Meridian left out in the cold by market watchdog

By Ray Lilley

Friday 11th August 2000

Meridian Energy has won no support from the electricity industry's market surveillance committee for its complaint that Contact Energy charged exorbitant prices and breached a supply agreement when the Manapouri power station was shut down in mid-May.

The electricity market's surveillance committee said this week it had found no breach of market rules in Contact's actions in charging Meridian 18 times the spot market rate for supplying backup power to the Tiwai aluminium smelter.

"[The committee] intends to take no action against Contact Energy in respect of its actions or behaviour arising from the event," chairman Sir Duncan McMullin said.

He confirmed the market's probe (NBR, June 2) was sparked by concern over pricing behaviour but said no spot market participant had complained to the committee over the matter.

During the May 20-21 spot market spike, Contact pushed prices from about $30 per megawatt-hour before the Manapouri shutdown to around $540 during the outage.

Meridian launched court action last week over what it claims was Contact's breach of the 1996 deed under which it must provide the Tiwai smelter with backup power during outages at Manapouri.

It is claiming damages of more than $3.1 million - the amount it claims it was overcharged for spot electricity by Contact during the 25-hour shutdown.

Some market observers say they are surprised by the action, since Meridian knew it was exposed to the spot market during the shutdown.

They say the company should have fully assessed its risk under the deed, the effective supply contract for such shutdowns.

While other power purchasers use hedge contracts to cover their exposures, Meridian clearly put its price risk management on the deed, originally signed between Contact and ECNZ in 1996.

"Constraints occur in the market every day," said one market observer. Meridian knew physical constraints in Transpower's system meant it was dependent on Contact's power and the prices it decided to charge in a monopoly supplier situation.

Cheaper electricity from the Waitaki or other supply centres could not be used for the Tiwai smelter because of the Transpower system's constraints.

Electricity industry inquiry head David Caygill said the issue of whether there are adequate market rules to cover such events "is an outstanding question" not covered by the inquiry.

His inquiry had no ongoing responsibility for such issues, but "it might have found its way into our report if it had happened three weeks earlier."

Mr Caygill said moving the wholesale electricity market to a real-time market so bids were made on the basis of firm prices would prevent such problems. "That's where you get the real gains and a deeper market, with more participants and economic efficiency gains."

Meridian has warned it would be forced to abandon its $200 million upgrade of Manapouri if similar "extortionate" rates were charged during a three-week shutdown planned from December 2.

The action to clarify the 1996 deed contract and Meridian's damages claim is expected to be heard by the High Court in early October.

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