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Small power retailers dealt to again, says Pulse Utilities

Wednesday 2nd November 2011

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Small, independent electricity retailers are the losers under new Electricity Authority rules governing the pre-payments that local electricity network monopolies can levy before allowing power to be sold on their network.

The new Electricity Authority rules, which come into force in May 1, next year, will require local network monopolies to accept two weeks’ payment or a third-party guarantee equivalent to two weeks’ line charges, if they don’t have a credit rating of at least BBB- from Standard & Poor’s.

Networks will, however, have discretion to seek up to two months’ line charges in total, as long as they pay interest on the difference between the total sought and the two-week estimate.

While the credit rating requirement has long been a bugbear for the major electricity retailers because of its prohibitive cost if the network required a new rating analysis, small independent retailers were once again victims, said the managing director of low-cost retailer Pulse Utilities, Dene Biddlecombe.

Many network companies were owned by local community trusts and should be welcoming new entrants to the market as they helped push power prices down in the areas where they operate, said Biddlecombe.

Instead, they imposed prudential payment requirements that stifled competition from small, independent retailers.

“There’s an inherent imbalance between networks and small retailers,” Biddlecombe told BusinessDesk. “The networks hold all the cards. They will give a breach notice within minutes, threatening to kick you off their network.”

Pulse has struggled to meet an array of up-front prudential payment requirements covering not only network companies but also the NZX-administered wholesale electricity market and recently took Buller Electricity, a network owner, as a major shareholder in order to gain critical mass and access to working capital to meet such payments.

Major electricity generator-retailers don’t suffer the same stresses because they are backed by billion dollar-plus balance sheets.

With its latest decision, Biddlecombe said the EA had backed the big industry players and the lines company monopolies, to the detriment of retail electricity competition.

“The gen-tailers have had a great win because our growth could be restricted by our ability to fund growth,” he said. “The Electricity Authority has let new retailers down. They came out with a mandate to promote competition, and everything they have done has been to maintain the status quo.”

Biddlecombe conceded that network companies had previously been able to charge up to six months’ anticipated network charges, rather than the two months now proposed.

These regulations will apply from December for new use-of-system agreements and from May next year for existing agreements.

Also potentially helpful to major generators is the EA’s proposed new “stress-testing” regime, which will require major consumers to provide regular, confidential information about their hedge positions, to determine the market’s overall level of risk management in the event of wholesale market price volatility.

The EA says unhedged major users can enjoy prolonged periods of stable spot market prices, punctuated by periods of much greater volatility than in other commodity markets.

This in turn “provides fertile ground for lobbying for intervention and for arguments the electricity market is uncompetitive”, and creates incentives for major users not to hedge their exposure appropriately. Ad hoc political intervention becomes the risk, the EA says.

By introducing stress-testing, it will be clear that “parties buying electricity on the spot market do so knowing the risks they are taking are accordingly accountable for the consequences of those decisions.”

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