Competition Issues in New Zealand Energy Markets

presented by D Kirk, Fletcher Challenge Energy Limited PO Box 92-114, Auckland

at the 1998 New Zealand Petroleum Conference

Abstract

The Legal Framework

Market Definition

Determining the Relevant Market

Commerce Commission Gas Market Definitions

Key Changes Facilitating Cross-"Market" Sales

A Contested Market

Author

Abstract

Energy markets the world over are influenced by a range of competition law issues. Natural monopoly pipelines and transmission lines are everywhere subject to regulation. Other parts of the chain in both gas and electricity have been subject to increasing deregulation. Competition has replaced regulation in ensuring normal (as opposed to supernormal) returns to investors. The paper briefly reviews the New Zealand regulatory regime and the key decisions of the Commerce Commission and the Courts which have established the current competition framework in the gas and electricity markets. The paper goes on to argue that the key to good outcomes for both consumers and the companies investing risk capital in these industries is logical and consistent market definition. Such clarity is currently lacking in New Zealand. The industry risks seriously sub-optimal outcomes if a more robust understanding of the markets for gas and electricity is not achieved.

The Legal Framework

Legislation

• Commerce Act, 1986 (key sections: 27, 36, 47).

Regulation

• Light-handed
• Information disclosure
• Reasonable return on ODV

Common law and precedent

• Prime necessities doctrine
• Commerce Commission decisions - 256, 270
• Kapuni case

Market Definition

• The first step
• Crucial to the right outcomes
• Precedent confused and inaccurate
• Rapid evolution to one gas market

The Court's Gas Market Definitions

The Kapuni Judgement defined separate markets for:

• Transmission - "a natural monopoly"
• Wholesale - "NGC is of necessity, dominant ... in the wholesale market"
• Retail - "[NGC] has a substantial degree of market power in the retail market"

Commerce Commission Market Definitions

Decision 256 - FCL acquisition of BP Oil Exploration (additional Maui equity)

Found separate markets for:

• Petroleum exploration - "there are a number of firms involved ... barriers to entry are low"
• Production and supply of condensate - "price is determined by international market forces"
• Production and supply of LPG - "as with condensate, the price is determined in the international market place"
• Production and supply of natural gas - "gas produced [is] ... fully committed ... price is determined by provisions in the sale and purchase contract ..."

Determining the Relevant Market

Process is to:

• Define a possible relevant market
• Test with a SSNIP

Commerce Commission Gas Market Definitions

Decision 270 - NGC proposed acquisition of Enerco.

Found separate markets for:

• Exploration and production - low barriers to entry
• Transmission - natural monopoly
• Distribution - natural monopoly
• Wholesale - NGC dominant
• Retail - Limited competition

Key Changes Facilitating Cross-"Market" Sales

• Creation of Contact Energy and mandate to trade gas
• Private investment in IPP/Cogen
• Removal of gas on-sale restrictions
• NGC settlement of 1980 Utility Contracts dispute with Powerco/Enerco/TransAlta

A Contested Market

Factors defining a more or less competitive market are:

• Rivalry within the market
• Market entry potential
• Powerful buyers or suppliers

Author

Dr David Kirk is currently the General Manager, Marketing and Commercial, for Fletcher Challenge Energy Limited (FCE) in New Zealand. In this role he has accountability for the marketing of FCE's crude oil, condensate, gas and LPG. He manages the company's commercial activity in New Zealand, including competition law issues. He has overall Accountability for the company's investment in the Maui Field.