Monday, 8 August 2016

Basslink woes continue


Plan A from the rulebook for side stepping questions at parliamentary hearings is to cite confidentially. The reason why it’s confidential is also confidential. This is a corollary to Plan A.

Plan B is to use the sub judice rule where a matter might be the subject of legal action. Plan B also has corollaries. Canvassing legal options, even a litigant’s thought bubble are covered by Plan B.

Plan A has been used at current parliamentary public accounts committee hearing into the State’s electricity companies following the Basslink outage.

The government has now invoked Plan B and asked the committee to call a halt to proceedings “to enable arrangements to be put in place to protect the state's interests in the context of contractual matters related to the BassLink failure.”

What are these contractual matters?

Basslink’s parent company, Keppel is listed on the Singapore Stock Exchange. Its latest half yearly report dated 18th July has more to say about the Basslink failure than Hydro and the government  are prepared to tell.

The report says:

Based on current circumstances and subject to further professional advice and investigation, Basslink believes that the outage is a force majeure event. The cable has since returned to service on 13 June 2016 and Basslink has been in discussions with Hydro Tasmania and the lenders on matters arising from the outage. The insurer has confirmed that the physical loss and damage to the cable as well as time element loss (such as business interruption loss) arising from the incident are insurable (subject to the relevant terms of the insurance policy) and Basslink is working with the insurer on Basslink’s claims under the insurance policy.”

Basslink believes the outage is a force majeure event. In other words, an act of God. It has insurance cover for such an eventuality.

Hydro on the other hand does not. The estimated cost to Hydro is between $140 and $180 million.

Hydro’s risk assessment analysis apparently showed outages longer than 60 days were highly unlikely. This period was nominated in the original specifications and confirmed in the Basslink Operations Agreement signed by the Tasmanian government. The 2012 Expert Panel report into Tasmania’s electricity industry disclosed however there were no financial penalties relating to non performance.

If an outage wasn’t expected to last 60 days, the cost to cover longer outages would arguably have been minimal.

Even now Hydro is unable to tell the parliamentary hearing the cost of such insurance or whether it plans to take cover in the future.

If a force majeure event occurs the contractual obligations of the parties are temporarily suspended whilst things are fixed. Penalties may not apply unless the relevant legal contracts specifically address the matter.

Given Basslink had insurance in place to cover a force majeure event they would be keen to ensure this was the case. Finding the source of the fault proved difficult and more cable was removed than the replacement length originally earmarked. An extra length necessitated three joins. This left a length of discarded cable which Hydro would like to have tested but Basslink won’t bring to the surface. Exhibit A which may prove cable failure was other than an act of God is still on the seabed about 100 kms north of Georgetown.

Legal action between Hydro and Basslink is not new. An earlier dispute about the cable required former Chief Justice Murray Gleeson’s mediation skills. Hydro made a couple of references to the dispute buried deep in annual returns but when asked about the amount finally awarded to Hydro, CEO Steve Davy resorted to Plan A by telling the June hearings it was commercial in confidence.

Not so in Singapore. Keppel revealed publicly the amount was $6 million.

There was a time when Hydro’s annual costs of Basslink were provided in annual returns. No longer. It is now commercial in confidence. The annual financial statements record an estimate of the overall Basslink liability and the amount expected to be paid in the ensuing 12 months. But the amount actually paid is commercial in confidence.

Not so for Keppel. It discloses what it receives from Hydro but the amount is in Singapore dollars and the financial year end dates are different so it’s a little hard to line up with Hydro’s accounts.

The Basslink fee contains an interest rate component. If rates go up then so does the fee, and vice versa.  Hydro decided to swap this component with Macquarie Bank and not risk the fee rising with rising interest rates. Macquarie Bank agreed to pay Hydro the amount of the fee resulting from higher interest rates while Hydro agreed to pay Macquarie the amount of the fee saved should the fee fall with falling rates. To date this misadventure has cost Hydro about $200 million. The exact figure is commercial in confidence, as is whether or not the swap arrangement with Macquarie still applies when the fee is waived.  According to Hydro’s last financials, based on current low interest rates, the swap arrangement is expected to cost another $340 million.

Hydro’s insurance against rising interest rates have therefore cost $540 million and its failure to insure against an extended Basslink outage another $140 to $180 million.

The very person at the table when these fateful matters were first considered is now advising the government on energy security. Geoff Willis it yet to follow Justice Brian Martin recent example in the case of the NT royal commission into juvenile detention and exclude himself on real or even perceived conflict of interest grounds.

The inquiry which promised so much is in danger of degenerating into a pathetic embarrassment. Mr Bacon is solely interested in finding a paper trail to the Minister’s office. The two Liberals members are acting like Praetorian guards protecting their masters and blaming their predecessors rather than bothering to address their minds as to how it all works, what went wrong and where do we go from here.

Combined with a ready willingness to withhold information where possible, the only result will be a more disillusioned public once again let down by the political process.

4 comments:

  1. Excellent article John. Well written and to the (sharp) point. Have you ever investigated the TT Line and the BSPVES?

    ReplyDelete
    Replies
    1. Gordon,I've looked at TT line. The financials are pretty straightforward, atho' it will be interesting this year to find out the full vessel refurbishment costs, and the alleged improved bottom line.

      I don't understand the acronym?

      Delete
  2. Bass Strait Passenger Vehicle Equalisation Scheme. You could start with the 2014 Productivity Commission report. Very interesting!!
    http://www.pc.gov.au/inquiries/completed/tasmanian-shipping/report

    also

    http://bitre.gov.au/publications/2016/mr_015.aspx

    Cheers.

    ReplyDelete
  3. Hi John,
    Is it possible to separate out the revenue Hydro makes from selling power to the mainland vs their Tasmanian revenue? Are they operating in Tasmania as a community service or a business? How would their operations differ if they were fully private?

    ReplyDelete