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The Commerce Commission has decided to refuse a request from electricity grid operator Transpower to pass on costs of backup generation.
The cost of standby generation available within minutes increased due to a combination of Transpower's decision to remove Pole 1 of the high-voltage direct current link from service in September 2007 and high spot prices.
On August 28 last year Transpower sought an amendment to a settlement it has with the commission to remove its future exposure to its instantaneous reserve fees for backup generation, by treating them as pass-through costs. The fees, which had historically been around $3 million, are forecast to be $18.9m in 2008-09.
"A significant increase in instantaneous reserve charges was foreseeable and did not result from exceptional circumstances," the commission said in declining the amendment.
Transpower's board was aware of the risk of instantaneous reserve fees increasing as a result of Pole 1 being removed from service yet it proposed a level of operating costs in its settlement significantly below its own forecast.
"The onus was on Transpower to accurately forecast and manage its risks and costs. The decision to remove Pole 1 whilst having no alternative capacity in place increased its exposure to reserves; a risk that was fully predictable," said commission chairman Mark Berry.
"Allowing Transpower to pass these costs through would provide poor incentives for Transpower' future behaviour regarding investment decisions," said Dr Berry.