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Electric Competition in New Zealand: Putting Last Things First

Fortnightly Magazine - June 15 1996

interesting, WEL, the Hamilton-based electricity distributor, has announced a strategy of becoming a full-service "network" owner in its former service territory by constructing and owning reticulation networks that include gas, electricity, cable television, and telephone lines.

Retailing Sector

Beginning in 1993, under the Electricity Act of 1992, competition for retailing was allowed for

any customer whose annual

consumption was less than 0.5 gigawatt-hours (500 megawatt-hours). Retail competition was allowed for all other customers beginning on April 1, 1994. These actions have provoked fierce competition in this market, particularly for the larger customers, as companies have attempted to maintain or build market share.

Among the competitors that have emerged number distribution companies, firms associated or affiliated with distribution companies (such as Pacific Energy, which is owned by three distribution utilities), and independent energy traders. Off-network sales have flourished despite the virtual absence of competition in generation, at least as of mid-1996.

The Figure presents data on the growth of off-network sales in New Zealand. Monthly off-network sales have increased by about 200 percent in the two years since competition was allowed to serve larger customers. Currently, off-network sales account for approximately 5 percent of all retail sales and one-eighth of all "contested" retail sales, excluding direct sales by ECNZ and retail sales to households. To date, margins have remained quite low in this business, with most companies purchasing at the ECNZ hedge price and adding a small fee for management. More recently, spot prices have declined below the ECNZ hedge price. As a result, some contested customers are receiving the lower price and sharing the risk with suppliers that the spot prices may subsequently rise above the hedge price.

These off-network sales understate the significance of the retail competition that has taken place. While the incumbent distribution company has prevailed in other competitions to supply retail services, the result has generally been lower prices for electricity purchasers than would have prevailed without retail competition.

Typically, but not always, the distribution company owns the meters and reads them, while the retailer is responsible for billing the customer. As with the generation market, no licenses are required for entry: Entry is a strictly commercial proposition, with success dependent on market factors and company performance. Competition is enhanced by requiring distributors to grant equal access to all retail competitors and to disclose their line charges as well as the basis for their determination.

Outlook

Within a very short time, competition in generation, construction and ownership of network assets, and, particularly, retailing has begun in earnest in New Zealand. Consolidation continues, with a further shakeout expected.

Among the most significant developments:

s Efficiency. Gains have occurred throughout the industry. For example, unit costs for ECNZ fell by approximately 24 percent between 1987 and 1994. Many firms now contract out some of their service functions, including line services, to force their employees to compete with private-sector providers.

s Marketing. New models have emerged. Companies in slower-growing regions are targeting the Auckland region. Some firms, such as WEL, focus on providing network functions; other distributors are emphasizing vertical integration.