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Electric Competition in New Zealand: Putting Last Things First

Fortnightly Magazine - June 15 1996

2000. In addition, some restrictions limit ECNZ in building new capacity and contracting with power purchasers until its market share declines to 45 percent or less. Contact Energy will account for about 25 percent of generation assets by the late 1990s. Actual competition between Contact and ECNZ, based on separate ownership of their assets, will not commence until late 1996, with the introduction of the open competitive wholesale electricity market.

Entry into the generation market is allowed on strictly commercial terms, with no entry barriers. Generators must seek contracts to sell to downstream customers and/or sell to the spot market. No capacity licenses are required for entry. However, generators must still obtain all relevant environmental consents for each station.

Entry into generation has been active. Many geothermal, gas-fired, and other projects have been proposed and many are being built. Among the most important:

s The Southdown cogeneration facility, a 114-megawatt (Mw), gas-fired, combined-cycle plant scheduled for competition in late 1996 in a joint venture between Trans Alta and Mercury Energy, the nation's largest distribution company.

s The 350-Mw Taranaki Combined Cycle plant, a gas-fired facility to be completed by mid-1998 by Mercury, Trans Alta, and Fletcher Challenge.

Distribution Sector

Local distribution companies no longer enjoy an exclusive franchise. Open competition prevails for construction and ownership of new (or rebuilt) network assets. Moreover, vigorous competition has emerged in the construction of distribution networks in many new residential, commercial, and industrial developments. Competition has flourished to a lesser degree for ownership of new and rebuilt network assets; many anticipate that local companies will retain ownership of the vast majority of network assets within their service areas for the foreseeable future.

The New Zealand Commerce Commission has determined that distribution is a natural monopoly (em whether provided by the existing distribution company or a new developer (em although competition for the provision of duplicate lines may prove feasible in some limited and special circumstances. In recognition of this natural monopoly, and to prevent monopoly services from subsidizing competitive services, the industry disclosure regulations have mandated separation of line and energy charges.

The Table presents information on competition for the construction of new network assets in the service territory of Mercury Energy. The data, current through late 1995, demonstrate that competitors have made inroads, although the incumbent has retained most of its share. Competitors have been most successful in constructing new commercial subdivisions.

Competition in the market for ownership of new network assets has been slower to develop, although a few substantial examples exist. Further, competitive bidding for construction and ownership has begun to force existing distributors to reevaluate line charges across customer classes to reduce or eliminate anomalous pricing and explicit cross-subsidies.

Competition in construction and ownership of new network assets has brought about major shifts in strategy among electricity distributors. For example, since most of New Zealand's growth remains concentrated in the Auckland area, some distributors from outside the area, notably Bay of Plenty Electricity and TrustPower, have apparently determined that they must become owners of substantial network assets in the Auckland region. More