Government rules abandoned at the coal face

By CHRIS DANIELS

Basic rules of state-owned enterprises, which are supposed to run entirely on commercial grounds, were effectively abandoned by the Government during the winter power crisis.

Papers released to the Business Herald under the Official Information Act show that as recently as May the Government was considering helping Genesis Power pay for "uneconomic" fuels to fire its Huntly Power Station.

They also show that Government officials, charged with analysing big contracts between such enterprises, said they were too rushed by the pressure of the power crisis to properly consider an $800 million coal deal before sending it to Finance Minister Michael Cullen and State Owned Enterprises Minister Mark Burton.

In a further move towards political involvement in state-owned generators, the Government is also exploring a request from Genesis Power, which made a $48.1 million profit last year, that it help underwrite its plans for a new gas-fired power station at Huntly.

By law, state-owned enterprises must be "as profitable and efficient as comparable businesses that are not owned by the Crown". Ministers are allowed to influence them through their "statements of corporate intent", which lay out clearly the nature and scope of their activities, their performance targets and dividend policies.

Such rules seem to have been abandoned once it became clear in March that low rainfall in the South Island, coupled with high electricity demand and the depleting Maui gas field, would threaten national energy supplies.

The documents show high-level Government pressure was exerted on Genesis and fellow state-owned company Solid Energy to reach a speedy conclusion to their stalled coal contract talks.

Officials asked to look over the $800 million eight-year coal contract between the companies said they did not have enough time to consider it properly, but that it should be approved anyway because of the impending risk of power shortages.

The sheer size of the deal meant that under the Companies Act it was classed as a "major transaction" and required approval from the shareholding ministers, Burton and Cullen.

"Officials have not reviewed the contract in detail or its underlying assumptions because of time constraints," says a briefing paper from the Crown Company Monitoring Advisory Unit.

Officials had no reason to consider the contract was a bad one, but "this view relies critically on the commercial judgment by the boards of the two companies, including that the terms of the contract do not expose either party or New Zealand's energy security to unforeseen outcomes".

The contract was of "vital strategic importance for the maintenance of generation capacity at Huntly in a period of minimal reserve generation capacity".

Officials told the ministers that because of the short time allowed for their study, they had been unable to "engage the company" on what other options it had to the Solid Energy contract, nor were they able to test the cost and benefit of alternative coal sources.

Burton and Cullen eventually approved the Solid Energy coal deal, relying only on the endorsement of the two firms as proof it was a good deal.

The deal was announced on March 21 by the two companies, but full details were not published until June.

Genesis came under fire from some in the energy sector for not ensuring it had enough coal stockpiled in case of a dry winter restricting electricity generation at the southern hydro stations.

Documents from Energy Minister Pete Hodgson's office show he was concerned about the Huntly coal situation as early as November, when lake levels were high and there was no sign of the impending dry autumn.

He wrote to Genesis chairman Brian Corban, asking whether it had enough coal stockpiled to help see New Zealand through a dry winter.

There did not seem to be enough stored, he said, and if things got bad, it could not get enough in time to help.

"I understand that Genesis has around 10PJ [petajoules - a measurement of energy content, with one PJ the equivalent of 45,000 tonnes of coal] of coal stored at Huntly, much less than seems to be required to ensure Huntly makes a full contribution to electricity security in a dry year," he wrote.

Corban replied on December 18, saying that Genesis kept enough coal needed for the equivalent of about four months' generation.

It did not, however, carry coal reserves to meet dry-year risk and saw droughts as lasting three to four months in any year.

Solid Energy had been asked in March last year to give it a quote for a 10-year coal contract, but its asking price was too high.

But a top adviser at the Crown Company Monitoring Advisory Unit told Burton and Cullen this March that Solid Energy provided the best solution for supplying coal to Genesis. Solid Energy, however, had no formal responsibility to protect electricity supply and so was trying to get the best commercial deal.

Genesis could not meet the price that Solid Energy wanted, without "significant risk to their business".

These delays in reaching a deal, with wrangling over the need for Solid Energy to commit to opening a new mine, and Genesis not wanting to be tied down into a lengthy deal, reached crisis point this winter.

In previous dry years, when thermal stations such as Huntly were required to make up for lost electricity generation, Maui gas was available to draw on. This is no longer the case because the Maui field is running down, meaning coal rather than gas is burned in the boilers.

The "uneconomic fuels" referred to by officials would most likely be oil distillate, a kerosene-type fuel.

With the establishment of a new, Government-appointed electricity commission to enforce rules in the electricity sector, and state contracting of reserve power supply for dry years, the days of a lightly regulated industry appear to be over.

The recent drought and accompanying public electricity savings campaign showed the political risks faced by the Government in the energy sector.

Proponents of privatisation could argue that the past few months have provided further proof that the Government cannot keep from meddling in state-owned assets.

Others may contend that the myth of a commercially driven, state-owned enterprise should be abandoned in favour of more centralised, political control.