On Energy missed chance to hedge bets

By RICHARD BRADDELL utilities writer

New Zealand's largest electricity retailer, On Energy, had the chance as late as February to protect itself from mounting losses, but rejected the hedge contracts it was offered.

Sources suggest the retailer is the author of its own misfortunes, having in February turned down hedge contracts said to have been offered by generators Meridian, Mighty River and Contact at prices less than a fifth the $200 MWh prevailing last week.

On Energy went back to the generators with a tender in March-April, but as the levels of previously full South Island hydro lakes began to fall, the hedge prices offered were higher and the company rejected them.

Spokesman Bruce Thompson said that had the company been offered commercially acceptable hedges, it would have grabbed them.

Instead, On Energy and its 100 per cent parent, the Natural Gas Corporation, face mounting losses and customer defections.

The corporation was put on creditwatch negative last week by Standard & Poor's after predicting that high wholesale prices would result in break-even at best in the second half.

The company also faces customer defections as price rises announced last Friday have not been matched by other retailers, many of whom have their own generation or are protected by hedge contracts.

The corporation's embarrassment presents an opportunity to New Zealand's largest generator, Meridian Energy, to boost its small retail base.

Meridian spokesman Alan Seay said its call centres had been inundated by potential new customers after the company said it would not raise its prices. It took 2500 calls yesterday and 1200 on Saturday.

But Mr Seay rejected suggestions that it was unfairly manipulating the market, saying the company was managing its lakes in the national interest and trying to avoid a repeat of the 1992 electricity crisis.

Rainfall over the past week has helped boost lake levels, but Meridian's two largest lakes (Pukaki and Tekapo), which account for 60 per cent of New Zealand hydro storage, were still only 45 to 50 per cent full on Sunday.

It has been suggested that the corporation's 66 per cent shareholder, Australian Gas Light, may not have fully appreciated the dramatic impact that changing weather can have on New Zealand lake levels, and may have been lulled into a false sense of security by three successive mild winters with good rainfall.

But although On Energy has asked the Market Surveillance Committee to investigate generator behaviour, the head of the committee's administrative body said there was a classic commodity market in electricity.

Philip Bradley of M-Co said the market was behaving exactly as it was designed to.

"If you are not well hedged, you are taking a bet against the weather."

Energy Minister Pete Hodgson said yesterday that research by his own officials gave no indication that there had been a shortage of hedges on offer.

And while wholesale prices are much higher now, the unhedged spot market accounted for only a small part of the electricity traded and thus could not be inferred as representing the market at large, he said.

Prices of $200 to $250 per MWh might seem high, but they were probably doing little more than signal that there was potential for a shortage.

New Zealand prices might be put in perspective against $A2700 ($3400) per MWh that had prevailed for a day in Victoria, Mr Hodgson said.