NZ generators gouged customers

Thursday 21st May 2009

New Zealand’s biggest electricity generators creamed an extra $4.3 billion from customers between 2001 and mid-2007 than they would have been able to if the nation had a truly competitive wholesale market, the antitrust regulator has concluded.

The Commerce Commission released findings of the biggest-ever study into wholesale electricity pricing, which began in 2005 and was led by Stanford Unversity’s Frank Wolak, who is chairman of the market surveillance committee of the California Independent System Operator.

The report concludes that wholesale prices were, on average, 18% higher during the period than they would have been “if the wholesale market had been more competitive and the gentailers had not been able to exert market power.”

Lack of competition was especially evident in the dry years of 2001 and 2003, with the report estimating that additional earnings attributable to the exercise of market power was $1.5 billion in each year.

Still, the report found no evidence that Contact Energy, Genesis Energy, Meridian Energy and Mighty River Power had breached the Commerce Act during the six-and-a-half-year period covered by the study. The regulator will issue one warning over a risk of a breach, it said.

“Each of these companies has the ability and incentive unilaterally to exercise market power and increase wholesale prices during certain periods,” Commerce Commission chairman Mark Berry said.

“The price increases in dry periods are well above any increases in input costs, including the higher opportunity cost of water when hydro storage is low,” Berry said in a statement. Still, the gentailers were “using that market power to maximise their profits in a purely legitimate way within the current market structure, design and rules,” he said.

The commission’s report is likely to be material to the Ministerial Review of the Electricity Market, announced last month by the Energy and Resources Minister, Gerry Brownlee, it said.

Shares of Contact rose 0.8% to $6 and have tumbled 19% this year.

Businesswire.co.nz

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