Part 3: Asset management capability
3.1
We reviewed the asset management practices of Alpine, Unison, and Waipa. In this Part, we consider the three companies':
Governance of asset management
3.2
Governance practices are fundamental to the effective operations of any entity. We looked at how the three companies govern how their network assets are managed. We expected:
- the boards of directors of the three companies to be involved in strategic and long-term planning and to receive regular reports about the performance of their networks (directors need to be involved in the planning and monitoring of an electricity distribution businesses' core business – in this case, operating their networks); and
- the three companies' investments in subsidiary or associated companies, particularly in emerging technologies, to not affect the "business-as-usual" ongoing management of their networks. We have previously noted that electricity distribution businesses are making more investments that are not central to their operations.16Therefore, we looked at how boards of directors were ensuring that:
- management resources were not diverted or spread too thinly; and
- investment risk was being managed.
3.3
Governance practices are a focus of our annual audits of financial statements. We have previously reported that our annual audits did not identify any significant governance issues in electricity distribution businesses.17 However, we encourage all electricity distribution businesses to be vigilant in their standards of governance, especially in applying appropriate levels of scepticism when evaluating information from management.
Governance arrangements
3.4
The boards of directors of the three companies are involved, to different extents, in planning the asset management strategies for their networks. Each board oversees asset management plans early in the strategic-planning process and scrutinises the budgets. We found that the boards regularly reviewed the performance of their respective networks, mainly through monthly reporting.
3.5
There was a clear separation of management and governance roles in the three companies.
The effect of subsidiary investments on the management of the network
3.6
Managing subsidiary investments did not appear to distract from the three companies' governance and management of their networks. The Appendix summarises the corporate structures of the three companies and their company investments.
3.7
In some instances, the three companies' investment in subsidiary contracting companies may help to create close and complementary relationships that could improve the overall management of their networks. Unison's investment in ETEL Limited has given it the opportunity to operate better-performing transformers. Alpine's investment in Infratec Limited has provided it access to emerging technologies.
3.8
There are risks in non-core investments. Waipa does not expect a significant return on its fibre investment until at least 2020, and Infratec Limited is exposed to risk, particularly with its overseas operations. In our view, the three companies are appropriately recognising and managing these risks.
Resourcing of asset management
3.9
Effective asset management can happen only if an entity has the right resources in place. We expected the three companies to:
- appropriately resource their asset management teams and manage any identified staff shortages or skill-set requirements; and
- provide appropriate training and development of staff.
Resourcing strategies
3.10
The three companies have resourcing strategies in place, which are specific to their organisation and tailored to their size. The Appendix summarises the approach that each company takes. The three companies use external contractors to manage any gaps that they identified in their staff levels.
3.11
The three companies' resourcing strategies allow them to prepare their asset management plans in-house. Underpinning the asset management plan are various systems and procedures, which have been devised by staff and external contractors.
3.12
All electricity distribution businesses recognise a need in the future for more data technicians and business analysts to complement the traditional engineering and electrician roles. Because New Zealand is a relatively small country, we expect that finding more data technicians and business analysts could be a challenge for many electricity distribution businesses. This is something that electricity distribution businesses, possibly collectively, might need to consider and manage.
Staff training and development
3.13
The three companies have processes to ensure that their staff are adequately trained. They also work to maintain the number of staff required in a particular area. For example, Unison has an employment programme to train graduates in professional asset management and engineering. Waipa has introduced an internal secondment programme to increase the number of staff in network management.
3.14
The three companies have plans in place to manage the training needs that they have identified. For example, Waipa noted that it needed to provide staff training to properly maintain a new type of asset it had recently installed on its distribution network.
3.15
We were told that staff employed by contracted businesses might not be familiar with asset management concepts and strategies. Each company needs to consider whether these staff need more training to understand the links between strategic asset management and work in the field. We consider it encouraging that the three companies are aware that they need to address this through training. We encourage the three companies to put in place processes that are designed to ensure that the work of contracting and maintenance personnel is fully in line with each company's asset management direction and strategies.
Risk management
3.16
Risk management is an important foundation for effective asset management. The overall purpose of risk management is to understand the cause, effect, and likelihood of adverse events occurring and to mitigate these risks to an acceptable level. There are widely used standards that set out how the entity identifies and assesses asset- and asset-management-related risks.
3.17
Identifying risks at an asset level is necessary when deciding whether to intervene in the management of assets. This is important regardless of whether the decision is about maintaining or replacing an asset.
3.18
We expected the three companies to have integrated risk management strategies and to report risks and their treatment to relevant levels of management and then to the board of directors.
3.19
Alpine and Unison based their approach to risk on the Australian/New Zealand Standard, Risk Management – Principles and guidelines.18 However, the comprehensiveness of their approaches differed:
- Unison had the most sophisticated approach to risk management. Unison has risk streams for operational and corporate matters, including asset management. Unison's resources in risk management include an experienced risk manager and designated "risk champions" to oversee the risk strategies in each business unit. Risks are reported to specialised committees. These committees report twice-yearly to the Audit and Risk Committee.
- Alpine improved its approach to risk during 2015 and 2016. In 2015, Alpine approved an updated risk management policy, which focuses on health and safety, network risk matrix, and corporate risks. Critical risks are reported to the chief executive officer and the Audit and Risk Committee.
3.20
Waipa's risk management is in the early stages of development. Its policy currently focuses on health and safety, natural disasters, and supply to critical customers. Risks are reported annually to the board of directors.
3.21
The three companies are aware that they need to improve their risk management efforts. We commend each company for recognising this.
3.22
Unison's intended improvements come from a reasonably advanced platform. Unison intends to pursue a granular approach to network risks that may result in thousands of assets being plotted on risk graphs. One of the challenges for Unison in making this improvement will be to ensure that its granular approach does not become so detailed that it loses sight of the bigger picture.
3.23
Both Alpine and Waipa acknowledge that they can achieve improvements through appropriate reporting to management and their boards of directors. Alpine and Waipa are currently investigating what these improvements could be. Better reporting of risks will enable more informed decisions about the management of assets. We urge Alpine and Waipa to prioritise investigating and implementing improvements to their reporting regimes.
16: Office of the Auditor-General (2016), Energy sector: Results of the 2014/15 audits, Wellington, pages 19 to 23.
17: Office of the Auditor-General (2016), Energy sector: Results of the 2014/15 audits, Wellington, page 19.
18: AS/NZS ISO 31000: 2009 (2009) Risk Management – Principles and guidelines, Sydney and Wellington.