11/08/2020
Submission: Aurora Energy’s plan to fleece Central/Lakes
Aurora Energy is a lines company that operates as an effective monopoly in most of the Otago region, and is 100%-owned by the Dunedin City Council’s holding company. It distributes electricity from Transpower’s national grid, and both owns and operates the poles, lines and other equipment required to deliver that electricity to around 90,000 Otago homes, farms and businesses.
Aurora’s costs and charges are built into consumers’ power bills, no matter the energy retailer that those consumers might engage.
The recent history of Aurora is an unfortunate story of mismanagement at both governance and senior executive level There have been independent, Deloittes and Auditor-General inquiries into the company that have all returned critical verdicts.
In March 2020, the High Court held Aurora responsible for contravening network quality standards after repeated warnings and fined it $5 million. In addition, failed land development ventures, excessive dividend payments, and inadequately maintained infrastructure have all served to compound Aurora’s service problems, as well as its commercial reputation and its financial standing.
To address outstanding maintenance requirements and upgrade their infrastructure to an acceptable standard, Aurora is proposing an investment plan – the Customised Price-Quality Path (CPP) Application - that will raise hundreds of millions of additional revenue from its current customer base. Most of those customers are located in Dunedin, Central Otago and the Queenstown Lakes districts.
Because of its monopoly nature, the Commerce Commission is required to give approval to any Aurora revenue generation scheme, and it is leading public consultation on this matter. Any submission made by the Otago Regional Council
and others will be considered by the Commission before a final decision on 31 March 2021.
What is Aurora proposing?
Aurora has applied to the Commerce Commission to spend $383 million over the next three years (or $609 million over five years) “to address safety and reliability issues on its network.”
Aurora concedes that its application “is to address historic under-investment … which has resulted in a gradual deterioration of its equipment … a higher number of safety incidents and an increasing number of unplanned power cuts.”
The financial costs of this strategy will be imposed solely upon electricity consumers, through increased power bills.
The Electricity Commission estimate that about 27% of the average power bill is made up by the distribution cost (see Diagram 1). It is this cost/charge that Aurora has responsibility for with affected consumers. Aurora is proposing that this charge rises by an average of $20/month ($240/annum) for Dunedin consumers; $30/month ($360/annum) for Central Otago/ Wanaka consumers, and $24/month ($288/annum) for Queenstown consumers.
It is important to understand that these average consumer rises are sourced from Aurora Energy and have not been verified by the Commerce Commission.
If the Commerce Commission approve Aurora’s default five-year investment period, then that would result in an additional price increase in years four and five of
between 2.6% and 3.2%, or approximately $5-$6 more a month depending on where consumers live.
Aurora Energy is also proposing lesser service standards as they embark upon their infrastructural upgrade and renewal.
Aurora would increase the maximum limits for the duration and frequency of unplanned power cuts across its network, claiming that this “reflects the realistic performance of its network given its deteriorated state. It is forecasting that on average, customers can expect about 111 minutes of unplanned power cuts (excluding the full impact of severe weather events) per year over the investment period, regardless of whether this is three or five years. That’s about 4% more than the previous investment period.”
It doesn’t expect its reliability of its service to improve any time before 2024.
In effect, Aurora is proposing significant price increases over the next three years for the majority of Otago consumers with an accompanying diminished level of service.
Otago Regional Council’s primary concerns
The Local Government Act 2002 states the purpose of all local government in New Zealand, including the Otago Regional Council. It is –
“to promote the social, economic, environmental, and cultural well-being of communities in the present and for the future.”
The Council believes that Aurora’s current investment plan will have negative impacts upon the financial well-being of Otago consumers, and also have consequential negative environmental effects.
1. Economic/Financial Effects
As the Commerce Commission notes, this Aurora proposal comes at a time of serious economic decline. The impact upon the Queenstown-Lakes district has been well publicised, but unemployment and financial hardship is also forecast to rise in Central Otago and Dunedin
The government’s wage-subsidy programme has been vital in sustaining businesses and jobs in the immediate wake of the Covid-19 emergency.
However, it is due to expire in early September 2020, along with home mortgage ‘holidays’, and then the fuller effects of the emergency will be relayed across the region.
Job losses are projected to worsen, household budgets will come under increasing strain and many businesses will reduce capacity or close. There will be no international tourists visiting the region this summer, nor in the foreseeable future.
Budget advisory services, foodbanks and emergency relief agencies are already experiencing unprecedented demand.
It is international rather than domestic tourism that has sustained the Central/Lakes economic boom. Without overseas visitors, many businesses’ balance sheets will not prove viable once wage subsidies have ended.
The one bright spot in the regional economy is that farming, horticulture and viticulture sectors are not as badly affected as first feared. Our export industries continue to enjoy firm markets returning favourable prices.
However, the increased cost of air freight is expected to have negative effects upon the profitability of some enterprises (eg cut flowers, cherries, some fish stocks). There are also legitimate concerns being expressed about the availability of seasonal labour to harvest Central’s stone-fruit and grapes crops.
The Aurora investment plan imposes a significant cost upon households and businesses at a time when they can least afford it. Even worse, the first impact will be experienced as the Central/Lakes districts prepare for the 2021 winter – when seasonal employment is ending, and the warmer months are coming to an end.
The power price rises will also have their greatest impact upon those households least unable cope. Welfare, low and low-middle income households with families will be particularly challenged. Some consumers may simply be unable to afford the rise.
2. Health Effects
Aurora’s planned investment strategy is likely to have a negative impact upon the health of certain socio-economic groups within the Central/Lakes districts in specific, and Otago in general.
As indicated above, the affordability of the intended price rises will be an issue for many low-income households especially those dependent upon welfare benefits and national superannuation. An additional $30 per month on the power bill may be compensated for by some households seeking to use less electricity to reduce their monthly expense.
That has implications for home heating. Many households in the Central/Lakes districts and in Dunedin City are of older construction with inadequate insulation. Reducing the amount of heat in those homes will have adverse health effects especially upon the young, the sick and the elderly.
The increased Aurora line charges are unavoidable to electricity users. They become a fixed cost no matter electricity consumption. So this exacerbates the inequity of the charges upon low income households, and the potential health effects.
3. Environmental effects – air quality
The Otago region has a long established problem with air quality – particularly in the winter months and particularly in towns that suffer the seasonal inversion layer.
Regional councils and unitary authorities are responsible for managing air quality under the Resource Management Act. They are required to monitor areas where air quality is likely, or known, to exceed the standards. As a consequence, the Otago Regional Council has designated four urban areas as being ‘Airshed 1’ – where the air quality is often measured at standards that exceed World Health Organisation guidelines. These towns are Milton, Alexandra, Arrowtown and Cromwell.
The primary cause of this poor air quality is the combustion of wood and coal for home heating purposes in winter. Upgrading fuel-burners to more efficient models has not been proven to make discernible air quality differences (Arrowtown 2020 study, ORC).
A new National Environmental Standard for Air Quality is expected to be promulgated in the next twelve months and impose greater responsibilities upon regional councils to manage and monitor air quality, especially airsheds that regularly exceed the defined allowances for PM 2.5.
This is likely to increase regulatory pressure upon inefficient burners, ban coal and place stricter standards upon burner emissions. In return, the science suggests that air quality and the respiratory health of the affected communities should improve. Therefore it is imperative that heating alternatives to fuel burners are accessible and affordable.
The pricing of electricity to communities in Airsheds 1 and 2 is critical to any improvement in environmental and/or health outcomes.
There is no reticulated natural gas to these communities. Electricity-driven heat-pumps and LPG gas canisters are the only alternative to the burning of combustible matter. Therefore Aurora’s intent to lift non-avoidable line charges will likely impede the financial viability of any switch to ‘cleaner’ energy alternatives.
Alternate Solutions?
The Commerce Commission generally accepts that poor past governance and management created the need for Aurora’s current plan. They also accept that the Commerce Commission itself “dropped the ball” as regards oversight of Aurora.
The Commission seems to accept that there is no alternative than for Aurora to engage upon its extensive renewal and maintenance programme if it is going to meet its statutory and consumer obligations.
However much of the consultation has centred around not so much what consumers will consequently pay, but the best structure to smooth the financial shock.
In the wider community though there is a perception that the financial impost falls inequitably upon Central Otago and Lakes consumers. Dunedin consumers at least shared some of the benefits of the enhanced dividends that Aurora paid to its sole shareholder, Dunedin City Holdings Limited. Those dividends might have been re-invested in the company’s declining assets and in better maintaining the lines and equipment that now require such urgent and extensive repair.
The Commission might explore the contribution that the Dunedin City Council could make, through its holding company, to reduce the financial demands upon Otago consumers.
Despite protestations from Aurora that its planned financial spend has no relation to past dividends paid out to Dunedin City Holdings, [Media Release, 12 June 2020] outgoing Aurora and Delta board member Stuart McLauchlan publicly highlighted subvention payments made, at the request of the holding company, that would ordinarily have gone “to fund network renewal”. [ODT, 15 December 2016].
Deloittes’ independent report of December 2016 reaches similar conclusions – that the Aurora/Delta governance planned short-term dividend payments to Dunedin City Holdings, and then worked out their asset maintenance requirements after that.
The Office of the Auditor-General reported to Parliament in 2015 that the holding company’s demand for higher returns led to ill-fated land developments by Aurora/Delta that lost the company around $8 million.
In summary, the Dunedin City Council’s demands to maximise dividend revenue from Aurora/Delta had the direct consequence of under-investment in the lines company.
Other issues that the Commission needs to address
The financial plan that accompanies Aurora’s CPP application does not address three fundamental questions. They are all relevant to the ongoing impost of planned price rises upon Otago’s consumers.
The first relates to the return-upon-investment that the Dunedin City Council might expect, via its holding company, once the asset renewal is complete. If the assets of the company are improved by this investment plan, does that mean that the enhanced value of the asset will have an effect upon any dividend that the Council might demand? The return on capital issue.
Given that the primary cash injection would appear to be coming from captured consumers, then it would be inequitable that a territorial authority derives a financial gain.
Second, if Aurora is readied for some future sale by the Dunedin City Council, should that territorial authority derive, again, the financial benefits that have been accumulated to Aurora via the enhanced contribution of Central Otago and Queenstown consumers?
Finally, should the costs imposed upon Aurora’s consumers be separated out into district differentials? Given that the lines company extends its monopoly operation throughout the Otago region, then the most equitable outcome would seem to be universal charging, rather than the district-wide differential pricing that Aurora proposes.
Cr Michael Laws
Deputy Chairman
Otago Regional Council
[email protected]
027 3060 600
