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New Report On Mandatory Electricity Hedge Market

Friday, 22 March 2002

Energy Minister Pete Hodgson today released a report on the viability of a mandatory hedge market for electricity.

The Ministry of Economic Development commissioned Dr John Small of Auckland University to report on:

- whether generators should be forced to offer tradable hedges;

- if so, what minimum offer requirements should be imposed; and

- what mechanisms would be required to facilitate the emergence of a secondary market in hedges.

In his report Dr Small concludes that a form of net hedges should be considered for introduction to create a more efficient hedge market in New Zealand.

Mr Hodgson has sent copies of the report to the chief executives of the five major electricity generator-retailers seeking their comment. The Government has not yet formed any conclusions on Dr Small’s findings.

“I am releasing this report to promote discussion on the issues surrounding mandatory hedging,” Mr Hodgson said. “Although it says a form of net hedging might be beneficial, it also raises significant issues that would need to be addressed before such a regime could be implemented.”

Hedges are fixed price contracts that insure buyers and generators against volatile spot market prices. They can also enable retailers to compete for more customers.

Mr Hodgson warned the electricity industry after a review of its performance last winter that the Government would consider measures such as mandatory tendering of hedges if the level of retail competition did not improve. He met the chief executives of the five major electricity generator-retailers on March 6 and asked them to report back in a month on the steps they would be taking to improve competition, and on the regions in which they would be operating.

“I remain concerned that retail competition is not as effective as it should be and this report is a clear signal to the industry that mandatory tendering of hedges will be seriously considered if there is not a significant improvement,” Mr Hodgson said.

Copies of Dr Small’s report are available on the Ministry of Economic Development website (www.med.govt.nz). Comments on the report are invited by 26 April 2002.


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