MEUG releases NZIER slides on Wolak analysis

Monday, 15th June 2009

Media release by the Major Electricity Users’ Group (MEUG)

MEUG releases NZIER slides on Wolak analysis

“The investigation into the electricity sector by the Commerce Commission including the report by Professor Wolak should be viewed as a valuable input for the Ministerial Review of the Electricity Sector,” said Terrence Currie, Chair of the Major Electricity Users’ Group (MEUG).

“The Commission concluded last month that the four integrated generating retailers had amassed $4.3 billion of market power rents over the period 2001 through to 2007. The supply side has tended to completely dismiss the Wolak analysis. Or it has criticised the Wolak methodology.

Mr Currie stated “However there is no escaping that electricity suppliers have gained significant market power rents in the past. Without changes to either the market structure and/or the gentailers behaviour, they will continue to do so.”

“Resolving the market power policy problem in electricity markets is complex. It will take careful analysis and Wolak has led the way by using observed behaviour and data from the suppliers themselves. Understanding the Wolak methodology, the results and its applicability to New Zealand isn’t trivial, but it is essential if we are to have a debate based on good theory and analysis.

“For this reason MEUG commissioned Dr Johannah Branson of the New Zealand Institute of Economic Research (NZIER) to prepare and present a series of slides to allow us to understand the Wolak methodology, how it was applied, the results and some initial comments on its applicability to New Zealand. We asked NZIER to prepare the slides for non-economists.

“We think the NZIER slides will be helpful to a wide range of parties. Hence MEUG has today made those slides public.

“The final NZIER slide summarises in non-economist language their conclusions as

• Methodology = established, widely recognised and applied worldwide

• But some questions remain about how applied to NZ

• Adjustment may reduce estimates of market power rents

• But finding remains that suppliers have had substantial ability and incentive to exercise unilateral market power, in wholesale market, to raise or lower market-clearing prices by increasing or reducing their offer prices

• Price movements explained more by ability and incentive than changes in hydro storage levels

“The Wolak analysis for the Commerce Commission is a very useful input into the Ministerial Review of the Electricity Market. To get the best use of it, including understanding the pros and cons in applying it to New Zealand, the NZIER slides are a useful contribution to this complex debate” concluded Mr Currie.

Attachment: Dr Johannah Branson, NZIER, briefing to MEUG on Wolak Methodology, Exercising unilateral market power in the wholesale electricity market, 4th June 2009 [PPT].

ENDS

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