Spot market rules aid competition says panel

By RICHARD BRADDELL utilities writer

The electricity market is completely above board, despite spiralling spot market prices that have crippled some electricity retailers, the industry's market surveillance committee has found.

The committee, led by former Appeal Court judge Sir Duncan McMullin, said no evidence had been found to support complaints by two retailers that there is an "undesirable situation" in the spot electricity market rules. The report results from complaints by two unnamed energy retailers.

Retailers with limited generation have reeled as they are unable to pass on high power prices to their customers, instead wearing losses as spot prices have spiked in response to high demand in a cold winter and low water inflows into South Island hydro lakes.

Worst hit, Natural Gas Corporation subsidiary On Energy has been forced to sell 116,000 South Island customers to Meridian to limit losses, expected to be around $300 million in 2001.

Meanwhile, TrustPower has suffered multimillion-dollar losses and Todd Energy temporarily defaulted in June on a New Zealand Electricity Market call for extra prudential security.

But while NGC has complained that insufficient suitably priced hedges were on offer in the early part of the year to offset losses as wholesale prices spiked, the committee said sufficient financial hedges had been available.

"Had they been taken, those financial hedges would have provided reasonable cover for, among others, the winter period," the committee said.

The committee said rules covering what is described as an "undesirable situation" were intended to protect an efficient and competitive spot market and should not be used to protect participants from market forces unless the consequences threatened trading and settlement on the spot market as a whole.

The central issue was the extent to which particular episodes of supply and demand provided differing opportunities for competitors to profit in the spot market in ways that were against the public interest.

To date, retail consumers had largely been immunised from these events, even in periods of high prices.

The report was greeted as vindication by Meridian Energy, New Zealand's largest generator, whose dominance of South Island hydro has been cited as giving it undue influence over spot electricity prices this year.

Spokesman Alan Seay said the high wholesale prices were simply an early warning signal for a difficult supply situation.

"It's a warning not to be taken lightly," he said, adding that the strong signal that careful energy management was required had resulted in virtually all retailers promoting energy conservation.

"A little bit of conservation now is better than the crisis scenario later on as we experienced in 1992," he said.

But Natural Gas Corporation chief executive John Barton said wholesale prices had been at extraordinary levels and retailers with limited generation had been severely affected.

"If the market rules result in retailers being squeezed out of the market, then changes to the rules need to be urgently considered to ensure true competition for all purchasers of electricity," he said.

His claim that there would be fewer retailers as a result of the findings was endorsed by TrustPower spokesman Graeme Purches, who noted that Christchurch would now have only two retailers following the withdrawal of On Energy.