Supplementary Agenda of Council - Wednesday, 26 February 2025

Council

26 February 2025

Reports

Submission on the Local Government (Water Services) Bill

Department: 3 Waters and Legal Services

EXECUTIVE SUMMARY

1 This report seeks the Council’s approval of a draft Dunedin City Council (DCC) submission (Attachment A) to Parliament’s Finance and Expenditure Select Committee on the Local Government (Water Services) Bill (the Bill). The Bill was introduced to Parliament on 10 December 2024 and referred to Parliament’s Finance and Expenditure Committee for consideration. The Committee is due to report back to Parliament on the Bill by 17 June 2025.

2 This Bill is the third step in a legislative programme designed to give effect to the Government’s ‘Local Water Done Well’ policy.

3 The key points from the draft DCC submission relate to:

a) Structural arrangements;

b) Provision of water services – operational matters;

c) Planning, reporting and financial management;

d) Economic regulation and consumer protection;

e) Taumata Arowai – the Water Services Regulator;

f) National Engineering Design Standards for water networks; and

g) Environmental performance standards and infrastructure design solutions for wastewater and stormwater systems.

4 The deadline for submissions on the Bill was 23 February 2025. On 20 December 2024 staff requested an extension from the Finance and Expenditure Committee for a date after the Council meeting of 26 February 2025. An extension was granted on 29 January 2025, with an extended due date of 2 March 2025.

RECOMMENDATIONS

That the Council:

a) Approves the draft DCC submission to Parliament’s Finance and Expenditure Committee on the Bill.

b) Authorises the Mayor and/or his delegate to speak to the submission.

c) Authorises the Chief Executive to make any minor editorial changes if needed.

BACKGROUND

5 Local Water Done Well (LWDW) is the Coalition Government’s plan for water services delivery improvement in New Zealand. LWDW is being implemented in three stages, each with its own piece of legislation. This Bill is stage three.

6 The first bill, the Water Services Acts Repeal Act 2024 repealed the previous Government’s water services reform legislation. The second bill, the Water Services (Preliminary Arrangements) Act 2024 (Preliminary Act), established the LWDW framework and the preliminary arrangements for the new water services system.

7 The Bill provides for:

a) arrangements for the new water services delivery system, including both the structural arrangements and the enduring settings;

b) a new economic regulation and consumer protection regime for water services; and

c) changes to the water quality regulatory framework and the water services regulator.

8 The arrangements for new water services delivery systems include:

a) structural arrangements for water services provision such as establishment, ownership, and governance of water organisations;

b) operational matters such as arrangements for charging, bylaws, and management of stormwater networks; and

c) planning, reporting and financial management.

9 The new economic regulation and consumer protection regime in the Bill is based on existing economic regulation in the Commerce Act 1986, which already applies to other industries across New Zealand, e.g., electricity lines services. The Commerce Commission will also enforce a new “ring-fencing” rule which requires regulated suppliers to spend the revenue they receive from providing water services on providing those services.

10 Changes to the water quality regulatory framework and the water services regulator, include:

a) change the Taumata Arowai-the Water Services Regulator Act 2020 to amend the regulator’s name to ‘Water Services Authority – Taumata Arowai’;

b) changes to the Water Services Act 2021 (WSA 2021) designed to reduce the regulatory burden of the drinking water quality regime and improve proportionality in the application of regulatory powers;

c) a change in the approach to Te Mana o te Wai; and

d) enabling the introduction of environmental performance standards for wastewater and stormwater networks.

11 The Bill is available on the New Zealand Legislation website: https://www.legislation.govt.nz. A summary of the Bill can be found at Attachment B.

12 It is expected the Bill will be enacted in mid-2025.

DISCUSSION

13 The Bill enables greater flexibility in terms of delivery models and more provision for local ownership and influence when compared with previous water reform legislation. As such, DCC’s draft submission is generally supportive of the Bill and its enabling approach, specifically around ownership and local influence.

14 The draft submission states, however, that Council is concerned that the level of regulation and widening ministerial influence contained in the Bill could have the effect of diluting Council control, regardless of which water services delivery model is adopted.

15 Similarly, the draft submission also states the Bill’s structural arrangements are more weighted towards some water service delivery models over others, with what appears to be council controlled organisations being given more benefits (e.g., higher debt level thresholds) than in-house delivery models.

16 The draft submission urges the Government to ensure that restrictions against privatisation are enduring, and that local influence is preserved.

Structural Arrangements

17 The draft submission questions aspects of the structural arrangements outlined in the Bill including comprehensive and staged economic regulation and different debt leverage percentages for different water service models. Of most immediate concern, however, is the conflicting consultation provisions between the Preliminary Act and the Bill, and the draft submission requests clarification to ensure a “Change Proposal” only relates to changes outside the Water Services Delivery Plan process so that Council is not subject to unnecessary consultative processes.

18 Further, the draft submission states the definition of Joint Water Service Provider Arrangement (JWSPA) is too wide and requests there is a narrowing or flexibility given to the definition of a JWSPA to ensure simpler shared service arrangements can be efficiently entered. Further that there is an explicit exemption for contractual shared service arrangements from the new Change Proposal provisions.

19 The Bill provides limited mandated direction on mana whenua participation in water service delivery. The Bill states that water service providers must act in a manner that is consistent with Treaty settlement obligations, and shareholding councils may set expectations for how water organisations conduct its relations with Māori in the Statement of Expectations. The draft submission urges the Select Committee to consider amending the Bill to mandate engagement with Māori in line with other legislation e.g., Local Government Act 2002, as well as a requirement to include Māori representation on the board of a water organisation.

Provision of Water Services – Operational Matters

20 The Bill provides tools designed to improve operational efficiencies and manage risks, including management plans and bylaws relating to drinking water catchments, trade waste and stormwater networks (including private watercourses). The draft submission states that, given the complexities of stormwater, further consideration is needed in relation to the integration of its management with asset owners, property owners and regulators, the management transport corridors, infrastructure maintenance, and how charging for stormwater may work.

21 The Bill requires water service providers to produce a drinking water catchment plan, a trade waste plan, and stormwater network risk management plan in the first two years after the Bill’s enactment. Within the same timeframe, all water services bylaws must also be identified and reviewed. A plan must also be developed for each where they are either amended, revoked, or revoked and replaced.

22 Given the high volume of work for water service providers within the first two years post enactment of the Bill, relating to reviewing and/or preparing new bylaws and producing management plans, the draft submission requests some leniencies on timeframe given resource limitations.

23 The Bill specifies who can be charged for water services as the customer. These provisions are consistent with the provisions in the Local Government (Rating) Act 2002 that set out who is liable to pay rates. The draft submission supports this approach.

24 The Bill allows for the Crown to be exempt from paying development contributions. The draft submission opposes Crown exemption and states that any entity putting a burden on the system should be liable for development contributions.

Planning, Reporting and Financial Management

25 The Bill sets out new planning, reporting and financial management requirements for all water service providers. The requirements include a statement of expectations (for shareholders to provide to water organisations), a water services strategy, water services annual budget, and a water services annual report.

26 The draft submission states that Council acknowledges the principle of separate planning, reporting and financial management to ensure that money collected for the delivery of water services is spent on water. However, Council questions whether the new planning and accountability framework is another example of prescriptions within the Bill that are more weighted towards some models over others.

Economic Regulation and Consumer Protection

27 The Bill provides for the establishment of an economic and consumer protection system to be overseen by the Commerce Commission. Water service providers would be subject to core regulatory requirements, including information disclosure requirements, and may be subject to further regulation as determined by the Commerce Commission.

28 The draft submission states Council is generally supportive of the new economic regulation framework for water services, but that it considers the scope and scale of the Commerce Commission’s economic regulation activities should be tailored to the water service provider’s delivery model.

29 Further, the draft submission states that the level of oversight that is proposed for the Commerce Commission may be higher than is necessary in cases where territorial authorities adopt a delivery model that retains a high degree of control (e.g., in-house delivery). Council notes that the existing ‘in-house’ delivery model for water services already has several checks and balances that contribute to achieving the objectives of the proposed economic regulation system.

Taumata Arowai – the Water Services Regulator

30 The Bill would amend existing legislation to change the name of Taumata Arowai – the Water Services Regulator. These amendments would give effect to the Government’s preference for Government agencies to have an English language name first. The draft submission expresses support for retention of ‘Taumata Arowai’ as the primary name for the water services regulator / authority.

31 Parts of the Bill have been designed to reduce the cost and burden for drinking water suppliers associated with complying with the WSA 2021. These include:

a) adding a requirement to take compliance costs into account in Taumata Arowai’s operating principles;

b) adding scope for Taumata Arowai to grant general exemptions to drinking water suppliers from regulatory requirements in order to provide flexibility where compliance is impractical, inefficient, unduly costly or unduly burdensome;

c) excluding ‘shared domestic drinking water supplies’ (i.e., supplies servicing up to 25 consumers for domestic use) from the requirements of the drinking water regulatory system;

d) excluding community drinking water supplies serving fewer than 25 consumers from the requirement to have a drinking water safety plan; and

e) adding a definition of ‘mixed-use rural water scheme’ and requirements for Taumata Arowai to tailor aspects of its regulatory approach to these supplies.

32 The draft submission states that although Council recognises the proposed changes are likely to be pragmatic and will likely reduce costs, it is concerned the changes should not come at the expense of drinking water safety outcomes. This is particularly the case in communities serviced by domestic self-suppliers or shared domestic drinking water suppliers that may be more vulnerable to drinking water safety issues.

33 The draft submission also states the Council does not support the proposed amendment to the WSA 2021 that would remove the requirements for Taumata Arowai and water service providers to give effect to the Te Mana o te Wai hierarchy of obligations. Council is concerned this may have an adverse effect on the health of freshwater and associated values, including mana whenua and drinking water values.

National Engineering Design Standards for Water Networks

34 The Bill reintroduces the National Engineering Design Standards (NEDS) for water services networks. The NEDS, which were part of the previous reform, would provide mandatory technical standards for the design, construction and operational performance of infrastructure and process. The draft submission supports the reintroduction of the NEDS, however, it requests further information regarding the timing of these standards given their significant impact on water service providers’ workstreams.

Environmental Performance Standards and Infrastructure Design Solutions for Wastewater and Stormwater Systems

35 The Bill proposes a suite of changes designed to reduce the costs and increase the efficiency of consenting and operating wastewater and stormwater systems. These include:

a) amendments to Taumata Arowai’s existing powers to make environmental performance standards for wastewater and stormwater networks – these would be single (not maximum or minimum) standards that would be implemented through resource consents; and

b) providing Taumata Arowai with powers to introduce infrastructure design solutions, which would set out design and operating requirements for wastewater treatment plants (or components of wastewater treatment plants) that – if implemented – would meet applicable wastewater environmental performance standards.

36 The draft submission states that these changes are pragmatic, however, additional opportunities should be provided for interested parties to participate in the process of making environmental performance standards and infrastructure design solutions for wastewater and stormwater systems.

37 Further, the draft submission states that following a robust process to develop the content of these tools will reduce the risk that their implementation unintentionally leads to adverse effects on environmental or cultural values.

OPTIONS

Option One – Submit on the Local Government (Water Services) Bill (Recommended Option)

38 Approve, with any suggested amendments, the draft submission to the Finance and Expenditure Select Committee on the Local Government (Water Services) Bill (Attachment A).

39 There is no impact on debt, rates, and city-wide and DCC emissions.

Advantages

· Opportunity to provide feedback on implementation of the Government’s ‘Local Water Done Well’ plan.

· Opportunity to recommend changes to Parliament’s Finance and Expenditure Committee on particular provisions of the Bill.

Disadvantages

· There are no identified disadvantages for this option.

Option Two – Do not submit on the Local Government (Water Services) Bill

40 Do not approve the draft submission (Attachment A).

41 There is no impact on debt, rates, and city-wide and DCC emissions.

Advantages

· There are no identified advantages for this option.

Disadvantages

· Missed opportunity to provide feedback on implementation of the Government’s ‘Local Water Done Well’ plan.

· Missed opportunity to recommend changes to Parliament’s Finance and Expenditure Committee regarding the provisions of the Bill.

NEXT STEPS

42 If approved, the draft submission will be finalised and sent to Parliament’s Finance and Expenditure Committee by 2 March 2025.

Signatories

Author:

Katherine Quill - Policy Analyst

Scott Campbell - Regulation and Policy Team Leader

Nadia McKenzie - In-House Legal Counsel

Authoriser:

David Ward - General Manager, 3 Waters and Transition

Karilyn Canton - Chief In-House Legal Counsel

Attachments

	Title	Page
⇩a	Draft DCC submission - Local Government (Water Services) Bill	13
⇩b	Summary of the Local Government (Water Services) Bill	26

SUMMARY OF CONSIDERATIONS

Fit with purpose of Local Government

This decision enables democratic local decision making and action by, and on behalf of communities,

and promotes the social, economic, environmental and cultural well-being of communities in the present and for the future.

Fit with strategic framework

	Contributes	Detracts	Not applicable
Social Wellbeing Strategy	☐	☐	✔
Economic Development Strategy	☐	☐	✔
Environment Strategy	✔	☐	☐
Arts and Culture Strategy	☐	☐	✔
3 Waters Strategy	✔	☐	☐
Future Development Strategy	✔	☐	☐
Integrated Transport Strategy	☐	☐	✔
Parks and Recreation Strategy	☐	☐	✔
Other strategic projects/policies/plans	✔	☐	☐

This report has been prepared with reference to the Dunedin strategic framework.

Māori Impact Statement

The draft submission urges Parliament to further mandate engagement by water service providers with Māori in line with other existing legislation. The draft submission also states it does not support the proposed amendment to the Water Services Act 2021 that would remove the requirements for Taumata Arowai and water service providers to give effect to Te Mana o te Wai hierarchy of obligations.

Sustainability

Financial sustainability of local government water services is a key objective of the Government’s “Local Water Done Well” plan. The suite of legislation is designed to implement this programme and ensure delivery of water services is financially sustainable.

The draft submission states it does not support the proposed amendment to the Water Services Act 2021 that would remove the requirements for Taumata Arowai and water service providers to not give effect to Te Mana o te Wai hierarchy of obligations, as this may have an adverse effect on environmental values.

The draft submission also states that a robust process needs to be followed when developing the content of the Environmental Performance Standards and Infrastructure Design Solutions for Wastewater and Stormwater Systems to ensure there are no adverse effects on the environment.

Zero carbon

There is no impact on city-wide or DCC emissions directly associated with this report and the decision to approve the draft submission to Parliament’s Finance and Expenditure Committee.

LTP/Annual Plan / Financial Strategy /Infrastructure Strategy

This report and the decision to approve the submission to Parliament’s Finance and Expenditure Committee have no direct implications for these plans and strategies.

Financial considerations

There are no financial implications directly associated with this report and the decision to approve the draft submission to Parliament’s Finance and Expenditure Committee.

Significance

The decision to approve the draft DCC submission is considered low in terms of the Council’s Significance and Engagement Policy.

Engagement – external

A workshop was held with Councillors on Friday 14 February 2025 to inform the development of the draft submission. The workshop was open to the public.

Engagement - internal

Staff from the Legal Team, 3 Waters Group, and Executive Leadership Team have contributed to the development of the draft DCC submission.

Risks: Legal / Health and Safety etc.

There are no identified risks directly related to the DCC submission on the Local Government (Water Services) Bill.

Conflict of Interest

There is no known conflict of interest.

Community Boards

Community Boards are likely to be interested in the proposed water services delivery changes and staff will consider how to update the Community Boards.

Council

26 February 2025

Local Water Done Well - Decision on water models for consultation

Department: Legal Services, Finance and 3 Waters

EXECUTIVE SUMMARY

1 The purpose of this report is to provide information and analysis so that Council can decide, for the purposes of consultation, on:

a) its preferred water services delivery model (Preferred Option); and

b) what other option(s) it will consult on (Alternative Option(s))

(together, referred to as “the Water Consultation Options”).

2 Staff recommend the following two options as the Water Consultation Options:

a) in-House delivery of 3 Waters (In-House Option); and

b) an asset owning council-controlled organisation for 3 Waters, with Council as the sole shareholder (CCO Option).

3 It is for Council to decide whether it prefers the In-House Option, the CCO Option or any other option. This will require careful weighting by Council of financial and non-financial considerations.

4 This report provides detailed information to help inform Council’s decision, including information on:

a) Financial and non-financial considerations;

b) the Local Government (Water Services Preliminary Arrangements) Act 2024 (Preliminary Act); and

c) the Local Government (Water Services) Bill 2024 (December Bill).

5 There are a lot of acronyms and definitions used in the context of water reforms. A glossary is attached as Attachment A.

RECOMMENDATIONS

That the Council:

a) Decides to consult on the following two options under the Local Government (Water Services Preliminary Arrangements) Act 2024:

i) In-House delivery of 3 Waters (the In-House Option); and

ii) An asset owning CCO for 3 Waters, with Council as the sole shareholder (the CCO Option).

b) Decides that its Preferred Option for consultation is the In-House Option.

c) Notes that there will be a report to Council on 18 March 2024 asking Council to approve the water options consultation document.

BACKGROUND

Water Services Reform

Local Water Done Well

6 The Government is now in the final stage of their three-stage process implementing its “Local Water Done Well” (LWDW) reform programme.

7 The first stage of LWDW saw the repeal of legislation relating to large water services entities. This was in February 2024.

8 The second stage of LWDW was implemented with the passing of the Preliminary Act on 2 September 2024. As a result, Council is required to prepare and submit a WSDP to the Secretary for Local Government by 3 September 2025.

9 The third stage of LWDW is now underway with the introduction of the December Bill on 10 December 2024. The December Bill provides the enduring settings for LWDW including the framework for economic regulation as well as the more detailed powers and duties for service delivery models.

10 Further information on the Preliminary Act and the December Bill is included later in this report.

Requirement for a Water Services Delivery Plan

11 Council’s immediate action resulting from the Preliminary Act is to prepare and submit a WSDP to the Secretary for Local Government by 3 September 2025.

12 As reported to Council in earlier reports, the WSDP requires information on the WSDM including:

a) the anticipated or proposed WSDM or arrangements for delivering water services;

b) a summary of consultation undertaken as part of developing the WSDM; and

c) an implementation plan for delivering the WSDM.

13 If Council decided to enter a joint arrangement with one or more other territorial authorities, it could choose to prepare and submit a joint WSDP.

14 There is an opportunity to amend a WSDP within a specified timeframe if the proposed amendments are significant and necessary due to exceptional circumstances.

15 Council is required by law to give effect to the proposals or undertakings specified in the WSDP. Not doing so could be a ground for appointing a Crown facilitator.

Timeline and Process

16 DIA’s implementation roadmap for LWDW is shown at Attachment B.

17 DIA has also provided a high-level roadmap for Council’s planning and delivery, as shown at Attachment C.

18 Staff have presented on the WSDP (including on possible WSDMs) to Council at various workshops and meetings since the passing of the Preliminary Act on 2 September 2024. Council adopted a shortlist of three WSDM options at its Council meeting on 25 November 2024: https://infocouncil.dunedin.govt.nz/Open/2024/11/CNL_20241125_AGN_3009_AT_WEB.htm

An overview of the December Bill

19 The December Bill is currently going through the Parliamentary process and will be subject to amendment. It is anticipated that the December Bill will be enacted in mid-2025 and that most of the content will come into effect the day after Royal Assent.

20 Staff have prepared a draft submission on the December Bill. Councillors have had the opportunity to provide feedback through a workshop. Adoption of the submission is the subject of another Council Report on 26 February 2025.

21 It is expected that the December Bill will be divided during the Parliamentary process into two separate Bills (perhaps intended to separate the standalone provisions of the December Bill and the amendments to several other Acts). The two likely names of the separate Bills are:

a) Local Government (Water Services) Bill; and

b) Local Government (Water Services Repeals and Amendments) Bill.

22 DIA has now updated its guidance materials given the introduction of the December Bill (Guidance). A copy of the updated Guidance can be found at https://www.dia.govt.nz/Water-Services-Policy-Future-Delivery-System#Financing. Specific factsheets have also been referred to through this report. Further general information on LWDW is also available on the DIA website: https://www.dia.govt.nz/Water-Services-Policy-and-Legislation .

23 As expected, the December Bill is comprehensive covering all aspects of the new water services delivery system and delivery entities. Specific impacts on the options presented in this report are discussed throughout this report. A Summary of the key themes of the December Bill (as previously provided to Councillors) is included at Attachment D.

Preliminary Act

24 As presented to Council in earlier reports, the Preliminary Act prescribes the process that Council must use for decision making and consultation on the WSDM.

25 Council is not required to comply with the corresponding requirement in the Local Government Act 2002 (LGA 2002) where an alternative process under the Preliminary Act applies.

26 The options presented in this report comply with the Preliminary Act.

Requirement to identify at least two potential options

27 The Preliminary Act specifies that, during decision making, the Council:

a) Must identify both of the following two options for delivering water services:

i) Remaining with the existing approach for delivering water services; and

ii) Establishing, joining, or amending (as the case may be) a water services CCO (WSCCO) or a joint local government arrangement.

b) May also identify additional options for delivering water services and must assess the advantages and disadvantages of all options identified.

Information to be included in Consultation Document

28 During consultation, Council must make the following information publicly available:

a) The proposal (being the Preferred Option), an explanation of the proposal and the reasons for the proposal.

b) An analysis of the reasonably practicable options, which must include:

i) the option to remain with the existing approach for delivering water services; and

ii) the option to establish, join or amend (as the case may be) a water services CCO (WSCCO) or a joint local government arrangement.

c) How proceeding (or not) with the proposal is likely to affect Council’s rates, debt, levels of service and water services charges.

d) Community implications (if joint) and accountability/monitoring arrangements (if assets transferred).

e) Any other relevant implications of the proposal that Council considers will be of interest to the public.

Potential for shared services

29 Under either the In-House or CCO Options, there is the potential to add shared water services. There is a separate report to Council on 26 February 2025 regarding a proposed memorandum of understanding between the Dunedin City Council and the Christchurch City Council to investigate the possibility of shared water services.

Overlapping consultation with the 9 Year Plan

30 Council is only required to consult once but may decide to undertake further consultation before deciding on a WSDM.

31 Consultation on the Water Consultation Options is a separate process from the 9YP consultation process. Consultation on the Water Consultation Options will be under the Preliminary Act whereas consultation on the 9YP will be under the LGA 2002.

32 There will be one consultation document for the 9YP and another consultation document for the Water Consultation Options. Each consultation document will cross reference the other.

33 Given that a decision on the Water Consultation Options has the potential to impact the 9YP, there will be combined Hearings in May for both the 9YP and the Water Consultation Options.

Consultation requirements with mana whenua

34 Council is required to consult with mana whenua under both section 77(1)(c) and section 81 of the LGA 2002 given both references are included under section 60 of the Preliminary Act. Further, section 14(1)(d) of the LGA 2002 also provides that a local authority should provide opportunities for Māori to contribute to its decision-making processes.

Decision Making on a Change Proposal (after enactment of the December Bill)

35 The December Bill, as currently drafted, includes new decision-making requirements if there is a “Change of Proposal”. This would only apply following enactment of the December Bill (mid-2025).

36 A Change Proposal includes things like establishing a council-controlled organisation (CCO) or agreeing on shared services with another territorial authority.

37 If a Change Proposal is triggered, Council would need to consult on three options; being the existing approach, the change proposal and at least one further reasonably practicable option, if available.

38 This contrasts with the minimum of two options under the Preliminary Act.

39 There is some uncertainty on whether Council would be required to re-consult if Council decided on the CCO Option for its WSDP and the CCO was not established until after enactment of the December Bill. However, DIA has indicated by e-mail to staff that the new decision-making requirements in the December Bill are intended to apply to future decisions by Council outside current decision making required to inform the WSDP. Staff are hoping that the December Bill will be amended to clarify this.

40 If Council decided on the In-House Option for its WSDP and then later (for example, in 2 years’ time) decided that it wanted the CCO Option then, based on the current drafting of the December Bill, Council would need to go through a fresh consultation process.

Legal Requirements for Water Service Providers

41 As noted in earlier reports:

a) A ‘water organisation’ means the separate organisation that territorial authorities may establish or be shareholders in, and which provides water services in accordance with transfer agreements. A water organisation does not include the in-house model. An example of a water organisation is a CCO.

b) A ‘water service provider’ is a wider term and means water organisations and territorial authorities. In other words, a water service provider includes both the in-house model and models such as the CCO model.

42 Legislative requirements are set out in the December Bill for all water service providers. Additional requirements are included for water organisations. Both sets of requirements are described below.

All Water Service Providers

43 The requirements for all water service providers (including in-house delivery) broadly follow earlier DIA guidance with some updates.

44 The following summary of these core requirements is taken from the DIA Guidance. Staff have provided further detail on each requirement at Attachment E:

Additional Requirements for Water Organisations

45 Additional requirements also apply to those councils forming a water organisation e.g., a CCO. These are set out in the Guidance as below including a new requirement relating to a transfer agreement:

46 It is possible to apply for exemptions from the marked (*) requirements on a case-by-case basis through a legislated process.

DISCUSSION

PART A: Which base models does Council want to consult on?

47 At Council’s meeting on 25 November 2024, Council decided to shortlist three base WSDMs:

a) In-House Delivery;

b) Single CCO; and

c) Regional Multi-Council Entity

(the “shortlist”).

48 Some initial explanations and comparative analysis on the Shortlist were discussed in the November Report and included some advantages and disadvantages for each: https://infocouncil.dunedin.govt.nz/‌‌Open/2024/11/CNL_20241125_AGN_3009_AT_WEB.htm

49 Following Council’s decision on the Shortlist, there have been discussions with staff at Christchurch City Council regarding the potential for shared water services. This is discussed in a separate report to Council, also on the agenda for 26 February 2025. The intention is to manage shared services through contracts rather than a multi-council entity.

50 There have also been discussions with other territorial authorities, but those discussions have not progressed to the stage where there is an identified practicable option suitable for consultation. Without knowing who the participants would be in a Regional Multi-Council Entity, it is difficult to provide any further analysis than what has already been provided through the Morrison Low Report dated 24 October 2024. The Morrison Low report was attached to the November Report.

51 As part of considering the Shortlist, staff have considered whether a two waters CCO may be a reasonably practicable option or whether it would be reasonably practicable to use one of Council’s existing CCOs for the delivery of water services. For a variety of reasons, these two variations on the CCO Option have not been considered further because they are not seen as being reasonably practicable options.

52 Staff consider that the “reasonably practicable options” under the Preliminary Act are:

a) the In-House Option; and

b) the CCO Option.

Part B: Which is Council’s Preferred Option?

53 Council will need to carefully weigh a variety of financial and non-financial considerations before deciding on its preferred WSDM.

Summary of Financial Considerations

Financially Sustainable

54 A WSDP needs an explanation of:

a) How revenue from and delivery of water services will be separated from the territorial authority’s other functions and activities; and

b) How Council proposes to ensure delivery of water services will be financially sustainable by 30 June 2028.

55 The December Bill specifies the financial principles for water service providers. The financial principles support the ringfencing objectives of LWDW and are supported by DIA guidance: “Ensuring compliance with financial principles for water service providers” (Attachment F). The December Bill also includes objectives to ensure water services are provided in a cost-effective and financially sustainable manner.

56 Ringfencing of water services is critical for financial sustainability and revenue sufficiency. The DIA guidance states that ringfencing requires:

a) Water revenues be spent on water services; and

b) Water services charges and expenses be transparent and accountable.

57 The Preliminary Act defines ‘financially sustainable’, in relation to a council’s delivery of water services, as:

a) The revenue applied to the council’s delivery of those water services is sufficient to ensure the council’s long-term investment in delivering water services; and

b) The council is financially able to meet all regulatory standards and requirements for the council’s delivery of those water services.

58 The DIA Guidance suggests three components to assessing financial sustainability. How councils approach achieving financial sustainability can be different depending on local circumstances and requires councils to consider the balance between the three components:

a) Revenue sufficiency - having sufficient revenue to cover the costs (including servicing debt) of water services delivery.

b) Investment sufficiency - having a sufficient level of investment to meet levels of service, regulatory requirements and provide for growth.

c) Financing sufficiency - having sufficient funding and financing arrangements to meet investment requirements.

59 The DIA Guidance makes further recommendations about how councils can demonstrate ringfencing. It also provides further information about financial sustainability as well as providing a template for financial projections and a financial sustainability test (See DIA link https://www.dia.govt.nz/diawebsite.nsf/Files/Water-Services-Policy/$file/Guidance-for-preparing-Water-Services-Delivery-Plans-September-2024.pdf).

60 Further DIA guidance: “Financing water services delivery through establishing new water CCOs” (Attachment G) provides advice on financing options for councils considering the CCO model for water services delivery. The guidance outlines criteria for accessing higher borrowing from the Local Government Funding Agency (LGFA).

Financial Analysis

61 The following financial analysis has been prepared to support Council’s decision making in preparation of the WSDP. The analysis does not provide the level of detail required in the WSDP but does provide a level of analysis and information that demonstrates the financial impacts of each option being considered.

62 Two sets of forecast financial statements for the 10 year period 2024-34 have been prepared:

a) The In-House Option - as per the approved 2024/25 Annual plan and draft 9 year plan 2025-34 (9 year plan) (Attachment H) and

b) The CCO Option – a 3 Waters CCO, as at 1 July 2025 (Attachment I).

63 A series of tables comparing the two options have been included in Attachment J.

64 Although in practice a CCO probably would not be established until 1 July 2027, the modelling assumes a date of 1 July 2025 to provide financial comparison over the longest period possible.

65 The WSDP requires a minimum of ten years of financial projections for water services, covering the financial years 2024/25 - 2033/34. Due to the inherent uncertainties with forecasting, the financial forecasts provided do not go beyond the 2033/34 year.

66 As mentioned above, DIA provided a template to use for the financial sections of the WSDP. This includes financial projections, measures and charts required in the financial sustainability assessment. Staff have used these templates for the financial analysis of the two options.

Assumptions

67 Key assumptions underlying both options are:

a) 1 July 2024 opening balance sheet to ringfence 3 Waters for modelling purposes.

b) The 2024/25 Annual Plan is year 1 (due to the 9 year plan only being 9 years).

c) The starting point is the draft 9 year plan 2025-34.

d) Total operating expenditure of $1.568 billion and total capital expenditure of $1.095 billion is forecast over the 9 year plan.

e) No allowance is made for savings as a result of efficiencies.

68 Each option assumes additional operating costs as follows:

a) An increase in staff resourcing to meet new regulatory requirements, customer service, finance and billing.

b) Additional levies to Taumata Arowai (Water Services Authority) and the Commerce Commission.

c) Additional audit fees for additional financial reporting requirements.

69 The CCO Option attracts further operational costs, in particular governance and leadership.

70 Some corporate costs, including fleet, would shift from Council to the CCO, however some internal costs could remain as stranded costs within Council and need to be managed over time. Further work on this is required and will be underway in the coming months. An update on this work will be provided to Council in May.

71 LGFA have agreed in principle to lend up to 500% of operating revenues to a 3 Waters CCO, creating additional borrowing capacity. The CCO Option assumes access to this borrowing limit. It also assumes a Funds From Operations (FFO) of 10% of debt. LGFA has advised that most water CCOs will have a minimum FFO to debt ratio of between 8% and 12%, depending on credit profile. These will be negotiated with each water CCO.

72 Transitional costs need to be accounted for but these are yet to be determined.

73 In order to ensure compliance with the financial principles and financial sustainability provisions, current systems (including finance and asset management) are likely to need investment, for either option. A provisional amount for this has been included in the 9 year plan.

Funding Approach

74 The funding approach for the In-House Option aligns with Council’s draft Financial Strategy and draft 9 year plan as follows:

a) Balanced budget - the LGA 2002 requires councils to have a balanced budget unless it is prudent to do otherwise. This means fully funding depreciation, which in turn is used to pay for capital expenditure. For 3 Waters, the draft 9 year plan provides 15% per annum rate increases for the first three years leading to a balanced budget (for 3 Waters) by the 2027/28 year.

b) Debt limit – Council’s gross debt limit is 250% of revenue. The LGFA financial covenants limit net debt to 280% of revenue.

75 The funding approach for the CCO Option follows DIA guidance as follows:

a) Operating revenues pay for operating costs - DIA guidance indicates that financial sustainability and ringfencing requirements mean that operating revenues should be set to a level that covers the operating cost (including debt) of water services. This ensures sufficient operating cashflows are secured to support borrowing and investment requirements (including staying below borrowing limits). Operating revenues, including 3 Waters rates, should cover all cash operating costs plus a minimum FFO.

b) Capital sources pay for capital investment - DIA guidance indicates that capital expenditure should be funded by capital revenues (such as development contributions) and debt financing.

76 The DIA guidance on CCO funding states:

“This approach could replace current council approaches to funding of depreciation to generate cash reserves to fund capital investment. Depreciation funding in effect pre-funds capital investment and results in a higher cost to consumers than using effective debt financing for investment.”

77 The difference in funding approaches means that under the CCO Option, over the 10 year period modelled, charges to customers could be lower and debt higher. This is because more debt is used to pay for capital expenditure. For the In-House Option, more rates income is used to pay for capital expenditure.

In-House Option

78 Under this option, 3 Waters remains in-house. This option is consistent with the draft 9 year plan. The key financial outcomes are:

Table 1

a) Operating revenue (excludes development contributions of $26 million) over the 10 years is $1.506 billion.

b) Rate increases of 15% per annum for the first three years, followed by an average of 6% for the remaining years.

c) The average customer charge per connection (including GST) increases from $2,024 in 2024/25 to $4,280 in 2033/34.

d) Operating expenditure over the 10 years is $1.568 billion, including interest costs of $196 million.

e) Net surplus is achieved in the 2027/28 year.

f) Capital expenditure over the 10 years is $1.095 billion.

g) 3 Waters debt is $630 million by 30 June 2034.

h) Total Council debt is $1.092 billion by 30 June 2034. Council debt remains within the 250% debt limit throughout the period. By year 10, debt reaches 174% of revenue. Council debt remains within the LGFA net debt limit of 280%. By year 10, net debt reaches 156% of revenue.

CCO Option

79 Under this option, a 3 Waters CCO is established. As indicated above, operating revenue covers cash operating expenses plus an FFO margin of 10%. The key financial outcomes are:

Table 2

a) Operating revenue (excludes development contributions of $26 million) over the 10 years is $1.392 billion.

b) Annual increases in water charges range from 5.8% in 2025/26 to 13.1% in 2029/30. The average price increases over the 9 year plan timeframe is 8.5%.

c) The average customer charge per connection (including GST) increases from $2,024 in 2024/25 to $4,202 in 2033/34.

d) Operating expenditure over the 10 years is $1.613 billion including interest costs of $231 million.

e) The CCO Option does not achieve a balanced budget during the 10 year period because operational revenues cover operational cash expenses only (not depreciation) plus the FFO requirement (modelled at 10%). Over time, as debt and therefore the FFO requirement increases, the deficit reduces.

f) Capital expenditure over the 10 years is $1.095 billion.

g) Debt is $788 million by 30 June 2034. This is within the 500% LGFA net debt limit. By year 10, debt reaches 405% of revenue.

h) Council debt excluding 3 Waters is considered in paragraphs 80-83 below.

In-House Option compared to the CCO Option

80 The key financial differences between the two options are discussed below. Table 3 summarises financial information for year 10 (2033/34) and the 10 year total for each of the options.

Table 3

a) Over the 10 year period, operating revenue under the CCO Option is $114 million less than the In-House Option. As discussed in paragraph 76 above, charges to customers are lower. More debt is used to pay for capital expenditure than under the In-House Option, where more rates funding is used to fund capital expenditure. The CCO Option would debt fund an additional $157 million over the 10 year period. Chart 1 below shows the profile of operating revenue under each option over the 10 year period. By the 2033/34 year, operating revenue is $198 million in the In-House Option and $194 million in the CCO Option.

Chart 1

b) The average charge per connection under both options is provided in Table 4 and Chart 2 below. The average charge per connection is lower in the CCO Option, however the difference (saving) reduces as more debt is raised. While this does not reflect the current charging model, it provides a comparison:

Table 4

Chart 2

c) Annual increases in charges for water services are higher for the In-House Option for the first three years of the 9 year plan period (2025/26 – 2027/28), reflecting Council fully funding depreciation by 2027/28. From the 2028/29 year, the annual increases are higher in the CCO Option. This is illustrated in the Chart 3 below:

Chart 3

d) Operating expenditure under the CCO Option is $44 million higher than the In-House Option due to additional interest ($35 million) and CCO related operational costs ($9 million).

e) Net surplus/(deficit) is different in each option and this reflects the different funding approaches. The In-House Option achieves a balanced budget in the 2027/28 year. The CCO Option does not achieve a balanced budget during the 10 year period because operational revenues cover operational cash expenses only (not depreciation) plus the FFO requirement (modelled at 10%). As debt increases so does the FFO requirement therefore the deficits will reduce.

f) Capital expenditure over the 10 year period is the same for each option.

g) Under the CCO Option, 3 Waters debt is $157 million higher than the In-House Option due to the reduction in operating revenue and the additional interest and operating costs. By year 10, net debt reaches 405% of revenue in the CCO Option and 314% in the In-House Option. The graph below shows the debt to revenue metric for each option:

Chart 4

Council excluding 3 Waters

81 The establishment of a CCO for 3 Waters results in Council having less debt. This would create additional debt headroom compared to the in-house option, as shown in the two charts below, due to the ratio of revenue to debt improving without 3 waters. The debt limit indicated on each chart is the Council 250% limit.

82 Chart 5 shows the in-house option. The headroom in the 2033/34 year is $480 million.

Chart 5

83 Chart 6 shows Council excluding 3 Waters. The headroom in the 2033/34 year is $603 million, $124 million higher than the In-House Option.

Chart 6

84 The debt forecast for both options, for Council companies and the total Council group have been summarised in Attachment J. This attachment also provides associated financial metrics. Group debt under the In-House Option reaches $2.26 billion by 2033/34 and under the CCO Option group debt reaches $2.42 billion by 2033/34.

Other Considerations

85 There are a number of possible scenarios. For example, in the CCO Option, expenditure could be increased if customer charges are maintained at the in-house level. Noting that all scenarios will be subject to the regulatory compliance.

86 The FFO margin is required to meet revenue sufficiency requirements and ensure debt is appropriately serviced. Financial modelling for the single CCO option has used a 10% FFO, the mid-point of the LGFA’s suggested range of 8-12%. Attachment K compares the In-House Option against the CCO option with the FFO margin set at 8% and 12%. Generally:

a) A higher FFO margin increases operating revenue, resulting in higher customer charges, lower debt and lower interest expense.

b) A lower FFO margin decreases operating revenue, resulting in lower customer charges, higher debt and higher interest expense.

Summary of Non-financial Considerations

87 There are a wide range of considerations that are non-financial considerations, including the following:

· Regulatory Compliance: The capacity to meet current and future water quality, environmental, and economic regulations.

· Service Delivery and Operations: The effectiveness and efficiency of day-to-day operations, including resource allocation and infrastructure management. Includes ease in modernising the customer experience, access and leveraging specialist skills/staff as well as digital systems.

· Governance and Control: The degree of Council oversight, including through development of the water services strategy.

· Implementation Feasibility: The practicality, cost, and risk of transitioning to the model, ensuring minimal disruption to services.

88 Staff set out below an analysis of these non-financial considerations.

Regulatory Compliance:

89 Regulatory compliance is non-negotiable for water services delivery in both the In-House Option and CCO Option. Whether Council establishes a CCO or decides on an In-House Option, it will be subject to:

a) economic regulation; and

b) environmental and infrastructure regulation.

90 The second page of the Implementation Roadmap (Attachment B) shows the different types of economic, environmental and infrastructure regulation.

91 Regarding economic regulation:

a) The Commerce Commission will have a range of tools to promote sufficient revenue recovery, and efficient investment and maintenance so that water services meet regulatory requirements. These are summarised in the DIA Guidance called “Economic regulation and consumer protection”: https://www.dia.govt.nz/diawebsite.nsf/Files/‌Water-Services-Policy/$file/LWDW-Bill-3-factsheet-Economic-regulation-and-consumer-protection.pdf

b) The expected timelines for economic regulation tools are set out in the table below:

c) If Council decides on the CCO Option for its WSDP, then the Commerce Commission would regulate the CCO.

d) If Council decides on the In-House Option for its WSDP, then:

i) the Commerce Commission would regulate those parts of the Council that directly and indirectly deal with water services; and

ii) there will be a significant amount of work required (in a short period of time) to ensure that Council complies with the regulatory framework, particularly the requirement to ringfence water services from the finances of the rest of Council.

92 Regarding environmental and infrastructure regulation:

a) Council already has established governance frameworks that facilitate strong compliance with water quality and environmental regulations.

b) A CCO would focus solely on water services, which creates a dedicated focus. However, the CCO Option would require significant work to establish compliance management during a transition period and would require strong ongoing collaboration with Council to ensure alignment with broader environmental and community goals.

Service Delivery and Operations:

93 At present:

a) Water services are integrated with other Council functions, as there are a lot of interdependencies. For example, flood management, parks, urban planning, resource consenting and the transport network. This enhances co-ordination and efficiency.

b) The three waters team routinely co-ordinates with other teams within Council.

94 If there was a CCO for water services, then there is a risk of a “silo-type” approach. This would particularly be the case if the CCO offices were not co-located within the Council’s offices. While there is provision in the December Bill for a stormwater network service agreement between those entities having a role, function or interest in the operation of stormwater infrastructure in the area (including the Council and a CCO), there is a risk that the approach would be less co-ordinated than the In-House Option.

95 There is a perception within parts of the water sector that the CCO Option may be better able to attract and retain specialised expertise in water management, engineering, and compliance. It is difficult at this stage to know whether that is true. If Council proceeds with shared services (eg with Christchurch City Council), then it is likely that Council staff would get the opportunity to work with their peers.

96 Systems will need to be upgraded to ensure financial separation in both the In-House and CCO Options. The cost of these systems is expected to be substantial.

Governance and Control:

97 This topic is covered under the DIA’s factsheet called: Planning and accountability for local government water services: https://www.dia.govt.nz/diawebsite.nsf/Files/Water-Services-Policy/$file/LWDW-Bill-3-factsheet-Planning-and-accountability-for-local-government-water-services-updated-Dec-2024.pdf.

98 Under the In-House Option, Council would remain as the governing body for water services, and it would retain control (subject to regulatory requirements) over how water services are funded and charged to the community, including rates and the possibility of volumetric charging.

99 Under the CCO Option:

a) Strategic oversight would remain with Council, but operational control would be transferred to the CCO’s board and management.

b) Staff expect that, if Council chooses the CCO Option as its WSDM, then the most likely date that it would be established would be 1 July 2027 although it could in theory be earlier.

c) Council (as shareholder) would prepare a statement of expectations setting out the expectations, priorities, and strategic direction for the water organisation to inform and guide the decisions and actions of the board. Water organisations must give effect to these statements.

d) Council would be the sole shareholder. The shareholding would not be through Dunedin City Holdings Limited (DCHL). This is because the legislative framework specifies that a water organisation must be wholly owned by one or more local authorities (or trustees of consumer trusts).

e) Council could appoint directors to a board directly (or could appoint a committee) and ensure that relevant perspectives were brought to the director appointment process (flexibility to appoint mana whenua, community or consumer representatives) subject to statutory requirements including competency, collective skills, knowledge and experience.

f) The CCO would have less flexibility in how it charges for water being restricted from using property value-based charges and requires transition to specific water charges, such as fixed fees or volumetric billing within five years.

100 Under both the In-House Option and the CCO Option, there is a requirement to prepare:

a) a water services strategy; and

b) a water services annual report.

101 The water services strategy is a single comprehensive water focused document which must be prepared every three years. There will be an annual budget in the intervening years.

102 The first water services strategy is to be adopted so it takes effect from 1 July 2027 (or an earlier date as determined by the water service provider) and ending on the 30 June 2030. Likewise, the first water services annual report would start on 1 July 2027 (or earlier in line with the water services strategy) and end on 30 June 2028.

103 The water services strategy will set out how the provider is proposing to perform, respond to local expectations and priorities, and meet statutory objectives and regulatory requirements. It will include financial forecasting information over 10 years, and infrastructure and investment information over more than 30 years. Strategies prepared by water organisations will respond to matters in the statement of expectations. Prices and charges will be set in accordance with the proposals in the strategy.

104 Under the In-House Option, Council would be required to consult communities in relation to its proposed water services strategy. Under the CCO Option, the CCO would be required to consult with Council (as its shareholder).

105 Under the CCO Option, the Council would determine the nature of its involvement in preparing and finalising the water services strategy. Council would ensure that information on its preparation and finalisation of the water services strategy is included in the CCO’s constitution, or elsewhere.

106 The water services annual report is a document reporting on the water service provider’s actual performance against the expectations and proposals in water services strategy and, if applicable, in the statement of expectations.

Implementation Feasibility

107 The In-House Option is expected to have the least initial setup costs and to be the most straightforward to implement. However, there will be significant costs and changes required to meet the regulatory regime. For example, there will need to be new systems for ring-fencing and water billing.

108 The CCO Option provides an opportunity to invest in a new fit for purpose entity within the new water services framework. However, the CCO Option has a higher initial cost to implement as well as being potentially more disruptive in the short term due to transition.

109 There is a perception in parts of the water sector that the CCO Option may offer long-term efficiencies (assuming a successful transition, operational integration, a robust implementation plan and resource allocation).

110 Shared services could be added to either the In-House Option or the CCO Option (noting that shared services may trigger a requirement for further consultation).

OPTIONS

111 The Preliminary Act requires Council to choose its future WSDM.

112 There are a range of advantages and disadvantages for both the In-House Option and the CCO Option. In essence, the In-House Option provides Council with direct control over water services, ensuring residents can participate in decision making through usual local democracy practices, and there is alignment with broader Council strategies and Council functions. However, the CCO has access to higher borrowing and operates under different financial arrangements.

113 The Council’s financial modelling is over a 10-year period (2024-2034). It is not possible to accurately model beyond this period, but the models prepared show that the option to reduce charges to customers decreases towards the end of the modelled period when there is increased debt.

114 Although it is finely balanced, staff recommend that Council:

a) Consult on the In-House Option and the CCO Option; and

b) Decides its Preferred Option for consultation is the In-House Option.

115 This recommendation is set against the context that:

a) Council’s decision on its Preferred Option will be subject to public consultation.

b) The draft 9YP supports the ability of Council to retain 3 Waters.

c) Council has a proven ability to deliver water services to a high standard. Council over the last 5 years has invested in the capital programme and has accelerated investment in both planning and delivery. This means the 3 Waters Team and Council’s contractor base are well positioned to continue delivery at pace.

d) Council is in the process of investigating shared services with Christchurch City Council. It would be helpful to have time to see how and to what extent the shared services, in practice, assist Council to achieve cost reductions and enhance water services.

e) Subject to changes in legislation or Government direction, if Council chooses the In-House Option now it would still be open to Council to later decide that it wants to establish a CCO. For example, Council could decide as part of its next long term plan process in 2027 that it would like to re-consult the public on the Council’s WSDM.

f) If Council chooses the CCO Option, then this may be difficult to unwind in the future.

g) It is unclear what the long-term benefits or risks would be after the end of the modelled period.

116 It is possible that there will be future water reforms. Without knowing what those reforms may be, it is not clear whether Council would be in a better position for legislative change under the In-House Option or the CCO Option. The potential for legislative change has not therefore been discussed as an advantage or a disadvantage under the options.

117 Similarly, it is likely that there will be systems, staff and technology costs under both the In-House and CCO Options, so these have not been discussed as an advantage or disadvantage.

118 The governance arrangements under the In-House Option and the CCO Option are different, but there are mechanisms available to ensure that each entity has specialist advice available.

119 The impact on emissions and zero carbon is likely to be similar whether the Preferred Option is the In-House Option or the CCO Option. Should Council decide on the CCO Option, then the Statement of Expectations for the CCO could include provisions regarding emissions and zero carbon.

Option One – Recommended Option - In-House Delivery as the Preferred Option, and CCO is the additional reasonably practicable option

120 Under this option, Council would:

a) Decide to consult on the following two options under the Local Government (Water Services Preliminary Arrangements) Act 2024:

i) In-House delivery of 3 Waters (the In-House Option); and

ii) An asset owning CCO for 3 Waters, with Council as the sole shareholder (the CCO Option).

b) Decide that its Preferred Option for consultation is the In-House Option.

c) Note that there will be a report to Council on 18 March 2024 asking Council to approve the water options consultation document.

Advantages

· Retains local control and accountability.

· Strong integration with other Council functions (e.g., flood management and urban planning) which supports operational efficiencies and aligns with Council’s broader strategies and city-wide priorities (subject to regulation).

· Builds on Council’s successful delivery of water services.

· Financial modelling indicates that the Council Group would take on less debt under the In-House Option.

· Avoids the costs of establishing a CCO and minimises transition costs (noting however that the In-House Option will have significant costs associated with setting Council up so that it can comply with the new regulatory regime).

· Council’s draft 9YP retains water while remaining within Council’s debt-to-revenue limit of 250% and the LGFA net debt limit of 280%.

· This option would allow Council time to test how the In-House Option works under the new regulatory regime, and to see the effects of any shared services arrangements (such as those currently being investigated with Christchurch City Council).

· This option does not prevent Council from reconsidering its WSDM later, such as in 2027 as part of the next Long Term Plan process and developing a Water Services Strategy.

Disadvantages

· Financial modelling shows this option as having fewer potential savings to households.

· Council does not have access to the 500% debt to revenue ratio that is available under the CCO Option.

· The In-House Option could constrain Council’s ability to spend in areas other than water and/or to deal with large-scale infrastructure investments not already budgeted for in the draft 9YP.

· Council will need to establish new mechanisms for ringfencing water revenue and costs.

· The Commerce Commission will have wide powers, with the ability to consider matters relating directly and indirectly to water services.

· Lacks single focus on delivering water services and does not ringfence legal liability to within the CCO.

· Arguably, less commercial and/or agile due to the legislative framework for councils.

· Does not capture scale benefits and may not attract specialist staff, although this may be mitigated through shared services arrangements.

Option Two – CCO is the preferred option and In-House Delivery is the additional reasonably practicable option, with the option of any add-ons, subject to further analysis

121 This option is the same as option one, except Council’s Preferred Option would be a CCO instead of In-House. Therefore, under this option, Council would:

a) Decide to consult on the following two options under the Local Government (Water Services Preliminary Arrangements) Act 2024:

i) In-House delivery of 3 Waters (the In-House Option); and

ii) An asset owning CCO for 3 Waters, with Council as the sole shareholder (the CCO Option).

b) Decide that its Preferred Option for consultation is the CCO Option.

c) Note that there will be a report to Council on 18 March 2024 asking Council to approve the water options consultation document.

Advantages

· Financial modelling shows this option as having potentially greater savings to households -$114 million over the 10 years modelled.

· LGFA will allow a debt to revenue ratio of 500% (compared to 280% for Council under the In-House Option).

· Does not constrain Council’s ability to spend in areas other than water.

· The Council would not be subject to the new regulatory regime, and the associated compliance costs associated with that regime.

· The CCO’s single focus would be on delivering water services.

· Legal liability would be ringfenced to within the CCO (at least to some extent).

· The CCO must give effect to statement of expectations (if consistent with CCO’s purpose and statutory objectives).

· A director of a CCO must be appointed based on their competency to perform the role, and the directors of a CCO must collectively have an appropriate mix of skills, knowledge, and experience in relation to providing water services.

· Accountability to the Council as shareholder via regular reporting and annual reporting.

· Arguably, a CCO may be more commercial and/or agile due to it not operating under the same legislative framework as councils.

Disadvantages

· Potential for higher debt, with the associated risk and cost of servicing higher debt. Council Group will have an extra $157 million of debt.

· Risks reduced co-ordination with Council functions if not adequately managed.

· Independent governance introduces risks of misalignment with Council priorities (unless effectively managed through governance arrangements and key accountability documents).

· Potential for reduced community input.

· Accountability to consumers for service delivery potentially blurred.

· Establishment and transition costs reduce immediate value.

· If Council found that the CCO Option was problematic, it would be difficult to unwind the arrangements.

NEXT STEPS

122 The next steps are currently being discussed with Audit New Zealand, who are currently in the process of auditing Council’s 9YP CD. The Water Options CD does not need to be audited.

123 Although the 9YP process and the WSDP process are two separate processes undertaken under separate legislation, the 9YP CD and the Water Options CD will need to be cross-referenced and the processes will need to run in parallel.

124 Staff expect that the process will be essentially as follows (although this is subject to change depending on the approach taken by Audit New Zealand):

a) Staff will report back to Council on 18 March 2025 with a draft Water Options CD for approval by Council.

b) The Water Options CD and 9YP CD will be released and open for submissions from 31 March 2025 to 30 April 2025.

c) There will be combined Hearings in the week commencing 5 May 2025 on the Water Options and the 9YP.

d) As soon as possible after the Hearings (mid-May), Council will decide on its WSDM. A decision on the WSDM would need to be made in mid-May so that staff can update the 9YP to reflect the WSDM, as required, and to allow time for the Audit Report on the 9YP.

e) Council will adopt its 9YP prior to 30 June 2025, and will submit its WSDP to the Secretary for Local Government before 3 September 2025.

Signatories

Author:

Karilyn Canton - Chief In-House Legal Counsel

Nadia McKenzie - In-House Legal Counsel

Carolyn Allan - Chief Financial Officer

Hayden McAuliffe - Financial Services Manager

Authoriser:

David Ward – General Manager, 3 Waters and Transition

Sandy Graham - Chief Executive Officer

Attachments

	Title	Page
⇩a	Glossary of Terms	62
⇩b	DIA Implementation Road Map	65
⇩c	DIA High Level Road Map for Council's planning and delivery	67
⇩d	Summary of key themes of the December Bill	69
⇩e	Summary of Core Requirements	76
⇩f	DIA Ensuring compliance with financial principles for water service providers	80
⇩g	DIA Financing water services delivery through establishing new water CCOs	85
⇩h	In-House Options - Financial Forecasts 2024-34	101
⇩i	CCO Option - Financial Forecasts 2024-34	103
⇩j	CCO Option - Comparison Tables 2024-34	105
⇩k	Group Level Metrics	106
⇩l	FFO Comparisons	107

Council

26 February 2025

Memorandum of Understanding with Christchurch City Council - potential for shared services

Department: Legal Services

EXECUTIVE SUMMARY

1 This report is to provide Council with information regarding a proposed process with Christchurch City Council (CCC) to investigate whether there are opportunities for certain shared water services (Shared Services) between the DCC and CCC.

2 The aim of Shared Services would be to reduce costs and enhance water services for each council’s communities. This aligns with the objectives of the Local Water Done Well reforms.

3 A memorandum of understanding (MOU) has been prepared to record the proposed process for investigating the possibility of Shared Services. The draft MOU is attached as Attachment A and is subject to Council approval.

4 Shared Services would not affect the underlying ownership of each council’s existing water assets as the services would be managed through contracts.

RECOMMENDATIONS

That the Council:

a) Approves the Memorandum of Understanding between Dunedin City Council and Christchurch City Council.

b) Notes that the Council’s consultation document under the Local Government (Water Services Preliminary Arrangements) Act 2024 will record that Dunedin City Council and Christchurch City Council are working together to investigate whether there are opportunities for certain shared water services.

c) Delegates to the Council’s Chief Executive Officer the authority to finalise and sign the Memorandum of Understanding on behalf of Council.

BACKGROUND

5 The Government’s reform programme called “Local Water Done Well” (LWDW) requires territorial authorities to make decisions in relation to how they deliver water services.

6 LWDW allows for flexible arrangements, including the possibility of Shared Services.

7 Staff recommend investigating the possibility of Shared Services because this has the potential to reduce costs and enhance the delivery of water services, particularly if large metros are involved.

8 Staff have met with staff at CCC to discuss the possibility of Shared Services. CCC is also wanting to investigate the possibility of shared services.

9 Staff have prepared a MOU, in consultation with CCC, to record the proposed process for investigating the possibility of Shared Services between DCC and CCC. The MOU is attached as Attachment A and is subject to Council approval.

DISCUSSION

10 There is a report on the Council agenda for 26 February 2025 regarding Council’s preferred model for the delivery of water services (e.g. in-house or CCO). Shared Services could apply to whichever model DCC or CCC chooses for their future delivery of water services.

11 Shared Services would be managed through contracts rather than a shared entity. The underlying ownership of each council’s existing water assets would not change through Shared Services.

12 The MOU sets out a process for investigating the possibility of Shared Services.

13 The initial process will be to form a joint working group comprised of staff from DCC and CCC.

14 The joint working group will investigate and make recommendations on the feasibility of any Shared Services, and report back to each council within a specified timeframe. Any steps beyond the investigation phase would be fully at the discretion of each council.

15 The joint working group will engage with mana whenua and will consider how any Shared Services could be extended to involve other territorial authorities.

16 At present, the scope of any Shared Services has not been agreed. This will depend on the outcome of the investigation of the possibilities by the joint working group, and each Council’s decision on how it wants to proceed beyond the investigation phase.

17 The joint working group will look at new ways of working and sharing expertise. They will consider a wide range of functions or services, such as joint procurement, laboratory services, plans for asset management, infrastructure planning and delivery, water safety, compliance, and performance monitoring.

18 Key points from the MOU include:

a) The MOU records the proposed process for investigating the possibility of Shared Services between CCC and DCC.

b) Each Council will be required to follow the proposed process, but with some flexibility around timeframes if agreed.

c) There will be agreed relationship principles and communication goals, and rules around intellectual property and confidential information.

d) DCC and CCC will engage with mana whenua as the process progresses.

e) Either Council will have the right to terminate the MOU at any time and any steps beyond the investigation phase will be fully at the discretion of each Council.

19 The joint working group will not have any decision-making power. Its function will be to make recommendations and to report these back to each Council’s elected members so that each Council can then decide whether it wants to proceed further and, if so, how it wants to proceed.

20 The joint working group will be required to report back to each Council before the end of April 2025 (or later, if agreed by both parties). This would align with Council’s decision making on its water services delivery models which is expected to occur around mid-May 2025.

21 The MOU is between DCC and CCC, but the MOU contemplates that Shared Services could potentially be broadened to include other councils following the initial investigation phase by DCC and CCC.

22 Although Shared Services is not in itself a base model for the delivery of water services, it will be mentioned in the Council’s consultation document under the Local Government (Water Services Preliminary Arrangements) Act 2024 as something that DCC and CCC are investigating.

23 Based on the current drafting of the Local Government (Water Services) Bill, Council may need to undertake separate consultation prior to signing any contracts for shared services. This is because the current drafting of the Bill treats shared services as a “change proposal” which means the Council would need to consult on three options, being the existing approach, the proposed approach and at least one further reasonably practicable option, if available.

OPTIONS

Option One – Recommended Option -Approve the Memorandum of Understanding

24 Under this option, Council would:

a) Approve the Memorandum of Understanding between Dunedin City Council and Christchurch City Council.

b) Note that the Council’s consultation document under the Local Government (Water Services Preliminary Arrangements) Act 2024 will record that Dunedin City Council and Christchurch City Council are working together to investigate whether there are opportunities for certain shared water services.

c) Delegate to the Council’s Chief Executive Officer the authority to finalise and sign the Memorandum of Understanding on behalf of Council.

25 There is no impact on debt, rates, and city-wide and DCC emissions.

Advantages

· This is an opportunity for DCC and CCC to work together to achieve cost reductions and enhance services for their communities.

· Each council has a wealth of expertise and specialist staff. Shared services create opportunities for those staff to collaborate and share ideas.

· This option aligns with the Government’s ‘Local Water Done Well’ reform programme as shared services have the potential to reduce costs and enhance water services.

· This option could apply to any base model for the delivery of water services (eg to an in-house model or a CCO model).

Disadvantages

· There will be some staff cost and time in investigating the possibility of Shared Services.

Option Two – Do not approve the Memorandum of Understanding

26 Under this option, Council would not approve the MOU.

27 There is no impact on debt, rates, and city-wide and DCC emissions.

Advantages

· There would be no staff cost and time involved in investigating the possibility of shared services.

Disadvantages

· This would be a missed opportunity to work with CCC to investigate the possibility of Shared Services, which have the potential to reduce costs and enhance services.

NEXT STEPS

28 If Council approves the MOU, then it will be signed and a joint working group will be established.

29 The joint working group will report back to Council following its investigation into the possibility of Shared Services between DCC and CCC.

Signatories

Author:	Karilyn Canton - Chief In-House Legal Counsel
Authoriser:	Sandy Graham - Chief Executive Officer

Attachments

	Title	Page
⇩a	Draft MOU with Christchurch City Council	114

SUMMARY OF CONSIDERATIONS

Fit with purpose of Local Government

This report enables democratic local decision making and action by, and on behalf of communities and promotes the social, economic environmental and cultural well-being of communities in the present and for the future.

Fit with strategic framework

	Contributes	Detracts	Not applicable
Social Wellbeing Strategy	☐	☐	✔
Economic Development Strategy	✔	☐	☐
Environment Strategy	✔	☐	☐
Arts and Culture Strategy	☐	☐	✔
3 Waters Strategy	✔	☐	☐
Future Development Strategy	✔	☐	☐
Integrated Transport Strategy	☐	☐	✔
Parks and Recreation Strategy	☐	☐	✔
Other strategic projects/policies/plans	☐	☐	✔

Māori Impact Statement

Mana whenua has a strong interest in water resources and the delivery of water services. The Council will seek to engage with mana whenua as the process progresses in investigating the possibilities for certain shared water services with Christchurch City Council.

Sustainability

Financial sustainability of local government water services is a key objective of the Government’s ‘Local Water Done Well’ policy. The proposal to investigate certain shared water services with Christchurch City Council aligns with the Government’s stated aim of financial sustainability.

Zero carbon

It is too early to say whether there would be any zero carbon implications through the sharing of certain water services with Christchurch City Council. This would be considered further once the specific services were identified as being suitable for sharing.

LTP/Annual Plan / Financial Strategy /Infrastructure Strategy

The investigation itself will not have any implications for the LTP/Annual Plan/Financial Strategy/Infrastructure Strategy. There may be implications later depending on how the Councils decide to proceed following the investigation phase.

Financial considerations

The cost of establishing a joint working group comprised of staff from DCC and Christchurch City Council is unlikely to be significant and can be absorbed within current budgets.

Significance

The proposed investigation into the possibility of certain shared water services with Christchurch City Council is considered low to medium under Council’s Significance and Engagement Plan. The possibility of shared services will be referred to in the consultation document on its preferred model for the delivery of water services. That consultation document will be prepared under the Local Government (Water Services Preliminary Arrangements) Act 2024.

Engagement – external

Christchurch City Council.

Engagement - internal

Council’s Chief Executive Officer and staff from Legal, 3 Waters and Procurement have been involved in discussions to date.

Risks: Legal / Health and Safety etc.

There are no identified health and safety risks related to this report. Legal considerations are discussed in the body of this report.

Conflict of Interest

There are no known conflicts of interest.

Community Boards

There are no specific implications for Community Boards.

Mayor	Mayor Jules Radich
Deputy Mayor	Cr Cherry Lucas
Members	Cr Bill Acklin	Cr Sophie Barker
	Cr David Benson-Pope	Cr Christine Garey
	Cr Kevin Gilbert	Cr Carmen Houlahan
	Cr Marie Laufiso	Cr Mandy Mayhem
	Cr Jim O'Malley	Cr Lee Vandervis
	Cr Steve Walker	Cr Brent Weatherall
	Cr Andrew Whiley