Thursday, 28th November, 2019

Aurora Energy Price Increase Update 28 November 2019

Queenstown Chamber of Commerce CEO, Anna Mickell, has been representing both the Chambers on the engagement by Aurora on the proposed energy price increases. Check-out Anna's latest update below.
 

I have been sitting on the consumer advisory group that Aurora has assembled to support their Commerce Commission application that will allow them to invest more and charge more.  This has been the most extensive and in-depth engagement process that I have ever been a part of.

Aurora has held four face-to-face day long meetings, a teleconference and post workshop discussion forums to assist consumer representatives learn about this complex issue.

An expert independent consultant has been employed to write a consumer report on behalf of the consumer advisory panel. We will have input into the development of this report and sign it off.  Other members of this panel include representatives from social agencies, local government and other employer/business sector membership/advocacy groups.  Stephen Batstone, QLDC Manager Strategy and Asset Planning joins me on this panel.  Stephen is an economist and electricity sector expert.

Aurora Energy has signaled power bills may increase by an average of 16% for businesses in Queenstown in 2021 if they are successful in gaining Commerce Commission approval.

Aurora is looking to lift investment in their assets by $404 million in order to continue replacement of aging assets with the aim of improving safety and reliable electricity supply across the entire Otago region (Dunedin, Central/Wanaka and Queenstown). Queenstown will pick up around $55m over the three-year period

In addition to this investment, and due to the area’s fast growth, Queenstown faces additional investment needs to improve the Transpower grid services to Queenstown if the town continues growth at similar pace within the next ten years.   Transpower is the national grid owner, connecting generation to local distribution companies like Aurora and PowerNet.  Ballpark numbers for this grid investment sit around $150-$200 million and are likely to be met by consumers in our region alone. 

On what went wrong – why this price shock?

Aurora CEO Richard Fletcher has said that the management and board, over the past decade, did not signal (to the Commerce Commission) that they needed to lift their investment in infrastructure beyond the legislated, allowable cap each year. In the absence of any need for major requests for additional capital expenditure, the Commerce Commission regulated environment defaults to a ‘set and forget’, percentage cost increase regulation on the prior year.

Seeking a variance to the allowable cap is a massive piece of work for any company and extremely disruptive and expensive. Consumers also, according to the 2015 Statement of Intent between Dunedin City Holdings and Aurora, have had no appetite for price increases and were satisfied with a lower level of reliability. This price/quality trade-off is an industry-standard approach to planning investment in the assets. Consequently, consumers for the last decade have had the advantage of paying electricity distributed by a well-sweated asset and it is now catch up time.

What about those dividends?

The June 2019 Aurora Statement of Intent states that no dividends will be paid for the next three years. Prior to last year, dividends were paid at around $7.5 to $10m per annum. Even if Aurora had successfully sought and received a lift in their allowed cost cap 10 years ago and retained dividends, without price hikes, they would have fallen short of the capital required for the level of asset investment now required.

Where to now?

In the view of the consumer advisory panel there is no option but to invest in the network, or else it will remain unsafe.

We need to be assured that the Aurora team is up to the job.  The consumer advisory group appears confident that Aurora’s executive management team has the necessary skills to identify the investment that needs to be made and the ability to implement these changes. The GM of Asset Manager and Planning Glenn Coates is very well respected in the electricity sector and word on the street is that we are lucky to have him.  My dealings with CEO Richard Fletcher have been proactive and transparent.  Both these executives have been in the role two years.

Because of the poor standard of the assets, Aurora has breached the quality standards for electricity supply over the past couple of years and is expected to be fined for doing so. The fine, rumoured to be in the millions, does not come back to our region, instead goes into the government slush fund. Our consumer panel will be asking that this money will instead be invested locally, possibly to reduce the blow of the price increases to more vulnerable customers.

Paying for this investment now needs to be considered. There is a complex piece of work to understand and decide over what period this asset cost recovery should be. There is an argument that consumers over the past decade have been underpaying for the asset they have been using and have realised this benefit. Why should consumers in twenty years’ time overpay for benefit that has been realised by the past generation of consumers? This piece of work is well beyond my abilities to provide meaningful commentary on at present.  I will try and update you when more information comes to hand.

The Commerce Commission will be using their own sector experts to verify the work undertaken by Aurora with respect to the need for the assets and the funding of it.  They will also use a consumer advisory panel as part of this process.