Auditor-General's overview

This is the first report from my Office that focuses on the results of the audits of public entities in the energy sector.

The energy sector in New Zealand is diverse and made up of a mixture of public and private entities. Most of the public entities in this sector are electricity distribution businesses responsible for distributing electricity to consumers.

This report outlines the trends that are apparent from the audits of these electricity distribution businesses. Electricity distribution businesses are asset-intensive entities, so they must plan and carry out good asset management. Electricity networks require continuous replacement and upgrading to ensure safe, reliable supply.

I plan to carry out further work to produce case studies on the asset management practices of selected electricity distribution businesses. In particular, I want to examine how these entities are investing in ensuring that their networks are able to continue to deliver the services required for future generations. This will involve considering how they intend to take advantage of emerging technologies.

Because many of the companies in the electricity industry are monopolies they are also subject to regulatory regimes affecting their core electricity distribution business. These regulatory regimes are designed to limit price increases, which can affect future profitability. My staff audit the information reported under the regulatory requirements for public entities.

Electricity distribution businesses often tell me that the regulations are complex, so they need to invest much effort in ensuring that their staff understand the detail of the regulations to prepare the required information. The companies also noted that they continue to consider the effect of regulating revenue and therefore profits from their core business when making investment decisions.

Many companies have made, or are planning to make, investments seeking revenue sources beyond their core electricity distribution business. Because of the additional risk these investments bring, I urge electricity distribution businesses to work through appropriate due diligence processes in making these investments and to set up robust corporate governance and management arrangements. Investments in core business should not be compromised.

Generally, my auditors have found that those responsible for governing public entities in the energy sector have the appropriate skills and experience to manage their core operations. For entities making an investment, particularly outside the energy sector, those charged with governance must be careful to apply appropriate judgements based on good business cases.

I am particularly pleased with the initiatives of the mixed-ownership model companies in 2014/15 to make their financial statements more readable. Each took a different approach, and I encourage other entities in the energy sector to look to the examples they have set for potential improvements to their own reporting.

Lyn Provost
Controller and Auditor-General

21 June 2016