Download Response to unanswered questions - Contact Energy

Response from Contact Energy
Question 9.
Contact Energy’s
response
SPD method
Your submission states: “The decisions regarding the majority of that $2 billion [worth of transmission
investment] were made in the past. There is no potential for efficiency gains to be made in relation to that
investment.” Yet you also state that HVDC cost allocation needs to be changed.
a) How do you reconcile the apparent inconsistency in these positions?
b) In what circumstances would a reallocation of costs of historic investments be warranted?
The comment “The decisions regarding the majority of that $2 billion [worth of transmission investment] were
made in the past. There is no potential for efficiency gains to be made in relation to that investment.” was
made in the context of answering question one of the Electricity Authority’s original paper.
The second statement, that HVDC cost allocation needs to be changed, is an acknowledgement that the
current system is inefficient. An example of this inefficiency can be seen in the lack of new generation built in
the South Island and the withholding of peak generation output because of the HAMI charge.
In Contact’s view, these statements are not inconsistent. Question One asked submitters to give views on the
Electricity Authority’s interpretation of whether the materiality threshold had been achieved. Our submission
was that given 'material change' is not defined, we looked to the Electricity Authority's economic efficiency
objective, i.e. for the threshold to be reached there must be the likelihood of a material change to the
economic efficiency of the market.
A review of the transmission pricing methodology (TPM), being a review of the allocation of the method of
recovering the cost of historic investments, has been warranted from implementation of the TPM and remains
equally as relevant today due to the acknowledged inefficiencies of the current HVDC charging regime. The
issues Contact raised in its submission on materiality related to the durability of the proposed changes to the
TPM. The Electricity Authority is constrained by the Electricity Industry Participation Code (Code) and in
particular clause 12.86. Contact urges the Electricity Authority to robustly meet all regulatory hurdles to ensure
that the proposed amendments to the TPM are enduring.
Question 13.
You state in your cross-submission (page 3) that you “refute NZIER’s comment that it is likely that the HVDC
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HAMI charge has already been factored into South Island generators asset values. We can only comment in
relation to Contact and advise that this is incorrect.”
Contact Energy’s
response
Why is this cost not incorporated into Contact’s asset value since it was a cost on Contact prior to the
purchase of Contact in 1999?
This line of questioning on the impact of regulatory change on asset and share valuations does not seem
relevant to the EA’s decision making process.
Contact’s generation plant and equipment purchased prior to 1 October 2004 are stated at deemed historic
cost less accumulated depreciation and accumulated impairment losses. All other property, plant and
equipment are carried at historical cost less accumulated depreciation and accumulated impairment losses.
The carrying amounts of Contact’s assets are reviewed at the end of each reporting period to determine
whether there is any indication of impairment. These tests are conducted by testing the deemed historic cost
against the valuation of a single generation cash-generating unit reflecting the integrated nature of the assets
in the portfolio and do not result in any adjustments, other than in the instance of an impairment, to the
carrying values of the assets.
Question 14.
Contact Energy’s
response
Question 15.
Contact Energy’s
response
If the HVDC charge affects the returns that you can receive from your generation, why is that not impacting on
your asset values?
We do not believe this line of questioning is relevant to the TPM debate.
Contact does not revalue its assets, rather they are stated at deemed historic cost less accumulated
depreciation and accumulated impairment losses and tested as a single cash-generating unit for impairment
on a six monthly basis.
Is your proposition that potential shareholders and existing shareholders are not taking into account the
current charging regime on the HVDC when making decisions whether they will buy or quit your shares and
the price they think is acceptable and appropriate for the value of your business?
Contact does not see how this question is relevant to the TPM debate.
Contact has a range of shareholders from its majority shareholder Origin Energy to institutional and retail
investors. In our experience the majority of shareholders and financiers do consider regulatory risks when
making investments. The complexity of the proposed TPM makes any assessment of the impact on value
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difficult.
Question 25.
Contact Energy’s
response
You suggest (submission p 29) $20,000/MWh is an appropriate value for the cost of non-supply in the SPD
method, yet load parties suggest $3000/MWh is too high as it reflects a short-term solution. How do you
reconcile your position with that of load parties? Why do you consider your position best promotes efficiency?
The value of lost load (VoLL) is currently specified in clause 4 of schedule 12.2 of the Code as being
$20,000/MWh. This is also consistent with the figure used in the Grid Investment Test for the current upgrades
that the SPD method is proposed to be applied to.
Given the Electricity Authority asserts that SPD (beneficiary pays) promotes efficiency, then $20,000 is
consistent with that. We believe it is appropriate for VoLL to be set at a high level to reflect extreme scarcity.
Contact encourages the Electricity Authority to look at how this issue is dealt with in other jurisdictions, in
particular in Australia where the National Energy Market has a maximum spot price of AUD$12,900/MWh
(previously VoLL). This price is automatically triggered when the Australian Energy Market Operator directs
network service providers to interrupt customer supply in order to keep supply and demand in the system in
balance.
Question 34.
Contact Energy’s
response
Do you have a view on the New Zealand Geothermal Association’s submission that “integrated
retailer/generators would be in a better position to pass on generator costs at the retailer end while a merchant
generator of the type many Maori Trust investors will be will not have the same ability to pass on these costs”?
The ability of merchant generators to pass on costs at the 'retailer end' is likely to be dependent on confidential
contractual arrangements. In Contact's experience, a change of law clause is common in power purchase
agreements as it is a risk that neither party to the agreement can manage and will ultimately be borne by the
customer. Parties may have an ability to amend the contract following implementation of a new TPM.
However, this will be dependent on contractual terms. The Electricity Authority should explore these issues
with the merchant generators.
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