The Government is negotiating a new taxpayer-funded subsidy with Tiwai Point aluminium smelter's owners and has all but acknowledged its assets sales programme is being used by them to get a better deal on power prices.

State Owned Enterprises Minster Tony Ryall this morning said the Government has opened discussions with the smelter's ultimate owners global mining giant Rio Tinto in a bid to broker a deal over a variation to the existing electricity contract.

Mr Ryall's announcement came after Meridian Energy's chief executive Mark Binns said that after nine months of negotiations with Rio Tinto's subsidiary Pacific Aluminium, "there remains a major gap between us on number of issues, such that we believe that it is unlikely a new agreement can be reached".

Pacific Aluminium pushed for a more favourable deal over power from July last year as it was making similar moves in other countries including Australia where it has smelters. As the talks with Meridian began the company raised the prospect it could close the smelter if it didn't get a favourable deal.


Should the smelter - which uses one seventh of New Zealand's electricity output - close, wholesale power prices are likely to fall, affecting the earnings potential of all power companies including Mighty River which the Government is now the process of partially privatising.

Mr Ryall said the two companies' positions were "reasonably close in terms of the short to medium term electricity price, but they remain well apart in the longer term.

"With this in mind, the Government has been in contact with Pacific Aluminium's international parent company Rio Tinto this week to discuss helping to bridge the gap in their positions over the short to medium term, if this could be of assistance in concluding an agreement."

Mr Ryall indicated the Government had offered Rio Tinto "a modest amount of money to try and help bridge that gap in the short to medium term but there's still a very big gap in the long term... We're not interested in subsidising this business in the long term".

Asked whether Rio was using the Government's asset sales programme as leverage to squeeze a better deal out of the Government, Mr Ryall said "they're pretty tough negotiators and I'm sure they look at what else is happening in the economy when they make their various decisions".

However, "they certainly haven't got the Government over a barrel", he said.

Mr Ryall's comments come after Mr Binns and Meridian chairman Chris Moller appeared before Parliament's commerce committee where they were questioned on the negotiations with Pacific Aluminium.

Mr Binns later told reporters the timing of Pacific Aluminium's push for a better deal "does seem very coincidental".

"The timing is around about the same time as the asset sales."

Asked whether Pacific Aluminium and Rio Tinto had the Government over a barrel due to the asset sales, he said: "That might be obvious to you and to a lot of people but I can't comment on their tactics, that's their business".

Pacific Aluminium chief executive Sandeep Biswas this morning contradicted Mr Binn's comments about the status of negotiations.

"Our electricity contract negotiations with Meridian have progressed more in the past two weeks than in the previous nine months", he said in a statement.

"We believe a commercial agreement that is in the best interests of NZAS, Meridian, the New Zealand Government, and the people of Southland can be reached.

"We look forward to continuing productive negotiations with a view to achieving a positive outcome for all parties."

Labour Leader David Shearer said this morning's developments meant the National Government "must pull the plug on the Mighty River Power sale with massive uncertainty now surrounding Meridian's supply deal with Rio Tinto".

"The electricity market has been thrown into upheaval by Meridian's statement today", he said.

"If Mighty River Power is sold in May it risks turning into a fire sale with investors likely to demand a risk premium."

"There is simply no way that the Government should sell a major electricity supplier like Mighty River Power in the midst of such turmoil. The Government has been gung-ho in pushing the sales but has refused to acknowledge the risks with Tiwai Point. National must tell the public what's going on before asking them to buy shares in the electricity market."

Labour's SOE spokesman Clayton Cosgrove said Prime Minister John Key "must put aside his pride and vanity and cancel the sale. There's too much at risk".