Part 9: Audit aspects of the electricity sector

Local government: Results of the 2008/09 audits.

9.1
In this Part, we:

Overview of the electricity sector

9.2
The electricity sector supplies residential, commercial, and industrial customers with electricity through a variety of public and private entities.

9.3
The sector has four main components:

  • generation (electricity production stations);
  • transmission (the high-voltage network known as the national grid);
  • distribution (electricity lines companies); and
  • retail (electricity retail companies that compete to buy wholesale electricity and to sell it to consumers).

9.4
In 2010, changes are likely to the structure and functioning of the electricity sector, arising from the Ministerial Review of the Electricity Market. The review, initiated by the Minister for Energy and Resources, has led to the introduction of draft reform legislation into Parliament (the Electricity Industry Bill). The proposals in that Bill include dissolving the Electricity Commission and reallocating its existing functions to a new entity (the Electricity Authority) and to some other existing entities. They also include transferring some electricity generation assets between the SOEs active in the sector, and also transferring responsibility for the Whirinaki facility to one of the SOEs.

9.5
The Auditor-General, as the auditor of all public entities in New Zealand, audits most of the entities in the electricity sector, including the SOEs involved in generating, transmitting, and selling electricity. The Auditor-General is also the auditor of 21 of the 29 local lines companies.

9.6
Policy matters relating to the electricity sector are dealt with by the Ministry of Economic Development. The Commerce Commission and the Electricity Commission, both Crown entities, regulate different aspects of the electricity sector.

9.7
The electricity sector is recognised as a significant sector in the government's National Infrastructure Plan.69

Electricity lines businesses – regulations and our audits

9.8
In this section, we provide:

  • an overview of the electricity lines business sector; and
  • a summary of the audit opinions that we issued, under aspects of the regulatory framework, to electricity lines businesses.

9.9
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 electricity lines businesses and regulations

9.10
Electricity lines businesses manage assets that are financially substantial and a critical part of the wider national energy infrastructure.

9.11
In July 2008, Vector Limited sold its Wellington electricity network to a new company, Wellington Electricity Distribution Network Limited (later renamed Wellington Electricity Lines Limited), an entity jointly owned by Cheung Kong Infrastructure Holdings Limited and Hong Kong Electric Holdings Limited. The introduction of Wellington Electricity Lines Limited increased the number of electricity lines businesses in New Zealand to 29.

9.12
Electricity lines businesses are seen as local monopolies that could, without regulation, 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 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 –

(a) have incentives to innovate and to invest, including in replacement, upgraded and new assets; and

(b) have incentives to improve efficiency and provide services at a quality that reflects consumer demands; and

(c) share with consumers the benefits of efficiency gains in the supply of the regulated goods or services, including through lower prices; and

(d) are limited in their ability to extract excessive profits.

9.13
The major frameworks for regulating the sector are:

  • the default/customised price-quality regime; and
  • the information disclosure regime.

9.14
The default/customised price-quality regime sets benchmarks for the delivery of prices and quality. These benchmarks are expressed as price and quality thresholds. The detailed requirements of the regime were covered by the Commerce Act (Electricity Distribution Thresholds) Notice 2004 and a 2006 amendment to that notice. These requirements cover financial years up to 31 March 2009. From 1 April 2009, electricity lines services are subject to default/customised price-quality regulation under subpart 9 of Part 4 of the Commerce Act, as amended by the Commerce Amendment Act 2008.

9.15
The information disclosure requirements are set out in the Electricity Distribution (Information Disclosure) Requirements 2008. These requirements were published in October 2008 and significantly changed and expanded the previous disclosure requirements.

9.16
Because of the timing of the new information disclosure requirements, electricity lines businesses had to publish the required information for the years ended 31 March 2008 and 31 March 2009 during the 2009 calendar year.

9.17
Both the information and the threshold disclosure requirements need independent audit and assurance work, additional to the statutory audit required to attest to the financial statements of an individual electricity lines business.

9.18
Under the information disclosure requirements, the Auditor-General has to be the regulatory auditor where she is the statutory auditor of the annual financial statements. The Auditor-General was the auditor of 21 out of the 28 electricity lines businesses in the 2007/08 financial year and 21 out of the 29 electricity lines businesses in the 2008/09 financial year.

Audit opinions issued under the information disclosure requirements

Nature of audit opinions

9.19
Of the 21 information disclosure audit opinions issued on behalf of the Auditor-General for the year ended 31 March 2008, four were qualified (2006/07: one qualified audit opinion). In the year ended 31 March 2009, five of the 21 audit opinions were qualified.

9.20
Two audit opinions for the year ended 31 March 2008 were qualified because of limitations in the availability of independent evidence to support reported information about the performance of electricity lines businesses in meeting the regulated quality thresholds, particularly about recorded faults, and control data used in the System Average Information Duration Index (SAIDI) and the System Average Interruption Frequency Index (SAIFI). A severe storm was the reason for one of these limitations, because it caused extensive outages throughout the network and accurate records could not be kept by the business at that time.

9.21
Of the other two qualified opinions for the year ended 31 March 2008, one related to the non-disclosure of required information. The other opinion was qualified because the Board of Directors would not provide the auditors with the representations they sought about whether the entity kept proper records of the number and duration of faults, and the number of customers affected by each fault.

9.22
Four audit opinions for the year ended 31 March 2009 were qualified because of limitations in the availability of independent evidence to support reported information about the performance of electricity lines businesses in meeting the regulated quality thresholds, particularly about recorded faults, and on control data used in SAIDI and SAIFI. The same entity that was affected by a storm in the year ended 31 March 2008 was also affected by a storm in the 2009 financial year.

9.23
The other qualified opinion issued for the year ended 31 March 2009 was related to non-disclosure of "Fault Information per 100 circuit kilometres by Voltage and Type" as required by the information disclosure requirements. This entity also received a qualified audit report in the year before.

9.24
The qualified audit opinions show that the electricity lines businesses do not always have independent controls in place for the systems they use to report faults. The lack of independent controls means that auditors cannot attest to the reported performance. We expect entities to have appropriate controls and systems to accurately report information requirements, and have enough independent controls for auditors to verify that the information recorded is materially correct.

9.25
Electricity lines businesses are entering their third year of reporting against the Electricity Distribution (Information Disclosure) Requirements 2008. We expect those lines businesses that have received qualified audit opinions to be looking for ways to ensure that there are enough controls in place to record and support the information they report.

Timeliness of audit opinions

9.26
The deadline for publishing and publicly disclosing the required information for the year ended 31 March 2008 was extended from 28 February 2009 to 10 April 2009. Of the 21 electricity lines business audited on behalf of the Auditor-General, two failed to meet the deadline.

9.27
For the year ended 31 March 2009, the deadline for publishing and publicly disclosing the required information was within five months after the end of the financial year – that is, 31 August 2009. One of the 21 electricity lines businesses failed to meet this deadline. This entity had also failed to meet the deadline in the 2008 financial year.

9.28
We are disappointed to note that any entity has failed to meet its statutory deadline. The failure suggests a lack of commitment to timely reporting. The requirement to publish and publicly disclose electricity information is a known obligation.

Concluding comments

9.29
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.

Financial aspects of the electricity-related State-owned enterprises

9.30
In this section, we provide:

  • an overview of SOEs' objectives and accountability arrangements, and their involvement in the electricity sector; and
  • a summary of financial aspects of the SOEs involved in the electricity sector.

Objectives and accountability of SOEs

9.31
Under section 4 of the State-Owned Enterprises Act 1986 (the SOE Act), SOEs' principal objective is to:

… operate as a successful business, and to this end, to be –

(a) As profitable and efficient as comparable businesses that are not owned by the Crown; and

(b) A good employer; and

(c) An organisation that exhibits a sense of social responsibility by having regard to the interests of the community in which it operates and by endeavouring to accommodate or encourage these when able to do so.

9.32
Shareholding Ministers, who hold the SOE shares on behalf of the Crown, are responsible to Parliament for the SOE's performance of the functions given to them by the SOE Act. The shareholding Ministers for the electricity SOEs are the Minister of Finance and the responsible Minister – the Minister for State-owned Enterprises.

9.33
The Crown Ownership Monitoring Unit within the Treasury (formerly the Crown Company Monitoring Advisory Unit) monitors all SOEs on behalf of the shareholding Ministers.

9.34
The key accountability documents for SOEs are the statement of corporate intent (SCI), the annual report, and the half-yearly report.

9.35
The SCI must be finalised before the start of each financial year and must include specified information, including information about objectives, activities, targets and measures, and dividends.

9.36
SOEs' annual reports must be finalised within three months of each financial year ending 30 June. The annual report must include audited financial statements and:

… such information as is necessary to enable an informed assessment of the operations of the State enterprise and its subsidiaries, including a comparison of the performance of the State enterprise and subsidiaries with the relevant statement of corporate intent.70

9.37
The responsible Minister must present to Parliament the SCI for the forthcoming period, and the annual report for the past period, within 12 days of finalising the annual report.

9.38
Within two months of each half-year period ending 31 December, an SOE must deliver to its shareholding Ministers a report of its operations for that half-year.

9.39
The Auditor-General is the auditor of all SOEs. In this role, she is responsible for the annual audit of the financial statements included within the annual report, and other aspects of the Auditor-General's mandate provided for by the Public Audit Act 2001.

SOEs in the electricity sector

9.40
There are five SOEs in the electricity sector.

9.41
The Electricity Corporation of New Zealand Limited is a residual entity, left after assets were transferred in 1999 to the newly established SOE generators at the time. The Electricity Corporation of New Zealand Limited will eventually be wound up.

9.42
Transpower New Zealand Limited is the owner and operator of the national grid.

9.43
The three SOE generators are Genesis Energy Limited, Meridian Energy Limited, and Mighty River Power Limited. All of these companies are also involved in electricity retailing.

Summary of financial aspects

9.44
In the financial year ended 30 June 2009, the SOEs involved in the electricity sector71 reported total revenue of $5.7 billion and post-tax profits of $206 million. These figures were lower than the previous year (2008: revenue of $6.9 billion and profits of $417 million), which was heavily affected by the weather conditions of the winter of 2008.

9.45
In their annual reports, each electricity SOE discloses an amount described as "underlying profit". The underlying profit amount is different to the profit in the financial statements that has been determined in keeping with approved financial reporting standards. The term "underlying profit" is not defined in financial reporting standards, but it typically excludes the effects of accounting for changes in the value of financial instruments and "one-off" transactions.

9.46
We encourage public entities to include information in their annual reports that is likely to be relevant to users. However, we have some unease about the practice of disclosing underlying profits because:

  • there is no guidance about what underlying profit is, or how it is arrived at, and therefore inconsistent practices are likely among different entities;
  • the underlying profit amount has significant prominence in the annual report and has the potential to overshadow the financial information prepared in keeping with financial reporting standards; and
  • the underlying profit amount is not always clearly labelled as supplementary information that is additional to the information required by financial reporting standards.

9.47
The SOEs also reported operating cash flows of $1.1 billion. After investing cash of $1.2 billion, and after other cash movements relating to financing, these companies increased their overall cash balances by $43 million in 2008/09.

9.48
The electricity sector SOEs are a significant part of the Crown's overall SOE portfolio. They had combined total assets of $17.3 billion as at 30 June 2009, and net assets of $9.7 billion. These represent about one-third of the total asset values for all SOEs included in the Financial Statements of the Government of New Zealand.72

9.49
The combined post-tax profit generated by these SOEs in 2009 represents an overall return on assets and net assets of 1.2% and 2.1% respectively.

9.50
Figure 9 summarises the recent financial results, position, and cash flows of the SOEs involved in the electricity sector.

Some aspects of our annual audit work

9.51
As part of our appointed auditors' audit of annual financial statements, we assess SOEs' management control environments, and their financial information systems and controls.

9.52
In 2009, we assessed all electricity sector SOEs as either good or very good in these aspects. This means that we considered they had either no or some relatively minor aspects to improve. We made recommendations to the respective boards and management to address these where applicable.

9.53
We do not assess SOEs' service performance information and associated systems and controls, which we do assess in a number of other sectors. This is because such information is outside the scope of the audit we are required to complete.

9.54
In practice, SOEs in the electricity sector provide additional information in their annual reports, including reporting against their SCI as required by the SOE Act. They also provide a range of information on corporate social responsibility and sustainability matters, including some reporting against recognised international frameworks. Although this information is not audited, some of it is subject to independent assurance provided at the SOEs' request.

Concluding comments

9.55
Through our appointed auditors, we audit most of the companies involved in the electricity sector, which includes the transmission, generation, distribution, and retail of electricity in New Zealand.

9.56
The SOEs active in the electricity sector are substantial businesses, and manage assets that are significant both in financial terms and in securing critical supply.

Figure 9
Summary of financial aspects of State-owned enterprises involved in the electricity sector

Genesis
Year 2010 1st half
$m		 2009
$m		 2008
$m
Revenue 961.4 1,957.1 2,436.6
Post-tax profit 64.6 (135.7) 99.1
Assets
2,585.4 2,706.7
Net assets
1,392.8 1,406.8
Operating cash flows
262.9 209.1
Investing cash flows
(238.9) (254.0)
Financing cash flows
(9.1) 47.3
Net cash flows
14.8 2.4
Meridian
Year 2010 1st half
$m		 2009
$m		 2008
$m
Revenue 925.5 1,892.4 2,600.0
Post-tax profit 142.5 89.3 128.6
Assets
7,177.3 7,197.7
Net assets
4,284.1 4,204.6
Operating cash flows
313.5 342.6
Investing cash flows
(476.8) (271.5)
Financing cash flows
139.4 (47.9)
Net cash flows
(23.9) 23.2
Mighty River Power
Year 2010 1st half
$m		 2009
$m		 2008
$m
Revenue 521.8 1,119.9 1,178.6
Post-tax profit 73.9 159.6 111.0
Assets
4,388.1 4,058.0
Net assets
2,621.6 2,257.7
Operating cash flows
317.1 207.4
Investing cash flows
(221.8) (345.3)
Financing cash flows
(72.5) 85.0
Net cash flows
22.8 52.9
Transpower
Year 2010 1st half
$m		 2009
$m		 2008
$m
Revenue 379.6 699.3 644.2
Post-tax profit 60.3 92.9 78.1
Assets
3,106.4 2,844.3
Net assets
1,399.9 1,307.5
Operating cash flows
250.3 330.3
Investing cash flows
(253.1) (434.7)
Financing cash flows
32.6 110.7
Net cash flows
29.7 6.3
Totals
Year 2010 1st half
$m		 2009
$m		 2008
$m
Revenue 2,788.3 5,668.7 6,859.4
Post-tax profit 341.3 206.1 416.8
Assets
17,257.2 16,806.7
Net assets
9,698.4 9,176.6
Operating cash flows
1,143.8 1,089.4
Investing cash flows
(1,190.6) (1,305.5)
Financing cash flows
90.4 195.1
Net cash flows
43.4 84.8

69: National Infrastructure Plan (March 2010), available at www.infrastructure.govt.nz/plan/mar2010.

70: State-Owned Enterprises Act, section 15.

71: Transpower New Zealand Limited and the companies generating and retailing electricity (or "gentailers") – Genesis Energy Limited, Meridian Energy Limited, and Mighty River Power Limited.

72: Including KiwiRail and Air New Zealand.

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