By Garry Sheeran
Sunday Star-Times
11 December 2005
www.sundaystartimes.co.nz

Our much-criticized electricity market is facing a major shake-up as the Electricity Commission signals a wide-ranging review.

The Electricity Commission is to conduct the first major review of New Zealand's deregulated electricity market, which will probe flaws in its structure, as well as soaring power prices and power company profits.

The review, which begins next month, follows last week's fire-up of the government's reserve power station at Whirinaki after wholesale electricity prices topped $200 a megawatt an hour, well above average prices.

It also follows revelations the Commerce Commission is to investigate claims of anti-competitive behaviour and restrictive trade practices in the power industry.
Electricity Commissioner Roy Hemmingway said while the Commerce Commission would look for abuses of power in the marketplace, the regulatory body he headed would look at the market's broad structure.

"We've got a major piece of work to figure out what's wrong with this patient and what prescriptions we should write to put it back into health," Hemmingway said. "When you see every electricity company making record profits every year - in good years and bad - you have to wonder whether there is any downward pressure on prices," he said."That concerns me, absolutely."

Hemmingway said his review of the electricity market could bring significant changes to the way it operated. The commission could initiate some changes itself, but others may need significant government action.

In 1997, New Zealand became one of the first countries in the world to deregulate its electricity industry and introduce a market focus to an industry previously run by the state. Since then, the five big electricity generators (three state-owned) have earned a combined $3.56 billion in net profits. This year profits have been bigger than ever. The combined $667 million profit for the 2004-05 financial year was 30% more than the previous year's $512m. Headlines have dropped "record" for "super" profits.

Since 1999, the government has received $916m in dividend payments from Meridian, Genesis Energy, and Mighty River Power. Meanwhile, electricity users have copped power price rises of 30-40% since 2000.

Hemmingway said his review would be a thorough examination of the decade-old reforms, especially where they were not delivering as was hoped.
Energy Minister David Parker said he had an open mind on whether the reforms had delivered. "That is something I will be considering in coming months," he said.

But electricity companies and major electricity users have welcomed the commission's initiative. Contact Energy chief executive David Hunt said it was not surprising the electricity commissioner wanted to run his ruler over the market in light of large power price increases. He said the commissioner would have to decide whether the power price increases were more than what was needed to justify new investment in the industry. Hunt also said current high prices and decreasing demand when reserves were low showed the market was performing as it should.

But Comalco government and external relations director David Bloor said that was cold comfort for the country's largest electricity user. "The market might be `working', but our business - and broader national interests - are paying a price," he said. Comalco was essentially exporting electricity in the form of aluminium, and flaws in the electricity market meant it had to cut production by 5% and lose valuable exporting opportunities.

Bloor said the market's most glaring flaws were its lack of competition, and price-setting mechanisms that delivered the dearest, rather than the cheapest spot prices to the market. "Right now everyone is generating flat out to keep up with demand - there is no oversupply that would create competition, and no incentive in the marketplace for generators to create that excess capacity," Bloor said. "That's how you get electricity costing $200 a megawatt hour."

Long-time critics of the "reformed" electricity market point to the Whirinaki station as an example of what is wrong with the market. Whirinaki was established in the 1970s, in the days when the market was state-run, as a low-use, dry-year station to kick in when the lakes were low. In late 2000, Hunt, spokesman (now chief executive) for the newly-privatised Contact Energy, announced the two 54MW generators at Whirinaki were being sold. "They are not earning their keep," he said.

Contact sold them to its own cornerstone shareholder, Edison Mission Energy, in an "arms length" sale process for $10m. Peak loading in California had caused "brown-outs" and there was strong demand in the US for these kinds of units. In 2001 and 2003, New Zealand had two dry years in close succession with little or no reserve capacity to meet the crises. Last year, the government paid Contact $150m to re-build and manage a 155MW diesel-fired reserve station at Whirinaki.

Power industry analyst Bryan Leyland said that in a market-driven electricity industry it did not make sense for a profit-driven organisation to build a plant if there was a good chance it may not be used. "Whirinaki was built years ago by wise men for times such as this," Leyland said."Don't blame Contact for selling it in 2000 - they made a correct commercial decision as a for-profit organisation. Blame the rules under which the market now operates."

Leyland said the electricity market was not giving New Zealanders what they wanted - an economical and reliable supply of electricity. It was not giving long-term price signals needed to match the 10-year period between conceiving and building new power stations. And it was not giving the country dry-year power security without the need for extensive intervention. "The reformed market now needs reforming."