Comalco's Power Play

by Murray Horton

CHRISTCHURCH, NEW ZEALAND - Fiordland National Park, situated in the mountainous, rain-soaked and uninhabitable southwest corner of New Zealand's South Island, is one of the scenic wonders of the world. Milford Sound and the Milford Track are internationally renowned. A close rival for the tourist dollar is the Triple Trip - a boat trip up Lake Manapouri; a bus trip several hundred meters underground to the Manapouri power station; followed by a further bus trip over the Wilmot Pass and a boat trip on the indescribably beautiful Doubtful Sound.

 The power station is clearly the oddity here, not least because it is located in a national park. The power plant was paid for by New Zealand taxpayers and built by a multinational workforce. It is an underground powerhouse, with the turbines driven by water that hurtles through a tailrace from Lake Manapouri to Doubtful Sound. Bechteldesigned it, and the Utah Mining Company built it. Fourteen men died during its construction.

 The power station was built in 1963, and has operated ever since, for a single purpose - to provide electricity, 24 hours a day, 365 days a year, for the Tiwai Point smelter of New Zealand Aluminium Smelters Ltd. (NZAS), located at Bluff, the southernmost tip of the South Island. The smelter is the eighth largest aluminum smelter in the world and the largest single electricity user in New Zealand (using more than Auckland, the largest city). It has also been the subject of bitter controversy ever since it was first proposed.

Sumitomo of Japan holds a 20.6 percent share in NZAS and Comalco owns 79.4 percent of the company. Comalco is majority owned by Conzinc Riotinto Australi a (CRA, itself the world's sixth largest mining company), which in turn is controlled by Rio Tinto Zinc (RTZ, the huge British mining multinational).

 Comalco ships bauxite from Weipa, in Australia's northernmost Cape York peninsula, to Gladstone (further south, in Queensland), where it is refined to alumina and shipped to Bluff for smelting. The majority is re-exported to Australia for final processing. Finished aluminum is sold to New Zealand at market prices.

There is good reason for the controversy which has surrounded the Manapouri station and the Comalco deal. Although former Works Minister Hugh Watt said upon his retirement in 1974, "The greatest achievement of my career was persuading Comalco to build their smelter in New Zealand," Comalco has created numerous problems for the country which subsidizes its smelting operations. It tried to ruin a lake to build a power station, it fought both National and Labour governments over attempts to raise power prices and now it is trying to buy the power station itself from the state at a steep discount. Structurally, the Comalco arrangement puts New Zealand in the role of low-cost energy exporter, a fact which the government has implicitly noted in rebuffing other mineral smelter proposals. In 1974, for example, the Labour government rejected a proposed nickel smelter, saying: "As energy and labour would have been the only substantial inputs into a product primarily aimed at export markets, the proposal could have, in effect, involved a low-priced energy export."

Manapouri history

 In 1960, the Labour government and Comalco signed a contract for the company to build both a smelter and a power station. In return, Comalco received exclusive rights to the waters of both Lake Manapouri and Te Anau for 99 years. The company planned to build dams that would raise both lakes - 84 feet in the case of Manapouri. This raised the specter of the irreparable damage done to lakes by hydro schemes in the Australian state of Tasmania, where Comalco also has a major presence, and gave birth to the Save Manapouri Campaign (SMC), which marked the beginning of the modern New Zealand environmental movement.

 SMC argued, as campaign chair Ron McLean succinctly stated at the time, "Raising the lake is not necessary. You get ample power by keeping the lakes as they are." SMC gathered 264,906 signatures - representing approximately 10 percent of New Zealand's population - on a petition opposing the raising of the lakes; that remains one of the largest public protests in the country's history. The Labour government came to power in 1972 promising not to raise either lake, and appointed leading environmentalists (including McLean) to a new body, the Guardians of the Lakes.

Comalco never built the power station. With the company complaining that it could not afford to build the power plant, the government agreed in 1963 to build the Manapouri plant itself and to sell electricity from the station to Comalco at bargain- basement prices that have still not been officially revealed. Bill Rosenberg of the Campaign Against Foreign Control of Aotearoa (CAFCA; Aotearoa is the indigenous Maori name for New Zealand) says, "Comalco has long had highly favorable power prices. Its initial agreement with the government, based on Manapouri power, gave it a 99-year agreement for power at a tiny fraction of the price to other users, with no provision for inflation." The original Comalco rate was 13 times less than the rate paid by New Zealand householders and one twentieth the rate charged to other industries and farmers. The government even granted the company the right to take electricity from the national grid at Manapouri prices; Comalco exercised this right in 1974, when a drought caused a severe drop in Lake Manapouri's level.

 Comalco has repeatedly manipulated and interfered with New Zealand politics - and politicians - to preserve its special arrangement with the Manapouri plant. Rosenberg says that, in 1970, Comalco "issued shares to influential New Zealanders at a cheap rate before offering them to the public. These included prominent journalists, politicians, judges and newspaper executives."

Fighting hard against a rate increase of 650 percent proposed in 1977 by the Muldoon (National) government, Comalco contacted its parent companies in Japan, the UK and the United States [Kaiser Aluminum used to be in the smelter consortium] and asked them to persuade the U.S. and UK governments to "take action" against the New Zealand government, according to internal company documents leaked to CAFCA. The documents reveal that Comalco asked its Japanese associates to organize Japanese industrialists to act against New Zealand and directly asked Australian Prime Minister Malcolm Fraser to intervene in the price dispute. Comalco eventually agreed to a 350 percent rate increase, and the government managed to cut the length of the contract from 99 years to 30 years, so that it will now expire in 2007.

 In 1986, with the Labour government trying to increase Comalco's rate from 1.5 cents to 3.5 cents a unit, Comalco attempted to pressure top government officials, including Minister of Energy Bob Tizard, to be more sympathetic toward the company. Comalco also unsuccessfully took the government to court to try to prevent a rate increase from being legislated.

Comalco shifted tactics in the late 1980s, Rosenberg says, after a 1986 public opinion survey showed that people thought "power prices" rather than "aluminum" when they heard Comalco's name.

 In 1989, Comalco launched a lavish self-promotion campaign. Television advertisements called the company "A Power of Good," and used Vivaldi music and images of sparkling Fiordland water to show how Comalco converted water into electricity into aluminum. Working in conjunction with the Department of Conservation and New Zealand's most prestigious environmental body, the Royal Forest and Bird Protection Society, Comalco donated NZ$1 million earned from recycling cans into a fund for the preservation of the kakapo, one of New Zealand's most endangered birds. (1 NZ$ is worth between US$.50 and US$.60.)

Kerry McDonald, managing director of Comalco New Zealand Ltd., explains Comalco's new concern with public relations: "Comalco came to New Zealand as a producer of basic raw materials. It didn't want to create a high profit. It just wanted to get on with the business of making aluminum. With the benefit of hindsight, that wasn't totally appropriate. Clearly, there are a lot of questions about power pricing and the rate of return to New Zealand. So in recent years we've tried to establish a higher profile for the company, more recognition of the name Comalco and to build on it by providing more factual information on the business, benefits to the company and New Zealand, on the grounds that it is an important quid pro quo for being the largest electricity consumer in New Zealand."

 Essentially, the advertising campaign failed. Comalco has such a bad track record in New Zealand that people were instantly suspicious, and realized that the company wanted something. The campaign focused unwanted public attention on Comalco, and specifically on its attempts to take advantage of the New Right revolution carried out in New Zealand under the 1984-1990 Labour government.

Private vs. public power

 The Labour government's new economic program, commonly called Rogernomics, after Sir Roger Douglas, its architect, called for the corporatization of government agencies. Former government departments became profit-oriented State Owned Enterprises (SOEs), governed by boards of directors. The Electricity Department became Electricorp, headed by New Right ideologues and millionaire businessmen. Comalco's negotiating partner had changed drastically.

The National government at least had some success in increasing the power price in the 1970s; Labour failed completely in the 1980s. Comalco dragged out negotiations, took court action and complained publicly about its power price. But the company was hardly suffering under the new arrangement, as Electricorp CEO Rod Deane revealed in leaked 1987 documents: "With corporatization, electricity consumers will now have to meet the full cost of running the electricity system. Under the existing agreements, without any explicit Government subsidy, all other electricity consumers will be subsidizing the smelter. Comalco is benefiting by [NZ]$1-1.5 million per week as a result of the present agreements." But the Rogernauts running Electricorp had no stomach to legislate a price increase (which would signal a return to discredited Muldoonism), and the negotiations disappeared into the realm of "commercial confidentiality," where they remain.

 Further insights into Comalco's privileged financial position have been unearthed by the research of Geoff Bertram, an economist at Wellington's Victoria University. Betram analyzed tax payments made by the smelter, revealing that between 1971 and 1987, the company frequently paid nothing, and on average paid only NZ$1.6 million per year. It only started paying New Zealand's standard corporate rate in 1988.

 Labour's real agenda for the Manapouri power plant became evident in 1986. The Labour government and its ideologues saw corporatization (the creation of SOEs) as only the first step toward privatization. It wanted to sell the Manapouri power station, and Comalco was the obvious buyer.

Buying the Manapouri plant is a viable option for Comalco. Its current contract expires in 2007; it wants security of supply, and it is talking of building a fourth potline (a facility at which alumina is smelted into pure aluminum). As Bertram points out, "There are only two ways for Comalco to lock in half-price electricity for the next half century. One is to buy the power station at half its value and integrate it into the smelter consortium, so that the electricity price is merely an intra-company transfer price, and not an arms-length market transaction. The other winning strategy for Comalco would be to trap the New Zealand government into another long-term supply contract, written by the company's lawyers and full of small print, which adds up to a replay of the history of the last 30 years."

 Outside analysts, such as Bertram, estimate the plant's value as at least NZ$3 billion. But the parsimonious multinational only offered a few hundred million dollars for Manapouri. The only issue for the Labour government was negotiating the price for the power station - and the government has sold other public assets, including the national phone system, to multinationals at scandalously low prices - but it did not get the chance to hammer out a deal.

 Labour crashed to New Zealand's biggest electoral defeat in 1990, but the Bolger (National) government continued Rogernomics unabated. Today, however, there are signs that, influenced by 1993 election pragmatism, the government may be rethinking its policies. As Leader of the Opposition, Jim Bolger had stated that Comalco was entitled to get its power price issue settled, and had promised to study the issue of selling Manapouri to Comalco.

 In 1991, the Save Manapouri Campaign was revived, with many of the same leaders in place, albeit 20 years older. Called Power For Our Future, it spent NZ$53,000 from the leaders' own pockets, bombarded the government with position papers and conducted public meetings throughout the country. Unlike the Labour Party, it was opposed to the whole principle of selling Manapouri to Comalco (or anybody else), not simply the price. The Campaign opposed selling off the power station to ensure that Comalco did not rehabilitate its plans to raise Lake Manapouri's waters and voiced the compelling economic argument for keeping a massive 4000 gigawatt-hour power station in public (or semi-public) ownership.

 The Campaign was successful. In 1991, Bolger announced that Manapouri would not be sold to Comalco. In the "meantime," he said, Electricorp would resume negotiations with Comalco. The issue of Manapouri being sold is now on hold at least until after the 1993 election.

Power For Our Future was even paid the backhanded compliment of a politically motivated break-in, which targeted its membership lists, financial details and minutes. Sir Randal Elliott, one of New Zealand's most famous physicians and a leader of Power For Our Future, described it as "a Watergate-type exercise, clearly meant to destablize and irritate the group." There is no clue as to who was responsible. The Campaign has gone on to focus on the government's plans to privatize the nation's electricity network.

Comalco keeps going and going ...

 Comalco has not given up its aspirations to retain access to Manapouri power at discount rates. Now it is employing the tried-and-true multinational strategem of pitting regions and countries against each other. In March 1992, the Comalco board of directors met at Tiwai for the first time since 1984, told the anxious local media that it could only afford to upgrade one smelter at a time and announced that it would make its decision on which smelter to upgrade within the next six months. Chief Executive Nick Stump suggested several possible options: construction of the fourth Tiwai potline (with extra power needed from Electricorp); privatization of the Gladstone power station and expansion of the Boyne Island smelter in Queensland, Australia, following negotiations with the State government; or replacement of the Bell Bay potlines in Tasmania. "They are all [NZ]$500 million plus projects. The question is who is going to be first cab off the rank," Stump said. And he introduced a wild card - a pre-feasibility study on a new smelter in Chile.

 The pressure tactics have worked, at least at the local level. Invercargill, the major city closest to Tiwai, has benefited handsomely from Comalco money and smelter jobs. The local National MP urged Bolger to step in to assure that the smelter expansion would take place in Bluff, and not in Chile or elsewhere. But Bolger, a Cabinet Minister in the Muldoon government, has dealt with Comalco before, and said the negotiations will be left to Electricorp, with no government intervention.

 Bertram believes Comalco should stay, but that the government should call the company's bluff by charging it the real commercial rate for electricity. "The early phase of the resource multinational is predatory, because otherwise it wouldn't come. About 10 years on, they enter a more mature phase, and evaluate whether they're in for the long haul, or phase out. Comalco is in that phase now." A beautiful lake, and a nation's peace of mind, depend on whether Comalco is willing to accept the responsibilities of corporate maturity.