Select committee expresses concern over Meridian evidence

Saturday, 3 April 2021

Meridian chief executive Neal Barclay and then Electricity Authority strategy manager James Tipping discuss action to correct the 'undesirable trading situation' in 2019.

Meridian Energy has been admonished by a select committee for advising that a regulatory ruling over wasted hydro power would not cost it more than $2 million, when its liability had yet to be determined.

Parliament’s transport and infrastructure select committee “expressed its concern” in a report that Meridian stated its exposure at $2m when “its liability was still to be determined by the Electricity Authority at that time”.

The majority-state owned electricity company said in response that the committee might have formed an incorrect view on the company’s exposure and that it was seeking to have its report appended.

The incident stems from the “undesirable trading situation” in the electricity market that occurred in 2019 that remains subject to regulatory action.

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The Electricity Authority ruled last year that water that should have been used to generate electricity during a period of heavy rainfall and flooding in December 2019 was instead spilled from South Island dams.

Meridian said in November that the Electricity Authority’s legal approach to its investigation was “fundamentally flawed”.

The authority’s chief executive, James Stevenson-Wallace, reiterated to Stuff last month that Meridian was withholding generation from its hydro scheme on the Waikiti River to avoid power cables between the South and North islands reaching capacity and “they did that to stop South Island prices reducing”.

“That was right at the front and centre of the confluence of factors that came together. There were multiple issues that we outlined – that was one of them,” he said.

Meridian Energy chief executive Neal Barclay told the select committee that its own investigation found there was about 28 gigawatt-hours of energy that was spilled “that maybe did not need to be” but emphasised the unusual hydrological conditions it was facing at the time.

The authority issued a draft ruling last month that proposed addressing the undesirable trading situation (UTS) by lowering some spot market electricity prices that applied in December 2019 by a total of just under $80m.

Stevenson-Wallace said it was not in a position to say what the impact on the profits of individual electricity companies would be, once hedging and other market arrangements they would have in place were taken in account.

The authority has acknowledged the UTS may have had impacts beyond raising spot market prices in the South Island that its proposed “actions to correct” would not address but has said it could not “unspill” water.

Electricity Authority strategy manager James Tipping said during a technical briefing on its proposed UTS reset that the authority had wide powers to redress the UTS.

“We can take any action provided it relates to an aspect of the electricity industry that the authority can regulate under the code,” he said.

Neal Barclay, chief executive of Meridian Energy.

But Stevenson-Wallace was not able to provide an assurance its proposed fix would prevent companies from profiting from activities the authority had determined to be undesirable, or that all electricity consumers who might have been impacted by the UTS would be fully compensated.

“The proposed ‘actions to correct’ seek to reduce $80m out of the system and it is a fair question to ask how does that impact on households,” he said.

The authority is separately investigating whether Meridian and Contact Energy breached trading standards rules, which could potentially lead to separate penalties.

Barclay told the select committee, prior to the Electricity Authority’s draft decision on resetting wholesale prices, that any reset would not cost it more than $2m.

“If the EA does change prices back to what they think should have occurred if that 28GWh had been used for generation, the impact on our bottom line is less than $2m.”

Stevenson-Wallace said it did not understand how Meridian’s $2m figure was derived and could not comment on it, or why Meridian was disclosing that to the select committee.

“The fact of the matter is Meridian released that number before we released our proposal for actions to correct so they were not privy to that; all participants were privy to the same information at exactly the same time.

“So I don’t believe Meridian was in a position to comment on the actions to correct given we hadn’t released that information at the time they were making those statements,” he said.

A Meridian spokeswoman said it “acknowledged the committee’s concern” but said Meridian had to “routinely estimate our exposure to a range of matters that may occur in the future but about which we do not have certainty”.

These included upcoming regulatory decisions, she said.

Meridian believed the select committee might have formed “an incorrect view that the estimate we gave them was wrong, which it was not”, she said.

“We have written to the committee to clarify our position and we have asked that our letter be attached to their report.”

In an earlier response, Meridian said it did not need to have any advance information on the authority’s “actions to correct” to produce an estimate of Meridian’s exposure to a price reset.

“This was because Meridian had pre-sold or hedged a significant amount of its December 2019 generation at fixed prices,” it said.

“This means that a reset of spot market prices over the period in question has a relatively modest and broadly similar impact on Meridian’s revenues.”

The authority said it expected to finalise its “actions to correct” by August but that its decision could then take “several months” to implement.