Power firms will not have to pay back $4bn - Brownlee

Gerry Brownlee

Power companies will not be expected to pay back $4.3 billion in overcharging, Energy Minister Gerry Brownlee said this morning.

The Commerce Commission yesterday released its long-awaited report into the electricity market.

It concluded each of the four big generators - Meridian, Contact, Genesis and Mighty River - has been exercising the power the market's design gives them to command unjustifiably high prices, at least during years when inflows to the hydro lakes are low as they were in 2001, 2003 and 2006.

The report alleged the generators overcharged customers $4.3 billion over six years by using their market dominance.

But this did not amount to a breach of the Commerce Act, the commission said. It was a lawful and rational exploitation of the opportunities the market gave generators and they would not be hauled before a court.

Speaking on Radio New Zealand this morning Mr Brownlee said refunds were not an option. He pointed out the report looked at the wholesale not the retail market, but also it was too difficult.

"Most of this happened in the past, it happened over the seven years up to 2007," he said.

"The 2008 year hasn't been part of the assessment...you've got to remember to that the household sector is just on a third of all electricity use so it becomes very, very difficult to work out who actually has paid for what."

Behaviour 'unaccpetable'

Labour's energy spokesman Charles Chauvel said the companies had behaved in a way unacceptable to most people.

He warned against any attempt by the Government to secure higher dividends from the state-owned companies.

"The report shows why this would be a terrible idea...Kiwi families must come before government dividends and reform must be a priority."

Mr Brownlee said the Government was telling state owned enterprises to lift their act, but that did not necessarily mean price hikes.

"I don't think anyone should assume that better performance simply means higher price," he told RNZ.

"In most cases it means exactly that, better performance, better delivery to customers and I suppose you'd say better service as well."

Mr Brownlee yesterday said he was "advising" electricity companies not to raise their prices while the Government considers the report.

"It would be audacious to raise their prices while this sort of allegation is hanging over them," he said.

He said it came as no surprise that there was something fundamentally wrong with the way the electricity market worked. That was why he set up a ministerial review last month, chaired by economist Brent Layton, to advise on what changes could be made.

Nothing was ruled out, Mr Brownlee said, other than privatisation of the state-owned enterprises. "No assets are going to be sold."

Dr Layton's committee would be given the time it needed to sort out the issue, he said. There was no magic wand and it was worth being patient.

How the pricing system works

Residential power prices rose by two-thirds between 2000 and 2007, or 5 per cent a year faster than general inflation.

On the wholesale market, prices are set every half-hour by the most expensive power offered by a generator that is needed to ensure demand is met. If other generators offer their power for less, they still get the higher price.

If a generator can be sure it will get to set the price, and it will not be a net buyer (since the same companies are electricity retailers), it has an incentive to set the price high.

A lengthy study of the price data by Stanford University economist Frank Wolak, an expert in the field, concluded that they had been doing just that.

The effect had been excess revenues of $4.3 billion between 2001 and 2007, or 18 per cent of wholesale market revenues over that period, he estimated. The commission said that was "the most likely explanation" of higher prices for consumers.

But the $4.3 billion figure is relative to a hypothetical competitive price. There is room for argument about how Professor Wolak has arrived at that, in particular about how to calculate the "option value" to a hydro generator of hoarding water during a dry year until later when demand and prices will be higher.

Defenders of the market say it has fulfilled its two main functions - keeping the lights on in dry years and ensuring that enough new generation is built to maintain security of supply.

But the commission implicitly rejects the idea that profiteering in dry years is the unavoidable byproduct.

It said the price signals provided when the market was operating competitively were a better guide to when new capacity was needed than the "haphazard and weather-related market power rents that occur periodically under present market circumstances".