Transpower dragged into Rio Tinto outage dispute

Transpower is backing Meridian Energy's view that a transformer failure at the Rio Tinto aluminium smelter last November was not a "force majeure" event.

The transformer failure cut one-third of the Tiwai Point aluminium smelter's production on November 9 last year, creating an enormous logistical and financial headache for Rio and its electricity supplier, Meridian, since most of the electricity is supplied to the smelter on a take-or-pay basis.

The smelter, which uses around one-seventh of all electricity generated in New Zealand, did not return to full production until about six weeks ago. As a result, liability for undisclosed tens of millions of dollars of unused electricity is in dispute, with Rio claiming the transformer failure as an unforeseeable "force majeure" event that would allow it to escape its contractual power purchasing obligations.

Both the Transpower and Meridian annual reports, tabled in Parliament yesterday, reveal that Meridian and Rio are in an arbitration process on the issue, and that neither SOE accepts that the failure of the transformer, located on the smelter site and owned by Rio, qualifies for "force majeure" treatment.

Transpower discloses that, in March, Meridian notified the national grid operator that "if a force majeure event is established, Meridian would wish to invoke a clause in its contract in relation to the transmissions charged paid by Meridian to Transpower relating to the New Zealand Aluminiuum Smelter.

"Transpower does not believe that the transformer failure is a force majeure event," the annual report says. Transpower may seek to join the arbitration.

"In the event that the Arbitrator finds the transformer failure is a forece majeure event, Transpower may be required to repay transmission charges to Meridian of approximately $8 million to the end of June 2009."

Meridian makes no estimate of the possible impact on its accounts of a win by Rio in arbitration, saying in its annual report: "Because the claim is at an early stage and has yet to be determined it is not practicable to recognise the contingent asset in the financial statements."

Businesswire.co.nz

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