It's not often that I find myself in agreement with anything written by Kerry McDonald regarding the Tiwai Point smelter. From the word go McDonald has been one of the smelter's consistent fans and boosters. From writing the original highly-positive NZ Institute of Economic Research (NZIER) cost-benefit report in 1971, McDonald went on to become Managing Director of Comalco NZ Ltd and a key player in several rounds of negotiations with Government over the price the smelter pays for its electricity.

His latest piece, "The Aluminium Smelter Saga: There Has Never Been An Electricity Subsidy", stays true to form, arguing that the smelter always paid above the cost of supply for its electricity and therefore on that basis alone could not have been "subsidised". As noted below, the truth or otherwise of that statement hinges on what definition of "subsidy" you choose; McDonald naturally goes for the one that suits his case. But for much of the paper McDonald is focusing on the way the New Zealand electricity market is organised and run, and here I am happy to quote and applaud his crisp summary:

"Poorly designed and implemented electricity sector reforms simply became a vehicle for successive Governments to gouge all electricity consumers and maximise Government revenue through asset sales and outrageous electricity pricing arrangements. Although the Crown retained a majority interest in them the generators were not obliged to act in the national interest - or even to have any regard for it".

"Consequently, there have been many examples of exploitive/inappropriate behaviour (from a National Interest viewpoint) by the generators, including managing capacity or system incidents to maximise prices and profits, regardless of the impact on consumers. And Transpower and the lines companies were also allowed to use various devices to inflate their costs and prices to consumers, including the smelter. These arrangements, still in place, mean that electricity prices are much higher than they should be, that all consumers are being exploited and that electricity using industries face severe cost penalties".

As someone who has spent a lot of time and energy over the past three decades documenting the happy hunting ground for unbridled corporate greed that is the New Zealand electricity industry under neo-liberal restructuring, I'm delighted to welcome McDonald to the cause. It's just a pity that McDonald's on-target critique of the electricity "reforms" is wielded as just another item in his long litany of alleged exploitation of the supposedly hapless transnational owners of the Tiwai Point smelter.

Tiwai Point Least Worthy Of Our Sympathy

Of all the electricity consumers in this country who have felt themselves to be victims of extortionate electricity pricing, the Tiwai Point smelter is the least worthy of our sympathy. The electricity pricing problem in general is the fruit of uncontrolled abuse of market power by a bunch of monopolists with Government in their pocket. The history of Tiwai Point is similarly a history of bullying monopolist behaviour, repeatedly using the threat of closure to blackmail successive Governments into paying ransom in one form or another to a company that CAFCA has aptly described as "New Zealand's biggest corporate bludger".

For Comalco and its successor Rio Tinto Alcan (RTA) the consistent focus of its corporate strategy since 1989 has been to capture for itself a growing share of the monopoly rents extracted from the New Zealand population by the big electricity gentailers (generator-retailers). Precisely because the fat profits flowing in to Meridian, Contact Energy et al are pure rents - not a necessary return on capital actually put at risk - they can be stripped out by a powerful customer's blackmail without threatening the survival of those big generators.

For Meridian the calculation every time around is the same: is the risk of lost profit due to smelter closure greater than the cost of another ransom payment? Yet again in 2020 the smelter's closure threat credibly faces Meridian (and the Government as shareholder) with more corporate bleeding than it will cost to buy another few years of peace. Bludgers do, after all, come in two varieties. The plain vanilla sort may sit around with their hand out waiting for some charitable soul to drop a coin. But the corporate variety arrive fully armed with nuclear options to force reluctant donors to their knees.

As Kerry McDonald's telling of the story makes clear, New Zealand governments since the 1950s have been weak, gullible and easily manipulated when confronting international capital. Once politically committed to the idea of a Manapouri power station feeding a smelter, neither Labour nor National politicians could contemplate the loss of face if the project fell through.

By noisily leaving the negotiating table and heading out the door back in 1959, Comalco was quickly able to bring Government to heel and get taxpayers to pay for the power station themselves, in place of the original plan for private capital to do the job. Thereafter, once committed to construction of Manapouri, the Government was in no position to dictate tough terms over the smelter's power contract. The traditional transnational game of playing countries off against one another in a race to the bottom duly played out.

True Opportunity Cost: Nation's Foregone Share Of Profits

So, ostensibly the central issue in Kerry's paper: was the power price "subsidised"? Here the definition of "subsidy" matters a lot. Kerry's definition says there is no subsidy if the long-run financial marginal cost of supplying electricity is paid by the smelter - that is, no commercial loss in the business sense is imposed on the Government. Critics of the smelter deal have said from the start that the subsidy resides in the extent to which benefits which could have been secured for New Zealand by a tougher bargaining stance were unnecessarily sacrificed - in other words, the true opportunity cost of Manapouri electricity is to be measured not by marginal cost but by the nation's foregone share of the transnational's profits.

McDonald's narrow calculation can be defensible when deployed under competitive conditions for a project that is so small relative to the economy as a whole that it has no external effects, and where the undertaking of the project under consideration does not foreclose any alternatives. But when the electricity user is taking 15-20% of the country's total electricity supply, there are plenty of grounds for arguing that a subsidy is involved when such a large purchaser does not pick up a fair share of the system's overall fixed costs, nor pay the host Government taxes at a reasonable rate on the profits it secures from its operations.

Regarding the calculation of "fixed costs of the system", it has to be admitted that the scale of monopolistic profit-taking by electricity generators and lines operators since 1989 has rendered largely meaningless the economist's idea of fixed costs, which means that the argument can quickly become bogged down. But regarding the second issue - the nation's participation in profits of the smelting venture - Comalco/RTA's record of tax avoidance, use of transfer-pricing dodges, and accounting tricks of the trade(1), means that McDonald is struggling for credibility.

"Subsidy" has always been, in the Comalco debates, really just shorthand for the general argument that New Zealand has been getting ripped off. McDonald's eagerness to deploy in rebuttal an economist's technical definition of "subsidy" is bait-and-switch tactics to avoid getting seriously into the question of what economic benefit New Zealand has secured relative to what might have been available under different contractual arrangements.

The 1975-84 Muldoon government's arbitrary price hike, the subject of McDonald's high-decibel complaints of unfairness, was motivated by the official view that Comalco was perfectly capable of paying more for its power without being forced to shut down. The outcome indicated that that calculation was correct. The transnational's furious reaction, flinging toys out of the cot in all directions, was just a dress rehearsal for its successful exercise in monstering the Lange Government out of repeating the experiment in 1986.

Power Price "Commercially Confidential"

One other claim in McDonald's paper merits comment. He says "there are frequent comments that the power price has never been disclosed, which is incorrect". Even President Trump might blush at this one. As one of those making the "frequent comments", I and others several times in the 1980s and 1990s undertook the task of trying to estimate the price by indirect means, only to face being debunked by Comalco using the consistent argument that the price was "commercially confidential". Reporters asking directly about the price met the same stonewall defence.

McDonald says "the original power pricing agreement was set out in detail in the relevant empowering legislation, including how the power price was to be calculated - basically cost plus 10%. Anyone could make their own assumptions and calculate a price – and many did". But those who did undertake this task were always up against the "commercial confidentiality" stonewall. Published estimates of the price were always just that, estimates - and quickly dismissed as such by the company spokespersons.

McDonald's second piece of defence is that in the mid 1990s, "there were significant electricity negotiations... under the Bolger government, as a precondition to a major (some $600m) refurbishment, upgrade and modest expansion of the smelter. It was made a condition of the resulting agreement that the power price was disclosed - and it was, with considerable supporting detail, including graphs. It was sent to all media outlets and interested parties and there were also media briefing/Q&A event".

Speaking as an interested party back in those days, I can't say that I received any of this claimed disclosure material containing the electricity price. Nor, so far as I can ascertain from a search of news reports at the time, did other analysts such as Fran O'Sullivan of National Business Review and Pattrick Smellie of the Independent, who throughout the 1993-94 debates over Comalco's renegotiated electricity contracts repeatedly pointed out that disclosure of the technical detail of the contracts did not enable outside observers to reconstruct the actual price.

Here is Fran O'Sullivan's summary of what was disclosed in 1993:(2)

"Comalco subsidiary Comalco Power (NZ) Ltd has two major long-term contracts with the Crown. The average price has been put at 55% of other bulk discount rates, but no public confirmation is available. A third contract for an additional supply of 20MW was later signed to take effect from 1988 at the 'bulk supply tariff under the same terms and conditions as ECNZ's other customers'. The two long term contracts are based on a formula which adjusts the price in line with world aluminium prices. A foreign exchange linkage was also included in the contracts".

Here is Smellie writing in March 1994:(3)

"It is true that the intense secrecy around the contracts and the price Comalco pays for its power has recently been eroded. The full technical detail of the new contracts is available and (emphasis added) it even becomes possible to have a stab at the power price Comalco will be paying on each of the three legs of its contracts by about 2010. It is also true that by late in the next decade, Comalco will be buying most of its power at close to market prices. But it is still almost impossible to work out what the path to that price will be" (emphasis added).

"A certain amount of secrecy is justified. No other major user has to divulge exactly what it pays, and doing so would yield valuable information to Comalco's competitors. On the other hand, full disclosure would also show New Zealanders how cheap Comalco's electricity really is, leaving it in a potentially unwinnable political fight".

"In addition, the pressure for disclosure is the greater because no other user receives such special arrangements as Comalco. It is recognition of such pressures which have allowed the doors to be prised ajar on the smelter's arrangements recently. But without more disclosure, we are simply left with a pile of opposing claims".

Conspicuous among those offering opposing claims was, of course, Kerry McDonald, who saturated the news media with repeated claims about the absence of subsidy, appealing to company-commissioned "cost benefit" studies by consultants Brown Copeland. But the actual electricity price never figured in those releases nor in the cost-benefit studies. Some indicative price numbers prepared for the Electricity Corporation of NZ (ECNZ) Board in 1989 by Keith Turner, then Chief Executive Officer of ECNZ, were leaked to media in 1993(4) - but those numbers, and 1993 internal calculations by Government officials(5), were always debunked by McDonald and other Comalco spokespeople(6).

Always Threatening To Leave

The extent of the smelter's alleged "contribution" to the New Zealand economy has always been trumpeted by the company as part of its PR effort. From the 1970s on Comalco/RTA commissioned so-called cost-benefit analyses listing various flows of payments to the New Zealand economy. All of these studies had a common feature that echoes the company's propaganda line: they compare the situation with the smelter to a hypothetical situation in which the smelter is absent.

No cost-benefit analysis has ever been produced to show the consequences of raising the electricity price by, say, half a cent; or increasing tax on the company's profit by, say, a million dollars, with the smelter continuing business as usual. The standard response to any proposals along these lines is for the company's bosses to throw a public sulk and announce they will shut up shop and walk away.

The media, the public, and politicians of most political parties, have been too intimidated by the sheer noise and fury of the Comalco/RTA PR blitzkrieg to hold their ground and ask about the marginal consequences of marginal changes that might shift a slice of the profits from the overseas owners of RTA/Comalco to the New Zealand economy. The 2020 events have been just a replay of this long-familiar scenario.

Endnotes

1. See the Judges' Report for the 2013 Roger Award.
2. "Comalco To Pay More In New Power Agreement", National Business Review, 13/8/93, p.3.l
3. "Secrecy Still Rules On Critical Energy Issues", Independent, 4/3/94, p.11.
4. Pattrick Smellie, "Gov't Distances Itself From Comalco Power Price Deal", Independent, 30/8/93, p.15, and "Gov't Sells Comalco Cheap Power In Secret", Independent, 30/8/93, p.1.
5. Reported in Pattrick Smellie, "It's Official: Comalco's Cheap Power Costs Consumers $500m A Year", Independent, 18/2/94, p.1.
6. See, for example, Kerry McDonald "Comalco Rejects Pricing Statements", National Business Review, 27/8/93, p.12