TRANSPOWER NEW ZEALAND LIMITED LINES BUSINESS

NOTES TO THE FINANCIAL STATEMENTS continued

FOR THE YEAR ENDED 30 JUNE 2007

18. CONTINGENT LIABILITIES continued

(iii) Economic Gain (Loss) Account

Transpower operates its revenue setting methodology within an Economic Value ("EV") framework that analyses economic gains and losses between those attributable to shareholders and those attributable to customers. The balance of the accumulated gain (loss) from monopoly activities attributable to customers ("the EV balance") has been passed on or claimed from customers over time.

The EV balance at 30 June 2007 was $37.4m to the credit of the customer (2006: $111.6m).

(iv) Administrative settlement and Customer Rebates

On 23 December 2005 the Commerce Commission (the Commission) published notice of its intention to make a declaration of control of Transpower under Part 4A of the Commerce Act.

On 27 January 2006 the Commission published a paper setting out its draft reasons for forming an intention to declare control.

Transpower disagreed with the Commission’s preliminary conclusions and the reasons, and provided the Commission with detailed written submissions setting out Transpower’s views on the matter. Transpower also provided the Commission with a number of reports prepared by independent experts, which supported Transpower’s views.

On 31 March 2006, the Commission and Transpower reached agreement whereby: (a) the Commission agreed to delay its decision on whether to impose control and to provide Transpower with an opportunity to put forward an administrative settlement proposal and (b) Transpower agreed to invoice customers in accordance with notified 2006/07 prices, but provide a credit note that effectively restored customer charges to the level applicable in March 2006.

Transpower has issued credit notes for $22.4m for the period April to June 2006 and $67.4m for the period July 2006 to March 2007.

On 4 December 2006 Transpower issued new prices for April 2007 to March 2008 which represented a compounded average 15.2% increase on the March 2006 prices. The Commission’s preliminary view was that the increase was appropriate.

Transpower submitted a formal Administrative Settlement proposal to the Commission on 31 August 2007. The proposal was accepted by the Commission on 21 September 2007 and was published for consultation on 5 October 2007. Following consultation and cross submission a final determination is expected to be reached in the New Year.

Until such time as an Administrative Settlement proposal is agreed with the Commission there remains some uncertainty around Transpower’s current and future revenue.

(v) Various other lawsuits, claims and investigations

Various other lawsuits, claims and investigations have been brought or are pending against Transpower. The Directors of Transpower cannot reasonably estimate the adverse effect (if any) on Transpower if any of the foregoing claims are ultimately resolved against Transpower’s interests.

19. SEGMENTAL INFORMATION

The Transpower Lines Business operates predominantly in one industry, the transmission of high voltage electricity. Transpower’s operations are carried out in New Zealand and are therefore within one geographical segment for reporting purposes.

20. FINANCIAL INSTRUMENTS

(a) Financial risks

The Transpower Group is subject to a number of financial risks which arise as a result of its business activities, including having a debt portfolio of $1,607.982,000 as at 30 June 2007 ($1,553,005,000 as at 30 June 2006) denominated in both New Zealand dollars and foreign currency, making purchases from foreign suppliers and having contractual agreements with customers. These financial risks comprise:

Interest rate risk

Interest rate risk is the risk of adverse impact on the present and future finance costs of the Group arising from the interaction of interest rate movements with the Transpower Group’s debt portfolio.

Currency risk

Currency risk is the risk of adverse impact of exchange rate movements, which determine the New Zealand dollar cost of foreign denominated expenditures and the New Zealand dollar value of debt issued in foreign currencies.