Decision Fails To Address High Spot Price Crises

MSC Decision Fails To Address High Spot Price Crises

Major electricity users say that the failure by the NZEM Market Surveillance Committee (MSC) to address the unprecedented level of the spot price means that its report is “pointless”.

The Chairman of the Major Electricity Users’ Group, Mr Terrence Currie stated today that it would have been far more appropriate to have the Commerce Commission inquire into why spot prices have increased from 5 cents a unit to over 25 cents a unit in only 4 months.

“In any other market in the world, increases of 500-700% in the price of an essential commodity would be put under the microscope.

“Instead the main focus of the MSC inquiry was to determine whether any purchaser in the market would default, that is not pay the bill for the electricity purchased and sold to consumers. There is clearly something wrong with a market where prudential issues are more important than prices that are running out of control.

“Any suggestions that MSC report gives the operation or structure of the market a clean bill of health are naive. What it does do is identify a number of the fundamental defects that need to be addressed.

“The project team working on the restructuring of the market to comply with the Government Policy Statement need to take account of the problems identified. Also an urgent and fundamental review of the electricity spot and hedge markets in New Zealand is necessary by an independent organisation that does not have its terms of reference constrained by the generators who control the rules of NZEM.

“In one sense there are no surprises in the MSC decision, because the MSC is simply a judicial body elected by members of NZEM to ensure the efficacy of the wholesale trading rules agreed by NZEM participants. NZEM is voluntary and net generators dominate its voting structure. However many major players on the supply side of the industry point to the MSC decision as clearance from any suggestion that some form of anti-competitive or opportunistic behaviour is occurring. Consumers will not accept that the wholesale electricity market is totally free of the exploitation of market power until and unless an independent inquiry is undertaken.

“The MSC is not a regulatory authority, such as the Commerce Commission. Therefore the MSC’s terms of reference, method of inquiry and consultation process were undertaken as befits the needs of NZEM participants. Consideration of the wider impact on competition and the impact on consumers were not considered by the MSC. Industrial consumers who are facing prices which defy any rational explanation by being 7 times higher than this time last year are entitled to view the outcome of the MSC investigation with extreme jaundice or outright skepticism,” Mr Currie said.

Despite its narrow terms of reference the detailed MSC decision has identified a number of areas which warrant further study including:

- It recognises that vertical integration and dominance of the rule making process by net generators is reducing the economic benefits that the 1996 designers of NZEM had in having a balance and tension between generator and purchaser class participants; and

- The report identifies that the NZ market is now subject to oligopolistic behaviour but cannot identify that this constitutes manipulative behaviour in terms of the quite narrow definition in the rules.

- There are a number of aspects of the market design that the MSC did not consider because they were too complex to consider as part of the decision, such as ex-post pricing, the two-hour rule and transparency around bids and offers. Those were not dismissed but the MSC clearly saw greater transparency closer to real time as being a useful change to promote demand side competition.

“Another major concern that MEUG has with the outcome of the MSC decision is that they did not agree to its proposal that the Committee release all information sourced from generators and retailers in consideration of the MSC inquiry. Full transparency of bids and offers and the timely disclosure of this information remain a key issue. The participants in the NZEM would add enormous credibility to their activities by voluntarily agreeing to the full disclosure of their offers and bids,” Mr Currie said.

Ends

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