Purchase of Basslink giving Temasek headache – Tasmanian Govt now demands more than $100m in compensation

In the 60’s, the Tasmanian Government of Australia first examined the possibility of linking Tasmania’s electricity grid with mainland Australia. In the 90s, state entities in Victoria and Tasmania began to undertake investigations for an electricity transmission interconnector to link Tasmania to mainland Australia.

In 2000, Tasmanian Government announced the appointment of the National Grid (UK) as the builder, owner and operator of Basslink. The first commercial transfer of electricity between Tasmania and the mainland occurred on the 28 Apr 2006.

The Basslink’s electricity interconnector is 370km long and is the longest sub-sea power cable in the world. It helps to transfer bidirectional high-voltage direct current (HVDC) linking the electricity grids of the states of Victoria and Tasmania, crossing Bass Strait.

Temasek buys Basslink for nearly A$1.2 billion

After about 1 year in operation in 2007, Temasek’s CitySpring Infrastructure Trust, which was later renamed to Keppel Infrastructure Trust, decided to acquire Basslink from National Grid (UK) for A$1.175 billion. National Grid (UK) had reportedly spent about A$800 million constructing the cable.

At the time of the acquisition, then CitySpring chief executive Fai Au Yeung said, “Basslink fits perfectly within our stated investment mandate and significantly enhances CitySpring’s footprint.”

“This asset will be part of the listed trust (in Singapore) and we don’t have any plans for any further listings (in Australia),” Yeung added.

National Grid (UK) said it was selling Basslink because they wanted to focus in US and UK. A spokesperson said, “In the foreseeable future we have decided to concentrate our efforts in the US and the UK, and at this moment in time it is goodbye Australia.”

The Chief Executive of the power authority of Tasmania, Hydro Tasmania, said at the time, “We look forward to working with CitySpring and developing a good business relationship with this new entrant to the Australian energy market.”

Basslink outage and strained relationship

On 21 December 2015, Basslink was disconnected due to a faulty interconnector approximately 100 km off the Tasmanian coast. It was originally expected that Basslink would be repaired and returned to service by 19 March 2016. However, the link was not restored until 13 June 2016, some 6 months later.

A separate non-cable fault caused another failure of power flow on 22 June. After almost 36 hours, power flow was again restored in the evening of 23 June.

The outage strained the relationship between Basslink and Hydro Tasmania. However, an investigative reporting by the Australian Broadcasting Corporation (ABC) in Jun 2016 showed that their relationship was already strained from day 1.

Their relationship was so hostile that even before the outage in Dec 2015, they had a legal arbitration in 2013.

Legal documents show that Hydro had argued that Basslink’s “acceptance tests were deficient” in measuring the cable’s limitations, which Basslink denied, from day 1. The two parties then agreed to begin operating the cable for an initial period under “minimum technical specifications”. The arbitration later noted that the testing was not done according to the contract’s requirements.

Tensions flared again in 2009 when there were cable outages in January and February then. Basslink argued the outages were due to “extraneous events”, namely the extreme weather conditions. Hydro disagreed.

In 2012, Hydro Tasmania’s profits boomed due to the new carbon tax introduced by the then Labor federal government. Exporting its renewable power to the mainland, Hydro posted a record profit of A$238 million. At the height of record profit, the cable went down again. The two sides could not agree on the cause of the fault.

Basslink blamed Hydro and its desire to “maximise a competitive advantage” that came from the carbon tax. The export of electricity across the cable was restricted while an investigation into the cause of the fault was done, but even that caused the two companies to fight.

Hydro withdrew from the agreement in late Sep 2012, and Basslink continued to operate the cable. Hydro then claimed that Basslink operating in a “unilaterally developed protocol” was causing “serious financial harm” to Hydro. It also claimed that Basslink knew about the 2012’s faults “but kept it a secret”.

The legal proceedings were finalised at the beginning of 2014, with Basslink being ordered to make two big payments to Hydro Tasmania.

Basslink may be “sunk”

In Mar 2016, Tasmania’s daily newspaper, The Mercury, published a report saying that Basslink does not make any money.

It lost $22 million in 2015 after losing $25 million in 2014. Interest payments on borrowings, are the major cause of the losses.

“There are about 20 companies in the Keppel stable, including 10 in the Basslink group,” noted The Mercury.

Keppel’s purchase of Basslink was financed by bank borrowings and intra-group loans. In 2014, intra-group loans were written off by $140 million as uncollectable because falls in future expected revenue from the interconnector had reduced the value of the Basslink investment. The value of the Basslink investment was adjusted downward again with the 2015-2016 outage.

“Its value at this stage is unlikely to exceed bank borrowings implying all equity contributed via intra-group loans has been wiped out. In short, the Basslink group is likely to be currently underwater. Liabilities exceed assets and there is no money coming in the door,” said The Mercury.

Tasmanian Government demands millions in compensation from Basslink

Last month, ABC reported that the Tasmanian Government is demanding compensation from Basslink over the 2015-16 outage.

It wants Basslink to pay up more than A$100 million in compensation for the 6 months when Basslink’s cable went down. The cable fault has partly contributed to the energy crisis faced by state of Tasmania in 2016.

An independent report produced by Basslink could not find a precise cause for the fault. The company then claimed it was proof the failure was a “force majeure” event, or unavoidable catastrophe.

The Tasmanian Government disagreed. It said, “The expert reports into the cable failure delivered in December 2017 indicate that BPL (Basslink) had operated the cable in a manner that allowed it to exceed its temperature design limits during a number of periods in its service life.”

Basslink has strongly denied allegations it breached any warranties under the operations agreement, or that it’s liable for any losses. It said it would vigorously defend any legal action.

In short, it looks like Temasek has brought nothing but troubles to itself after buying Basslink.