Editorial: Rash move to meddle in power market

Ever since the electricity industry was transformed from a state monopoly into a market supplied by four main generating companies, the four have been accused of exploiting excessive market power. Their critics have waited a long time for the Commerce Commission report released last week that endorsed most of their suspicions.

It concluded that in dry periods, when hydro lakes are depleted and the system has to buy from thermal stations, the generators have been able to reap excessive returns amounting to $4.3 billion over the six and a half years of study. That figure represents 18 per cent of their total revenue from the wholesale market over the period.

The commission absolves the companies of any suggestion of collusion or other anti-competitive behaviour. Rather, they have been taking advantage of the opportunities created by the design of the market, "a lawful, rational exploitation of the ability and incentives available to the generators".

The report is less clear on the market's technical deficiencies but it is not hard to nominate one possibility. The electricity spot market operates on a curious mechanism by which the price is set every 30 minutes not by the lowest bid, as in normal markets, but by the highest.

Electricity is an unusual product because the supply must equal demand at every instant at every transmission point on the network. Suppliers put in bids for the next half-hour and obviously the lowest prices are accepted first. But the price that must be paid for the last unit needed is the price that all the suppliers for that period will receive.

Little wonder, then, that it represents an excessive return for most of them. They will have asked a price that reflects their costs of supply at that point on the network, the value of their reserves and a reasonable return on their assets. Unless theirs is the last price accepted, they will receive a margin above those calculations.

It may be that the spot market has to work this way. It needs to post a price that buyers of electricity can see in order to adjust their consumption patterns to the country's generating resources at any given time. And the highest price accepted is the marginal cost of supply at that time. It tells additional consumers whether to buy in or reduce their demand. This is the economic purpose of operating a market and it should not be forgotten in a rush to condemn the system.

Critics are inclined to say the electricity market has "failed" when power prices are not as low as they think they should be in this country. In fact the market would be failing if it kept prices low in a dry period, inviting interruptions of supply.

A hydro-based supply is not as reliable as consumers suppose. The lakes have a constant flow that quickly drops in a dry spell. The system needs an expensive back-up of coal, oil or gas-fired generators and the real test of the market is whether it produces prices that invite extra investment if needed.

In recent years investment signals have been distorted by uncertainties over public policies on climate change, the life expectancy of the Maui gas field, resource consent procedures and the previous Government's moratorium on fossil fuels, now lifted.

National needs to give the generating companies a clearer picture of the carbon emissions regime they are likely to face, the faster resource consents promised for projects of national importance and the sort of regulations they must satisfy.

Instead, Energy Minister Gerry Brownlee seems hell-bent on stifling their prices until he decides what to do about the Commerce Commission's verdict. He should be careful. For all its imperfection, the market has never seen a power failure. He meddles at his peril.