CitySpring – OCBC

Dispute resolution process starts

Dispute resolution process starts. CitySpring Infrastructure Trust (CitySpring) announced recently that state-owned Hydro Tasmania has invoked dispute resolution procedures. Hydro Tasmania is CitySpring’s counterparty on the 25-year revenue agreement for the Basslink asset. To recap, discussions were ongoing with Hydro Tasmania on its demand for an additional A$6.9m in commercial risk sharing mechanism (CRSM) payments from Basslink for CY2009.

What is CRSM? CRSM is designed to share the market risk of operating in the National Electricity Market between Basslink and Hydro Tasmania. Payments under CRSM are based on differences between the top 30 and bottom 50 electricity pool prices and can range from up to 25% of base power cable revenues or up to negative 20% of revenues depending on the volatility of electricity prices in Victoria. While the CRSM is designed to have a neutral effect in the long term, it creates a level of volatility in Basslink’s revenue (offering both upside and downside).

Could require resolution by arbitration. Hydro Tasmania’s demand for additional CRSM payments was first disclosed in Feb, at the 3Q FY10 results. In the latest announcement, CitySpring noted that the Basslink Services Agreement contains dispute resolution procedures which can be activated to resolve such matters. Hydro Tasmania issued a dispute notice on 17 Sep on the “CRSM matters and other alleged breaches” of the services agreement. It also noted that such procedures ultimately may require Hydro Tasmania and Basslink to enter into arbitration. While further details were not revealed, we note in a typical arbitration, a third party reviews the case and imposes a decision that is legally binding for both sides.

No provisions made yet. To date, CitySpring – after taking legal advice – had not made any provision for liabilities arising from the discussions with Hydro Tasmania. We note that with dispute resolution procedures invoked, there could a greater risk of CitySpring booking some sort of provision on its P&L. Separately, discussions with Singapore’s Energy Market Authority (EMA) regarding the conversion, and ensuing liberalization, of the City Gas town gas network are ongoing. The manager re-iterated that it was re-assured by the consistent and fair nature of EMA’s decisions so far as a regulator, especially in the electricity market. The manager also emphasized that the marginal returns per household create a natural barrier for newcomers to the residential market; City Gas serves 623,000 customers. We are suspending coverage on CitySpring as we see limited positive price catalysts in the near-term.