The Dam: Election Update

Given a series of articles have appeared in the papers over the last few months. I thought it might be worth recapping developments with the dam.

Consultation – a 100% funding model

The original proposal had council fully funding (100%) the total dam cost with the question of how ratepayers would be leveraged to fund it all. At the time the dam was estimated to cost around $74.6 million.

The cost was separated into three elements: (1) current consumption (40% of total dam cost: $30 million), (2) future consumption (30% of total dam cost: $22.4 million), and (3) environmental benefit (30% of total dam cost: $22.4 million).

dam-fundingmodel1

TDC currently consumes 15% of current capacity (or water extraction) from the Waimea plains (the aquifer). The remainder (85%), is consumed by irrigators. In terms of the current capacity portion (40% of Dam cost or around $30 million), ratepayers would fund 15% of the current capacity (6% of the total dam cost). This equated to roughly $4.5 million. Irrigators would fund the remaining part of the 40% (ie 34%) which equated to roughly $25.5 million.

The environmental benefit portion (30%) was originally proposed to be fully (100%) funded by the public. This part of the proposal changed after consultation – with 1/3rd of the 30% being paid on the basis of extraction, and remaining 2/3rds fully (100%) funded by the public.

The future capacity portion, contemplated TDC more than doubling it’s existing extraction (or water supply) from 6% of total dam cost (roughly $4.5 million) to 12% of total dam cost (roughly $8-9 million). In effect this would allow Richmond to double in size.

A 100% publicly funded dam was overwhelmingly rejected by the community. As it should have been. I was not surprised. It was totally unrealistic given the already burgeoning debt council was carrying. I suspect those advancing a 100% fully funded model probably knew that and were hoping the community would subsequently welcome a reduced contribution (33% of total dam cost). Moving forward, the public need to also be vigilant against TDC being exposed to an underwriting role – whereby council are left carrying the full cost of the Dam should the other parties evaporate.

Post-consultation – a 33% funding model

After consultation, council rejected a fully publicly funded dam model, but by majority (with Cr Higgins and Ensor moving the resolution, and Cr Bouillir, Canton and myself voting against it) agreed to provide $25 million towards a $74.6 million dam. This equated to roughly 33% of the total dam cost at the time. As Cr Higgins acknowledged in his rebuttal, the 30% environmental benefit portion was consistent with earlier water augmentation projects. However, in my opinion, just because one earlier project adopted such an approach, does not validate that approach.

Interestingly, a 33% level of funding was also consistent with an earlier (unofficial) funding model contemplated by members of WWAC when a dam was first mooted– whereby council would fund 1/3rd, irrigators would fund 1/3rd, and government would fund 1/3rd. So no surprise, where the Mayor, Cr King, and the rest of his flock, wanted the plane to land.

In my opinion, why should ratepayers be funding a disproportionate amount of the environmental benefit? In my opinion, extractors should pay in proportion to the amount extracted. Under this approach, ratepayers would only be funding 15% of the environmental benefit, rather then 66%.

Under this revised funding model – that the council majority arrived at, not the public – a $25 million contribution was proposed that roughly comprised: (1) $8 million for reticulated water (current and future water consumption), (2) $14 million for environmental benefits (being a 66% contribution towards the 30% environmental benefit portion, or 20% of the total dam cost), and (3) $3 million for establishing a council controlled organisation (CCO) and to fund other administration costs in establishing a dam (ie sunk costs).

Under this funding model it was not immediately apparent to the public how much water council was actually buying for the level of funding it was contributing. The focus was on the source of the funding. All the public knew, was they were funding about 33% of the total cost of the dam.

Interestingly, questions about the maximum level of public funds towards the dam (or for that matter, the percentage of environmental benefit to be funded by the public) was never raised in the consultation document. Instead a majority of councillors decided this on the day.

A revised model – design capacity of 34%

Earlier this year, a new model (design capacity) was proposed. Much of it is discussed in the Morrison Report (from page 53 of the Full council agenda of 31 March 2016). This was the first time water supply was explicitly tied to funding. The new model was also given more certainty using a P95 (95% certainty) estimated costing of $82.5 million.

morrisonreport-p95comparison

Under this model, it was much clearer what proportion of the dam council were funding, and what proportion of water council were getting for that level of funding. I supported this model in terms of greater transparency. It also meant, ongoing maintenance and operational costs were allocated on the basis of TDC’s proportion of subscribed (current and future) water capacity (roughly 12-13%). Although this appears to have crept up in the revised model to 18%.

morrisonreport-extractiveallocationmorrisonreport-costallocation

 

Under this model the total cost of the dam is attributed to the total hectares that the dam is capable of irrigating (7,765 hectares) based on the Dam holding roughly 13.4 million cubic metres of water. In hectare equivalents, TDC currently irrigates the equivalent of 620 hectares and was looking to subscribe to an extra 780 hectares.

 

Allocation Dam capacity Funding
Hectares Water supply percentage Funding percentage Total TDC Irrigators and other
Environmental benefit
TDC

2216

0.00%

20.00%

$16.48

Extractors

1112

0.00%

10.00%

TDC (15%)

167

0.00%

1.50%

$1.24

Others (85%)

945

0.00%

8.50%

$7.03

Total

* 3328

0.00%

30.00%

$24.75

$17.72

$7.03

Urban Water Supply
Current

620

8.00%

5.59%

$4.61

$4.61

Future

780

10.00%

7.03%

$5.80

$5.80

Total

1400

18.00%

12.62%

$10.41

$10.41

Other Supply
NCC

515

6.60%

4.64%

$3.83

$3.83

Total urban

1915

17.00%

17.26%

$14.24

$10.41

$3.83

Irrigator Supply
Current

3800

49.00%

34.26%

$28.26

$28.26

Future (direct)

1000

12.90%

9.01%

$7.44

$7.44

Future (indirect)

1050

13.50%

9.47%

$7.81

$7.81

Total irrigation

5850

75.40%

52.74%

$43.51

$43.51

Total Extraction

7765

100.00%

100.00%

$82.50

$28.13

$53.47

[*] The “3,328” hectares is only used for the purposes of allocating funding. Total extraction of “7,765” is based on actual water supply (ie 1,915 + 5,850 = 7,765).

Under this model TDC’s contribution is roughly $18 million for environmental benefit, and $10.4 million for water supply (current and future). A total of $28 million. Irrigators are tasked to find roughly $49 million, with NCC providing roughly $4 million.

The per hectare price for 7,765 hectares based on funding of $57.75 million (ie $82.5 million – $24.75 million, being the environmental benefit portion) is $7,437 per hectare. This is the cost per hectare for subscribers. TDC is subscribing to 1400 hectares at this price (ie around $10.4 million).

The use of the environmental benefit portion and the effect of a disproportionate loading of the environmental benefit portion on TDC ratepayers (roughly 70% of the environmental benefit portion is funded by TDC), results in the funding percentages being lower than the actual water supply percentages.

This means that irrigators are consuming a greater percentage of water (roughly 75%) than they are funding (52%), and in contrast ratepayers are funding a greater percentage of water (34%) than they are consuming (18%).

To put this new model into context, I have transposed the hectare equivalent’s across to the former first round dam consultation funding model (that had a 30:40:30 split in funding).

 

Allocation Dam capacity Funding
Hectares Water supply percentage Funding percentage Total TDC Irrigators and other
Environmental benefit
TDC

2216

0.00%

20.00%

$14.00

Extractors

1112

0.00%

10.00%

TDC (15%)

167

0.00%

1.50%

$0.50

Others (85%)

945

0.00%

8.50%

$7.5M

Total

* 3328

0.00%

30.00%

$22.00

$14.50

$7.50

Water supply (current)
TDC (15%)

620

8.00%

6.00%

$4.00

$4.00

Others (85%)

3800

49.00%

34.00%

$26.00

$26.00

Total

4420

57.00%

40.00%

$30.00

$4.00

$26.00

Water supply (future)
TDC

780

10.00%

7.00%

$4.00

$4.00

Irrigators

2050

26.40%

18.00%

$14.00

$14.00

NCC

515

6.60%

5.00%

$4.00

$4.00

Total

3345

43.00%

30.00%

$22.00

$4.00

$28.00

Total Supply

7765

100.00%

100.00%

$74.00

$22.50

$51.50

*The “3,328” hectares is only used for the purposes of allocating funding. Total extraction of “7,765” is based on actual water supply (ie 1,915 + 5,850 = 7,765).

Under the initial model TDC’s contribution was roughly $14 million for environmental benefit, $8 million for water supply (current and future), and $3 million for establishing a CCO (including admin costs). A total of $25 million – less a share of the already funded sunk costs. Using a design capacity approach the following diagram shows how the 74.6 million dam would have been funded.

20160331-fc-damstruc-74m

On 31 March 2016, the council (by majority) agreed to increase the contribution to $28 million ($25 million plus the sunk cost of $3 million) towards a P95 costed Dam of $82.5 million.

20160331-fc-damstruc-82m

Under this model, TDC’s contribution was roughly $16.5 million for the environmental benefit portion ($13.5 million plus $3 million sunk costs), and $11.9 million for water supply (current and future), which included the extractive contribution of 1.5% – less a share of the already funded sunk costs. Funding for the CCO appeared to have evaporated.

The table below provides a rough comparison.

 Dam (consulted) Dam
(Morrison report)
Dam
(re-proposed)
Total cost  $74.60 $82.50 $82.50
Environmental benefit  $14.00 $18.00 $16.50
Water consumption  $8.00 $10.40 $11.90
CCO  $3.00 ? ?
TDC funding  $25.00 $28.40 $28.00

If the uptake sought by WCDL is fully subscribed (4,500 ha), council staff have estimated there is a $14 million funding gap due to 1350 ha of unsubscribed land (or $20 million if NCC does not subscribe). At of present, around 3800 ha is currently irrigated so it would appear that irrigators are only planning to increase irrigation by an extra 700 ha.

morrisonreport-ha-costs

Given that WCDL only appears to have secure around 2,700 ha of subscribed land (because some of the current 3800 ha of irrigated land do not want to opt in) – the funding gap is even larger, with 3,150 ha of unsubscribed land, which equates to around $33 million (or early $40 million if NCC does not subscribe). Of course this all assumes TDC is happy to fund 34% of the Dam cost. The figures get worse for the irrigators if ratepayers only want to pay for what they are consuming (ie 18%).

morrisonreport-capacity

Key points

The environmental benefit portion is where the ratepayer’s contribution is inflated above what they consume. Had council adopted an extractor pays approach, TDC would only be funding 15-18% of the environmental benefit?

Interestingly, the media did not pick up on the disconnect between funding percentages and water supply percentages – a point I had emphasised several times during the full council meeting (see Nelson Mail, 1 April 2016). I was subsequently told by the Nelson Mail reporter, that they considered the public understood this. I suspect, that is probably what some politicians had led them to naively believe.

My own survey of residents, suggests otherwise. Many residents (but not all) do not realise that they are being asked to pay more for their water, than irrigators are. And when ratepayers become aware of the disconnect between funding the dam (34%) and the water they receive (18%), nearly all do not think it is a very fair deal. That in my book is hardly a fair deal for ratepayers. Especially when the opportunity cost (Plan B) is only around $15 million. And when you consider that ratepayer’s won’t be consuming 18% for some time into the future.

Some might argue that ratepayers benefit from future economic growth and will have the first call on water. However, if the dam is built there will be more than enough water anyway. So having first call, is more academic than reality. Leaving aside whether trickle down economics works (see The Guardian article), those at the top, get even larger benefits, than those down stream. Why should ratepayers be called on to help fund risk when they will not get a proportional reward for underwriting that risk? Surely benefits will still flow if ratepayers pay a fairer portion of the dam cost anyway?

I have no problem with business people risking more and getting handsomely rewarded for that risk taking. But why should ratepayers be asked to to take on more risk than they need too, without an equivalent reward?

Cr King has suggested there are a lot of unknowns with Plan B (eg, water harvesting), but the reality is that a resource consent is hardly going to be more than the $1 million already spent on the dam’s resource consent. In my opinion, its just an attempt to poor political cold water over some reasonable alternatives. So much for reasoned argument?

Irrigators are also getting the benefit of government funding (which reduces their cost). Not to mention the tax deductions that irrigators (as businesses) qualify for, on the interest cost of debt, borrowed to fund the dam. Something ratepayers generally do not qualify for.

Unfortunately, neither the irrigators, nor the mayor, appear very interested in securing a funding deal for the ratepayers contribution. In my opinion, the mayor is more interested in protecting the interests of some irrigators, than the wider community. That impression has come from numerous council meetings on the dam (often in secret), and the arguments and proposals put forward – nearly always in the interests of the dam company (and irrigators) over ratepayers.

So, does this sound like a fair deal for ratepayers?

Who is helping out who here? Lets take a quick reality check. This dam was driven by irrigators (ie, Waimea Water Augmentation Committee (WWAC) comprising stakeholder irrigators who wanted to mitigate the risk of drought) as they needed a consistent supply of water. That position has changed somewhat, now that rule changes proposed by council (affecting both water cut thresholds and water rights) come into force. Now everyone will be affected. WWAC was tasked with finding a solution for irrigators. It explored many options (and locations) but came to the conclusion that a large supply of water (ie a large dam) was the best option (in terms of the unit price of water). And only the lee valley could provide a dam of such a size.

From my own observations, very little research was put into weirs, which were quickly written off as to small (in comparison to a large dam). Yet those advocating the use of weirs have repeatedly asserted that they mainly assist in the recharge of the aquifers (the underground dam). As evidenced from the sudden drop in the aquifer water table, when weirs were removed from the appleby river. What remains unclear from this argument, is whether a weir would top-up the aquifer sufficiently (think a very full dam) to ride out a drought and longer water take reductions under new rule changes.

Another variable is climate change. We are expected to get more rainfall (see table below from NIWA at https://www.niwa.co.nz/our-science/climate/information-and-resources/clivar/scenarios#regional). If this is true, then the trend to date, of more frequent and longer drought periods, is unlikely to continue. In which case, are we over-investing in a dam, when alternative options, might be more cost effective?

Climate variable Direction of change Magnituded of change Spatial and seasonal variation
Mean rainfall Varies around country, and with season. Increases in annual mean expected for Tasman, West Coast, Otago, Southland and Chathams; decreases in annual mean in Northland, Auckland, Gisborne and Hawke’s Bay ] Substantial variation around the country and with season (see Ministry for the Environment, 2008) Tendency to increase in south and west in the winter and spring. Tendency to decrease in the western North Island, and increase in Gisborne and Hawke’s Bay, in summer and autumn.

Another option that was written off early was piping water from the lakes. Again this option was never fully examined nor updated for new technologies, like plastic piping (used in the states), or taking into account the ability for electricity generation (from turbines located within pipes). In my opinion, these options need to be examined more closely, if funding for the dam does not materialise.

More recently, council (led by the mayor) has undertaken to fund 50% of the cost (roughly $1 million) of establishing a future procurement process, should the dam proceed. In my opinion, this is yet another move that front loads a disproportionate amount of risk on ratepayers should the dam not proceed, rather than those who benefit the most – irrigators. Remembering ratepayers are only getting 18% of the water supply and funding 34% of the total dam cost. Neither amount to 50%.

I could understand it, if we had entered into a joint venture (a 50:50 arrangement), but we have not. We are not expected to enter into that kind of arrangement until “Dam Co” (the irrigators investment holding company) have actually secured their part of the dam cost (roughly $49 million). Nor are we likely to in my opinion. I have received no assurances that Dam Co are able to raise anything. At best council has received letters of comfort (ie Dam Co think they can raise the money, but are unable to make any binding promise).

Further, Dam Co have barely secured any funds (cash or debt), than what they had proposed to raise when the dam’s total cost was only $42 million? In fact, I’m not aware of Dam Co raising any funds whatsoever. And until it capitalises (ie raises shareholder funds and\or debt), the company would appear to not be worth much at all. Information about the irrigators dam company can be found at the companies office (see www.business.govt.nz/companies/app/ui/pages/companies/3365573).

I have challenged the financing of this Dam for some time (see 2015 Dam disclosure/, 2015 Dam economics revisited 2014 Dam decision on funding, and 2014 Dam consultation begins).

I strongly suggest ratepayer take a read of the Morrison Report and Agenda item (see Full Council agenda on 31 March 2016) for themselves – and get informed.

Dam funding model

I also note the continued questioning of the councils funding position (ie funding 2/3rds of the environmental benefit portion). I agree with Mr Horn, who says in the Leader (25 August 2016) at page 6 that “on a proportionate basis (ie based on the water take from the plains) ratepayers contribution should be around $12 million, not the $28 million proposed”. In response, the mayor has said, “the council and Waimea Community Dam Co Ltd are still working on the funding model”.

I find the mayors statement very misleading. I have repeatedly asked that council adopt an extractor pays principle to the dam, and on every occasion, the mayor and other councillors (who support the mayor) have opposed it. In march 2016, I challenged the mayor to adopt an extractor pays approach for all of the environmental benefit portion, when he sought to lift the ratepayers contribution from $25 million to $28 million, and he declined. His argument was it was to late to change? In my opinion, the current leadership has shown no willingness to change course. And to suggest otherwise, is very misleading.

Leader (page 6). www.neighbourly.co.nz/e-edition/the-tasman-leader/6575?utm_medium=email&utm_source=transactional&utm_campaign=e-edition_the-tasman-leader_2016-08-25_6575.

Tradable water debate

Since I am on the topic of water, I thought it worth while pointing to a broader debate over tradable water rights. Although my impression is that the debate is fixated on “ownership” rights.

RNZ (3 May) Nick Smith (National). See http://www.stuff.co.nz/nelson-mail/news/73504764/new-115m-water-treatment-plant-opens-at-richmond

RNZ David Parker (Labour). See http://www.radionz.co.nz/news/te-manu-korihi/304199/maori-have-no-greater-interest-in-water-labour

At present, no one owns water (at least located in the public domain). However, if you hold it (for example, in a bottle or storage container, that you own), then its yours. Generally, people acquire water rights by either capturing water as it falls from the skies, or applying for a resource consent to extract it from the ground (or river). The cost of a resource consent is not a great expense and is not tied to the amount of water you want to extract. The amount of water provided under the resource consent is generally only constrained by the science (and impact on neighbouring water extractors).

Perhaps removing water rights from the Resource Management Act (RMA) to a separate legislative instrument, that is better able to tie the amount of water to a unit price, requires some further examination. I wonder if water should managed under a QMS (quota management system), to ensure sustainable utilisation of water resources through the direct control of water harvesting for a specified geographical area.

Basically, rather than just pay a flat charge for a resource consent to extract a specified amount of water, you tie the amount of extracted water to a charge (like you do with the fishing QMS) – that charge then goes to the administrators of the water – to manage it. The base unit price for water would reflect the cost of ensuring a specified water quality level by the administrators of the water. However, the unit price could also increase depending on demand and supply in the market price (enabling water to be tradable, like the fishing quota). Thus the charging and price of water is tied to the amount of water, rather than just the cost of the consent. Charging for a the amount of water, (rather than consent) would incentivise more efficient water use.

 

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