David

PARKER

Spokesperson for Finance
2 August 2013 MEDIA STATEMENT

Wolak comments mischaracterised

Reports in the media have claimed that Professor Wolak, a world-leading expert on electricity markets from Stanford University, recently said that single buyer electricity markets do not work.

“That is not what he said.

“I attended the recent lecture by Professor Wolak at Victoria University's Institute for the Study of Competition and Regulation.

“While he clearly likes electricity markets, Professor Wolak said of the New Zealand market:

• Under the NZ market, generators are able to maximise prices above the competitive benchmark, particularly when water is short. Professor Wolak’s graph comparing wholesale prices to the energy component of residential retail prices identified a large gap opening up, and increasing through to 2013.

• Generators are exercising unilateral market power and are able to do so without colluding.

• This is similar to what has happened in other hydro-dependent markets including California and Columbia.

• It is hard to achieve adequate competition to hold prices down when the generators are vertically integrated with the retailers.

• When asked whether excessive profits are extracted by gentailers as a consequence, he said that is a political not an economic question.

• When asked whether a single buyer, in place of multiple buyers, operating under the existing long run marginal cost market model would reduce excessive prices, he said it would not.

“Contrary to some of the assertions since his presentation, Professor Wolak confirmed his assessment that New Zealand prices have been substantially higher than the competitive benchmark.

“Some commentators have also asserted that Professor Wolak said the single buyer model does not work. He did not.

“Professor Wolak also stated that his analysis was about competitiveness (or otherwise) of the wholesale LRMC market. He agreed it does not take into account, nor express any view about whether it is fair that privately owned generators using older hydro assets should be able to keep the extra returns they make from the public water resource when those returns increase under the long-run-marginal-cost model. He again said that is a political question and he doesn’t get involved in political questions.

“Labour’s single buyer model does not replicate the existing long run marginal cost model, but rather proposes a single buyer paying operating costs plus a return on capital to each generator, and averages that into the retail market. Our proposal also structurally separates generators from retailers, which is a patently necessary step,” David Parker said.

ENDS

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