No Undesirable Situation Found in New Zealand Electricity Market

Orderly trading in the New Zealand Electricity Market (NZEM) was not affected by an undesirable situation during 2001 and, specifically, in May and June of 2001, the NZEM Market Surveillance Committee (MSC) announced today.

“The MSC considered numerous issues about the structure and operation of the wholesale electricity market and, particularly, about the spot market administered by NZEM,” MSC Chairperson, Sir Duncan McMullin said. “These did not justify the MSC finding that an ‘undesirable situation’ exists.”

The NZEM Rules define an undesirable situation as any event affecting orderly trading on NZEM; manipulative activity; excessive positions; unwarranted speculation; a breach of any law; and/or regulatory action threatening trading.

The MSC is an elected body of independent members, whose major task is to ensure compliance with the NZEM Rules. The announcement comes after the MSC’s month-long investigation into the electricity market. The inquiry included looking at the market’s management of prudential risks in the context of current prices and the demand-side and pricing issues raised on both sides of the electricity market.

During the investigation the MSC met extensively with various electricity Market Participants and service providers, hearing and considering information on the spot market, the hedge market and the retail market. “The MSC is content that there has been open dialogue between the MSC, Market Participants and service providers throughout the course of the inquiry,” Sir Duncan said.

The inquiry was launched following a complaint from two Market Participants. They were particularly concerned that:

* excessively high prices were set due to a lack of competition in NZEM;

* some generators’ activities, including offering, may have been manipulative2under NZEM Rules; and

* market conditions could represent conduct inconsistent with the high standards of integrity, fair dealing and trading required by the NZEM Rules.

Sir Duncan said the rules concerning “undesirable situation” were designed to ensure an efficient and competitive spot market. “Those rules should not be used to shield particular Market Participants from market forces unless, for example, the failure of a Market Participant threatens trading and settlement on the spot market as a whole,” he said. “And in the MSC’s view this is not currently the case.”

The MSC considers that some Market Participants have been, and are being, placed under financial pressure due to current spot prices, a thin financial hedge market and current retail prices. “But this does not currently amount to an ‘undesirable situation’ since, among other things, NZEM’s prudential requirements currently seem adequate to protect the market from significant disruption,” Sir Duncan explained.

He also said none of the information available to the MSC suggested that any Market Participant engaged in manipulative activity, or attempted manipulative activity, in NZEM during the period under review. Nor does the MSC find that market power has been used in the wholesale market to limit competition in the retail market.

Certain Market Participants claimed that the level of spot prices in NZEM in June was of itself evidence of the use of market power and therefore indicated an undesirable situation. “The MSC does not justify current spot prices,” Sir Duncan noted. “But on the evidence before it, it cannot find that they occurred as a result of the opportunistic use of market power.”

“Ultimately, each Market Participant’s individual perceptions of particular risks and opportunities are what matters in NZEM. A Market Participant that complies with NZEM’s guidelines and principles is entitled to compete in NZEM as it chooses,” he said. “The MSC is not suggesting that NZEM is by any means perfect in dealing with the effects of a market characterised by a limited number of participants,” Sir Duncan said. “But, in the MSC’s view, when assessing particular events in NZEM, it’s important to recognise the dynamic nature of electricity markets and not to take a static view of each individual episode.”

The MSC has been uniquely placed during this inquiry in that it has had to consider both sides of the market and the outcomes from the function of the market. The MSC notes that NZEM’s design and changes in Market Participants’ voting3 power have not changed consistently with changes in electricity markets, in particular with the development of vertically integrated Market participants. The MSC also notes that transmission constraints have a major bearing on the regionalization of the markets and possible inefficiencies.

As a semi-judicial body, the MSC’s decision speaks for itself and the MSC will make no further comment on the investigation or today’s announcement.

No posts to display