Comments on analysis by Professor Wolak

MAJOR ELECTRICITY USERS' GROUP

Friday, 11th September 2009

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

MEUG releases NZIER report on Ministerial Review comments on analysis by Professor Wolak

“The Ministerial Review of Electricity Market Performance and the work by Professor Wolak for the Commerce Commission on assessing market power in the wholesale electricity market have clearly identified the need for changes,” said Terrence Currie, Chair of the Major Electricity Users’ Group (MEUG).

“To provide some clarity about the reservations of the Wolak analysis expressed by some parties and repeated in the Ministerial Review discussion paper, MEUG commissioned Dr Johannah Branson of the New Zealand Institute of Economic Research (NZIER) to review those comments. The final three paragraphs in the NZIER report conclude:

“In conclusion, Wolak’s analysis has served the purpose of drawing attention to the problem of opportunity for exercise of market power in the wholesale market. The Electricity technical Advisory Group’s (ETAG’s) discussion document swiftly moves the debate on from the findings and limitations of Wolak’s analysis to the proposed solutions to this and the other problems and deficiencies of New Zealand’s electricity market. We consider this judicious.

We do not believe that the options presented by the ETAG would have differed without the criticisms of Wolak’s analysis, with the exception that the debate about the validity of Wolak’s analysis may have tempered the reallocation of assets in the proposed restructure of SOE generator-retailers. The implications of the ETAG’s comments on Wolak’s analysis are therefore only that, in making submissions on the discussion document, MEUG may wish to pay particular attention to the restructuring options presented and possibly advocate investigating a more aggressive reallocation of assets.

MEUG may also like to suggest investigating extension of the ETAG’s recommendation on improving pricing transparency and monitoring to include active market monitoring by the proposed Electricity Market Authority to assist market participants to manage their risk positions more effectively.

“MEUG is releasing the NZIER analysis ahead of the due date for submissions on the Ministerial Review discussion paper of next Wednesday because we think it will help other parties:

* Put into perspective the discussion about market power in the New Zealand wholesale electricity market. It clearly does exist and action is needed to adress that problem;

* Gain an understanding on why MEUG is a strong proponent for further work to consider asset reallocation within SOE suppliers to improve competition.

If credit rating agencies think asset reallocations will dampen profitability of suppliers because of heightened competition; then that makes us think this is a very promising idea. NZIER also recommend more aggressive asset reallocations need to be considered;

* Recognise that more active market monitoring is required. NZIER note this would assist the market. This is an important omission in policy reforms and we will be making it clear to Government that a monitoring regime is needed urgently.

“The Ministerial Review process is a real opportunity to make some changes that deal with the number one problem in the electricity market of persistent market power. Bold steps need to be considered with asset reallocation as recommended in the Ministerial Review discussion paper being a top priority” concluded Mr Currie.

ENDS

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