Part 6: Audit aspects of electricity lines businesses

6.1
In this Part, we discuss aspects of our role in auditing the country's electricity lines businesses. We:

• provide an overview of the electricity lines business sector;
• describe the regulatory frameworks for disclosure by electricity lines businesses, required because of the monopoly aspects of the sector; and
• discuss our audit responsibilities in relation to the regulatory frameworks for disclosure.

6.2
We note that the audit work associated with the regulatory framework is additional to our statutory role in auditing the annual reports of electricity lines businesses.

Overview of New Zealand's electricity lines businesses and regulations

6.3
New Zealand's electricity industry was significantly reorganised through the Electricity Industry Reform Act 1998. This reorganisation included the separation of electricity supply (generation and retail) from its distribution (transmission through the national grid and local electricity lines).

6.4
There are currently 28 local electricity lines businesses in New Zealand. These businesses manage assets that are both financially substantial and a critical part of the wider national energy infrastructure.

6.5
Electricity lines businesses are seen as monopolies which, without regulation, could abuse that position. They are regulated by the Commerce Commission through provisions issued under Part 4 of the Commerce Act 1986. The overall purpose of Part 4 of the Act is set out in section 52A:

… to promote the long-term benefit of consumers … by promoting outcomes that are consistent with outcomes produced in competitive markets such that suppliers of regulated goods or services—

1. have incentives to innovate and to invest, including in replacement, upgraded, and new assets; and
2. have incentives to improve efficiency and provide services at a quality that reflects consumer demands; and
3. share with consumers the benefits of efficiency gains in the supply of the regulated goods or services, including through lower prices; and
4. are limited in their ability to extract excessive profits.

6.6
The major frameworks for regulating the sector are:

• the threshold disclosure regime; and
• the information disclosure regime.

6.7
The threshold regime sets benchmarks for the delivery of price and quality (including number and duration of service interruptions). These benchmarks are expressed as price and quality thresholds. The detailed requirements of the regime are covered by the Commerce Act (Electricity Distribution Thresholds) Notice 2004 and a 2006 amendment to that notice. The current requirements cover financial years up to 31 March 2009.

6.8
The detailed information disclosure requirements were covered by the Commerce Commission's Electricity Information Disclosure Requirements 2004. However, for the years ended 31 March 2008 and onwards, the information disclosure regime is covered by the new requirements set out in the Commerce Act (Information Requirements) 2008. These requirements were published in October 2008, and significantly change and expand the disclosure requirements.

6.9
Under the old regime, there was a close alignment between the information disclosure audit requirements and the statutory audit requirements. For example, even though the regulations stipulated a specific methodology for the valuation of line assets, the regulatory audit requirement still focused on core historic financial information, based on generally accepted accounting practice with which the auditor attested compliance in carrying out the statutory audit of the annual financial statements.

6.10
The new regime includes audit requirements relating to prospective financial and non-financial information.

Audit activity under the regulatory framework

6.11
Both the threshold and the information disclosure regimes require audit and assurance work, additional to the statutory audit required to attest to the financial statements of an individual electricity lines business.

6.12
This regulatory audit work provides assurance about the information reported by electricity lines businesses in meeting their responsibilities under the regulatory framework.

6.13
The information disclosure regime requires the Auditor-General to be the regulatory auditor where he is the statutory auditor of the annual financial statements. The Auditor-General is auditor of 21 out of the 28 electricity lines businesses.

6.14
Beyond this, there is no requirement for the auditor carrying out the additional work required under regulation to be the same auditor who carries out the statutory audit of an electricity lines business' annual financial statements.

6.15
All electricity lines businesses have historically used their statutory auditor to perform audit work under the information disclosure regime.¹ As noted in paragraph 6.9, this reflects the close alignment between the statutory annual audit and the requirements under the old information disclosure framework.

6.16
Following the introduction of the new information disclosure framework, the use of the same auditor will continue where the Auditor-General is the statutory auditor.

6.17
Under the threshold regime, most electricity lines businesses have historically used an auditor other than their statutory auditor to perform the regulatory audit work. For the most recent financial year, 17 of the 28 businesses did so.²

Audit opinions issued under regulatory frameworks

6.18
Of the 28 threshold compliance audit opinions, 20 were qualified.³ The reasons for qualification mainly related to limitations over the availability of independent evidence to support reported information about the performance of lines businesses in meeting the regulated quality thresholds, particularly about recorded faults, and on control data used in the SAIDI (systems average interruption duration index) and the SAIFI (systems average interruption frequency index).

6.19
Of the 28 information disclosure audit opinions issued for the last year of the old framework, only one was qualified.⁴

Concluding comments

6.20
Our role in the electricity lines business sector is more extensive than issuing opinions on annual financial statements. Auditors also have an extensive role in issuing opinions on the disclosures required under the regulatory frameworks that govern the sector. The disclosure requirements have recently changed and have become more complex through the inclusion of information relating to prospective and non-financial information. We will be monitoring the effect of these new regulatory requirements on the audit work and the sector.

1: Based on the financial year ended 31 March 2007.

2: Based on the financial year ended 31 March 2008.

3: Based on the financial year ended 31 March 2008.

4: Based on the financial year ended 31 March 2007.