Revistas analizadas

($million)

Item Amount

Net cost of electricity acquired for re-sale to smelters 2 537

Less -

Revenue receivable from electricity sales

to smelters and related income (b) 1 262

Net present value of liabilities as at 30 June 1998 1 275

(a) All amounts expressed in net present value terms, as determined by the

Department’s financial consultants.

(b) Includes the impact of the hedge arrangement between the SECV and Edison

Mission Energy Australia Limited.

Supplementary power arrangements - Portland aluminium smelter

8.98 Under the electricity supply arrangements relating to the smelters, the SECV is required to supply an annual base load of 520 megawatts to the Portland smelter and up to 375 megawatts to the Point Henry smelter. While additional power of 64 megawatts was annually provided to the Portland smelter to maximise its production capacity, in January 1995, this supplementary supply was terminated by the State. The Government subsequently indicated that it was not prepared to negotiate for the supply of additional electricity to the smelters as Alcoa of Australia Ltd (Alcoa), the smelters’ operator, was reluctant to re-negotiate the terms of the agreements under which the substantial flexible electricity tariff payments were required to be made by the State.

8.99 Following a re-assessment of the above position, in September 1996, the Treasurer provided approval for the SECV to enter into an additional supply agreement with Portland Smelter Services Pty Ltd (PSS), the entity through which various joint venture participants hold an interest in the Portland smelter, and a hedge contract with Powercor Australia Ltd (Powercor) - an electricity distribution business, to hedge against the cost of electricity to be purchased from the wholesale electricity market associated with the additional electricity provided to the smelter. At that time, the Department of Treasury and Finance advised the Treasurer that the agreements can be terminated in the event of the SECV’s default or insolvency. However, due to the ‘pass-through’ provisions of the agreements, the SECV exposure to any costs from such an event is minimal.

8.100 The Treasurer was also advised that the transaction would provide the State with estimated benefits equivalent to $110 million in net present terms, including a profit surcharge of around $51 million from PSS and an increase of around $47 million in the value of Aluminium Smelters of Victoria Pty Ltd (Aluvic), a Government business enterprise through which the State held a 25 per cent interest in the Portland smelter.

8.101 In September 1997 the Treasurer announced that the Government had reached an agreement with PSS for the provision of additional power to the Portland smelter. The supplementary power arrangements provide for the supply of up to an additional 120 megawatts to the Portland smelter from January 1998 to December 2002, unless one party terminates the agreement earlier due to a material default, insolvency or other specified events.

8.102 PSS is required to pay to the SECV all costs and expenses required to be incurred by the SECV in the provision of the additional supply. These costs include energy costs, transmission costs, wholesale electricity market pool charges, smelter reduction amounts, hedge and administration costs. In addition, the SECV will receive a profit surcharge on the smelter production derived from the additional supply of power, determined by reference to the price of aluminium and the actual or anticipated use of electricity under this agreement. PSS is bound to make these profit surcharge payments whether or not it actually takes any part of the additional supply.

8.103 Other key terms of the additional supply agreement include:

• PSS acknowledged that the SECV is providing the additional supply on the basis of a full pass-through of all costs, expenses and liabilities associated with the provision of this supply;

• The parties shall negotiate in good faith with a view to making necessary changes to the calculation of the profit surcharge in the event of an introduction of a new tax such as a carbon tax, or an assessment relating to the emission of carbon or any greenhouse gas into the atmosphere which has the effect of increasing the price of power payable under the hedge contract;

• PSS agreed to comply with the regulatory requirements of the Victorian Power Exchange (operator of the Victorian electricity wholesale market) imposed on the SECV and indemnified the SECV for any failure to do so; and

• PSS has indemnified the SECV against any cost or expense incurred by the SECV in respect of the hedge contract, except in relation to the contract’s early termination resulting from the occurrence of an event of default by the SECV. 8.104 As part of the completion of the above arrangements, in March 1998, the SECV, Alcoa and PSS signed a separate interruptibility agreement which provided for the smelter operators to pay the SECV an amount of $6.5 million in return for the SECV not exercising its rights to interrupt the power supply under the base load contract for commercial reasons. The agreement also provided for the parties to identify arrangements that could be more flexible and would involve a different pattern and frequency of interruptions to those currently permitted under the base contract. This agreement has a term of one year, expiring in December 1998, however it requires the parties to commence discussions in October 1998 for the review and extension of this agreement.

Auditor-General’s certificate on electricity tariffs

8.105 The Administrator of the SECV is responsible for the preparation of data and the calculations used to determine the electricity tariffs payable under the electricity supply agreements. In September 1995, the PSS and Alcoa queried the determination of electricity tariffs applied by the SECV for the 1995-96 financial year and subsequently sought a review of the electricity tariff calculations for the period July 1993 to June 1996.

8.106 Consistent with the electricity supply agreements, in October 1995 the Administrator of the SECV requested the Auditor-General to conduct an independent review to ascertain whether the data and calculations used to determine the tariffs for electricity supplied to Alcoa and PSS complied with the requirements of the electricity supply agreements for the financial years 1993-94, 1994-95 and 1995-96.

8.107 Following a review of the data and calculations for the above mentioned 3 financial years, a certificate was issued in June 1997 to the Administrator. The certificate concluded that the data and calculations used to determine the tariff prices during the financial years 1993-94, 1994-95 and 1995-96 did not fully meet the requirements of the electricity supply agreements.

8.108 Following receipt of the Auditor-General’s certificate and discussions with the smelter operators, in May 1998 the SECV issued an invoice and received an amount of $10.7 million from the operators representing a cost adjustment to the period July 1993 to April 1998.

Privatisation of Aluvic

8.109 The successful completion of the supplementary power arrangements removed what was considered by the Government to be a significant impediment to Aluvic’s privatisation while, at the same time, had the effect of adding value to the State’s 25 per cent interest in the Portland smelter.

8.110 Subsequently, in August 1998, the Government announced the sale of Aluvic to 2 PSS participants, namely China International Trust and Investment Corporation, and the Marubeni Corporation. It is my intention to review and report upon the results of the sale in my May 1999 Report on Ministerial Portfolios.