This paper is the second in a symposium of papers that examine the 2009 report by Frank Wolak into the New Zealand electricity market. In this paper, we discuss the Report’s measures of the ability and incentives of generators to exercise unilateral market power. We show that the construction and interpretation of these measures are highly sensitive to some key assumptions, particularly those concerning the elasticity of demand for electricity in the wholesale market and the amount of transmission loss on the national grid.

As one of the first Full Nodal Pricing (FNP) electricity markets, New Zealand was also one of the first places where FTR concepts were developed and considered for implementation, actually as early as 1989. Ironically, though, it is only now, after more than two decades of discussion, that a limited FTR market seems likely to be actually implemented. This long delay may be partly attributed to failures in the regulatory process, but it also reflects the special circumstances facing the small hydro-dominated New Zealand market, in which a relatively small group of vertically integrated participants compete over a fairly sparse network, in which losses and reserve support requirements play a more important role than line transfer limits, per se. Thus there has been considerable debate over whether classical FTR concepts are really suitable. We discuss several variant proposals, one of which is moving toward implementation by 2012.