Part 1: Introduction

Energy sector: Results of the 2014/15 audits.

1.1
In this Part, we explain why we prepared this report and what we mean by "the energy sector", note which entities in the sector we audit, and outline the regulatory requirements that the sector must comply with and be audited against.

Why we prepared this report

1.2
This is the first report we have prepared about the energy sector. It outlines what we mean by, and what we do in, the energy sector. We also have a duty to report from time to time on the matters arising from our audits, including the types of audit reports issued. In previous years, our findings for this sector have appeared in separate reports.

1.3
Our work in the energy sector has identified several common trends, which we outline in this report. We have not formed a view on the trends we have identified. Instead, we describe them to prompt further discussion in the sector and among its stakeholders.

What do we mean by "the energy sector"?

1.4
Energy is produced and used in diverse ways. The main source of energy generated in New Zealand is hydro power. Energy is also generated from gas, geothermal heat, coal, wind, and oil. Most of these energy sources are used to produce electricity. Oil is primarily used as fuel for transport but accounts for a small amount of electricity generation.

1.5
A large part of the energy sector is the electricity industry, which is in four parts:

  • generators of electricity;
  • Transpower New Zealand Limited (Transpower), the owner of the national grid of transmission lines;
  • electricity distribution businesses that own and run local distribution networks; and
  • retailers, who sell electricity to consumers.1

1.6
Transpower and the electricity generators are considered the wholesale market. Electricity distribution businesses and retailers are the retail market (see Figure 1).

Figure 1
The structure of the electricity industry

Figure 1 - The structure of the electricity industry.

Source: Electricity Authority (2016), Electricity in New Zealand, page 5.

1.7
The owners of electricity distribution businesses include community or consumer trusts and local authorities.

1.8
The electricity industry is set up so that Transpower and the electricity distribution businesses are natural monopolies. Therefore, they are subject to regulatory control. We cover some of the regulatory requirements in paragraphs 1.23 to 1.26.

1.9
Certain entities are set up to promote efficiency in the energy sector. They have an important role in promoting competition, ensuring reliable supply, encouraging greater use of renewable sources of energy, and energy conservation.

1.10
In this report, "the energy sector" includes:

  • the electricity industry;
  • other suppliers of energy sources; and
  • entities set up to promote energy efficiency.

1.11
This report does not cover end-users, consumers of energy, or local generators.

The entities covered by this report

1.12
The Auditor-General does not audit every entity in the energy sector – some are not public entities and do not fall within the Auditor-General's mandate. We comment on the audits of only the types of energy-sector entities within our mandate, which we set out below. Appendix 1 lists the individual energy sector entities that we audit.

Electricity distribution businesses

1.13
The electricity distribution businesses that we audit are subject to the Energy Companies Act 1992. Section 45(1) states that every company incorporated under this Act and its subsidiary is a public entity.

1.14
There are several electricity distribution businesses that we do not audit because they are not public entities.2

Gas distribution businesses

1.15
We audit one gas distribution business, GasNet Limited. It is owned by Wanganui Gas Limited, which is subject to the Energy Companies Act 1992. Wanganui Gas Limited sold the assets (including the trading name) of its retail business Energy Direct New Zealand in 2013.

State-owned enterprises

1.16
Two State-owned enterprises are heavily involved in the energy sector. Transpower is the owner of the national grid of electricity transmission lines. Solid Energy New Zealand Limited is the largest coal mining company in New Zealand.

Mixed-ownership model entities

1.17
These are publicly listed companies in which the Government has a majority ownership interest. The mixed-ownership model companies that generate and sell electricity are Genesis Energy Limited, Meridian Energy Limited, and Mighty River Power Limited.

Community or consumer trusts

1.18
Some electricity distribution businesses are owned by community or consumer trusts. These trusts were set up to own electricity distribution businesses on behalf of their communities or of consumers. The Electricity Industry Act 2010 provides for the Auditor-General to audit such a trust if the trustees do not appoint another auditor.3 We currently audit four community or consumer trusts – Electra Trust, Network Tasman Trust, ScanPower Limited Customer Trust, and West Coast Electric Power Trust.

1.19
Some trusts choose not to appoint another auditor because they believe that it is more efficient if the Auditor-General audits all entities in their group.

Subsidiary entities

1.20
Public entities in the energy sector own many subsidiaries. Many of the subsidiaries operate in complementary industries to their owners. For example, many subsidiaries of electricity distribution businesses are construction or consulting companies. Some of the subsidiaries operate outside of the energy sector. We discuss this further in Part 3.

1.21
Many of the mixed-ownership model subsidiaries also operate in the electricity generation or retail sectors.

Crown agents and independent Crown entities

1.22
Two Crown entities are involved in the energy sector. The Electricity Authority promotes competition in, reliable supply by, and the efficient operation of, the electricity industry for the long-term benefit of consumers. The Energy Efficiency and Conservation Authority encourages, promotes, and supports energy efficiency and the increased use of renewable energy sources.

The regulatory environment

1.23
Transpower and the electricity and gas distribution businesses are natural monopolies. Part 4 of the Commerce Act 1986 provides for the regulation of price and quality to promote competitive behaviour. The Commerce Commission is responsible for enforcing the Act, and has created a regulatory framework. This framework has two parts.

1.24
First, the Commerce Commission sets the maximum revenue that some electricity distribution businesses, gas distribution businesses, and Transpower can earn, and requires them to meet certain quality standards. Some community or consumer-owned electricity distribution businesses are exempt from this regulation.4 The Commerce Commission's current determinations for 2014/15 on price and quality are available at www.comcom.govt.nz:

  • Electricity Distribution Services Default Price-Quality Path Determination 2012, covering electricity distribution businesses.5
  • Gas Distribution Services Default Price-Quality Path Determination 2013, covering gas distribution businesses.
  • Commerce Act (Transpower Individual Price-Quality Path) Determination 2010, covering Transpower.

1.25
Secondly, the Commerce Commission requires electricity distribution businesses, gas distribution businesses, and Transpower to publish information about their performance. Financial performance, service performance, pricing and contract, and asset information of the part of the business subject to regulation is included. Unregulated parts of a company are not included in the information disclosed. The determinations operating in 2014/15 are all available at www.comcom.govt.nz:

  • Electricity Distribution Information Disclosure Determination 2012 (consolidated in 2015), covering electricity distribution businesses.
  • Gas Distribution Information Disclosure Determination 2012 (consolidated in 2015), covering gas distribution businesses.
  • Transpower Information Disclosure Determination 2014, covering Transpower.

1.26
The Commerce Commission does not require all of the information prepared for these information disclosure determinations to be independently audited. In Part 2, we discuss the work we did in 2014/15 on the portion of the determinations that is subject to audit.

1: For more information on the electricity industry, see www.ea.govt.nz.

2: For example, Vector Limited.

3: Section 103(1) of the Electricity Industry Act 2010.

4: Section 54G(2) of the Commerce Act 1986.

5: After the Canterbury earthquakes, Orion New Zealand Limited developed a customised price path in keeping with the Electricity Distribution Services Input Methodologies Determination 2012. The Commerce Commission then developed a separate determination for Orion New Zealand Limited, Orion New Zealand Limited Customised Price-Quality Path Determination 2013, which applied in 2014/15.