Electricity distribution as an unsustainable natural monopoly: a potential outcome of New Zealand’s regulatory regime

The ongoing reform of New Zealand’s electricity supply industry has attempted to separate its potentially competitive elements from those with naturally monopolistic characteristics. Yet, some competition for distribution services is occurring, raising the question as to whether electricity distributors are natural monopolies as is typically assumed. This paper presents a simple model of a representative New Zealand distribution business, and shows that, in a true economic sense, distributors are most probably sustainable natural monopolies as expected. However, the model demonstrates that a mechanism for competition may arise because the financial principles enshrined in the Ministry of Commerce’s regulatory regime can produce unsustainable cost structures and unintentionally introduce elements of contestability into the market for distribution services.