Chapter 7 - Restructuring the New Zealand Electricity Sector 1984–2005

Abstract

This chapter describes New Zealand's failure over two decades of reform to establish a viable industry self-governance framework and the parallel failure to achieve restraint on monopoly profits by the means of light-handed regulation. Starting from a classic publicly owned monopoly of generation, transmission, distribution, and retailing, New Zealand corporatized all levels of the supply chain, separated lines businesses from generation and retail, removed retail franchises, and broke up the monopoly generator into five companies, two of them privately owned. Prior to the restructuring, which began in the mid-1980s, New Zealand's generation plants were operated on the basis of control procedures that equated the shadow value of stored water to the short-run marginal cost of thermal generation. Generators integrated vertically by takeover of retailers and the resulting retail oligopoly erected an effective barrier to entry by withholding affiliated generators' capacity from the very thin market for hedge contacts. Customer invoices continue to be presented without disaggregated line-item information that would enable consumers to identify the costs incurred at each stage of the supply chain—a level of information disclosure that the Task Force regarded as fundamental to retail competition, but which is never mandated by the Government. The structure of the industry in 2005 is shown in a figure. The Electricity Corporation of New Zealand (ECNZ) is broken into five separate generators.