Update on electricity investigation

Commerce Commission issues update on electricity investigation

The Commerce Commission anticipates receiving by the end of the month an initial report as part of an investigation into whether any of the activities of participants in the electricity industry are likely to have breached Part 2 of the Commerce Act. The investigation has focused on whether any participants breached section 36 of the Act by taking advantage of a substantial degree of market power for an anti-competitive purpose.

"The Commerce Commission is aware that there is a high level of interest in the state of the New Zealand electricity industry. The Commission is investigating whether any of the participants in the generation and retail markets have behaved anti-competitively, as defined by the Commerce Act," said Commerce Commission Chair, Paula Rebstock. "The investigation does not cover the wider policy questions, such as the design and structure of the electricity industry."

The first stage in any investigation into section 36 of the Commerce Act is to assess whether any of the relevant businesses have a substantial degree of market power. The Commission must then assess whether any of those businesses can be said to have taken advantage of that market power, and to have done so for an anti-competitive purpose. It is possible for a firm to possess or have taken advantage of a substantial degree of market power, but not be in breach of the Commerce Act.

"The Commission required the main generators, retailers and industry bodies to provide detailed historical data (covering the period 2001 to mid-2007) to enable a thorough assessment of any market power in the generation and retail markets. In many cases, the data required was not readily available, and it has taken the Commission considerable time to gather all the information necessary to conduct a robust investigation," said Ms Rebstock.

The Commission's investigation was opened in 2005 following a large number of complaints and concerns about electricity prices, company profits, a perceived low level of competitive activity and allegations of anti-competitive activity and events.

The Commission engaged a leading international economist to undertake the complex task of identifying the relevant data and analysing it to identify and measure the use of market power within the generation and retail markets. The economist engaged is an internationally recognised expert in the economics of the electricity industry.

The Commission will be making no further comment until it has considered the report.

Background
New Zealand's electricity sector has four main components:
• generation (electricity production stations)
• transmission (the high voltage network known as the national grid)
• distribution (local lines companies)
• retail (electricity retail companies compete to buy wholesale electricity and compete to retail it to consumers)

Gentailers. Companies that have both generation and retail arms are known as gentailers. In New Zealand the gentailers are:
• Contact Energy Limited
• Genesis Power Limited
• Meridian Energy Limited
• Mighty River Power Limited
• Trustpower Limited

Market power. Market power is the ability to act independently of competitive forces. This can include the ability to profitably price above the relevant measure of cost for a particular period of time.

Expert Report. The Commission expects to receive an initial expert report into the generation market shortly. Due to the level of public interest in this matter, the Commission will consider the extent to which it will be able to make the expert reports publically available under the Official Information Act 1982. The Commission's expert is preparing a further report into the retail market which is expected to be completed before the end of the year. At that time the Commission will similarly consider whether that report can also be made publically available.

The Commerce Act. The Commerce Commission has both an enforcement and adjudication role in relation to anti-competitive practices prohibited by Part II of the Commerce Act.
The Act:

• prohibits behaviour that restricts competition; and

• allows the Commission to authorise, on public benefit grounds, proposed anti-competitive practices that would lead to the substantial lessening of competition in a market.

In instances where the Commission concludes that the Act has been breached it can initiate prosecutions in the High Court. Only the courts can decide if the Act has been breached.

More information about anti-competitive behaviour under the Commerce Act can be found on the Commerce Commission website www.comcom.govt.nz under Business Competition/Anti-competitive Practices/Guide to Anti-competitive Practices/

ENDS

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