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Wednesday, 25 February 2009

Power firms gouge $4 billion

Dominion Post article regarding Commerce Commission finding.

By VERNON SMALL - The Dominion Post

Power generators gouged more than $4 billion from consumers by using their market dominance to overcharge, especially in dry years when hydro lake levels were low, according to a report due to be released tomorrow.

The study, by market watchdog the Commerce Commission, is not expected to conclude their actions were illegal, so no prosecutions are likely.

However, it will find that the big four electricity generators state-owned Meridian Energy, Genesis and Mighty River Power and privately-owned Contact Energy effectively used their market power to maximise profits, including withholding power at peak times.

That saw New Zealanders pay an average $1000 each more for power over a six-year period.

It will pose a major dilemma for the Government and Energy Minister Gerry Brownlee, who will face pressure to ensure the companies are prevented from exercising their power in future, despite the finding that there was no illegality.

That could lead to the first major overhaul of the market model, first set up under National in the 1990s.

Mr Brownlee has commissioned his own separate review into the price of electricity, the security of supply, the electricity market and overlapping roles in the industry.

Industry sources said the generators strongly rejected the methodology of the commission's report, and will attack its processes and findings. It considers theoretical pricing in a perfect market, "and this is not a perfect market," one source said.

Meridian is likely to be in the forefront of opposition, because the report implies hydro-generators were best placed to gain from playing the system.

Meridian spokesman Alan Seay yesterday said the company had not yet seen the report. "I would not be comfortable commenting till we have had the opportunity to study it in detail."

The Commerce Commission is expected to stand by its conclusions.

The report includes analysis by a leading expert on energy markets, Professor Frank Wolak, of Stanford University. It is understood he calculated companies' prices against what they should have charged and concluded they had overcharged by at least $4 billion.

He used data from 2001 to 2007, and found the worst cases of over-pricing occurred during winter power crises in 2001, 2003, and 2006.

In a draft of his work, delivered to a power conference in March but later removed from the internet, he concluded the generators offered higher prices in half-hourly bids to the spot market when they had "a higher unilateral ability to exercise market power".

Those higher prices flowed through to higher retail prices.

Power prices rose by 72 per cent between 2000 and 2008 while inflation went up only 29 per cent.

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