UTS 15 September 2018

UTS claim

On 8 November 2018 we received a claim from five participants: Electric Kiwi, Flick Energy, Pulse Energy, Switch Utilities (Vocus), and Vector. The claim was that an undesirable trading situation (UTS) had begun on 15 September 2018 and was continuing at the time of the claim.

The claim alleged the UTS was caused by a confluence of factors:

• gas supply disruptions
• failure of the hedge market
• high spot prices caused by collusion
• breaches of the Code relating to information disclosure obligations.

Our investigation

Our investigation focused on the criteria for a UTS, including whether we needed to use extraordinary powers to avoid serious consequences for the market.

Our investigation did not seek to determine whether the Code or other laws had been breached, but it did find some indications of behaviour that require further examination.

Our compliance team and the UTS investigation team liaised regarding alleged non-compliance with information disclosure obligations in the Code. We have referred allegations relating to Australian securities law to the Australian Securities and Investments Commission.

Spot prices in spring 2018 were unusually high. By some measures spot prices (in October 2018) set new records in the history of the New Zealand electricity market. High spot prices, if they accurately reflect underlying supply and demand, are a useful and necessary feature of the market. High spot prices indicate high demand, low supply, or both, and can incentivise parties to take action to ensure that supply always matches demand in the short, medium, and long term.

Our investigation found that spot prices reflected underlying supply and demand. In particular, demand was above average and supply was constrained by a combination of low hydro storage and gas production outages. We also found there was no evidence the high spot prices were caused by collusion or other undesirable behaviour. The high spot prices in spring 2018 helped ensure supply always matched demand because they suppressed demand and it became economic for more expensive generating plant to run.

It is up to participants to be aware of, and manage the risk of, potential high spot prices (or low spot prices if they are generators). In general, it is also up to participants to determine how much risk to take on, and how to manage that risk. Our focus is on ensuring participants have tools available to manage their spot price risk, such as the hedge market. The claimants allege that the hedge market failed to provide effective risk management to participants. However, our investigation found that the hedge market performed as expected and that 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. We will look at these in our work programme.

Our decision

We found that a UTS did not occur. We found no evidence that the situation threatened, or may threaten, confidence in, or the integrity of, the wholesale market. The reasons for this finding are:

• The factors cited by the claimants in support of there being a UTS either did not occur (either partially or wholly), or were a function of the market operating normally. We found that none of the factors cited by the claimants provide sufficient evidence that a UTS existed.
• Market indicators show no sign that market confidence and integrity were threatened.
• The claimants’ factors and market indicators either individually or as a whole do not support a finding that the situation threatened, or may threaten, confidence in, or the integrity of, the wholesale market.

Our analysis and conclusions are detailed in the following final decision paper.