Power fees fight echoes telco war

By Richard Braddell

WELLINGTON - A user of a natural monopoly service decides the charges it faces are unfair and refuses to pay the portion it thinks is unreasonable. Negotiations go nowhere and the supplier sues.

Sound familiar?

Thus can be summarised the dispute over interconnection payments between Clear and Telecom and, now, one between two state-owned enterprises, the operator of the national electricity grid, Transpower, and South Island electricity generator Meridian.

But while the Telecom/Clear dispute centres on alleged abuse of a monopoly position to extract monopoly rents, the one between Meridian and Transpower this week also seems to involve elements of discriminatory pricing.

"Seems" is the operative word since the parameters of the dispute are slightly mysterious as neither side has been prepared to go into details.

What is known is that Meridian has withheld about $25 million in transmission charges relating to the high voltage direct current link (HVDC) between Benmore in the South Island and Haywards in Wellington that have accrued since Meridian began operations as one of the three new generators created out of the ECNZ on April 1.

And while it seems that Transpower will be seeking to enforce a contract when the case gets to court, Meridian will argue that it is justified in not paying the full amount because it is being unfairly penalised in a competitive marketplace by being forced to pay more than its fair share of the cost of the HVDC link.

Transpower's annual report lends support to such a Meridian argument. Under the related party transactions note to its revenue statement, Transpower discloses the transmission revenue received from the four businesses created out of ECNZ - Meridian, Mighty River, Genesis and Contact. (The parties are related because, with the exception of Contact which was sold shortly before the end of Transpower's financial year, they are all Crown-owned.)

Industry sources say that the transmission revenue almost certainly arises from the HVDC link because the transmission charges for the rest of Transpower's network are footed by consumers via levies on line companies.

The accounts show that in the three months of Meridian's existence, it ran up a transmission bill with Transpower of $37.2 million including $13.3 million outstanding at balance date. Annualised, that is something in excess of $148 million.

In comparison, Contact, for the 10 or so months it was owned by the Crown, was charged $12 million. The conclusion: that while Meridian accounts for 71 per cent of South Island generation capacity, it could be paying more than 80 per cent of the cost. Put another way, other South Island generators, including TrustPower and Contact, may be getting a heavily discounted ride on the back of Meridian.

Such back-of-envelope calculations are, of necessity, crude and open to criticism, particularly by the army of economic experts competition cases inevitably attract.

But they do raise questions, not least one of why generators, rather than lines companies and end consumers, are paying for the HVDC link in the first place.

Furthermore, why has such an indecorous dispute between SOEs been allowed to get to the courts?

No one in the industry seems surprised it has, viewing it as a continuation of long-standing disagreement between ECNZ and Transpower on how the HVDC link should be charged.

"In view of the argument about Transpower's costs being too high, everyone in the industry is agreed about that, but we are all pretty divided about who should pay for it," one industry observer said.

For Transpower and Meridian, the dispute could have a huge influence on their respective values since the net present value of the cash flows involved could affect either company's valuation by as much as $500 million.

The fact that both are Crown-owned does not imply a zero sum game for the taxpayer. If Meridian is indeed paying more than its fair share of the cable link, it will be at a disadvantage to its private sector counterparts from the North Island, who are selling power in the South Island, like TransAlta, who may not be shouldering any of the HVDC cost at all.

Ironically, those same competitors may actually be selling power that was generated by Meridian in the first place.