Asset Management Plan Asset Management Plan APRIL 2016 – MARCH 2026 | P a g e 1 Asset Management Plan Asset Management Plan No. 23 A 10 Year Management Plan for Aurora Energy Limited From 1 April 2016 to 31 March 2026 Aurora Energy Limited PO Box 1404 Dunedin 9054 New Zealand Website www.auroraenergy.co.nz Phone + 64 3 474 0322 Fax + 64 3 477 5771 First published March 1993 LIABILITY DISCLAIMER This Asset Management Plan (AMP) has been prepared and publicly disclosed in accordance with the requirements of the Electricity Information Disclosure Requirements 2012. Some of the information and statements contained in the AMP are comprised of, or are based on, assumptions, estimates, forecasts, predictions and projections made by Aurora Energy Limited (Aurora). In addition, some of the information and statements in the AMP are based on actions that Aurora currently intends to take in the future. Circumstances will change, assumptions and estimates may prove to be wrong, events may not occur as forecasted, predicted or projected, and Aurora may at a later date decide to take different actions to those it currently intends to take. Except for any statutory liability which cannot be excluded, Aurora will not be liable, whether in contract, tort (including negligence), equity or otherwise, to compensate or indemnify any person for any loss, injury or damage arising directly or indirectly from any person using or relying on any content of the AMP. When considering any content of the AMP, persons should take appropriate expert advice in relation to their own circumstances and must rely solely on their own judgement and expert advice obtained. This issue approved by Aurora Board of Directors March 2016 | P a g e 2 Asset Management Plan 1 CHIEF EXECUTIVE OFFICER’S STATEMENT Energy powers everyday life. We are proud to supply the electricity infrastructure that underpins the economic and social well-being of the communities we serve in Dunedin, Central Otago and Queenstown Lakes. We are also pleased to present an updated Asset Management Plan (AMP) for the period 2016-2026 which documents how we intend to protect, enhance and operate the Network while meeting agreed levels of service to our customers and stakeholders. 1.1 Current Performance In the last 12 months, Aurora Energy has made substantial investments in new and replacement assets to meet growing demand and to improve our risk profile. We have continued to focus on delivering high levels of safety, reliability and customer service to the community while delivering on our Shareholder’s requirement for reasonable returns. This is despite unprecedented extreme weather events testing the resilience of the network and those maintaining it. However, weather-related events are not the only challenges facing the network. 1.2 Meeting the Challenges 1.2.1 Regulatory Impacts As an electricity distributor, Aurora Energy operates in a highly regulated environment. That environment, and any changes in it, greatly influences our plans. The Commerce Commission’s price quality path regulation operates in five-year regulatory control periods. After developing economic models for use in determining price and quality limits in early 2014, the Commerce Commission released its draft default price-quality paths for consultation in July 2014. The Commerce Commission then finalised price and quality settings for the next five years for 16 electricity distributor’s including Aurora Energy in November 2014. Aurora Energy’s maximum allowable revenue was set at $56.5 million from 1 April 2015. This reduction of 4.3 percent from last year, represented an improved outcome compared to the draft determination of a reduction of 6.5 percent, and includes the effect of a reduction in the weighted average cost of capital (or WACC) used for regulated businesses from 7.60 to 7.19 percent. For the subsequent four years ending 31 March from 2016 to 2020, Aurora Energy will only be allowed to increase pricing by a rate equivalent to the Consumer Price Index (CPI). The Commerce Commission has made changes to their forecast and economic models as a result of submissions by Aurora Energy and other lines businesses. The outcome however, means that approximately $6.5 million of planned work will not be compensated for in pricing over the regulatory period. Aurora Energy’s forecast operational expenditure allowance increased by 3.0 percent, only partially reflecting increased expenditure on vegetation and pole remediation that commenced in FY14 and continues unabated. The quality path remains similar to that which has applied in the previous regulatory period, with SAIDI and SAIFI maintained as the quality of supply measures, quality limits determined by reference to historic reliability performance, normalisation for maximum event days, and the overarching requirement to comply with the quality path for a minimum of two out of three years. | P a g e 3 Asset Management Plan The Commerce Commission’s general approach applies a sinking lid to quality standards by setting compliance limits with reference to a historical average. Like all sinking lid mechanisms, this could ultimately result in targets that are unsustainable (unless offset by an exponential increase in reliability investment). First quartile performers (including ourselves) will be affected the earliest in respect of compliance difficulties with reducing limits. Aurora Energy’s investment profile significantly influences the extent of planned outages required on the network. These factors, and more stringent health and safety practice involving greater use of de-energised work, could ultimately result in quality targets that are unsustain- able. A customised price-quality path (CPP) remains an option for Aurora should it consider that an alternative price-quality path would better meet its particular circumstances (including a quality-only CPP). 1.2.2 Emerging Technologies The emergence of new technologies, new energy sources and changing consumer demands such as local solar and wind generation and grid-connected battery storage are also challenging all participants in the energy sector to re-evaluate their future investment decisions, the regulatory framework and customer relationships. In coming years, the challenge will deepen for electricity networks to maintain an acceptable reliability and quality of supply for its consumers in the face of these emerging technologies and changing usage patterns. While the direct impact of these trends remains relatively modest for now, over the long term the pace of change is expected to accelerate, pushed by consumer choice and the increas- ing economic viability of technologies in energy storage, generation and transport. Indeed In the near term, we expect overall energy demand to remain stable or increase modestly across the Aurora Energy network. The picture is similar to recent years with flat or declining energy demand in Dunedin (relatively static population and economic activity levels) and increasing demand in Central Otago (from irrigation projects and a growing population). Nevertheless Aurora Energy is working to identify the most efficient means of meeting the new and changing infrastructure requirements that consumer investment in new technologies will place on the existing electricity system. A mix of conventional network investments and smart technology investments are likely to be necessary. Realising the benefits of new technologies also requires us to invest in ‘enabling’ systems early in the planning period. As part of a major project to modernise our network management, control and communication systems, we will complete the first stage of a new advanced distribution management system and combined control centre this year. We are also taking part in initiatives to promote the uptake of electric vehicles in New Zealand under the Drive Electric banner, establishing charging infrastructure at key locations on State Highway One, including on the Aurora Energy network. 1.3 Summary Over the next 10 years, we plan to outlay total expenditure of $417M to secure the future reliability of the network for our consumer and the communities we supply. This investment will support the achievement of challenging reliability targets and permit further reductions in network-related risk. We hope you find the Plan informative and welcome any comments or suggestions on it which can be emailed to [email protected] Grady Cameron Chief Executive Officer | P a g e 4 Asset Management Plan TABLE OF CONTENTS 1 CHIEF EXECUTIVE OFFICER’S STATEMENT ...................................................................................... 3 1.1 Current Performance ..................................................................................................................3 1.2 Meeting the Challenges ............................................................................................................3 1.2.1 Regulatory Impacts ............................................................................................................. 3 1.2.2 Emerging Technologies ...................................................................................................... 4 1.3 Summary ......................................................................................................................................4 2 BACKGROUND AND OBJECTIVES ............................................................................................... 11 2.1 Planning Period .........................................................................................................................11