Large electricity users burned by soaring prices

Friday 27th July 2001

SHORT SHARP SHOCK: Carter Holt Harvey is warning of devastation for the productive sector

By Nick Smith and Chris Hutching

Private operators yesterday blamed domination of the electricity sector by state-owned enterprises for the power price crisis that is forcing up bills to industry and other users.

TrustPower spokesman Graeme Purches said SOEs Meridian Energy and Genesis Power were able to manipulate the market to its advantage.

Normally TrustPower would have only about 10% exposure to spot prices but the company was presently exposed up to 20% on its business.

He said TrustPower would survive as a retailer and blamed the speculation about an imminent sale of its retailing base on questions asked at a recent shareholders' meeting.

On Wednesday TrustPower closed three of its West Coast hydro stations - the Waihapo, the Dillmans-Duffers-Kumara and the Arnold - because of the drought.

Mr Purches said the company had also been caught out as hedging contracts expired, exposing it to spot electricity prices that from day to day can soar to $500 a megawatt-hour.

He said $150 a megawatt-hour was a more realistic "price signal to the market that supply is short."

"[$500] is not a price signal, that's profiteering."

But Meridian Energy communications manager Alan Seay said high wholesale electricity prices caused by plummeting hydro lake levels were proof the market was working as intended.

Genesis chief executive Murray Jackson said the crisis was compounded by the "frenzy" of customer acquisition following electricity reform.

"Everybody wanted volume without looking at the margins," he said. "They were never going to survive even if the prices were normal."

Genesis is no longer in the market for customers after its buyup of Natural Gas Corporation's On Energy subsidiary's North Island customer base. This had boosted its customer base from 160,000 to 450,000.

Mr Seay said the electricity market was still new and some participants were still learning the significance of hedging contracts.

But competition between electricity companies has ground to a halt with nearly all of them refusing new customers, highlighting the failure of the market in practice.

For Meridian, the technical task of switching On Energy's customers over to its own database is expected to take several weeks or months. The fate of 200 On Energy call centre staff in Christchurch is uncertain.

Arguments about market efficiencies were lost on some large electricity users facing soaring spot market prices as their supply contracts expire.

A Hawke's Bay pulp mill has reduced output, a Picton supermarket has taken out bank loans to pay for electricity, a Queenstown hotel faces a massive price hike, and Carter Holt Harvey is warning of devastation for the productive sector.

On the West Coast, where the three hydro stations have been shut down, customers have been warned of possible transmission problems.

Canterbury Employers Chamber of Commerce chief executive Peter Townsend called for government action over a "looming electricity crisis" that would affect many businesses, particularly those whose supply contracts were coming up for renewal while prices were high.

Mr Townsend said a strategy was required for the short-term possible crisis and for the longer term. But Meridian's Mr Seay said the nub of the problem was simply a shortage of supply from the South Island hydro generation lakes mainly on the Waitaki River system because of low lake levels and a peak in demand due to cold weather.

The same situation affected North Island hydro generation. Rain usually boosted lake inflows in September and October, and during the summer months the melting snow from the Southern Alps helped fill the hydro lakes.

"It's not a crisis yet but we have a drought situation," Mr Seay said. "We're getting the message out there for people to save electricity [and] hopefully we won't need to bring in any draconian measures.

Direct intervention by the government seemed unlikely as Energy Minister Pete Hodgson emphasised the need for prudence and laid the blame squarely with his predecessor, Max Bradford, who divided up the industry into networks companies, generators and retailers.

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