Power struggle for Vector

By Mark Reynolds

International companies are already lining up to try and grab a share of what would be one of the country's largest ever privatisations, the sale of Auckland electricity lines company Vector - formerly called Mercury Energy.

United States power company GPU has been knocking the loudest, but a swag of other international firms have also come calling to see if they can buy a slice of what is still regarded as a plum asset in the New Zealand power transmission industry. The likely bidders include Utilicorp United, another United States company that already owns this country's largest electricity network operator, United Networks.

Interest in Vector is keen because despite its problems of recent years - including its calamitous blackout of central Auckland last year - the company is still a large and profitable business. It transmits power to the nation's commercial hub and has more than 250,000 people hooked up to its mesh of power poles and wires, giving it a greater concentration of household network connections than any other operator.

Vector's assets have a book value of $1.12 billion and, based on prices that other electricity networks changed hands for last year, would sell for as much as $2 billion. It is little wonder then that there is expected to be a huge tug of war over who should actually decide what happens to those assets, and who should share in the proceeds of any sale.

Hoping to lead the debate is Michael Barnett, chairman of the Auckland Electricity Consumers Trust that ostensibly owns the company. As Mr Barnett says, even that ownership claim is contestable.

The confusion stems from the way Vector was established back in 1992, when it was known as the Auckland Electric Power Board. In a rushed and ill-conceived restructure forced by changes to electricity laws, the company was established as the operating arm of a trust that owned it but did not control it. Its convoluted structure saw the elected trust given all but six shares in the company, but those other six shares came with the right to elect the majority of the company's board of directors.

To add further confusion to the set-up, the trust's role was to look after two sets of beneficiaries of the company's assets. The immediate beneficiaries were to be its 250,000 consumers, to whom the trust would distribute profits from the company. But that would change from 2073, when the assets of the trust would be given back to the three local authorities who originally owned it - the Auckland City, Papakura District and Manukau City councils.

The bizarre set-up was criticised by last year's Ministerial Inquiry into the Auckland power crisis as a contributing factor to the blackouts, because it blurred lines of governance and accountability.

Mr Barnett said that since the crisis, many of the governance structures had been sorted. Just this week Vector started to enforce a new protocol that gives it the power to appoint all of the company's directors.

But the debate over who benefits from the company's assets was just beginning.

"I think the councils would like to believe that whatever they might get in 2073 could come through earlier," Mr Barnett said.

"The consumers on the other hand, to whom we also have a responsibility, have to have their entitlement protected."

He said the role of the trust was to protect both sets of beneficiaries, but the structure of the electricity industry had changed so much in the past 18 months that maybe it was time for the beneficiaries to be master of their own destiny.

"The trust is saying that Vector is back in the black. It's profitable and the changes that were imposed by Government [electricity law changes] last year are behind us."

"The company is focused on its future and now I believe the trust should also be focused on its future by asking itself what are the best options to meet the demands of both sets of beneficiaries," he said.

To add substance to that debate, the trust asked sharebroking firm Merrill Lynch to study future options for the business. The trust wants to make that report public, but is holding back because the three local councils have started court proceedings in an effort to clarify their entitlement to Vector's assets.

"Personally, I think that's a shame because ratepayers money is being wasted when there are parties that are capable of sitting round a table and working through the issues," Mr Barnett said.

The Merrill Lynch report did contain a firm recommendation on what should happen with Vector, but until the court proceedings were dealt with, Mr Barnett did not want to reveal that recommendation. However, he pointed out that if a sale of any or part of the business was recommended, the trust's paramount driver would be to act in the interest of all beneficiaries.

"If a part of the future is going to be a sale of a part or all of the company, we would obviously have an obligation to get the best value"

But the more complex issue was what to do with any sale proceeds.

"Should we as a trust say we have been charged with managing these assets for the next 73 years, and put any proceeds in an investment account?" Mr Barnett asked.

"Or could you say that the councils are entitled to be paid part of any sale proceeds straight away, and distribute the funds to consumers and then on a pro-rata basis?"

There is a trust deed that governs these matters, and it would have the trust continuing to manage the assets. But as Mr Barnett points out, the environment has changed appreciably since that deed was written only seven years ago.

"I don't think you should be sitting there saying, the trust deed says this and therefore we can't distribute or we can't give it to the councils any earlier. I think the whole environment in which this trust was set up has changed," Mr Barnett said.

He points to the fact that part of the deed - which said 25 per cent of the company should be sold in a public offering - has already been allowed to lapse because of the changing conditions.

"My own opinion is that there has already been an agreement to get a variation to that by waiving the proposed initial public offering."

So if you can go to Government and get one variation, then you can get another, he said.

"You have to ask yourself what value is the trust adding in the middle, and every time I ask myself that I come up with 'nothing'."

Mr Barnett said that any decision would involve full consultation both with the councils and consumers.

"We need to ask them the same question: 'do you believe that we should be managing this ownership on your behalf?'"