An open letter to major electricity suppliers

An open letter to major electricity suppliers

Mr Stephen Barrett, Chief Executive, Contact Energy Limited

Mr Murray Jackson, Chief Executive, Genesis Power Limited

Dr Keith Turner, Chief Executive, Meridian Energy Limited

Dr Doug Heffernan, Chief Executive, Mighty River Power Limited

Mr Keith Tempest, Chief Executive, Trustpower Limited

Dear Sirs

Electricity Industry policy options and other questions regarding the behaviour of suppliers

On 19th March 2003 MEUG wrote to the Government alerting policy makers of an immediate crisis affecting end consumers and the need for a robust policy review because of what appear to be systemic problems in the market. At the same time MEUG initiated a media information campaign. Since that date the Government has announced a policy review by the Cabinet Infrastructure Group, a coordinated savings campaign commenced under the Grid Security Committee (GSC) convened Winter Power Taskforce and a select committee inquiry will be held.

MEUG members are understandably concerned about current spot prices they face and to ensure both short-term solutions and longer-term changes are well founded and effective. MEUG is conducting an in-house seminar on 30th April to consider the longer-term policy options that have been made public to date. To ensure that we have a full understanding of all policy options available attached are a set of generic questions for generators that would assist MEUG members. Options and papers that we already have and will be considering include various papers presented at the Utilicon conference (Ministry of Economic Development, M-co, Bryan Leyland and EMA Northern), the Wood Processing Strategy and other papers.

Your advice on these matters by 30 April would be helpful. Replies from generators will be made public in the same way that Meridian Energy’s reply of 21st March to our original letter on water values of 19th March is publicly available.

Yours sincerely

Ralph Matthes

Executive Director

Generic questions to electricity suppliers What Policy options does each generator believe should be implemented to make a difference before next winter, if any? From reports from MEUG members we cannot detect any new financial risk management products that have been developed since 2001.

Can generators advise if this is true, or if products have been developed and marketed – what are those products? Following on from question 2) above, what new financial risk management products for Time-of-Use (TOU) metered consumers does each generator envisage will be in place over the 2004 and 2005 winters? Some commentators and officials have suggested end consumers have found themselves without hedge cover now because they chose not to purchase hedges previously, ie sufficient hedges were available in the past – but end users elected not to acquire those because of price.

MEUG believe this is incorrect. Instead the anecdotal evidence is that the aggregate quantity of hedges and contracts to TOU consumers since 2001 has been diminishing, or at least not growing as much as contract volumes supplied to the non-TOU retail market. To assist resolve this debate we request each generator publicly disclose for each month since January 2001 the volume of actual sales to non-TOU consumers and the actual volume of contract or hedge volume to TOU consumers.

MEUG believe the levels of profit taking by some generators must be excessive this year. Some generators may be net buyers of power. But not all generators can be net buyers of power. The wholesale electricity market is not a zero-sum game. Some generators must be net sellers of power – in which case they may be extracting unnecessarily high profits from current high spot prices.

We may have got this wrong and there may be no excessive profits and generators may have genuine higher costs that they must cover The way to clearly resolve this question is for all generators to disclose their net sales into and purchases out of the wholesale market for each month beginning from January.

Accordingly we request this information from each generator along with an explanation of what additional costs they may have incurred to justify observed high spot prices. One of the characteristics of a mature and competitive commodity market is a liquid secondary market.

What proposals does each generator have to the development of secondary market trading, eg such as the futures product suggested by d-cypha at the end of 2001? Since 1 March how much standby diesel generator supply or alternative generation sources has been utilised or accessed? MEUG believe the industry and consumers have allocated too much time to the Electricity Governance Establishment Committee (EGEC) process and other critical sector monitoring activities have been put to one side.

However MEUG does not believe that a Crown Electricity Governance Board (EGB) is the only other option. Would generators comment on an alternative governance arrangement for a pan-industry rulebook based on the authorised Multi-lateral Agreement on Common Quality Standards (MACQS) governance and whether this was feasible and worth considering?