Put prices on hold, Brownlee tells power companies

Power generators are being told to put electricity price rises on hold until a review of their charging system and structure is completed in September.

The generators have been accused by the Commerce Commission of gouging more than $4 billion more than they should have out of consumers by using their market dominance to overcharge.

Energy Minister Gerry Brownlee, who has ordered the review, says it would be audacious if they raised their prices while these allegations are out there.

"There is something fundamentally wrong in the way in which we're marketing electricity in New Zealand," Mr Brownlee said.

Power generators overcharged customers $4.3 billion over six years by using market dominance, according to a Commerce Commission report.

The study has found find that the country's main electricity generators, state-owned Meridian Energy, Genesis and Mighty River Power and privately owned Contact Energy, effectively used their market power to maximise profits, including withholding power at peak times.

But the power companies have been cleared of the most serious allegations levelled against them - that they breached the Commerce Act by abusing market dominance and that they colluded to make extra profits.

In a news release just published this morning, the Commission says that it has not found any evidence of a breach of the Commerce Act, but it will be warning TrustPower "regarding the risk of a breach."

It has found the big power companies - three of which are state owned - simply used their market power "to maximise their profits in a purely legitimate way within the current market structure, design and rules."

The investigation was opened in late 2005 after a number of complaints about high electricity prices, large company profits, "a perceived low level of competitive activity and allegations of anti-competitive conduct," said the Commission.

Its report says that the wholesale power prices charged over the period 2001 to mid-2007 resulted in an extra $4.3 billion in earnings to all generators over those that they would have earned under competitive conditions.

Consumer power prices rose by 72 per cent between 2000 and 2008 while inflation went up only 29 per cent.

Lobby group Business NZ said the report's findings showed more competition was needed in the electricity market.

Chief executive Phil O'Reilly said there was never any expectation of a finding that power companies had used their market power in an anticompetitive way.

"But the fact that the ability and incentive to unilaterally exercise market power exists points to a lack of competition," he said.

Recent moves by the Government, including a Ministerial review showed it was taking "a serious look at reform" said O'Reilly.

"Let's get on with this - business and consumers are waiting.
A key outcome that we would like to see from this is a solution that delivers sustained downward pressure on electricity prices."

"Better governance arrangements and smarter regulation should result in more competitive outcomes," said O'Reilly.

The Commerce Commission investigation focused on whether the vertically integrated generator-retailers (also known as gentailers) had market power and, if so, whether they had taken advantage of market power in breach of the Commerce Act; and whether they had behaved in a collusive manner.

Part of this investigation included an economic analysis of the wholesale market undertaken on the Commission's behalf by an internationally renowned expert in the field, Professor Frank Wolak of Stanford University.

Wolak analysed data from the wholesale electricity market for every half-hour period for every day from January 2001 to July 2007.

"The Commission considers that each of the four largest gentailers - Contact, Genesis, Meridian and Mighty River Power - is likely to have held substantial market power on a recurring basis, particularly during dry years," said Mark Berry, Commerce Commission chairman.

"Each of these companies has the ability and incentive unilaterally to exercise market power and increase wholesale prices during certain periods. 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.

However, the Commission concludes in the case of this investigation that the gentailers are using that market power to maximise their profits in a purely legitimate way within the current market structure, design and rules. The Commission has found no evidence of an anti-competitive purpose," said Berry.

This behaviour did not meet the criteria of 'taking advantage' of market power for a proscribed purpose, namely the hindering or deterring of competitors, under section 36 of the Act, and is therefore not a breach.

Wolak compared actual wholesale power prices with "hypothetical competitive benchmark prices".

He estimated that the wholesale prices charged over the period 2001 to mid-2007 resulted in an extra $4.3 billion in earnings to all generators over those that they would have earned under competitive conditions.

"This suggests that wholesale prices were, on average, 18 per cent higher than they would have been if the wholesale market had been more competitive, and the gentailers had not been able to exert market power," said Berry.

"Less competition was especially evident in the wholesale market during the dry years of 2001 and 2003, when additional earnings attributable to the exercise of market power are estimated at $1.5 billion in each of those years."

The extent to which these peaks in wholesale prices were passed on to consumers over the seven year period was "difficult to estimate, although retail prices have followed a strongly rising trend."

"We consider that pass-through of wholesale market power rents to retail prices is likely to have occurred with a lag, but it has not been necessary in the context of this investigation for the Commission to determine this," said Berry.

The Commission also investigated whether the companies colluded to restrict competition in the wholesale or retail market.

It says it found no evidence of this, though it would be warning Trustpower about a time in 2004 when it ran the risk of breaching the law.

"Otherwise, the Commission found no evidence of collusive activity, although one specific and limited event continues to be investigated by the Commission. No further information regarding this event can be provided until the investigative activity and analysis is concluded," said Berry.

The report implies the hydro-generators were best placed to gain from playing the system, especially during dry years.

Meridian, which makes most of its power through the big hydro dams on the Waitaki River, is likely to be in the forefront of opposition, but said would not comment until it had seen the report and studied it.

- CHRIS DANIELS, NZPA, NEWSTALK ZB

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