Power lines get crossed in the struggle for control of Vector

By Brian Gaynor

Investment


What is happening at Vector, Auckland's electricity line company which was formerly known as Mercury Energy? More than 250,000 Auckland householders and businesses effectively own the company, yet a huge battle is being fought over its control without their input.

Directors are resigning; six partners of law firm Russell McVeagh McKenzie Bartlett have a significant influence over the company; a major court case begins at the end of the month; and influential individuals are promoting an agenda which may not be in the best interests of shareholders. In the meantime, most shareholders are being kept in the dark.

One of Vector's biggest problems is its ownership structure. When it was established in 1993 - out of the remnants of the old Auckland Electricity Power Board - all 300 million shares were issued to the Auckland Consumer Energy Trust. These shares are held in trust for the company's 250,000 consumers.

The Consumer Trust has five members who are voted in at local body elections. Traditionally, two of these elected members are appointed to the Vector board. But this is where the situation becomes complicated. It was always intended that an additional 100 million new shares, called C class shares, would be sold to investors. This would give the Consumer Trust 75 per cent ownership and investors 25 per cent.

In the interim, six C class shares have been issued to partners of Russell McVeagh and they can appoint 5 members to the Vector board. According to the company's constitution: "regardless of the number of C class shares on issue at any time, the minimum voting entitlement of those shares, taken in aggregate, shall be 49.5 per cent of the total voting entitlement of all voting securities."

Thus we have the ridiculous situation where:

\EE The Consumer Trust owns 300 million shares, has a 50.5 per cent voting entitlement, but appoints only four of the nine Vector directors.

\EE The partners of Russell McVeagh own just 6 shares, have a 49.5 per cent voting entitlement, and appoint five of the nine directors.

The situation is further complicated by section 6 of the Perpetuities Act 1964, which requires the Consumer Trust to be terminated within 80 years and the assets to be returned to the Auckland City, Papakura District and Manukau City councils by 2073.

This structure is a recipe for disaster, and last year's electricity crisis, and its aftermath, have confirmed this. The Rennie Report into the Auckland power supply failure said "the corporate governance structure of Mercury Energy (now Vector) did not cause the power supply to fail, but through its effect on governance, an opportunity to prevent it was lost". The report went on to recommend that "steps are necessary to restore the intended lines of accountability to normal standards in Mercury Energy's corporate structure."

Documents obtained under the Official Information Act and through other Wellington sources show that infighting amongst the major players began in earnest after the Rennie Report was completed. On 13 July 1998, the Consumer Trust chairman Stan Lawson wrote to the Minister of Energy, Max Bradford, and said "the trustees strongly believe that the Auckland community wishes to retain ownership of the assets of the line business."

On the same day, Michael Barnett, another Consumer Trust member, also wrote to Mr Bradford. He opened with the comment: "I have a genuine concern that any reliance you may have on Auckland Energy Consumer Trust may be misplaced." Mr Barnett went on to make a stinging attack on his fellow trustees, including Mr Lawson, and wrote: "In my opinion, trust appointments to the board are of insufficient calibre or commercial experience ... this in itself is good reason for trustees to be ineligible for director roles."

One of Mr Barnett' s concluding recommendations was that "a minimum of 50 per cent of the trust's investment in Mercury Energy [to] be divested." Letters went back and forth between Mercury, the Consumer Trust and the Government over the next seven weeks. A letter dated 4 August from the chairman of Mercury Energy to the Government, which was also signed by Mr Lawson, claimed that the board and trustees had agreed to six principles.

One of these principles was that "no trustee will be eligible to be a director" of Mercury. It is difficult to believe that trustees would willingly agree not to be appointed to the Vector board. On closer reading of this letter, it is clear that three of the trustees had agreed to the six principles but the other two had yet to be consulted.

This letter must have created considerable acrimony because a few days later Stan Lawson was replaced as chairman of the Consumer Trust by Michael Barnett. Mr Barnett is an elected member of the Consumer Trust who was a director of Mercury between October 1994 and February 1998. He was deputy chairman of the company until the power crisis, when he resigned to become an advocate for electricity consumers against the company.

Mr Barnett questions the capabilities of his fellow trustees, yet he was deputy chairman of Mercury in the lead up to the power supply failure. Having conveniently jumped ship in 1998, he is now back at the helm of the Consumer Trust and his letter to Mr Bradford suggests he is a strong supporter of the sale of Vector.

The appointment of Craig Little, a promoter of privatisation, to replace Victoria Carter on the Consumer Trust, reinforces this view.

There is nothing wrong with Michael Barnett supporting privatisation. The sale of public owned assets is often the best alternative. However, Mr Barnett is an elected official who did not advocate the sale of Vector in his pre-election campaign. He could be following a long line of elected politicians who promote certain policies in their election campaign but change tack as soon as they are elected. Many Aucklanders would not have voted for Mr Barnett if he had openly promoted the sale of Vector. They know that the Auckland region has benefited from the retention of its shareholding in Ports of Auckland.

Vector is now in limbo. The minister has revoked the original establishment plan but there is no replacement plan. Mr Barnett has called for a public debate and the Consumer Trust has asked Merrill Lynch to look at alternative ownership structures for Vector.

Anyone who commissions a stockbroker to prepare a report will be well aware of the likely outcome. Nine times out of 10 a broker will recommend a share sale - over a share distribution to a trust's beneficiaries or the status quo - because of the fat fees they can earn from the process.

The next stage in the drama is an important court case at the end of this month which has been initiated by the Auckland City, Manukau City and Papakura District councils. The main issue is that the current C class shares are illegal and the C class directors have no legitimate right to make decisions affecting the company. The outcome of this court case and discussions over the future ownership of Vector are vitally important to 250,000 Auckland households and businesses. It is unacceptable that the company's customers and indirect shareholders are totally excluded from these discussions.

Elected trustees have an obligation to keep their beneficiaries informed and to act in a manner which is consistent with their pre-election promises. It is time for the consumer trust, particularly Michael Barnett, to front up and outline its proposals for Vector.