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Genesis, Contact appeal against regulated price-cut


Thursday 14th July 2011

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Genesis Energy and Contact Energy have appealed against a regulatory decision that forced them to charge lower wholesale prices after a planned maintenance shutdown led to a spike in those prices on March 26.

Contact Energy chief executive Dennis Barnes said his company had appealed because it believed the Electricity Authority made an error of law in deciding an "undesirable trading situation" (UTS) developed on March 26.

The consequences of this error could be negative, and material for the broader market, he said in a statement.

"Retrospective resetting of prices will create regulatory uncertainty; risks disincentivising parties from putting appropriate risk management in place; and could dampen investor confidence in projects that support security of supply," Barnes said.

Prices reached $20,000 per megawatt hour, causing an outcry.

The Electricity Authority subsequently reset prices at $3000 per megawatt hour to maintain the integrity of the market, though it said that Genesis Energy did nothing wrong.

Those caught out by the high prices, which included Meridian Energy and Might River Power, argued the retrospective price-change was the right decision, while those against, like Genesis and Contact, said it rewarded bad business practice.

Contact and Genesis lodged a High Court appeal against the authority's decision on Wednesday, and Genesis said the decision had created investment and regulatory uncertainty.

It wanted assurance about the nature and scope of the market rules in the future, because the Electricity Authority decision was wrong in principle and in law, and lowered the bar for declaring an undesirable trading situation.

The Electricity Authority decision deemed a rise in spot prices north of Hamilton to more than $20,000 per megawatt hour (MWh) for several hours on that day to be a UTS.

The event happened during maintenance outages on the national transmission grid in the North Island, which significantly reduced transmission capacity from the Waikato to Auckland.

At one point this resulted in Genesis Energy setting the price of electricity coming from its Huntly power station about 250 times higher than usual. At that price a normal household would pay $3000 a week for electricity.

The authority said Contact Energy's decision to withdraw 425MW from its Stratford power stations about 1pm on March 25 was also crucial in putting Genesis Energy in a position where its offers at Huntly determined spot prices in a large part of the North Island.

Reductions in grid constraint limits by the electricity system operator also contributed to the outcome, the authority said.

The authority said the events of March 26 threatened to undermine the confidence in and reputation of the wholesale electricity market.

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