Editorial: Market on wrong line over power

Electricity is without doubt the most essential fuel of life today. Without it, households and industry would be crippled, computers and all the techniques of the e-conomy useless. For those reasons, it is sometimes said electricity is too important to be left to the whims of a market. It can equally be argued it is too important to be excluded from the market discipline of a competitive economy.

It has become clear there is something seriously wrong with the electricity market devised for this country over the past few years. It is in the midst of its first severe winter, following a summer and autumn of low rainfall in the catchments of hydro lakes. The country would be facing a problem now in any case. Markets do not change the weather.

But the solution the market has produced so far - wholesale prices at four or five times their previous level - is simply not practical. Those prices have already driven one electricity retailer out of the market and forced production to be cut back in one or two industries that buy their power from the wholesale market. If those price levels persist long enough to make their way into retail prices the consequences do not bear thinking about.

The economy would certainly suffer in the second half of the year but the social effects could be worse. Few households could afford the costs of their present power consumption and it is hard to see that the most drastic conservation efforts would bring the bill down to affordable levels. Something has gone seriously wrong in the design of the electricity market and the Government may have to take a stronger hand until the designers get it right.

New Zealand is not alone in its problems. California has faced an electricity crisis that resembles our own. In both cases the wholesale market has produced untenable prices that the retail market has been unable to pass on. The results in California, where retail prices are capped, has been power cuts and bankrupt power suppliers. Here retail prices are not capped but competition has prevented retailers recovering their costs, so far.

The largest of them has sold out to two of the generating companies, which might relieve the pressure. If, as many in the industry believe, the generating companies manipulated the wholesale price to get control of the retailing sector, then they may be satisfied now. But if that suspicion is unfounded, and the wholesale spot price has been a true reflection of the value of scarce hydro resources at the moment, the problem remains.

The public might wonder, though, what happened to the thermal capacity that was to fill the gap when hydro lakes were low. The public may also ponder the fact that the state-owned company now running those power stations, Genesis Energy, has just acquired the North Island business of the retailer that wholesale prices have driven from the market.

Whatever has been going on, it has put most of the industry into the hands of four generating companies, three of which are state controlled. That should have strengthened the hand of the Minister of Energy at his crisis meeting on Friday. The measures he has taken seem tentative at this stage but it is not yet time to panic.

Voluntary measures may help to move power to where it is in short supply and reduce prices in those localities. But that might not be enough to avoid capping wholesale prices, as happened in the 1992 drought, before the market was established. But price caps carry a warning. The response, as in California, can be that companies stop supplying. Even if it does not come to that, a price cap takes flexibility out of the system. The maximum price quickly becomes the standard price and there is less prospect of it coming down.

The aim must remain to build as much real competition as possible into the system. New Zealand is ahead of most countries in devising competition for network industries. The natural monopoly element of electricity, transmission lines, are run and regulated separately. The production and retailing business probably should be forcibly separated now to restore transparent pricing arrangements.

The flaws in the market must be fixed, before they do unbearable damage.