Browsing by Author "Guthrie, Graeme"

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Open Access
Approaches to Assessing Market Power in Electricity Markets
(Te Herenga Waka—Victoria University of Wellington, 2003) Guthrie, Graeme; Videbeck, Steen
Steen Videbeck presented a half day seminar in September 2003, Measuring and developing the performance of New Zealand's power market.
Open Access
Assessing the Integration of Electricity Markets Using Principal Component Analysis: Network and Market Structure Effects
(Te Herenga Waka—Victoria University of Wellington, 2006) Evans, Lewis; Guthrie, Graeme; Videbeck, Steen
The major difficulties in assessing market power in electricity wholesale spot markets mean that great weight should be placed upon assessing market outcomes against the fundamental determinants of supply demand and competition. In this spirit we study whether the New Zealand market has been a national market or a set of local markets since its inception in 1996. Electricity markets generally have loop flows that require simultaneous assessment of prices at all nodes thereby limiting the informativeness of pair-wise nodal comparisons. We introduce principal component analysis to this application and show that it is a natural tool for the qualitative and quantitative assessment of the presence of local markets. We find that increased competition induced some separation into local markets that was eliminated by transmission enhancement and the introduction of generation downstream from the constrained circuits. For most of the period New Zealand has had one national market.
Open Access
Asset Stranding is Inevitable: Implications for Optimal Regulatory Design
(Te Herenga Waka—Victoria University of Wellington, 2003) Evans, Lewis; Guthrie, Graeme
The irreversibility of much infrastructure investment means that some assets will stop earning revenue before the end of their physical lives; they will be stranded. Under traditional rate of return regulation firms are guaranteed the ability to recover the costs of investment insulating them from the consequences of asset stranding. Under modern incentive regulation firms are allowed to earn revenue just sufficient to cover the costs of a hypothetical efficient firm which provides services at minimum cost exposing them to the risk of asset stranding. By actively encouraging competition regulators increase this risk. We suggest two conditions applicable to both regimes which must be met if regulation is to be "reasonable": the regulated firm must not lose value from investment and it cannot collect more revenue than would the lowest cost alternative provider. This implies that regulated firms should be allowed to earn the riskless rate of return on the historical cost of their assets under rate of return regulation and a different (generally higher) rate of return on the replacement cost of their assets under incentive regulation. The risk premium depends on both the systematic and unsystematic risk of demand shocks. Since customers bear the risk of asset stranding under rate of return regulation and shareholders bear this risk under incentive regulation welfare is higher under incentive regulation as long as customers are more risk-averse than shareholders. We show that when there is a choice between reversible and irreversible technology there is no price specification under rate of return regulation that will induce the firm to choose the efficient bundle of technology while under incentive regulation the firm will choose the efficient mix of technologies. That is incentive regulation allocates the risk of asset stranding efficiently and also gives firms the incentive to reduce this risk to efficient levels. Finally incentive regulation has less demanding information requirements than traditional rate of return regulation.
Open Access
Can Ex Post Rates of Return Detect Monopoly Profits?
(Te Herenga Waka—Victoria University of Wellington, 2002) Boyle, Glenn; Guthrie, Graeme
We review the ability of the ex post internal rate of return (IRR) to detect monopoly profits. When market values are used as entry and exit values the ex post IRR simply reveals whether the firm did better or worse than the market expected at the entry date. It says nothing about monopoly profits. When replacement costs are used as entry and exit values the ex post IRR can in principle reveal something about monopoly profits. However since the ex post IRR is a noisy measure of ex ante monopoly profits it will be very difficult to reject the hypothesis given the sample periods typically available. The benchmarks typically used are market-determined and therefore only comparable to IRRs calculated using market values - a situation when the ex post IRR reveals nothing about monopoly profits anyway. Furthermore there is ample empirical and theoretical evidence that these benchmarks do not even represent fair rates of return.
Open Access
Carbon Subsidies and Optimal Forest Management
(Te Herenga Waka—Victoria University of Wellington, 2003) Guthrie, Graeme; Kumareswaran, Dinesh
We consider the effect of carbon subsidies and taxes in the form of carbon credit allocations on forest owners' land use and harvest decisions. We introduce three possible credit allocation regimes: one where credits are allocated according to the annual flow of carbon another where annual credits are proportional to the stock of carbon and a third involving lump sum payments. Using a real options model with uncertain future timber prices we examine the effect on the timing of harvest the replanting-abandonment decision and the value of a forest. We show that forests are less likely to be converted to alternative land uses under all three regimes relative to the situation without any carbon credit allocation. We also show that the flows and stocks schemes lengthen optimal rotations while lump sum allocations shorten them. Thus the objectives of reduced deforestation and longer rotations are best met by the flows and stocks schemes. Our numerical experiments suggest that these two regimes yield very similar outcomes.
Open Access
Commodity Price Behavior With Storage Frictions
(Te Herenga Waka—Victoria University of Wellington, 2007) Evans, Lewis; Guthrie, Graeme
We present a competitive storage model of commodity prices featuring frictions that introduce an element of irreversibility into storage decisions. This leads to situations in which speculators do not trade in the spot market even though total storage is positive. As a result the market value of the stored commodity which is determined in the (financial) market for ownership of firms operating storage facilities can diverge from the spot price. Such price separation leads to the existence of an endogenous convenience yield which we show equals the expected excess return on a real option embedded in each unit of the stored commodity. The outputs of our model are consistent with the stylized facts regarding commodity price distributions including serial correlation and GARCH characteristics. Samuelson's hypothesis - that forward prices are less volatile than spot prices - does not hold in general.
Open Access
Cricket Interruptus: Fairness and Incentive in Interrupted Cricket Matches
(Te Herenga Waka—Victoria University of Wellington, 2004) Carter, Micheal; Guthrie, Graeme
We present a new adjustment rule for interrupted cricket matches that equalizes the probability of winning before and after the interruption. Our proposal differs from existing rules in the quantity preserved (the probability of winning) and also in the point at which it is measured (the time of interruption). We claim this is both fair and free of incentive effects. We give several examples of how our rule could have been applied in past matches including some in which the ultimate result might have been different.
Open Access
A Dynamic Theory of Cooperatives: The Link between Efficiency and Valuation
(Te Herenga Waka—Victoria University of Wellington, 2006) Evans, Lewis; Guthrie, Graeme
Cooperatives and mutual organisational forms arise for reasons which include contracting problems between parties. Economic literature suggests a variety of allocated inefficiencies implied by these forms that largely have their origins in poor investment decisions. We demonstrate that a multi-period model and the supplier and cooperative valuations it implies are essential for understanding the sources of inefficiency and solutions to them. Using the case of a supplier cooperative we show that economic inefficiency arises because of the over-supply of input induced by suppliers responding to average rather then marginal revenue and that investment is actually efficient given the supply of input. The presence of unowned capital is an important source of over-supply. We show that if cooperative's shares are priced at the present value of expected dividends and supplier entry and exit decisions are taken solely on the basis of profitability of membership then there is no inefficiency and we describe a functioning example. Finally our valuations show that there is no "time horizon" investment problem at least from an industry prospective.
Open Access
Efficient Price Regulations of Networks that have Sunk Costs: Should Caps be Based on Historical or Replacement Costs
(Te Herenga Waka—Victoria University of Wellington, 2002) Evans, Lewis; Guthrie, Graeme
Incentive regulation allows decentralised decision-making under regulatory settings that are based upon industry characteristics. This study considers the design of regulatory profit caps and the choice of historical or replacement cost for incentive regulation when there is uncertainty sunk costs and flexibility in the timing of investment. It demonstrates that which of historical or replacement cost regulation is desirable depends upon the sources and extent of supply and demand uncertainties and trends and thereby characteristics of the industry. The welfare optimising level of the cap differs between historical and replacement cost regulation the caps are generally higher than the weighted average cost of capital and welfare is degraded much more if the cap is set below as opposed to above the optimal cap.In the presence of uncertainty and sunk costs investment thresholds that exceed the standard WACC are required to enable investment. The WACC just reflects systematic risk. It does not reflect the probability of bankruptcy or idiosyncratic risks that firms prudently consider when making investment decisions. From society's point of view the WACC is frequently too low to act as an investment hurdle rate. In practice hurdle rates are often distinctly higher than equity holders' average rates of return and much higher than return on debt.We have considered a situation where the firm has no competition. The presence of competition will generally mean that firms' investments are desirably timed from society's point of view although investment will not occur immediately. The imposition of a cap to improve welfare may if it is too tight reduce welfare substantially even relative to the situation of no regulation and no competition. It arises because investment is delayed. In such circumstances the regulator may respond by removing scope for decentralised investment by forcing investment or reaching some regulatory pact with the firm. It is easy to show that such regulation does not remove the issues of specific risks and timing considered in this paper: they are intrinsic to the industry. Unless the regulator agrees to pick up the costs of risks - eg the costs of stranded assets - a reasonable rate of return under regulatory investment requirements should cover the real options that these risks imply.We have focussed on encouraging the optimal timing of sunk investments. While the approach has been cast as provision of the entire network the same approach applies to maintenance of an existing network that is also sunk. Unless maintenance expenditure is allowable in line with the optimal caps considered in this paper networks may deteriorate or require forced maintenance by regulation. The issues are the same.
Open Access
Electricity Spot Price Dynamics: Beyond Financial Models
(Te Herenga Waka—Victoria University of Wellington, 2004) Guthrie, Graeme; Videbeck, Steen
An increasing number of researchers attempt to model the behavior of electricity spot prices using statistical models commonly used to model financial asset prices. In this paper we reveal properties of electricity spot prices which such models cannot capture. Using six years of half-hourly price data from the New Zealand Electricity Market we find that the half-hourly trading periods fall naturally into five groups corresponding to the overnight off-peak the morning peak daytime off-peak evening peak and evening off peak. The prices in different trading periods within each group are highly correlated with each other yet the correlations between prices in different groups are lower. Models adopted from the modelling of security prices that are currently applied to electricity spot prices are incapable of capturing this behavior. We use a periodic autoregression to model prices instead showing that shocks in the peak periods are larger and less persistent than those in off peak periods and that they often reappear in the following peak period. In contrast shocks in the offpeak periods are smaller more persistent and die out (perhaps temporarily) during the peak periods. Current approaches to modelling spot prices cannot capture this behavior either.
Open Access
Estimating Implied Valuation Parameters: Extension and Application to Ground Lease Rentals
(Te Herenga Waka—Victoria University of Wellington, 2008) Quigley, Neil; Boyle, Glenn; Guthrie, Graeme
A problem that often arises in applied finance is one where decision-makers need to choose a value for some parameter that will affect the cash flows between two parties such as a rental rate or an exercise price. Because the values of the cash flows also depend on various unobservable parameters identifying the value of the policy parameter that achieves the desired allocation between the parties is no simple task often resulting in disputes and the invocation of ad-hoc approaches. We show how this problem can be solved using an extension of the well-known 'implied volatility' technique from option pricing and apply it to the determination of equilibrium rental rates on ground leases of commercial land.
Open Access
Estimating the WACC in a Regulatory Setting: An Assessment of Dr Martin Lally's paper 'The Weighted Average Cost of Capital for Electricity Lines Businesses' of 8 September 2005
(Te Herenga Waka—Victoria University of Wellington, 2006) Boyle, Glenn; Evans, Lewis; Guthrie, Graeme
In September 2005 the New Zealand Commerce Commission (NZCC) released a document (TheWeighted Average Cost of Capital for Electricity Lines Businesses by Dr Martin Lally referred to as LINES hereafter) that estimates a weighted average cost of capital (WACC) for New Zealand electricity lines businesses and proposes a means for detecting future excess earnings. At about the same time the NZCC also began seeking submissions on another document (Draft Guide- lines: The Commerce Commission's Approach to Estimating the Cost of Capital 2005) that addresses the topic of an appropriate framework for the WACC in the New Zealand regulatory environment. Although no specific author is attributed to the latter its material content is drawn from LINES. In this paper we undertake a detailed analysis of the approach followed in LINES. We do so from the perspective of a referee who has been asked to provide a review of that report in order to assess its suitability for publication in an edited book or journal that adheres to conventional academic standards. Although LINES has not of course been submitted for publication orreview of this kind its contents and recommendations should nevertheless meet minimum standards of accuracy thoroughness and consistency. It is these criteria we use to assess LINES. Our report is motivated by a simple but important concern: although the cost of capital is a critical element of the revenue and price settings that materially determine the social net-benefit of income-control regulation there are presently no institutional arrangements in New Zealand that allow for reports such as LINES to be thoroughly reviewed and debated. On the basis of our review we conclude that such institutional arrangements are sorely needed. Our assessment of LINES comprises two parts. In Section I we provide an overview of what we consider to be the critical areas of concern in LINES. Section II then discusses specific errors in detail.
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FINA101: Finance: Finance for Business
(Victoria University of Wellington, 2016) Guthrie, Graeme
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FINA101: Finance: Finance for Business
(Victoria University of Wellington, 2017) Guthrie, Graeme
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FINA306: Finance: Financial Economics
(Victoria University of Wellington, 2013) Guthrie, Graeme
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FINA306: Finance: Financial Economics
(Victoria University of Wellington, 2015) Guthrie, Graeme
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FINA306: Finance: Financial Economics
(Victoria University of Wellington, 2016) Guthrie, Graeme
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FINA306: Finance: Financial Economics
(2019) Guthrie, Graeme
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FINA306: Finance: Financial Economics
(Victoria University of Wellington, 2014) Guthrie, Graeme
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FINA306: Finance: Financial Economics
(Victoria University of Wellington, 2017) Guthrie, Graeme