Politics restrict Vector's agenda

By ROB O'NEIL

In the end it came down to just $2 million. That, Weekend Business understands, was the difference between electricity network Vector succeeding and failing in its bid for Orion's North Island gas network.

In the context of the final sale price - $550 million - Vector missed out by less than half a per cent and the network went to 80 per cent US-owned United Networks.

Without Orion or similar acquisitions, Auckland's largest lines company is not a serious contender in the rapidly amalgamating networks business.

While it fails to cut deals, it is increasingly becoming a football to be kicked around as its own ownership structure becomes rapidly politicised.

The tale of how and why Vector's bid was altered at the last minute goes deep into the murky waters of local government politics.

It exposes the bad faith that exists within the Auckland Energy Consumer Trust, which owns Vector - bad faith between Vector and the trust and between the trust and its capital beneficiaries, the Auckland, Manukau and Papakura city councils.

It asks serious questions about how Vector can operate as a commercial enterprise in a highly competitive industry if the company is unable to take part in the enormous industry amalgamation.

That amalgamation is expected to eventually reduce the number of network providers to three or four.

In a sense, the success or otherwise of Vector can be seen as a test of public ownership.

After nearly a decade of wrangling over the ownership structure of Vector and its predecessor, Mercury Energy, it seems further changes may be required to allow the company to move forward.

Trust chairman Michael Barnett last month angrily blamed information leaks from within the trust for sinking Vector's bid.

He was referring to a report in the Herald that not only revealed that Vector was in the game, but the bid price as well.

It is understood that as a result of that article, the trust came under intense pressure and dropped Vector's bid for the network by $8 million.

Instead of winning by $6 million, it lost the deal by $2 million.

Since last year the trust has been philosophically split in two over many issues, including the possible sale of Vector.

A minority, most prominently Karen Sherry, staunchly defend public ownership.

The majority, headed by Mr Barnett, favour a wider consideration of the ownership and commissioned Merrill Lynch to study the options. It is understood that report recommended the company be sold.

That debate, and the way it was handled by both sides, has left a legacy of mistrust that has that again erupted in the aftermath of the Orion debacle.

Mr Barnett confirmed this week that the bid was changed. He said the trust was concerned at some of the information presented by the company. As a result, the trust "constrained" Vector's bid.

The specific area of concern was the long-term ability of the company to "double dip" on some expenditure once industry regulation was introduced.

Under existing rules, the company can charge administrative and other expenses for gas operations and again for electricity. That ability is one of the several synergies, including the ability to cross-sell services, provided by owning a gas and electricity network.

However, with a commission of inquiry reviewing industry regulation, the minority of the trust felt Vector's financial projections in respect of the Orion deal were less than certain.

Concerned about regulatory impacts, the minority wanted to bid a lower ODV (optimal deprival valuation), a concept something similar to government valuation.

Infrastructure companies are sold at multiples of ODV, which is a way of valuing infrastructure based on its replacement value discounted according to its remaining useful life.

The trust minority wanted no more than 1.2 times ODV; Vector proposed to pay twice the ODV.

Industry sources say smaller network companies have over the past two years been sold for as low as 1.6 times ODV while the big ones have gone for as high as 2.5 times ODV.

The trust, it is understood, believed it had to act unanimously. However, after receiving advice it found this was more a convention than a requirement.

The majority then went ahead with the deal as proposed by Vector with a relatively minor but in the end crucial change in the bid price.

The level of distrust between the company and its owner is revealed by Vector's request that trust members sign a confidentiality agreement over the details of the top secret bid. Mr Barnett said not all signed.

Within 24 hours the information had leaked into the public domain, putting the trust under intense pressure from its capital beneficiaries - the councils.

"It [the leaks] didn't allow the company to move forward under a new board and management," Mr Barnett said.

The Orion network bid is not the first time information leaks from the trust have hit the headlines.

Last year when the councils and others sued Vector, Manukau City's manager of strategic initiatives John McCardle was forced under heavy and prolonged cross-examination, to reveal the source of his information.

Transcripts of that High Court cross-examination reveal the bind Vector was in:

"Do you agree with the absolute undesirability of a board member feeding information from the board table to a stranger?"

Yes.

"But you were perfectly happy for the TLAs [councils] to receive that sort of information over a period of 18 months or so?"

Yes.

Asked to identify the trust-appointed director who leaked the information, Mr McCardle replied it was Karen Sherry.

Since then the trust has tried to exclude her from access to information it considers sensitive.

Karen Sherry yesterday said that she was not allowed to talk about the Orion deal.

However, she explained why she refused to sign the confidentiality agreement:

"The legal situation is that trustees, whether they like it or not, have a duty to account to the beneficiaries over what they do with the trust property.

"If they aren't allowed to provide any kind of information to the beneficiaries, how can beneficiaries enforce the trustees' duty to account?"

She also denied she had revealed details of Vector's Orion network bid to the media.

"I don't know who did.

"But in respect of information, it's about time there was a lot more transparency in the trust's dealings. It's being run like a private gentlemen's club."

Vector chief executive Dr Patrick Strange said the company believed in transparency.

Vector reported under the requirements of a listed company, down to salary bands, even though it was not required to.

"But in the day-to-day dealings of the business you have to be assured of confidentiality," he said. "Particularly when you are dealing with customers' confidential information or personnel issues or - and it's very relevant to modern utilities - buying or selling assets."

Dr Strange said confidentiality was important to maintain Vector's competitive position. He said the company would regret a situation where it felt it could not deal openly and freely with the trust.

"We want to be able to operate properly and not destroy value for our shareholder by having confidentiality breached."

He said the information leaks would be high on the agenda of the trust's next meeting.

Mr Barnett said the board had, in recent days, expressed its concerns to the trust - "and rightly so."

"If Vector can't get out there and grow it will be nothing more than a pawn in the market."