Thursday 19 May 2011

Electricity "Overcharging" Again

Earlier this month, the Electricity Authority came down on Genesis Energy for overcharing in the wholesale market during a freak 7-hour event on March 26-27 and has retrospectively rest the wholesale price for that period. The price spike, apparently resulted from part of the tranmission network south of Auckalnd being down for a few hours, cutting the far North off from the rest of the grid and giving Genesis an effective monopoly in the North. The spike and resulting angst from buyers was well covered by Matt at TVHE. But what has caught my attention now was the reaction of Labour's energy spokesman, David Parker to the authority's decision.
"The Government will no doubt argue that cutting back the overcharge on this occasion is enough. Labour says it is not good enough. This event is part of a wider problem, and New Zealanders are still paying excessive prices, which the Government defends and allows to continue," David Parker said.

"The excessive prices are yet more evidence of how consumers are overcharged for electricity, and it happened because the lack of an effective competitive electricity market means they can do just that.

"The Commerce Commission report (22 May 2009), based on an in-depth study by Professor Frank Wolak of Stanford University, a world authority, found NZ$4.8 billion of overcharging by electricity companies, equivalent to 18 per cent overcharging," David Parker said.
I have three issues with this:

First, as most New Zealand commentators who have studied the Wolak report have acknowledged (for a symposium of papers on this issue that I have contributed to see here, here, and here), if there have been monopoly rents earned in the New Zealand wholesale market, the amount is nowhere near $4.8b (or even the $4.3b cited in the Wolak report).

Second, it is ridiculous to cite an extreme event where one firm had a temporary monopoly as evidence of a "lack of an effective competitve electricity market".

Finally, while there is an important question of what safeguards (if any) need to be in place to deal with situations where temporary monopolies arise due to transmission constraints, complaining about "greedy" companies, who even with these periods of monopoly are not earning a competitive rate of return on their marginal assets, is a major distraction from the important questions about optimal investment in the transmission network, the incentives of buyers to take out forward cover, the lack of price responsiveness in demand even to predicted extreme events, and so on.

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