not work and central planning would lead to a better outcome. See the AG’s report at p.4.</p>
<p>This is almost always wrong.</p>
<p>Good economic policy relies on providing the right people with the right incentives. The auditor-general’s report highlights the failure that arises when bureaucrats think that they know best and impose their wisdom on us all.</p><img src="https://counter.theconversation.com/content/47685/count.gif" alt="The Conversation" width="1" height="1" />
Smart electricity meters are a great idea. They offer opportunities for consumers and electricity retailers to develop innovative programs to save both power and money. Tied into smart appliances and the…Stephen King, Professor, Department of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.