Treasury officials warned the Government to reject any request for a taxpayer funded hand-out to keep the Tiwai point smelter open.
However, a year later the Government stumped up a $30 million sweetener to Australian metals giant Rio Tinto to stop the Bluff plant closing before 2017.
Documents released this afternoon show Treasury advised last July that a bailout should be rejected because it would "would result in a significant transfer of value from New Zealanders to [owners] PA [Pacific Aluminium] and Rio Tinto shareholders".
The amount of the value transfer has been withheld. Also redacted from the papers are the company's original demands.
It threatened to move offshore if it didn't get cheaper prices from state-owned energy company Meridian.
Many believed power prices would then fall, slashing Meridian's profitability just as the Government was trying to partly privatise the company. The closure would also have seen the loss of 800 jobs.
Officials said that even if the smelter was shut, the Government's partial float of Meridian shares could still go ahead. But "the proceeds to the Government will be significantly reduced", they concluded.
News that Meridian and Pacific Aluminium were in negotiations first became public in August last year. But the documents reveal Treasury was providing advice to the Government for more than a month before this.
The documents cautioned there was a "significant risk that knowledge of this issue will become public soon".
By July this year, Treasury was still urging ministers not to offer a subsidy, arguing there was no "economic justification".
A document shows it recommended ways for the Government to play hardball as a deal was thrashed out.
The company was asking for a reduction in the price of power and transmission charges, and a cap on charges. Officials said this should be rejected, and the request around transmission would need "significant regulatory reform".
A briefing document ahead of a July 9 meeting between senior ministers and company executives in July also showed Pacific Aluminium was demanding that the price it paid Meridian for power be kept out of offer documents for the upcoming share float.
The Financial Markets Authority requires companies to disclose materially relevant information to the market.
Treasury saw no issues with the FMA exemption, saying it was "reasonable".
Officials also outlined a summary of "key lines" for Finance Minister Bill English, Economic Development Minister Steven Joyce and State Owned Enterprises Minister Tony Ryall to use during the meeting.
They were advised to say that Pacific Aluminium "have negotiated so hard with Meridian that it is at a point of indifference" and that a subsidy makes "no economic sense".
And it said the Government should set a July 19 deadline, at which point Meridian would withdraw its offers. Ministers were instructed to tell the company "take the deal in the next ten days while you can".
Finance Minister Bill English defended the payment, saying it kept jobs in Southland and gave certainty to the electricity market.
"We made the judgment that a one-off payment was worthwhile.
"It wasn't just about asset sales, there was the issue of the large number of jobs in Southland, the ongoing uncertainty in the electricity market ... and of course our own focus on the float of Meridian which would benefit from having more certainty about this deal."
The Government didn't want to get involve in managing the smelter, he stressed.
He said Treasury advice was not to get into a "long-term subsidy arrangement" with the smelter.
"We don't always do what Treasury says," he added.
- Fairfax Media