ASB, Vodafone hit for millions after power price spike

Using the Huntly Power Station at a time of planned maintenance on the power grid sent wholesale electricity prices soaring last weekend. Photo / Christine Cornege

A total of 14 organisations, including ASB, Telecom, Vodafone and the company that operates the Marsden Point oil refinery, have lodged complaints with the Electricity Authority over last Saturday's spike in wholesale electricity prices that saw them surge to more than 200 times normal levels.

The surge in prices took place while Transpower was undertaking planned maintenance on circuits between Auckland and the Waikato significantly reducing the transmission capacity from the Waikato region to the Auckland region.

As Meridian Energy puts it in its complaint, fellow state-owned generator and retailer Genesis Energy's Huntly generation was required to support load in the upper North Island and Genesis could "effectively name its price."

See all the complaints here.

This saw prices rise to between $19,000 and $20,000 Mega watts per hour (MWh) from normal prices of about $100 MWh.

Meridian estimates the price spike cost could hit its earnings before interest, tax, depreciation, amortisation, realisations and impairments, and fair value movements of financial instruments (ebitdaf) by between $10 million and $15 million if last Saturday's wholesale electricity price isn't overturned.

And Mighty River Power says it faces a potential ebitdaf hit of up to $25 million. Regulator the Electricity Authority has launched an investigation into what it terms provisional wholesale prices reaching historically high levels.

The complaints to the regulator include allegations of manipulative or attempted manipulative trading activity, unwarranted speculation or an undesirable practice, and exceptional or unforeseen circumstance at variance with, or that might threaten, generally accepted principles of trading or the public interest.

Genesis has rejected criticism it had acted unreasonably during the "well-signalled" transmission outage.

Genesis notes it had offered customers the opportunity to hedge their risk, it wasn't Genesis' role to cover and pay for the spot market risk some market participants chose to take, and Genesis has high operating costs and "will recover those costs when the opportunity arises."

Other companies to have lodged complaints with the Electricity Authority include Vodafone which says it had calculated the cost to it of the seven hour price spike to be in excess of 8 per cent of its historic annual electricity expenditure.

"This type of event seriously undermines the integrity of the wholesale electricity market for end users, and leads us to question future levels of spot exposure and hedging," Vodafone's Mark Jones says in his company's complaint.

"While we accept that the outage was known of in advance, the level of prices could not have been predicted by Vodafone and is outside of any reasonable forecast based on previous experience."

Vodafone's rival Telecom also says it faces a "significant" financial impact.

In ASB's complaint the bank argues the events of last Saturday advantaged an electricity generator at the disadvantage of it and other scale consumers of spot electricity.

"The financial magnitude of the impact will significantly affect our profitability," ASB's Perry Waldman says.

Waldman adds that if the Electricity Authority finds that an Undesirable Trading Situation (UTS) occurred, it could direct that interim prices don't stand as final prices and direct the trades that occurred during the relevant period be settled at specified final prices.

Meridian argues that other generators in the same position as Genesis haven't acted in the same way and says the market can't literally be "anything goes" if it's to retain the confidence of electricity users.

Mighty River Power, meanwhile, says it sought hedge pricing from Genesis at 4pm last Friday. But it says the issue was that the only company with sufficient spare capacity for hedges to provide it with cover was also the same company due to control spot pricing the next day.

"We felt these prices were excessive and declined to take up the hedges," Mighty River Power says. "Within one hour of declining the hedges the market forecast was showing that the high prices were alleviated to under $160 MWh and this remained the case until the constraint bound in real time at approximately 10.30am on 26 March."

"The alleviation in day ahead prices caused us to not reconsider hedge cover."

Other complainants include the NZ Refining Company, the Auckland Museum, NZ Sugar, Powershop, Smart Power, Wallace Corporation, Juken NZ ltd, Switch Utilities, and Nufarm.

The Electricity Authority says its UTS committee held its initial meeting on the events of Saturday yesterday.

"The focus of the UTS Committee at this stage is on whether a UTS, as defined in Part 1 of the Electricity Industry Participation Code (Code), occurred on 26 March. To assist it in making this decision, the UTS Committee has requested Authority staff obtain additional information from industry participants and report back to it next week. Hence, the Authority is today issuing information requests to participants, with responses requested by close-of-business Tuesday 5 April."

In the meantime, the UTS Committee has received assurances from a number of participants that they have put in place sufficient hedge agreements to manage commercial risks regarding this Saturday, April 2, when grid outages near Hamilton are scheduled.

"Despite these assurances parties exposed to spot market prices must assess the risks for themselves, and must not rely on the above statement for managing their own circumstances."

The Electricity Authority, an independent Crown entity responsible for the efficient operation of the New Zealand electricity market that succeeded the Electricity Commission last November, says it has also launched a Market Performance investigation into the events of Saturday 26 March.

"The scope of that investigation will encompass both the spot and hedge markets, and focus on identifying areas of the Code for possible further development."

It already has a "comprehensive" set of reforms underway to "substantially" improve market performance, in both the spot and hedge markets.

"A key reform initiative relevant to recent events is the proposed introduction of a financial transmission rights (FTR) market. If an FTR market had been in place prior to last Saturday then FTR-holders could have been substantially protected from the price spikes at Otahuhu relative to Benmore, and participants would have been likely to have had a wider range of choices for hedging their risks arising from scheduled transmission outages.

The Authority is on track to decide Code amendments by 1 November 2011 and have the FTR market operating in 2012."

INTEREST.CO.NZ