16/11/05 Intention to Declare Control on Unison Networks Limited PowerNet Limited Submission Martin Walton – Chief Executive Greg Buzzard – Chief Financial Officer

16/11/05 PowerNet Limited Background  Network management  JV company (formed in 1994)  Offices in Invercargill and Balclutha  Owned 50/50 by: – Electricity Invercargill Ltd – The Power Company Ltd (Southland)  Manages 4 electricity networks

16/11/05 Network Details ODV $350M4 th System Length13,547km3 rd Consumers63,0006 th GWh conveyed1,230GWh5 th Land Areasq km2 nd Customer density - highest (2 nd ) and lowest Undergrounding % - highest and lowest 2005 lowest SAIDI and SAIFI, 2004 highest SAIDI Most “efficient” network

16/11/05 Network Ownership Experience  Central Government  Local Government  Consumer Trust  Consumer Co-operative  Investor Owned Joint Venture

16/11/05 The 3 Dimensions Basis for Declaring Control (para 77-79) The balance between: Quality Price Return

16/11/05 Sharing Benefits  Acquisition process – Cost savings are identified – AND paid to the seller  “Benefits” identified by the Commission – Are not benefits – They represent cost savings identified and already paid for on acquisition  Paying twice is fundamentally wrong  Retrospective effect

16/11/05 WACC and ROI  Measuring apples with apples – Lally’s WACC tax rate – 33% – Commission’s view of Unison’s ROI tax rate – 16.6%  Individual WACC’s (para 162)  Use the WACC tax rate in the ROI – Prima facie 33%  AND in regulatory accounts

16/11/05 Tax Impact on Lally’s WACC TaxWACC* EIL33%7.35% TPCL66%5.11% OJV 0%9.58% Unison16%8.50% Prima facie 33% tax for ROI as in Lally’s WACC WACC* as per Lally 8 September 2005

16/11/05 Disaggregation  Discourages rationalisation of networks  Penalises recent acquisitions/mergers  Inhibits overall commercial effective pricing  Limits further industry wide efficiency gains  Commerce Commission – Company wide value and return  Electricity Commission – Methodology, aggregation, averaging.

16/11/05 Capital Contributions  Upfront cash contribution – Covers negative discounted cash flow cost of supplying consumer – NPV = 0 approach  Cost is incurred over the life of asset – Income spread over the same period – IFRS change to spreading

16/11/05 Inflation  CPI as a proxy for revaluation gains  Inflation scenarios modeled up to 3%  A possible scenario - Customer contributions 2% of ODV -Inflation 5% -Lally WACC of 7.35% -Every profit would equate to an ROI above WACC

16/11/05 Summary  Balance between the 3 dimensions – Price, quality and return  Building block approach does not share efficiency gains  Identified “benefits” are not benefits  WACC and ROI parameters are inconsistent  Continued disaggregation is less efficient  Consistency with the Purpose Statement?