BOMBSHELL SET TO HIT GENERATORS
01 March 2009By TIM HUNTER
A bombshell report is to reveal widespread abuse of market power by New Zealand electricity companies over several years, the Sunday Star-Times has learned.
The report, by Stanford University (California) economics professor Frank Wolak, is with the Commerce Commission and is likely to be made public this month.
Its conclusions are likely to make uncomfortable reading for the big electricity generators who dominate the market - state-owned Meridian, Genesis and Mighty River Power, and NZX-listed Contact Energy.
The Star-Times understands Wolak's findings indicate the electricity market is dysfunctional and causes power prices to be much higher than they would be if it was fully competitive.
While there is no suggestion power company executives meet in smoke-filled rooms to fix prices, the outcomes in the market resemble collusion because the system distorts incentives to compete on price, the Star-Times understands.
A spokesman for Energy Minister Gerry Brownlee said the minister had not yet received the report, but indicated it would get close attention. "The government won't hesitate to act if it does find there are shortcomings in the operation of the market," the spokesman said.
Last month, Brownlee told the National Energy Conference a ministerial working party would look into electricity affordability.
"It is anticipated ministers will have issues to address once the Commerce Commission investigation into market powers has been released," he said.
Wolak was engaged by the commission as part of an investigation started in 2005, after it received numerous complaints about power prices, excess profits by the generators and allegations of anti-competitive activity.
His initial report covers the wholesale market - a subsequent report will address the generators' ownership of retail businesses - and involved exhaustive quantitative analysis of half-hourly wholesale prices going back to 2001, number crunching that tied up computers at Stanford University for weeks.
The analysis compares actual prices with a theoretical model of a fully competitive market.
Wolak, chairman of the market surveillance committee overseeing California's energy market, is one of the world's pre-eminent experts on energy markets.
In 2002, he reported to the US senate on the California energy crisis, concluding that its major cause was "unilateral exercise of market power by suppliers".
"A firm exercises its unilateral market power by withdrawing generating capacity from the market either by bidding extremely high prices for some or all of its capacity, or by refusing to make a portion of its capacity available to the market at any price," he said. "The goal of both of these strategies is to create an artificial scarcity of energy in order to drive up the market price."
A similar finding in New Zealand could have far-reaching consequences. While it would feed into the commission's inquiry into alleged anti-competitive practices in the power industry, it would also have an impact on the political debate surrounding the future of SOEs and the Electricity Commission.
In the short term, the Commerce Commission, now that it has the relevant historical data, could seek to assess market prices on an annual basis to determine how much prices depart from a competitive norm. This work could be done by the Electricity Commission, currently under threat after a critical report from Business NZ.
The NZ Institute, meanwhile, has advised the government to consider selling stakes in the SOEs to raise cash for an economic development fund. Energy companies contacted by the Star-Times declined to comment.
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