New Zealand’s major electricity generators have been cleared of tacit collusion during last year’s electricity price spikes but may yet be subject to investigation by the Australian Securities and Investments Commission.

The Electricity Authority says it found no evidence of anti-competitive behaviour in the market during a period of sustained high prices from late September through November.

Nor did it believe Contact Energy and Genesis Energy – as major gas buyers during the period – had any major information advantage over other participants in the market.

“The investigation found that there was information asymmetry with regard to gas outage information, but it was small and often non-material, and the best available information was still uncertain,” the authority says in a 90-page report.

“The investigation also found that the perception of information asymmetry was larger than the actual asymmetry. We think this was largely caused by difficulty in accessing information regarding gas outages and other indicators of the gas supply situation.”

The authority noted that its investigation was limited to a claim that the price spikes and the collapse of market-making in the ASX-operated New Zealand electricity futures market during the period constituted an undesirable trading situation – or UTS.

It did find indications of some behaviour that may “require further examination” to determine whether other aspects of the electricity industry code or other laws have been broken.

“Our compliance team and the UTS investigation team are liaising regarding alleged non-compliance with information disclosure obligations in the code. We have referred allegations relating to Australian securities law to ASIC, and will provide further assistance as necessary.”

Small-scale retailers Flick Electric, Pulse Energy, Vocus Group and Electric Kiwi, and Auckland lines company Vector, complained to the authority in November that wholesale power prices had been “atypically high” even allowing for declining hydro storage and reduced gas supplies from the Pohokura field.

They alleged a failure of market-making in the futures market and said the failure of timely disclosure about fuel supplies and generator availability by Contact and Genesis had also disadvantaged them and shaken their confidence in the market.

Electric Kiwi chief executive Luke Blincoe said the finding is no help for customers still facing higher power prices.

Nor is it consistent with the authority’s signal that further work is needed to improve trading in the futures market.

“They’ve also referred certain trading behaviours to the Australian Securities and Investment Commission, which is a very serious step and suggests a disparity in standards between the EA here and ASIC. Any ASIC investigation should be a major cause for concern for a listed company.”

Genesis shares rose 0.4 percent to $2.79, taking their gain the past year to 18 percent. Contact shares rose 0.5 percent to $6.31, a 20 percent one-year gain.

Power prices jumped in late September as South Island lake levels fell and Shell shut production from the offshore part of the Pohokura gas field due to a valve fault on the production platform.

Those factors, combined with very weak wind production some days, a planned, five-week shutdown of Genesis’ E3p plant and other temporary generation outages, saw average wholesale prices exceed $500/MWh on some days in October – a seven-year high.

While the power market has seen high prices before, what was most damaging was their sustained nature. Average prices exceeded $200/MWh for about a month from Oct. 8 and then again for some days in mid-November. For many days they were above $400.

In 2018 dollars, the $293/MWh average for October was the fifth-highest ever for any month.

As a result many independent retailers had to stop taking new customers. Dunedin-based Payless Energy got out of the market, selling its customer book to Pioneer Energy.

But the threshold for declaring a UTS is high. For the authority to act, it must be satisfied that the event complained of posed a serious risk to the integrity of the market, or confidence in it. There must also be no other mechanism to address the issues raised.

There have been eight UTS claims in the past decade. Only one of those has been upheld, which was in March 2011 when prices jumped to $20,000/MWh in parts of the North Island after planned transmission work reduced power available to Auckland.

Authority chief executive James Stevenson-Wallace said there is no dispute that prices were unusually high.

But that doesn’t mean there was collusion, and nor does it mean the futures market didn’t work as it should have.

“We didn’t find any evidence of anti-competitive behaviour. We have absolute confidence in the wholesale market,” he said in a statement.

In its report, the authority found that the futures market did work as expected, albeit in a market that can suffer from a lack of liquidity.

“Parties who hedged before spot prices began to rise had little concern with managing their spot price risk. Nonetheless, we are aware of issues with liquidity in the hedge market. Our investigation highlighted these issues again. We indicated in 2018 that we will look at these in our 2019/20 work programme.”

Last week, a government-appointed panel reviewing electricity prices suggested the voluntary market-making provided by the four largest generators in the futures market be made mandatory.

Earlier this week, Mercury NZ and Genesis both called for greater participation by the rest of the industry in the market-making arrangements and fairer sharing of the cost. Genesis yesterday indicated it lost more than $5 million on market-making during the six months through December.

The EA says the “well-known” limitation of the market-making arrangements have become more apparent over time. It is keen to see whether liquidity can be improved but it is wary of doing so until it can be clear on the benefits to be gained, given the cost of any intervention “may be considerable.”

That said, it found that the futures market did work as expected during last year’s price spikes. It noted that the generators’ arrangements with the ASX do allow them to withdraw during times of “portfolio stress”. That provision was relied on during the period under review and the ASX confirmed that none of the generators breached their agreements, the EA said.

Nor did the authority find any evidence of collusion among the major generators. Market shares were not constant, there was no reduction in trading activity and firms were competing on both volume and price.

Generators with low-efficiency plant also made gas available to other generators, increasing the effective capacity available and putting downward pressure on price.

One of the four major generators made a loss during the investigation period. Of two that made profits, one booked losses in almost half the trading periods, while the other lost money on its hedge book.

“If tacit collusion were occurring, we would expect the alleged collaborators to be making a profit,” the EA said.

The authority is still looking at whether all firms met their disclosure requirements during the spikes.

But it found no evidence that plant operators had used the timing of plant outage announcements to trade in the ASX in any systemic way.

Nor did it believe there was any material advantage gained by the greater knowledge some parties had of the timing and scale of the Pohokura outage.

It noted that as early as July, Shell had indicated there would be further disruption to supplies from Pohokura later in the year.

Supplies dropped on Sept. 14, and the three generators with contracts from the field were told that that could last several days.

Genesis was then informed on Sept. 20 that the outage could last 53 days. On Sept. 28, Shell made a public statement that a valve on the offshore platform needed replacing.

“From this point onwards it was clear there was a major problem, the duration of which was open ended. The only unanswered question was how long the outage would last,” the EA says.

Shell said on Oct. 12 that the work could take until the end of November to complete.

The EA said that, of the four major generators, only Genesis had a significant position in hedge markets for that period. It had been building those to help cover its E3p shutdown.

In the 10 days prior to Shell’s Sept. 28 announcement, Genesis undertook a “rapid accumulation” of October month hedges.

The company said it was reacting to the signalled gas shortages, falling hydro storage at its Tekapo hydro operation on the South Island, and forecast dry weather.

The EA noted that futures contracts at the time were cheaper than coal for the company’s Rankine units at Huntly. It also noted that the Genesis ASX trading team did not have the information on the Pohokura outage that its fuel procurement arm did.

While Genesis had “significantly altered” its hedge position at a time when it had better information than was publicly available, that information was still uncertain and not that much better than other parties had.

“Importantly, Genesis had a legitimate commercial reason for purchasing October contracts,” the EA says.

“Based on the information available to us, it is not clear that Genesis would have acted any differently if it only had access to publicly available information – ie if there were no information asymmetry.”

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