Opinion: Govt apparently leaves it up to SOE Meridian to stitch up a deal with Rio Tinto and keep the asset sales programme on track. No pressure then

Opinion: Govt apparently leaves it up to SOE Meridian to stitch up a deal with Rio Tinto and keep the asset sales programme on track. No pressure then

By David Hargreaves

So, the Government has stepped back. Or has it?

Only five days after publicly letting on that it was involved in trying to broker a deal with global mining behemoth Rio Tinto that would keep the Tiwai Point aluminium smelter open, the Government has now apparently pulled back again.

Perhaps realising quite quickly that involvement in such closed door negotiations (not for the first time) was appearing to be a bad look, Prime Minister John Key attempted to seize the high ground today. He announced that Rio had rejected the amount of taxpayers' money the Government put on the table and that the Government would therefore not negotiate further.

Taking the statement at face value, this observer concurs. The Government should not be putting an undisclosed quantity of our money on the table in what is blatantly an attempt to prop up the asset sales programme. Yes, sorry Southlanders, while the Government would be bothered by closure of Tiwai Point (job losses are never a good look for governments) it would be a heck of a lot more bothered if its attempts to raise between NZ$5 billion and NZ$7 billion through asset sales are sabotaged. 

But do we really believe that the Government is now going to just leave it there?

Key is indicating that it is now up to Meridian Energy, the Tiwai Point electricity provider, to seal a deal with Rio. The problem with that of course is that Meridian and the Rio subsidiary that owns the smelter have been negotiating - it seems miles apart - since last July. Meridian's chief executive Mark Binns as a former lawyer and then senior executive with Fletcher Building would know a bit about big corporates and playing hard ball. And he was of the view just last Thursday that Meridian will not be able to strike a deal. He should know, surely. So, what could have changed over the long weekend?

This observer finds it difficult to imagine that the big muscle-flexing Rio will turn to jelly because the NZ Prime Minister says no more money will be thrown in its direction by the Government. Remember Rio is negotiating from an absolute position of strength here. It needs and wants to close smelters. It will be absolutely prepared to shut the door at Tiwai Point unless it gets a sweet deal. Its strategy is therefore not brinksmanship. It is not taking a risk. It is attempting to do the best it can and if it cannot achieve what it wants then the smelter is gone. No doubt. No regret.

So, where does that leave us?

If Rio turns around now and says: 'That's it we are shutting the smelter,' then the country is faced with about 15% of its power generation having no home. Very good for the consumer. Very bad for Meridian and the asset sales programme.

Key is now making a lot of the fact that Rio is tied in to a power supply contract for the next three years, with a further two-and-a-half years winding down period in the event of closure of the smelter. But is he saying that the 440,000 people who have pre-registered interest in buying Mighty River Power shares should just go ahead and buy, knowing that power prices will be good for the next three years but after that, who knows? Surely not.

Or has the Government actually changed tack? Perhaps it has realised quickly there is no negotiating with Rio (not even secretly as seems to be the way with this Government). So, maybe it is going to squeeze Meridian. Will the board and executives of Meridian now face behind the scenes pressure from the Government to cut a deal with Rio that disadvantages Meridian but does, for the time being, save the smelter for an indefinite period - long enough for the Government to cash in on its state energy assets?

Key's remark that "a smoother transition is certainly in Meridian’s interest" seems telling in that respect. Will Key and his government really just stand by and watch Meridian put up the shutters on negotiations with Rio? Would the Government, for example, consider directly subsidising Meridian at the taxpayers' expense so that it can strike a deal?

If the Government is now planning to pressure Meridian behind the scenes to reach a deal - purely to save the asset sales programme - then that would be grossly unfair on the SOE. And it would be the sort of Government interference that is not supposed to happen under the SOE model. It would also very probably be very unfair on the people of this country.

The logical thing would obviously be to postpone the asset sales till after the Tiwai Point issue is concluded. But the Government is philosophically too heavily committed it seems.

Perhaps also, the Government realises that Tiwai Point is ultimately doomed one way or another and that the country is heading for a surplus of electricity supply at some point in the future regardless. So, it short-sightedly wants out of the power companies as soon as possible. Cut and run it's called.

One way or another though, it is all looking like a royal mess of the sort that tends to occur when political dogma runs headlong into the realities of the world.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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What price the election in 014....if Meridian lets RIO off the hook...the SOE cash grab will look bleak...if they refuse to kowtow to RIO, Southland cops a kick in the goolies and Dipton will be most unhappy....but....voters could look ahead to big falls in power costs...assuming transmission systems are extended...and they would vote for that...and Timmy might see a host of new industry turning up....

SOE Minister Tony Ryall has just issued this statement:
Update on Government’s Tiwai Point offer
State Owned Enterprises Minister Tony Ryall notes that Rio Tinto has declined the Government’s offer to help bridge a negotiations gap between Meridian Energy and Rio Tinto subsidiary Pacific Aluminium.
Meridian Energy and Pacific Aluminium have been re-negotiating an electricity contract for Tiwai Point aluminium smelter for nine months.
“The positions of Meridian and Pacific Aluminium are reasonably close in terms of the short term electricity price, but they remain well apart in the longer term,” Mr Ryall says.
“Last week the Government was in contact with Pacific Aluminium’s international parent company Rio Tinto to discuss helping to bridge the gap in the companies’ positions over the short term, if this could be of assistance in concluding an agreement.
“But over the weekend the multi-national mining corporation Rio Tinto said it appreciated the Government’s intentions but was unable to accept the offer. 
“Pacific Aluminium and Meridian have both indicated a willingness to continue discussions.
Mr Ryall says the government will not be a party in the commercial negotiations between Meridian and Pacific Aluminium.
“The Government put its best offer of assistance forward because New Zealanders would expect us to do that. But we are not interested in providing a long term subsidy.  “In the meantime, we understand Meridian’s existing contract with Pacific Aluminium remains in place at least until 1 January 2016 with significant financial and other obligations beyond that.”
“As we’ve said previously, all relevant information will be reflected in the Mighty River Power offer document which is currently being finalised.”

I wonder how many countries in the world would see excess capacity in electricity generation a problem - no matter who owns the assets. Take MRP off the market and suddenly this whole sad story turns into a net benefit to the country and the future.

Depends how much excess capacity, and how it's being paid for.  There's no such thing as a free lunch

Kate,
and the pros and cons are? (short term?)
My Cons
1) We lose a bigger (biggest?) employer down there, impact, huge....whats left? well move to Auckland for a job, that will do the housing market wonders in um Auckland, not uh so down South. Increased un-employment costs and less tax intake, collapsed Southland economy (10%+down).  Do we really want 750 directly employed jobs plus that again in in-direct jobs to go? 2000? jobs?
2) No where to sell that spare energy to....no grid link at the moment and no incentive to put one in.
Pros
1) Spare eletrical energy, co2 free. Someone quoted 15% capacity would be used but the rest would go to waste without extending the grid.  At what cost? in a flat market? close the dam down then? yet more jobs lost?
2) Is the dam paid off? in which case the actual production cost is ongoing OPEX so the cost is marginal with a lot of benefits.
um....what are the REAL benefits in letting them go?
Kate, please list your benefits?
Now I dont think the Govn should be hog tied over a barrel and horse whipped by every corporate that comes along, not when the Govn is me. But the Nats have themselves to blame for the un-intended consquenses for the SOE sales. Looks like a vote loser which ever way it goes....good.
Oh and just how profitable is the ali market right now? 
"Rio signed a new electricity supply contract in 2007, to start from Jan 1 this year, and with a lifespan of up to 18 years. In the middle of last year, Rio told Meridian it wanted to renegotiate because tumbling aluminium prices were cutting profitability."
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1087...
Now longer term extending the grid would seem worthwhile should have been done in the first place, then maybe we'd care less, maybe. Should it (the electricity) be given away? well thats a hard Q.
What else could go there? "cloud servoces" ie a datacentre was mentioned, makes some sense in cooling energy terms but we have lots of datacentres close into the population giving fast response. Auckland to bluff could be 60ms round trip and then the data costs...ouch. Who builds a datacentre? what IT ppl would want to go live there? unless it paid very well? What does that employ? oh maybe 50~200 ppl.
regards

Easy. Here's one idea - according to Corrections;
 
Prison population forecasts show that prisoner numbers are going to increase rapidly and an additional 3,500 new beds will be required in the prison system by 2018. Current prison capacity is expected to be exhausted by 2010... Increasing double bunking will add approximately 1,000 beds to the prison system and will meet the immediate need for prisoner accommodation.
 
Why we recently built the new Mt Eden facility (900+ beds) in central Auckland is well and truly beyond me.
 
A 1,500-2,000+ facility would employ well in excess of 750 people - staff and service industry included. It could be a jewel in Southland's crown.

Well from your posts many things it seems.
Thy put a prison there because although they are felons, they usually have family and hence get incarcerated close to that family so the family do not suffer un-duly. 
There is also a huge problem with the wrong skill set, frankly going from a smelter worker to a prison guard isnt for most ppl.  Ive worked in/around a high security mental health unit its un-pleasent to say the least.
The above also applies to data centres, its almost impossible to take most tradesmen and make them into  IT ppl of the caliber required. Possible with some but at least 3 years. Also whats in the datacentre? if its someone just replacing the odd failed server or part at most 10 ppl or so....Actual programmers etc? India employs them at 1/10th the cost.
So you would have to import them, and then you are in huge trouble.  2 examples, a friend and his girl friend qualified as accountants, her job in Auckland paid $30k, his in Invercarill paid $45k because no one would work there.  Ditto myself, I was on $45k in Wgtn at the time, I got sent there by my company to manage a hospital short term until they got themselves sorted, they couldnt get anyone.  A $65k offer failed to attract me to Invercargill.  Or 2 other NZ towns again I covered whie the empty spot was filled, no one was interested. They ended up having an ex-HR manager running the IT dept and the FM manager running the other....utterly clueless but good salaries if you are prepared to live there.  If you already live there the wages are low....your considered trapped so they offer accordingly.
So most of this alternative talk is un-informed pie in the sky....IMHO.
regards
 
 
 
 
 
 
 
 
 
 

You'll find that Manapouri power station is not  a 'dam', oh self-promoted prodigy of maths, science and engineering etc (or so you keep telling us).

Robby217 - what an incredibly deep, well-thought-out argument.
 
Why the personal need to believe? Why the shallowness?

He's the one making the proficiency claims.
Hows the malthusian predicitions business going these days? Hopefully things aren't peaking out too soon for ya.

One door closes and another opens and there is 3 years plus to find it. I believe this Government will be respected more by not offering a lone term arrangement, and further more I believe we will be better for it in the long run.
KevinR

I suspect Timmy is fizzing with excitement at having 15% of NZs power output there for the taking in three years.....he will be dreaming of concrete mixers rumbling all over the shop....

More successful than most, another Think Big project bites the dust. Tiwai Point is on life support and will be switched off very soon. This creates a challenge and an opportunity for Southland and New Zealand. Instead of extending the transmission system yet further to bring power to industry in North Island and further increase its population we would be better served by bringing industry south to the green renewable energy centre. Offering electricity at cost of production, eg Tiwai Point rates to Southland as an incentive would solve many problems including the historical danger of concentration of productive capacity/population/housing density etc in fragile centres of the north. As  with the no-fee strategy of the Southern Institute of Technology, radical steps can be viable and productive.

Who actually believes we will get cheaper electricity.  Even with a spare 15% looking for a home.  New Zealand is determinedly not a market economy.  And it's not run for the benefit of the inhabitants.  A way will be found to rort us.  And we will continue to pay thru the nose like we do for everything else.

Certainly not under this Government. Here they are propping up broadband prices as a means to keep their Chorus/Government fiber joint-venture project viable;
 
http://www.stuff.co.nz/business/industries/8502732/Broadband-price-review-may-be-overridden
 
In this case they are prepared to amend legislation to ensure you don't get a fair price.
 

Kate, you could start a violin factory, how much electricity would that use?

LOL, would all be done by hand to maximise labour.....use canles that keeps bees and bee keepers employed.....The govn would then either stock pile them (aka EU butter mountain) or off 95% discount incentives for ppl to buy them....
regards

Go back and Look at Labour's 9 years, serious lack of investment  in anything but hand out for max dividend.  Then we have the so called competitive market.  Meridian doesnt have to put that 15% on the market and in fact trying to sell 15% to cover its overheads to run the dam probably wont make for cheap power anyway. So it can legally mothball the plant as its mothballed new wind farms due to lack of demand/profit.
I mean just where is the determination to drive down power prices? sure its a regressive tax on the poorer, but really it loses few votes compared to taxing incomes on the middle vote who are the swing.   Time and time again Pollies of all denominations but especially (Labour - poor) either take their voting block for granted or know its a waste of time pandering to them (National - poor).
Do I think the chorus determination (price drops) should go through? Yes the Govn should steer clear, "user pays" etc but wont.  Well then the action is obvious, dont vote National....Labour should be hammering this one IMHO, its a vote loser for National.
regards
 
 
 

RIO has had a very good run right from the start -
History - Manapouri - Conzinc Rio Tinto - aka Rio Tinto - aka RIO
http://en.wikipedia.org/wiki/Manapouri_Hydroelectric_Power_Station
 
In 1960 RIO received exclusive rights to the waters of both Lakes Manapouri and Te Anau for 99 years
In 1963, RIO decided it could not afford to build the power station.
The New Zealand government took over. Electricity generated by the plant was sold to ConZinc at basement prices, with no provision for inflation
 
A second parallel tailrace tunnel was built and completed in 2002 to increase the station's capacity
 
Question - why was the capacity of the power-station increased by building a second tailrace and at whose request

Let's see if we give Tim Shadbolt some help....Gidday Tim...how's the concrete setting down there...My bit of help is in the form of a question...Why am I not able to buy all manner of stuff made with 100% leather produced in Southland from local hides?