Haast Energy Trading Limited v The Electricity Authority
[2024] NZHC 195
•16 February 2024
NOTE: REDACTIONS MADE TO PARAGRAPHS [31] AND [61] PURSUANT TO CONFIDENTIALITY ORDERS IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2022-485-381
[2024] NZHC 195
UNDER The Electricity Industry Act 2010 IN THE MATTER OF
Appeals pursuant to section 64
BETWEEN
HAAST ENERGY TRADING LIMITED and ELECTRIC KIWI LIMITED
Appellants
AND
THE ELECTRICITY AUTHORITY
Respondent
AND
NOVA ENERGY LIMITED and MERIDIAN ENERGY LIMITED
Interested Parties
Hearing: 28 February 2023 Appearances:
R Butler, S Jeffs and T Refoy-Butler for Appellants R May and T Bain for Respondent
T Smith, J Tocher and J Raffills for Nova Energy as Interested Party
J Every-Palmer KC and J Woolley for Meridian, as Non-Party K Massey and J Upson for NZX, as Non-Party
Judgment:
16 February 2024
Reissued:
26 February 2024
JUDGMENT OF CULL J
HAAST ENERGY TRADING LIMITED and ELECTRIC KIWI LIMITED v THE ELECTRICITY AUTHORITY [2024] NZHC 195 [16 February 2024]
TABLE OF CONTENTS\
Para No.
Background context of the electricity market....................................................... [6]
The national electricity system.................................................................................. [7]
Pricing Manager’s statutory functions..................................................................... [14]
What happened on 9 August 2021?......................................................................... [22]
The grid emergency........................................................................................ [22]
The ISS Notice............................................................................................... [27]
Approach on appeal............................................................................................... [32]
The issues................................................................................................................ [35]
Preliminary applications....................................................................................... [37]
Special leave........................................................................................................ [38]
Fresh evidence on appeal - the Ruling Panel material........................................ [45]
Further evidence on appeal................................................................................. [53]
THE PRICING DECISIONS............................................................................... [57]
What is a pricing error?...................................................................................... [58]
The first pricing decision..................................................................................... [61]
The second pricing decision................................................................................ [67]
The circumstances surrounding the ISS Notice................................................... [75]
The ISS Notice issued in breach of the Code................................................. [81]
The basis of the pricing decisions........................................................................ [88]
Was there a pricing error?................................................................................... [99]
Conclusion.............................................................................................................. [38]
THE UTS DECISION......................................................................................... [112]
Observation........................................................................................................ [121]
Result.................................................................................................................... [123]
Costs...................................................................................................................... [125]
[1] On 9 August 2021, one of the coldest nights of the year, more than 34,000 households had their power turned off, when peak electricity demand reached its highest record in New Zealand. As a result of a grid emergency, scarcity pricing of wholesale electricity was imposed for four 30 minute trading periods, increasing the price of wholesale electricity for those trading periods by $130 million.
[2] Haast Energy Trading Limited1 and Electric Kiwi Limited (both referred to as Haast) appeal against three decisions of the Electricity Authority (the Authority), which found the imposition of scarcity pricing was not a pricing error or did not amount to an undesirable trading situation (an UTS).2 Haast appeals the decisions
1 Haast Energy Ltd is a sister company of the Energy Collective Ltd, both of which have 65% common shareholding and are commonly controlled. The Energy Collective is an energy retailer and technology business which owns electricity retailer Electric Kiwi Ltd.
2 Electricity Authority, Pricing Error Decision, 7 September 2021 [the First Pricing Error Decision]; Electricity Authority, Pricing Error Decision, 1 February 2022 [the Second Pricing Error
under s 64 of the Electricity Industry Act 2010, contending that the Authority erred as a matter of law to find the 9 August 2021 events did not give rise to a pricing error or an UTS. Appeals against any decision of the Authority are on questions of law only.
[3] In the relevant trading periods on 9 August, the system operator, Transpower, considered there was insufficient power generation available to meet demand and there were insufficient reserves for any contingent event. Transpower perceived there was a risk that the national power system would collapse and as a result of issuing notices under the Electricity Industry Participation Code 2010 (the Code), scarcity pricing was imposed for four trading periods (TP 39–42), causing the price of wholesale electricity to exceed $10,000/megawatts per hour (MWh). This increased the price of wholesale electricity for the relevant trading periods by $130 million.
[4] The Authority is the respondent, taking an active role in opposing the three appeals. It says that there was no pricing error, as the correct input and calculation processes were followed. The UTS decision, it submits, was without error and cannot be said to be wrong in law.
[5] Nova Energy Limited (Nova Energy), a generator-retailer,3 was granted leave to appear as an interested party to address the concerns and issues in the appeal of the UTS decision only.
Background context of the electricity market
[6] As these appeals concern technical details arising from the application of the Code with a focus on the ISS Notice, I set out the background and context of the wholesale market for electricity.
Decision]; Electricity Authority, Final Decision on the Claim of an Undesirable Trading Situation, June 2022 [the UTS Decision].
3 Nova Energy is a generator-retailer (known as a “Gentailer”) which operates fast-start, gas- hyphenated power plants and a solar plant supplying electricity and natural gas directly to retail consumers.
The national electricity system
[7] The New Zealand electricity system comprises a number of entities in four functional areas: generation, transmission, distribution and retail. Of relevance to this appeal is the price at which electricity is bought and sold on the wholesale market. As the Authority’s website explains the wholesale market is where generators sell electricity and retailers buy electricity. Retailers then on-sell that electricity to businesses and households across New Zealand.
[8] Haast is a financial intermediary on the wholesale electricity markets, selling hedge contracts to retailers and then using proprietary models to identify the most cost effective ways of managing the risk of fluctuating prices. The spot and hedge markets are the major components of the wholesale market. Each day is divided into 48 trading periods. Prices on the spot market are calculated every half hour and vary depending on supply and demand, and the location on the national grid. In addition to buying electricity directly from the spot market, retailers and large industrial users can enter into financial contracts (hedges), which smooth out some or all of the volatility in spot prices.
[9] A “hedge” is a form of insurance against the financial harm of high electricity prices. Similarly, some generators can sell their output through hedge contracts, insulating them against the risk of low spot prices. Within the spot market, generators offer to supply a defined amount of electricity at a certain price and certain location for each half hour trading period.4
[10] It should be noted that the process for calculating spot prices was changed from November 2022, subsequent to the grid emergency in August 2021.5 However, the Authority helpfully set out in its submissions how the offer stack system worked to calculate spot prices as at August 2021 and I set out that process below.
4 The Electricity Industry Participation Code 2010 (the Code) defines “trading period” in cl 1.1 as “a period of 30 minutes past each hour on any trading day”.
5 As of November 2022, the Authority implemented substantial reforms under the Electricity Industry Participation Code Amendment (Real Time Pricing) 2022 which changed the process by which spot prices are calculated. Prices are now automatically calculated every time generation is dispatched, at least once per trading period. The interim price for the trading period is calculated as a time-weighted average over that trading period. This becomes the final price by 1:00 pm the following day.
[11] Generators made offers for each trading period in respect of each generation asset. This meant that generators could offer different tranches of electricity from the same generation asset (such as an energy source at a location) at different prices. Offers are first submitted 36 hours before a trading period. They are then adjusted and refined as the system operator publishes indicative prices, which are based on projections of supply and demand. The process of refinement stopped at a point known as “gate closure” when all offers had to be finalised.
[12] The offers formed an “offer stack”, which is a list of all the offers ordered by price per MWh.6 Generation was then dispatched by the system operator to match real-time demand. The lowest offers were accepted and dispatched first, continuing up the list of offers, accepting and dispatching, until supply matched demand.7
[13] The highest accepted price was used to calculate the payment to all generators. This provided an incentive for low-cost generation to be offered at very low prices to ensure that it was always dispatched. The system continued to calculate indicative prices every five minutes, based on the preceding five minutes’ draft data.8
Pricing Manager’s statutory functions
[14] The Electricity Industry Act (the Act)9 and the Code, prescribe the function of the Pricing Manager to be the market operations service provider. The Authority has appointed NZX Limited as the Pricing Manager. The Pricing Manager calculates the prices for each trading period, following trading day and publishes these before midday as “interim prices”.10
[15] Indicative prices are based on data from less accurate monitoring equipment, while interim prices are based on readings from extremely accurate meters at
6 See the Code, cl 1.1 for a definition of “offer stack”. Note that this definition was revoked on 1 November 2022, by clause 4(2) of the Electricity Industry Participation Code Amendment (Real Time Pricing) 2022.
7 The Code, pt 13, sub-pt 2. The Authority’s submissions note that this description is a significant over-simplification, but the details are not material to this appeal. The core point it wishes to make is that the system operator accepts offers to arrive at the lowest overall cost to both satisfy demand and ensure the security of the grid.
8 The Code, cls 13.88 – 13.89.
9 Electricity Industry Act 2010, s 16(1)(h) and (2)(b).
10 The Code, cl 13.167.
generating stations and grid sub-stations, which usually are not available until the next day. Interim prices then become final prices at 2 pm the following day, unless an industry participant raises a pricing error claim, or the Authority exercises its powers to direct the Pricing Manager to delay publication of the final prices. As the Authority notes in its submissions, this might occur when the Authority becomes concerned that an UTS may have arisen.11
Scarcity pricing provisions
[16] Of relevance to this appeal are the provisions relating to scarcity pricing. A scarcity pricing situation, which is defined under the Code, exists when:
(a)There is a national shortage situation;
(b)There is no binding constraint in either island; and
(c)The HBDC link is in service and there is no binding constraint on that link.
[17] Once a scarcity pricing situation has been determined, prices for the affected periods are calculated in accordance with sch 13.3, rather than following the standard pricing process covered in sub-pt 4 of pt 13 of the Code. These are arrangements to modify prices in the wholesale electricity market (the spot market), when the system operator reduces demand by instructing mandatory power cuts and/or emergency load shedding, through disconnection at the relevant point of connection. Such an instruction by the system operator artificially suppresses prices and any final prices produced do not signal scarcity or provide market signals for investment. Scarcity pricing enables a $10,000/MWh price floor and a $20,000/MWh price cap to the average price of generation for either the island (if only one) or the national average price (if both islands).12
11 The Code, cls 13.168 – 13.180 and 13.184.
12 The Electricity Authority Pricing Error Claim – 9 August 2021 (Board Paper, 23 August 2021) from [7.1] provided a background on the scarcity pricing process and Haast’s pricing error claim. It was presented to the Authority on 2 September 2021 in respect of the Authority’s first pricing decision.
[18] Under cl 13.135A the Pricing Manager is required to determine if a scarcity situation exists in the relevant trading period and where the system operator responds to emergency events on the grid under Technical Code B. If the Pricing Manager determines that there is a scarcity situation in the relevant trading period, it must give notice of the fact and the Pricing Manager must calculate interim prices using the methodology in sch 13.3A.13
[19] The imposition of scarcity pricing does not apply until the Pricing Manager gives a notice that a shortage situation exists,14 and such a notice will not be issued unless the Pricing Manager has received notice from the system operator of a shortage situation in accordance with cl 5(1A) of Technical Code B of sch 8.3. If however the system operator is responding to emergency events, cl 5(1A) provides that the system operator must issue a notice in writing to all participants whenever, or as soon as practicable after, the system operator has issued, amended or revoked an island-wide instruction to electrically disconnect demand under cl 6.
[20] Clause 5(1B) of Technical Code B clarifies that an island-wide instruction is “when the electrical or geographical region affected by a notice is all of an island.” Clause 6 outlines the actions which the system operator can take in a grid emergency with an increasing level of intervention. The most significant is the requirement to disconnect electrical demand under cl 6(1)(d).
[21] As all parties agree, these provisions demonstrate that the scarcity pricing process cannot be triggered unless and until the system operator gives an island-wide instruction to electrically disconnect demand. The imposition of scarcity pricing is, as the appellant submits, contingent upon the system operator’s notice.
13 The Code, cls 13.135A, 13.135B(1)(a) and Sch 13.3(a).
14 The Code, cl 13.144(1).
What happened on 9 August 2021?
The grid emergency15
[22] 9 August 2021 was a cold night and peak electricity reached its highest level on record. Simultaneously, electricity generation unexpectedly declined, as a result of a drop in wind generation and weed clogging the intakes of the Tokaanu Power Station. Slower start generating assets were offline in the afternoon and could be brought online in time to service the evening peak.
[23] Transpower oversees New Zealand’s electricity system in its capacity as the system operator and also as manager of the national grid. It has the ability to issue notices to market participants to manage supply and demand. Transpower can direct lines companies, for example, to reduce demand, which they may do by remotely turning off domestic hot water supply on a short term basis. This is known as ripple control. Maintaining system control is one of the system operator’s principal obligations under the Code. On this evening, there was a risk that the national power system would collapse. While smaller-scale grid emergencies occur from time to time, an event of this scale is unprecedented. The Ministry of Business, Innovation and Employment (MBIE) completed a report on the events of 9 August 2021 and said, “It is the first time an event of this nature has occurred since the electricity market began in 1996.”16
[24] At 5.10pm on 9 August 2021, due to the drop in electricity generation, Transpower issued a grid emergency notice (GEN) requesting that participants increase energy offers and instantaneous reserve offers and decrease demand. Some distributors responded by reducing controllable load by ripple control or switching off water heating for relatively short periods without loss of consumer use. At 6.47 pm, when the evening peak demand approached, it became evident to Transpower that the situation may become more serious. It issued a second GEN repeating the previous request for generation and reserve offer increases and demand decreases. In response,
15 The background facts of what happened that night have been summarised in a number of investigation reports and agreed facts but were also summarised in the UTS decision. These facts were accepted by the parties without challenge.
16 Ministry of Business, Innovation and Employment Investigation into electricity supply interruptions of 9 August 2021 at 4.
distributors employed ripple control and other measures successfully and within six minutes of the notice a one per cent reduction was achieved, and within 20 minutes a three per cent reduction was achieved.
[25] At 7.09 pm Transpower issued a demand allocation notice (“DAN”). This notice was described by MBIE’s review as “remarkably faulty” as it contained materially incorrect allocations that allowed some recipients to increase demand above their original levels but meant that eight recipients further increased demand, some by significant amounts.17
[26] At 8.20 pm, 9.01 pm and 11.19 pm, Transpower issued three more GEN notices, each recording that the evening peak was passing and demand had reduced. By 9.01 pm, the GEN notified participants that the grid emergency had ended and that all reduced demand could be restored. This was done by 9.15 pm.
The ISS Notice
[27] At 11.54 pm, after the grid emergency had ended, Transpower issued the ISS Notice. The ISS Notice read as follows:
This notice is issued in accordance with Technical Code B – Emergencies, Schedule 8.3, Part 8, clause 5(1A). This Island Shortage Situation (ISS) notice has been issued by the System Operator to inform the Pricing Manager and Market Participants that an island wide instruction to disconnect demand has been issued, amended or revoked. Refer to the related GEN notice for details of the instruction. The ISS notice serves as an indication to the market that the Pricing Manager may invoke Scarcity Pricing subject to meeting additional market criteria.
[28] The Authority summarised the result of the issuing of the ISS Notice, in its UTS decision, as follows:
2.21The ISS Notice resulted in the pricing manager applying the scarcity pricing provisions in the Code. As discussed above, this resulted in prices for the affected trading periods being fixed at approximately $10,000 MW/h.
17 At 4, 14.
2.22The overall effect was to raise the gross settlement amount for electricity by approximately $130 million. However, as was noted by Nova Energy Limited in its submission, the actual financial gain for generators is likely to have been significantly less. This is because generators that are also retailers (“gentailers”) were both selling and buying electricity. Additionally, many retailers will have hedge contracts that seek to protect them (to varying degrees) from price spikes. While the Authority’s focus must be on the functioning of the market as a whole, we accept Nova’s submission that it would not be correct to imply that “consumers are $130 million worse off” because of scarcity pricing, particularly as many consumers will be on fixed price contracts.
2.23The Authority and the system operator are of the view that the ISS Notice was erroneously issued. The system operator did not, in fact, issue an island-wide instruction to disconnect demand. Instead, the GENs discussed above were only requests to decrease demand. Clause 5(1A) of the Code does not require an ISS Notice to be issued in such circumstances.
2.24This means that the Code’s pre-requisites for triggering scarcity pricing were not met during the Event. However, because the pricing manager must take the ISS Notice at face value, and the other criteria in the Code were met, the pricing manager was required to apply scarcity pricing to trading periods 39 - 42.
[29] Although Transpower issued a number of GENs that evening, it did not identify whether they were a request to reduce the demand on the grid or a requirement for a grid owner to reconfigure the grid. Importantly, Transpower did not require the electrical disconnection of demand under cl 7(2) of the Code.
[30] After Haast lodged its pricing error and UTS claims, both Transpower and the Authority have agreed that Transpower issued the ISS Notice on 9 August 2021 in breach of the Code. The Authority accepts that the Code’s prerequisites for issuing an ISS Notice and triggering scarcity pricing were not met.
[31] The result is that scarcity pricing was imposed, causing the price of wholesale electricity for TP 39–42 to exceed $10,000/MWh compared to the ordinary price of
$2,000/MWh. This resulted in an increase in the wholesale price of electricity by $130 million compared with the expected price in normal trading conditions for that trading period.18 Haast says it will cost it [ ] more than if market conditions had prevailed.19
18 UTS Decision, at Executive Summary, [4.4], and [4.7].
19 The price of electricity for the trading periods TP 39–42 has been held pending the appeals’ determination.
Approach on appeal
[32] As noted, appeals under s 64 of the Electricity Industry Act 2010 are on questions of law only. This Court has confirmed that s 64 appeals follow the orthodox principles for appeals on questions of law.20 The Court will interfere with the decisions only if it considers that the decision maker applied a wrong legal test; came to a conclusion without evidence or one on which, on the evidence, it could not reasonably have come to; took into account matters which it should not have taken into account; or failed to take into account matters which it should have taken into account.
[33] The Authority accepts that the appeal of the pricing error decisions must be on the grounds of a “pure” question of law, as it involves the interpretation of the relevant Code provisions. However, the Authority takes issue with the error of law alleged in the Authority’s UTS decision. Haast alleges:
The Authority erred in finding that the application of scarcity pricing to the Trading Periods did not threaten confidence in, and the integrity of, the wholesale market.
[34] The Authority submits that this ground of appeal clearly challenges a conclusion reached by the Authority on the facts and can only succeed, if the appellants establish that the Authority’s conclusion was unavailable on the evidence. The Authority reminded the Court that it has previously held that it ought to allow a degree of deference to the Authority, given its regulatory role and expertise, in both its interpretation of relevant provisions and how it applies the law to the facts.21
The issues
[35] Haast advances three grounds of appeal, each claiming that the Authority erred in law in:
(a)the Authority’s decision dated 7 September 2021 declining Haast’s pricing error claim (the first pricing decision);
20 City Financial Investment Company (New Zealand) Ltd v Transpower New Zealand Ltd [2018] NZHC 1488; Bay of Plenty Energy Ltd v The Electricity Authority [2012] NZHC 238 at [81].
21 Bay of Plenty Energy v The Electricity Authority [2012] NZHC 238 at [82].
(b)the Authority’s decision dated 1 February 2022 declining to reconsider Haast’s pricing error claim (the second pricing decision);
(c)the Authority’s final decision dated 28 June 2022 declining the claim of an undesirable trading situation (the UTS decision).
[36] These can be distilled to two issues, which I address in turn –– whether the Authority erred in:
(i)declining Haast’s pricing error claim in its first and second pricing decisions;22 and
(ii)declining Haast’s claim of an UTS.
Preliminary applications
[37] There are three applications to resolve before addressing the substantive issues on appeal. They are Haast’s applications for special leave to appeal out of time and for leave to adduce the Rulings Panel material on appeal; the Authority’s application to adduce the affidavit of Mr Benvenuti and its Board and related papers; and Nova’s application to adduce the affidavit of Mr Teichert as contextual evidence.
Special leave
[38] Haast seeks special leave to appeal the Authority’s pricing error claim decisions dated 7 September 2021 and 1 February 2022 out of time. Haast acknowledges that the notice of appeal was filed more than 20 working days after the date of the pricing error complaint decision, but notes that s 66 of the Electricity Industry Act 2010 contemplates the Court extending the time to file an appeal.23 Haast contends that special leave should be given because no appeal against the first two pricing decisions would have been necessary if the UTS decision was decided in its
22 Although there are two decisions, the second is a review of the Authority’s first decision to decline what is essentially one claim by Haast Energy of a pricing error.
23 Section 66 of the Electricity Industry Act 2010 states “An appeal under this Part must be made by giving notice of appeal within 20 working days after the date of the decision or order appealed against or within any further time that the High Court allows.”
favour. Haast filed its appeals against all three decisions of the Authority promptly, on 5 July 2022, seven days after the UTS decision on 28 June 2022 and sought leave to appeal out of an abundance of caution.
[39] The Authority opposes Haast’s application for special leave, because of the ten month and five month respective delays in appealing the first and second pricing error decisions. The Authority contends that its subsequent UTS decision proceeded on the basis there was no pricing error and allowing the pricing appeals would risk requiring the Authority to reconsider its UTS decision.
[40] The relevant factors for the grant of special leave include the length of the delay, the reasons for it, the conduct of the parties, any prejudice arising from the delay and the significance of the appeal.24
[41] I am satisfied that special leave should be granted. Haast lodged a pricing error and an UTS claim on 12 August 2021. On 7 September 2021, the Authority declined the pricing error claim. (This was 26 days after the claim was made, not by 2 pm of the second business day after receipt of the claim, as the Code directs).25
[42] Haast learned of Transpower’s acknowledgement that it had wrongly issued the ISS Notice and by letter dated 20 December 2021, Haast drew the Authority’s attention to that acknowledgement and sought a reconsideration of the pricing error claim in light of it. On 1 February 2022, the Authority, after a further month, declined to reconsider its pricing decision and said it would have declined it in any event. At the time of the expiry of the appeal period for the second pricing decision, the UTS claim was still under investigation and its terms had been widened by the Authority. The UTS decision was issued on 28 June 2022, in which the Authority acknowledged the breaches of the Code in the issuing of the ISS Notice and its view that Transpower was not entitled to trigger scarcity pricing under the Code.
24 High Court Rules 2016, r 20.4(3).
25 Cl 13.179 of the Code provides that the pricing manager and the Authority must make reasonable endeavours to ensure its determination of a pricing error claim is made by 2 pm on the 2nd business day after the relevant pricing error was claimed.
[43] I accept Haast’s submission that if the UTS claim was upheld, there was no need to appeal the second pricing error claim. Indeed, Haast was encouraged to raise the invalidity of the ISS Notice in support of its UTS claim. For reasons which I address further, I consider the Authority’s recognition that the ISS Notice was issued in breach of the Code is relevant to the substantive issue of whether the Authority was correct in law to decline the pricing error claims.
[44] Haast, therefore, had reason to delay filing an appeal in respect of the pricing error decisions until the outcome of the UTS decision was known. There is no prejudice arising from any delay. Further, the appeals raise an important legal issue, with significant pecuniary consequences. Accordingly, special leave to appeal the two pricing error decisions is granted.
Fresh evidence on appeal - the Ruling Panel material
[45] Counsel for Haast brought to the Court’s attention that the Authority had made a complaint to the Rulings Panel about Transpower’s actions on 9 August 2021. The Authority and Transpower agreed that Transpower had breached the Code and the System Operator’s Policy Statement. The Rulings Panel ultimately ordered Transpower to pay a pecuniary penalty of $150,000, together with costs.26 The Rulings Panel decision was issued on 2 May 2023, two months after the appeal hearing in this Court.
[46] Following the Rulings Panel decision, Haast applied to this Court for leave to produce the following material:
(a)The Authority and Transpower’s joint submissions to the Rulings Panel on penalty dated 31 March 2023;
(b)The Authority and Transpower’s agreed summary of facts to the Rulings Panel dated 31 March 2023; and
26 EA v Transpower [2022] Rulings Panel Decision – C-2022-002. The Rulings Panel is an independent panel that assists in enforcing the Electricity Industry Participation Code by dealing with complaints about breaches of the Code. It is established under the Electricity Act 2010. The complaint was brought under reg 30 of the Electricity Industry (Enforcement) Regulations 2010.
(c)The decision of the Rulings Panel on penalty dated 2 May 2023.
[47] The Authority and Nova Energy filed notices of objection to the admission of further evidence and the parties were timetabled to file submissions. All parties accept that Haast’s application to adduce further evidence could be determined on the papers.
[48] I consider that the further evidence Haast seeks to adduce is relevant to the position that the Authority takes on appeal. The material arises out of the same event on 9 August 2021, involving the same facts and the same parties. Although the Ruling Panel complaint involves a different process under the Code, the context and background facts are relevant to the issues on appeal.
[49] The Court may grant leave to adduce further evidence on appeal “only if there are special reasons for hearing the evidence.”27 This applies to both general appeals and appeals on questions of law. The Court’s discretion is exercised sparingly28 and there must be “very special circumstances” to allow a party to adduce further evidence on appeals on questions of law.29
[50] Leave however will be given where a new matter has arisen since the hearing. In this case, the Authority’s decision to lay a formal complaint with the Rulings Panel had been made prior to the appeal hearing and the formal notice was produced by the appellant’s Counsel. The Rulings Panel decision, the joint submissions by the Authority and Transpower on penalty and the agreed summary of facts have only become available following the appeal hearing.
[51] I consider that the material is relevant to the position adopted by the Authority in respect of the same events on 9 August 2021, not in relation to the penalty imposed, but to the acceptance by the Authority and the systems operator that the Code had been breached.
[52]I uphold Haast’s application. The further evidence is admitted on appeal.
27 High Court Rules 2016, r 20.16(3).
28 Montego Motors Ltd v Horne [1974] 2 NZLR 21 (CA) at [24].
29 Schier v Removel Review Authority [1999] 1 NZLR 703 (CA); Terrace Tower (New Zealand) Pty Ltd v Queenstown Lakes District Council [2001] 2 NZLR 388 (HC) at [9].
Further evidence on appeal
[53] There were a number of other applications and cross-applications to be dealt with on the papers.
[54] The Authority seeks to adduce the affidavit of Mr Benvenuti. Haast opposes its introduction. Haast also opposes the Authority’s application to include its Board papers and its first instance submissions. Nova seeks to adduce the affidavit of Mr Teichert to provide background knowledge and context to Nova’s position on appeal. Haast opposes the application.
[55] I grant leave for the Authority to place the Board material before the Court. Given the staged process of the Authority’s investigation over the period of time it took to reach its three decisions, I consider the Board material has relevance, given the lack of separate reasons supporting the Authority’s pricing error decisions. The Board paper prepared by management for the Authority’s Board meeting on 2 September 2021 provides some insight as to how the Authority reached its decision, as it adopted the recommendation within the Board paper. The Authority did not provide any other discrete or separate reasoning.
[56] In relation to the affidavit evidence from both Nova Energy’s Mr Teichart, who described how Nova Energy acted on 9 August 2021 and the impact of the regulatory response upon Nova Energy, and the Authority’s affidavit of Mr Benvenuti, who similarly sets out the industry background, the same reasoning applies to each. Neither party relies on the affidavits in relation to the substance of the appeals, given that these are appeals on questions of law, but proffer them as background contextual material to assist in understanding the electricity wholesale market. On that basis, I grant the applications.
THE PRICING DECISIONS
[57] In order to examine the Authority’s two pricing decisions, it is necessary to first consider what constitutes a pricing error under the Code, and the Authority’s two pricing error decisions on appeal. I then examine the circumstances in which the ISS
Notice was issued in greater detail, as this provides the basis for my ultimate conclusion that there was in fact, a pricing error.
What is a pricing error?
[58]A “pricing error” is defined under pt 1 of the Code as:
pricing error means an interim price or interim reserve price is incorrect or is likely to be incorrect, as the result of–
(a)an incorrect input being used in calculating the interim price or
interim reserve price; or
(b)the pricing manager having followed an incorrect process in calculating that interim price or interim reserve price, in contravention of this Code.
[59]The Code defines “pricing manager” as:
pricing manager means the market operation service provider for the time being appointed as pricing manager under this Code.
[60] As noted above, the Pricing Manager is NZX. The Code contains provisions prescribing the steps the Pricing Manager must take to prepare provisional, interim, and final prices of electricity by using input information, which is defined under the Code.30 The Code also defines the entity which deals with pricing error claims and their consequences.31
The first pricing decision
[61] Following the procedure in the Code,32 Haast lodged a pricing error claim with the Pricing Manager in response to the 9 August 2021 events for all trading periods on that day. Haast showed that as an error claimant, it had been materially affected by the pricing error by [ ].33
30 The Code, cl 13.141.
31 The Code, cl 13.167.
32 The Code, cl 13.169 and 13.170.
33 The Code, cl 13.170(b).
[62] On receipt of such a claim, the Pricing Manager must then determine whether a pricing error had occurred. If it did not agree that there was a pricing error, as it did here, it must recommend to the Authority that the claim not be upheld and provide reasons. The Authority must then decide whether to accept or reject the Pricing Manager’s recommendation.
[63] If the Authority decides that a pricing error has not occurred, the Pricing Manager must make the interim prices and interim reserve prices final or the Authority may direct the Pricing Manager to delay interim and/or final prices or reserve prices.34 This may occur, as here, where the Authority considers that it is necessary to allow time for the pricing error to be investigated or corrected.35
[64] In its submissions and in the hearing on appeal, Haast referred to the Authority’s first decision as the notification contained in the Authority’s weekly written update on regulatory market developments to the electricity industry. In its “Market Brief” the Authority advised that it “has decided not to uphold the claim”.36 The Authority said that it required time to undertake two investigations, firstly into Haast’s claim, and secondly, into an alleged breach of the Code by Transpower on 9 August 2021. The Authority advised that it had directed that prices for the trading period 39–42 on 9 August 2021 were to remain as interim prices only until further notice.
[65] It transpired during the hearing, that the basis for the Authority’s decision was contained in a Board paper prepared by management on 23 August 2021 (the Board paper) which outlined the factual position for the Authority and made a recommendation that there were no pricing errors for any trading periods on 9 August 2021.37 The Management recorded the Pricing Manager’s recommendation.38
[66] The Authority accepted the Pricing Manager’s recommendation to not uphold the pricing error claim.39 The reason given by the Pricing Manager was that there were
34 The Code, cl 13.177(2).
35 The Code, cl 13.180(1)(a).
36 The Electricity Authority Market Brief (7 September 2021).
37 The Electricity Authority Pricing Error Claim – 9 August 2021 (Board Paper, 23 August 2021).
38 At [9.1] – [9.4].
39 At [11.3].
no errors in the inputs to calculate pricing or to the process the Pricing Manager followed, including the decision to apply scarcity pricing from trading periods 39–42 on 9 August 2021. The Board accepted that the criteria for upholding a pricing error claim were not met.40
The second pricing decision
[67] On 20 December 2021, Haast wrote to the Authority, requesting it to reconsider its pricing error claim. Haast noted that since the Authority had published its decision in “Market Brief” of 7 September 2021, Transpower had “clarified its position” that the ISS Notice was void ab initio.
[68] As this was new and material information, Haast requested the Authority to reconsider its pricing error claim, given that Transpower acknowledged the ISS Notice was issued in error and scarcity pricing should not have been triggered.
[69] Following Haast’s request for a reconsideration of its pricing error claim, the Authority responded by email on 1 February 2022 saying that it:
…will be releasing a market brief article today publicising your request and the Authority’s decision. In short however, the Authority will not be reconsidering its decision on the pricing error claim because it is unable to re- exercise that power, and even if it were able to do so, there has been no pricing error.
[70] The Authority explained that it was already aware of a potential issue with the validity of the ISS Notice prior to Transpower “communicating its view that the ISS notice was not valid.” In explanation, the Authority said it had reviewed the grid emergency notices in the original pricing error claim and considered it was not clear whether the system operator was issuing instructions to electrically disconnect (as required for an ISS Notice) or whether it had issued instructions to reduce demand, in which case an ISS notice was not appropriate. Importantly, the email of 1 February 2022 stated that the Authority determined that even if the ISS Notice was invalid, it was not a pricing error.
40 In reply, the appellants responded to the Authority’s submission that the reason for the actual pricing error claim decision was contained within the Board paper. Dr Anderson deposes that the Board paper comprising the reasons for the decision was not received by the appellants until 31 March 2022.
[71]The Authority’s view, as stated in the email, is that:
Pricing errors are confined to an incorrect input being used in the calculation of interim prices, or the Pricing Manager having followed an incorrect process in calculating that interim price. An ISS notice is not an incorrect input for the purposes of a pricing error, and the Pricing Manager did not follow an incorrect process.
[72] As a result of this reasoning and there being no other basis on which to uphold the pricing error claim, the Authority accepted the Pricing Manager’s recommendation to decline to uphold the claim on 1 September 2021. Importantly, the Authority’s view was that:
The issue of a potentially invalid ISS notice and the resulting application of scarcity pricing is not something that can be considered within the relatively narrow confines of a pricing error claim.
[73] I refer to the Authority’s email advice and record of its decision not to reconsider the first pricing decision as the Authority’s “second pricing” decision.
[74] As foreshadowed above, I now consider the circumstances surrounding the ISS Notice issued on by Transpower on 9 August in greater detail as it provides the necessary context in which to consider whether the Authority erred in its first and second pricing decisions.
The circumstances surrounding the ISS Notice
[75] At the time of the 9 August 2021 event, the ISS Notice was issued by Transpower to the Pricing Manager and other industry participants, triggering the Pricing Manager to apply scarcity pricing following the grid emergency. The obligations on Transpower in a grid emergency are prescribed in Technical Code B of the Code. The actions to be taken in an emergency and the formal notices required to be issued are of particular importance here. The provisions of the Code require scrutiny.
[76]Clause 5 of Technical Code B provided:
Formal notices and responses
(1) The system operator must issue a notice either orally or in writing to relevant participants whenever, or as soon as practicable after, any of the following events has occurred:
(a)the ability of the system operator to plan to comply, and to comply, with the principal performance obligations[16] is at risk or is compromised (as set out in the policy statement):
(b)public safety is at risk:
(c)there is a risk of significant damage to assets:
(d)independent action has been taken in accordance with this technical code to restore the system operator’s principal performance obligations.
(1A) The system operator must issue a notice in writing to all participants whenever, or as soon as practicable after, under clause 6, the system operator has issued, amended, or revoked an island wide instruction to electrically disconnect demand.
…
[77] The requirement on Transpower to issue an ISS notice is to be read in conjunction with cl 6(1)(d).
[78]Clause 6 provided as follows:
Actions to be taken by the system operator in a grid emergency
(1) If insufficient generation and frequency keeping gives rise to a grid emergency, the system operator may, having regard to the priority below, if practicable, and regardless of whether a formal notice has been issued, do 1 or more of the following:
(a)request that a generator varies its offer and dispatch the generator in accordance with that offer, to ensure there is sufficient generation and frequency keeping:
(b)request that a purchaser or a connected asset owner reduce demand:
(c)require a grid owner to reconfigure the grid:
(d)require the electrical disconnection of demand in accordance with clause 7(20):
(e)take any other reasonable action to alleviate the grid emergency.
…
(5)The system operator may, if an unexpected event occurs giving rise to a grid emergency, take any reasonable action to alleviate the grid emergency.
[79]Clause 7(20) provided:
If the system operator requires the electrical disconnection of demand in accordance with this Technical Code, the system operator must instruct connected asset owners and grid owners (as the case may be) in accordance with the agreed process in subclause (19) to electrically disconnect demand for the relevant point of connection. If the system operator and a connected asset owner or grid owner (as the case may be) have not agreed on a process for electrical disconnection of demand for a point of connection, the system operator must instruct grid owners to electrically disconnect demand directly at the relevant point of connection. To the extent practicable, the system operator must use reasonable endeavours to ensure equity between connected asset owners when instructing the electrical disconnection of demand.
[Emphasis added]
[80] All parties accept that the Code distinguished between the system operator deciding to “request” demand reduction (cl 6(1)(b)) and deciding to “require the electrical disconnection of demand” (cl 6(1)(d)). As the background facts reveal, Transpower issued a number of grid emergency notices (GENs) but the notices did not clearly identify whether they were issued under cl 6(1)(b) or cl 6(1)(d). The Authority acknowledges the language was closer to a request than a requirement. There is agreement amongst the parties that the trigger for scarcity pricing only applies after the system operator requires the disconnection of load.
The ISS Notice issued in breach of the Code
[81] The Authority decided that it would lay a formal complaint with the Rulings Panel about Transpower because in its view, the system operator had likely breached a number of provisions of the Code.41 The Authority’s decision under Regulation 29 of the Electricity (Enforcement) Regulations 2010 (the complaint decision) to lay a complaint with the Rulings Panel against Transpower was produced during the appeal hearing.42 As addressed above, the subsequent Rulings Panel decision, adopting the joint agreement between the Authority and Transpower as to Transpower’s breaches of the Code, has been produced by leave.
41 Those alleged breaches were cls 7.1A(1) of the Code, cl 80 of the System Operator’s Policy Statement, and cls 3 and 5(1A) of Technical Code B of Schedule 8.3.
42
[82] The Authority’s decision to lay a complaint and the agreed statement of facts clearly identifies the Authority’s position in relation to Transpower’s actions on 9 August 2021. The Authority alleged Transpower had breached cl 7.1A(1) of the Code, cl 80 of the policy statement, and cls 3 and 5(1A) of the Technical Code B. It summarised in its complaint decision why the Authority considered that clause 5(1A) was breached. The notice of its decision records:43
5(1A) This clause requires an ISS Notice to be issued when the system operator requires island wide electrical disconnection of demand.
The system operator only requested that industry participants reduce demand and did not require island wide electrical disconnection of demand, on 9 August 2021.
[83] Ultimately, when Transpower admitted that it had breached cl 80 of the Policy Statement and cl 7.1A(1) of the Code (reasonable and prudent system operator standard), the Authority considered the cl 5(1A) allegations were covered in substance by the breaches admitted by Transpower and withdrew its allegations as to breaches of cl 3 and 5(1A) of Technical Code B. The basis for the Authority’s complaint of the cl 5(1A) breach remains relevant.
[84] The production of the Rulings Panel material resolved an important factual issue for this Court on appeal. The Authority’s position in this appeal hearing was that Transpower “had not been required to issue an ISS notice on 9 August 2021”. 44 In its opening submission, the Authority said “The ISS Notice may have been improperly issued in terms of the Code.” I note the footnote in the Authority’s submission that this summary was “using broader terminology for succinctness.”
[85] It was unclear whether the Authority accepted that Transpower’s ISS Notice was in breach of the Code. The position now squarely before the Court is that:
(a)An ISS notice can only be issued when the system operator requires island wide electrical disconnection of demand.
43 Notice of the Authority’s decision under regulation 29 of the Electricity Industry (Enforcement) Regulations 2010
44 Transpower and the Authority both in hindsight concluded that it was not required to issue an ISS Notice on 9 August 2021. However it disagrees with the Appellant’s claim that the ISS Notice was void, and submits that rather, the prerequisites for it being issued, were not met. It says invalidity does not void existing transactions.
(b)Transpower only requested that industry participants reduce demand (five companies had no option but to disconnect) and Transpower did not require island wide electrical disconnection of demand on 9 August 2021.
(c)the ISS Notice was issued despite the prerequisite at (a) not being met.
(d)An ISS notice triggers the determination by the Pricing Manager as to whether a scarcity situation exists and if so, prices are calculated using in accordance with the methodology sch 13.3A under cl 13.135B(1)(a).
[86] While there is no dispute that the Rulings Panel imposition of penalty calculations are based on different factors to the pricing error and UTS claims before this Court on appeal, the fact that the Authority accepted there had been code breaches by Transpower on 9 August 2021 is relevant to the questions of law in this appeal.
[87] This leads then to the next step as to whether, as a question of law, did the ISS Notice, issued in error, cause a pricing error?
The basis of the pricing decisions
[88] Haast and the respondents are diametrically opposed on whether the ISS Notice led to or resulted in a pricing error. The Authority contends that although the ISS Notice was issued in breach of the Code, it was not an incorrect input in the Pricing Manager’s calculations. It says that the Pricing Manager made no pricing error, as the correct inputs and mechanical calculations prescribed in the Code were followed.
[89] Haast on the other hand accepts that the ISS Notice was not in itself an input or pricing process, but it led to a pricing error under both limbs of the Code’s pricing error definition.
[90] As noted above, the Authority decided not to uphold Haast’s first pricing error claim, which it advised in the 7 September 2021 “Market Brief” but did not provide reasons. The 23 August 2021 Board paper provided the basis for the Authority’s
decision, where the Authority’s management recorded the Pricing Manager’s view and reasons for not upholding Haast’s pricing error claim.
[91] The Pricing Manager determined that the claim fell outside of a pricing error claim definition as there was no incorrect input used for the calculation of interim pricing and the Pricing Manager did not follow an incorrect process. The Board paper recommended to the Authority that it accept the Pricing Manager’s recommendation to not uphold the pricing error claim and asks the Authority to note:
the reason that will be given to the pricing manager, and published, is there were no errors in the inputs to pricing or to the process the pricing manager followed, including the decision to apply scarcity pricing for TPs 30–42 on 9 August 2021...
[92] As required under the Code, Haast’s pricing error claim was received by the Pricing Manager, NZX. The Board paper notes that NZX approached Haast on two separate occasions on 13 August, seeking evidence to support their pricing error claim under each of the limbs of the definition. NZX recorded that the claimant was unable to provide any basis for the pricing error claim but rather wished to solidify their position for the UTS claim subsequently raised. However, Haast subsequently provided further information to support the pricing error claim by stating they considered there was a breach of cl 13.5A of the Code.
[93] The Authority’s Board paper recounts the Code’s definition of a pricing error, which involves the Pricing Manager either:
(a)using an incorrect input to calculate the interim price; or
(b)following an incorrect process to calculate the interim price.
[94] The Board paper notes that an “input” is not defined in the Code. The current interpretation of an incorrect input is an input that differs between the initial dispatch instruction (at the start of the trading period) and the inputs being used by the pricing process. It explains that this is usually metering data from grid injection (generation) or exit (load) points, or the model of the grid (the physical configuration and/or the
constraints). These issues are usually the result of human error by the system operator, grid owner, or the grid metering agents.
[95]The Board paper then defines what an incorrect input means. It records:
6.7An incorrect input does not include errors or mistakes in offer prices, or any of the above issues that were used in the dispatch or earlier schedules. If an input was used for dispatch and was then used for final pricing it cannot be an incorrect input, even if the participant who originated the input did so by mistake (for example, a generator made a typo error when inputting an offer into WITS, or the system operator incorrectly entered a constraint into the market system model). This is because participants react to the prices produced by the forward and real time schedules and make consumption or generation decisions based on the forecast prices in these schedules. The prices produced by the pricing manager should reflect these inputs so that participants receive the benefits or costs of their decisions.
[96] The paper also notes that because the pricing process and calculations are specified in the Code, any deviation from these will be a Code breach and also a potential pricing error, if a claim is made. There are a range of procedural requirements for a pricing error claim to be valid, which the Pricing Manager and the Authority staff check as part of the process for validating a claim. There are no materiality provisions in the Code. The pricing process is for the Pricing Manager to produce provisional prices, interim prices and then final prices two days after the electricity is consumed.
[97] At the time of adopting the Pricing Manager’s recommendation to decline Haast’s pricing error claim, the Authority had not yet decided to lay a formal complaint about Transpower’s breach of cl 5(1A) of the Code to the Rulings Panel. Haast emphasises that the Board paper of 2 September 2021 had not been made available to it until mid-2022. The steps the Authority took to lay its complaint with the Rulings Panel occurred well after Haast had requested the Authority to review its first pricing decision.
[98] In assessing the pricing error claim, the Pricing Manager focused on whether an incorrect input had been used in the calculations for 9 August 2021 or whether NZX
had followed an incorrect process. It recommended that the Authority not uphold the claim, as it fell outside the definition of pricing error under Part 1 of the Code.
Was there a pricing error?
[99] In my view, the Pricing Manager’s approach and ultimately the Authority’s decision to uphold its recommendation, viewed the “pricing error” definition too narrowly. There was no recognition by the Pricing Manager that cl 5(1A) of the Code had been breached. Nor was there any consideration of the process it was required to take, when the prerequisites for imposing scarcity pricing were not met. In short, the Code’s prescriptive requirements were not complied with, as the Authority’s complaint to the Rulings Panel stated.
[100] Dealing first with the calculation input, it is not that the Pricing Manager used an incorrect input for scarcity pricing, but that he used it at all. Although it may be arguable that the ISS Notice led the Pricing Manager to wrongly calculate interim prices applying sch 13.3A scarcity pricing methodology, rather than the 13.3 methodology required, it begs the question as to whether that input should have been used in the first place. For that reason, I consider the first limb is not applicable here.
[101] It is the second limb which applies, in my view. The second limb of the pricing error in the alternative definition, is where the Pricing Manager has followed an incorrect process in breach of the pricing requirements in the Code. As all parties accept, the ISS Notice triggers the calculation of interim prices imposing scarcity prices under cl 13.135B and sch 13.3, rather than following the standing pricing process covered in sub-pt four of pt 13 of the Code.
[102] On any view of the process undertaken by the Pricing Manager on 9 August 2021, interim prices were achieved by the imposition of scarcity pricing as a result of the ISS Notice issued in breach of the Code. As a result of Transpower’s breach of cl 5(1A), the ISS Notice triggered the scarcity pricing process and the Pricing Manager calculated prices using the scarcity methodology. I consider that the Pricing Manager followed an incorrect process in breach of the pricing requirements in the Code and this amounted to a pricing error.
[103] In summary, I find that the ISS Notice, issued in error, led the Pricing Manager to wrongly calculate interim prices on a scarcity pricing basis, which otherwise would not have been triggered, but for the breach of cl 5(1A) of the Code.
[104] As the Supreme Court held in Bryson v Three Foot Six Ltd, a fact finding body may come to a conclusion that is so unsupportable as to amount to an error of law in rare cases:45
An ultimate conclusion of a fact-finding body can sometimes be so insupportable - so clearly untenable - as to amount to an error of law; proper application of the law requires a different answer. That will be the position only in the rare case in which there has been, in the well-known words of Lord Radcliffe in Edwards v Bairstow, a state of affairs “in which there is no evidence to support the determination” or “one in which the evidence is inconsistent with and contradictory of the determination” or “one in which the true and only reasonable conclusion contradicts the determination”.46
[105] Thus, a factual finding (such as a finding that there was no pricing error) can amount to an error of law if:47
(a)it is not based on evidence;
(b)based on the evidence that is inconsistent with, and contradictory of, the findings of fact; or
(c)contradicts the only true and reasonable conclusion of fact that was available on the evidence.
Conclusion
[106] The Authority’s finding that there was no pricing error is an error of law as it contradicts the only reasonable conclusion available on the evidence because:
(a)The ISS Notice was issued in breach of the Code.
45 Bryson v Three Foot Six Ltd [2005] NZSC 34, [2005] 3 NZLR 721 at [26].
46 [1956] AC 14, 36. Lord Radcliffe was adopting dicta of the Lord President (Normand) in Inland Revenue v Fraser 1942 SC 493, 497 and Lord Cooper in Inland Revenue Commissioners v Toll Property Co Ltd 1952 SC 387, 393.
47 Bryson v Three Foot Six Ltd [2005] NZSC 34, [2005] 3 NZLR 721 at [24]-[26] referring to Edwards v Bairstow [1956] AC 14 (HL). Lawson v Chief Executive of the Ministry of Social Development [2017] NZHC 967 at [35].
(b)This triggered the Pricing Manager to calculate interim prices using the scarcity measure under sch 13.3A (rather than the ordinary methodology in sch 13.3).
(c)This resulted in a significant increase in the price of electricity.
[107] Because (a) above should never have occurred, the Pricing Manager’s actions at (b)–(c) were wrongfully triggered, which amounted to an incorrect process in calculating that interim price or interim reserve price” which is a pricing error under cl 1.1 of the Code. The only reasonably available conclusion on the evidence of what occurred is that there was a pricing error which amounts to an error of law.
[108] I find support in reaching the above conclusion from the Authority’s express view in its UTS decision as to the impact of the wrongful triggering of scarcity pricing. It is expressed as follows:48
The Authority’s view is that the system operator was not entitled to trigger scarcity pricing under the Code. The Code prescribes conditions that must be met before scarcity pricing can be engaged, and these were not met on 9 August 2021.
The incorrect triggering of scarcity pricing is clearly a situation that affected the wholesale market. The gross settlement amount for electricity was approximately $130 million higher than it would have been if scarcity pricing was not triggered, although that figure overstates the true economic effect given that many generators are also retailers, and many retailers have hedge contracts.
[109] As a matter of law, the acknowledgement by the Authority and Transpower that the ISS Notice was erroneously issued and that scarcity pricing was triggered when the Code’s prerequisites were not met,49 signals to me that an error has occurred. This is reinforced by two factors:
(i)that scarcity pricing is rare and is strictly codified; and
48 UTS Decision, above n 2, at (iv).
49 UTS decision at [2.23].
(ii)the Electricity Industry (Enforcement) Regulations 2010 provide mechanisms to ensure compliance with the Code and penalty processes for non-compliance.
[110]The scarcity pricing process here should not have been triggered.
[111]I find the two appeals in respect of the pricing error decisions are upheld.
THE UTS DECISION
[112] Given that I have found there was a pricing error, which I consider needs to be corrected, the remaining issue on appeal as to whether the Authority erred in declining Haast’s claim that there was an UTS is moot.
[113] In its decision, the Authority declined to find there was an undesirable trading situation on 9 August, having found that the application of scarcity pricing to the four trading periods did not threaten confidence in, or the integrity of, the wholesale market. It reached this conclusion on the following grounds:
(a)Scarcity pricing exists to ensure that prices are not artificially depressed when the system operator directs demand reductions;
(b)The conditions were those that the scarcity pricing provisions were designed to manage;
(c)The Authority now accepts that the notices issued by Transpower during the grid emergency were notices requesting a reduction in demand, not disconnection of demand and that the technical requirements for scarcity pricing were not met.
[114] For the above reasons, the Authority considered that the application of scarcity prices was not likely to threaten confidence in or the integrity of the wholesale market.
[115] While I accept that a Code breach does not automatically lead to an UTS, it does not follow that a Code breach or breaches in the issuing of the ISS Notice did not
lead to a pricing error, as I have found. The Authority’s UTS powers however, are necessarily framed broadly, to allow the Authority to correct situations not provided for (or imperfectly provided for) in the Code by reference to confidence in, and the integrity of the wholesale market.
[116] In its UTS decision, the Authority records that the original UTS claimed by Haast alleged that two industry participants individually and jointly caused the 9 August peak demand, which the Authority rejected. Haast conducted this appeal against the UTS decision largely on the same basis as the pricing error claims, namely that the triggering of the Code’s scarcity pricing regime was in breach of the Code.
[117] To proceed to examine whether an UTS claim has been declined unlawfully, requires this Court to engage in a wider examination of the evidence involving the operators and other industry participants on the night of 9 August. In the material before the Court on appeal, it is difficult for this Court to reach a conclusion that the Authority was wrong to decline the UTS claim, which proceeded on a much wider investigation into the actions of other industry generators, which were not parties to this appeal. I consider that is beyond the scope of the matters raised on appeal, which must be on a question of law only.
[118] The Authority itself made a distinction about the functions of corrective processes available to it and how those differ from the focus of the UTS investigation. In particular, the Authority noted:
(a)The 9 August review by MBIE assessed the events and provided recommendations to mitigate the possibility that similar events could occur again;
(b)The compliance processes (the formal complaint to the Rulings Panel) focus on whether there has been a breach of the Code by the system operator; and
(c)By way of contrast, the UTS investigation assesses whether the event threatens or may threaten the confidence in or the integrity of the
wholesale market in a way which cannot be resolved through other mechanisms under the Code.50
[119] Accordingly, I dismiss the appeal against the Authority’s UTS decision, as I consider the error can be resolved through the pricing calculation mechanism under the Code, as I have already found.
[120] The imposition of scarcity pricing triggered in error should now be corrected. Any further steps in relation to an UTS investigation, in light of my finding that there has been a pricing error, will now be a matter for the Authority. As this is an appeal on a question of law, it is for the Authority to take the appropriate steps in relation to correction of that error.
Observation
[121] I observe that in its UTS decision, the Authority concluded that Transpower’s error was a technical breach of form and not substance and concluded further, that scarcity pricing was appropriate for trading periods 39–42 during the event.
[122] I find it difficult to reconcile the characterisation of Transpower’s breach of code as a “technical breach of form and not substance” when compliance with the Code is mandatory and the Authority itself sought sanctions and penalties against Transpower for its failure to comply with the Code’s provisions.51 Although some participants responded to the GEN notices on the night of 9 August by disconnecting supply when it had not been required, there was no basis for triggering scarcity pricing.
Result
[123] The appeals against the Authority’s decisions in the pricing error decisions dated 2 September 2021 and 1 February 2022 are upheld.
50 UTS decision, above n 2, at (iii)..
51 As noted, the Authority withdrew the allegations of breach of cl 3 and cl 5(1A) of Technical Code B because the particulars of each of those alleged breaches in substance had been admitted as a breach of the reasonable and prudent system operator standard.
[124] The appeal against the Authority’s UTS decision dated 28 June 2022 is dismissed.
Costs
[125] Costs follow the event. In the absence of agreement, Counsel are to file memoranda of no more than five pages, together with a schedule. The appellants are to file their memorandum within 15 working days of this judgment and the respondent and interested parties are to file replies within a further 15 working days.
Cull J
Solicitors:
Mackenzie Elvin Law, Tauranga, for Appellants
Luke, Cunningham, Clere, Wellington, for Respondent Thorndon Chambers, Wellington, for Nova Energy Limited Stout Street Chambers, Wellington, for Meridian Energy Russell McVeagh, Auckland, for NZX Limited
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