Stress testing regime
The stress testing regime requires certain participants in the wholesale electricity market to apply a set of standard stress tests to their market position, and report the results to their board and to an independent registrar appointed by the Authority.
The registrar will collate these results and provide them to the Authority in a form that ensures individual participants are not identified. The Authority will publish a report of results (again in a form that does not allow participants to be identified). Participants subject to the stress test regime will be able to review these reports, and compare their exposure to that of other participants.
Purpose of regime
Some participants choose to purchase some or all of their electricity at spot market prices without obtaining sufficient hedge cover to cover occasional periods of high prices. This choice is more attractive when hedge prices are considerably higher than spot market prices. Past experience in New Zealand shows that, when faced with prolonged periods of high spot prices, participants lobby for policy makers to intervene to suppress spot market prices.
It can be difficult for policy makers to understand the risk management choices made by such participants. Also, on technical topics like electricity hedging, it can be difficult for policy makers to convince the wider electorate that the risk-takers are responsible for the financial hardship their businesses face. This is particularly so if employees are stood down, export orders are lost, or New Zealand’s reputation for a reliable electricity supply is tarnished internationally, harming investor perceptions of New Zealand.
These outcomes increase the risk of ad hoc policy interventions during a tight supply situation to provide ‘relief’ for some participants, even though this undermines the more prudent decisions made by other participants.
The stress testing regime addresses this issue, by putting mechanisms in place for participants buying electricity on the spot market to analyse the risks they are taking, and disclose the level of risk they have decided to assume.
Who is required to provide disclosure statements?
The following participants are required by the Code to provide spot price risk disclosure statements to the registrar:
- participants who consume electricity that is conveyed to them directly from the national grid; and
- participants who buy electricity from the clearing manager.
How often must disclosure statements be provided?
- Participants who are required to provide spot price risk disclosure statements must do so each quarter, no later than five working days before the start of the quarter.
- Participants must also certify to the Authority each year that they have provided information about stress tests to customers and that their board has considered the contents of the disclosure statements.
Information to be provided to registrar
The Authority has appointed an independent registrar to receive disclosure statements.
Disclosing participants must provide the following information to the registrar:
- annual net cash flow from operating activities (based on the most recent audited financial statements);
- level of shareholders’ equity (based on the most recent audited annual financial statements);
- for each stress test:
- the estimated value of electricity to be sold to the clearing manager when the stress test is applied, minus the estimated value of electricity to be sold to the clearing manager when the base case is applied;
- the estimated value of electricity to be purchased from the clearing manager when the stress test is applied, minus the estimated value of electricity purchases from the clearing manager when the base case is applied;
- the estimated net cash flows from operating activities when the stress test is applied, minus the estimated value of those cash flows when the base case is applied;
- a statement as to whether the disclosing participant has an explicit risk management policy in respect of its exposure to the wholesale market and, if so, the target cover ratio calculated in accordance with a method published by the Authority.
When does the regime commence?
The Authority will implement stress testing from mid-2012, with an initial set of disclosure statements to be provided to the registrar by late June 2012.
Process establishment
NZX has been appointed as the registrar. NZX are establishing the end-to-end process from submission of the disclosure form to production of the results report and will run a trial of the process. See stress test process setup and trial page for details.
Published stress test status
The Authority produced a draft set of stress tests in February 2012. Useful feedback was received from participants and the tests were modified. These revised tests are the published tests for the July 2012 quarter and they can be found at the Stress tests page.
Authority contact
If you have any questions regarding the Stress Testing regime, please email [javascript protected email address] including “stress testing” in the subject line.