Submission on draft water services legislation
We provided a submission to the Finance and Expenditure Committee on the Water Services Legislation Bill and the Water Services Economic Efficiency and Consumer Protection Bill.
10 February 2023
Committee Secretariat
Finance and Expenditure Committee
Parliament Buildings
WELLINGTON
Tēnā koe
SUBMISSION ON THE WATER SERVICES LEGISLATION BILL AND THE WATER SERVICES ECONOMIC EFFICIENCY AND CONSUMER PROTECTION BILL
Thank you for the opportunity to comment on both the Water Services Legislation Bill and the Water Services Economic Efficiency and Consumer Protection Bill.
The Controller and Auditor-General is an independent Officer of Parliament. In that role, I am responsible for giving Parliament and the public assurance that public organisations are operating and accounting for their financial and service performance in keeping with Parliament’s intentions and public expectations. I also have a keen interest in the accountability of public organisations to Parliament and the public. In discharging these responsibilities, it is critical that I am independent of executive government and Parliament.
I have considered both Bills through a public accountability lens, particularly on the clarity of their accountability arrangements. The Water Services Legislation Bill substantially amends and adds to the Water Services Entities Act 2022 to implement the “Three Waters” reforms. It provides an opportunity to further strengthen the Water Services Entities Act by addressing matters that have arisen since my submission on the Water Services Entities Bill (now the Water Services Entities Act 2022).
My comments focus on:
- how the Water Services Legislation Bill could further strengthen the Water Services Entities Act 2022; and
- the proposed audit requirements in the Water Services Economic Efficiency and Consumer Protection Bill.
I have also set out, as an attachment to this submission, a range of comments on the technical details of the Water Services Legislation Bill.
Strengthening the Water Services Entities Act 2022 through the Water Services Legislation Bill
The monitor’s information-gathering powers and its application to the Auditor-General
Section 175 of the Water Services Entities Act 2022 states that the monitor of a Water Services Entity (WSE) may, by notice in writing, require a WSE or “any other relevant person”, to provide it with information.
“Relevant person” is not defined, which could give the monitor an extraordinarily wide information-gathering power. The acceptable reasons for refusing a request are narrow (section 176), and non-compliance runs the risk of High Court proceedings and a civil penalty of up to $50,000 (section 177).
The implications of these clauses are that Officers of Parliament would, in effect, be made subject to the powers of the Executive. This is constitutionally inappropriate and could undermine the statutory independence of the Auditor-General and the other Officers of Parliament.
I request that section 175 be amended to clarify which bodies or persons the monitor can request information from and include an exception for Officers of Parliament. A similar amendment is needed in section 458 (reviewer’s power to request information), inserted by clause 22 of the Water Services Legislation Bill.
Clarifying whether a territorial authority can collect revenue for stormwater services provided by a WSE
Clause 63 of the new Part 2 (inserted into Schedule 1 of Water Services Entities Act 2022) provides that, on and after the establishment date, a WSE may bill a territorial authority directly for all the stormwater services that the WSE provides within the boundaries of the territorial authority. This provision is repealed on 1 July 2027.
My reading is that to “bill a territorial authority directly” means the territorial authority must pay the WSE. This is different to an arrangement where the territorial authority simply collects revenue on behalf of the WSE.
I recommend that thought is given to whether a territorial authority will have the power to raise funds to cover the cost of the WSE’s stormwater services bill. Unless a specific provision is made, a territorial authority cannot (and should not) rate or charge for activities or services that it does not provide, or that are not provided on its behalf.
Requiring the Auditor-General to certify legal compliance is unusual, and what the Auditor-General will be required to do needs to be clarified
Section 165(3)(a) of the Water Services Entities Act 2002 requires the Auditor-General’s audit report to indicate whether a WSE’s annual financial statements, statement of service delivery performance, as well as any other information that the Auditor-General has agreed to or is required to audit, comply with the Water Services Entities Act 2022.
It is unusual for the Auditor-General to be required to certify legal compliance with legislation by a public organisation. This is the responsibility of each public organisation. An auditor’s role is primarily to assess an organisation’s compliance with generally accepted accounting practice.
Requiring the Auditor-General to provide adequate assurance over how a WSE complies with the entirety of the Water Services Entities Act 2022 is likely to be impractical. It will add significant scope and cost to, and challenges in undertaking my audits of WSEs’ annual financial statements and statements of service delivery performance.
When the Local Government Act 2002 was first enacted, there was a similar requirement for the auditor to provide a report on the extent to which the local authority complied with the requirements of the Local Government Act 2002 in respect of the long-term plan. In 2014, this legal compliance requirement was replaced, so that the Auditor-General’s report is on whether the long-term plan achieves its purpose.
Should the intention be for the Auditor-General to certify legal compliance, the Bill needs to provide further clarity and specificity on what the Auditor-General is required to indicate compliance with, and what is meant by “compliance with”. For example, section 99 of the Local Government Act 2002 requires a local authority’s annual report to include the Auditor-General’s report on “the local authority’s compliance with the requirements of Schedule 10 that are applicable to the annual report”.
Unworkable timing of audit report on information in the annual report of a WSE
Section 165(2) of the Water Services Entities Act 2022 states that the Auditor-General must, within 3 months after the end of a financial year, provide an audit report on a WSE’s annual financial statements and statement of service delivery performance. Both of these are included in a WSE’s annual report.
However, section 160(1)(a) of the Act states that a WSE must prepare its annual report within 4 months after the end of a financial year. In section 160(1)(b), a WSE must provide its annual report to the regional representative group no later than 15 working days after having received the audit report.
As currently drafted, we are required to provide an audit report before the information to be audited is required to be provided to us by the WSE. The timing in these clauses needs to be amended.
An example of workable timing is in the Crown Entities Act 2004, which requires a Crown entity to forward the information to be audited to the Auditor-General within 3 months after the end of the financial year. The Auditor-General must then provide an audit report to the Crown entity within 4 months after the end of the financial year.
Audit requirements in the Water Services Economic Efficiency and Consumer Protection Bill
With the Commerce Commission as the regulator, the Bill establishes an economic regulation and consumer protection regime (regulatory regime) for the water services sector. My understanding is that the Commerce Commission will, in due course, do further detailed work on the regulatory regime.
The Bill provides for three types of regulation: information disclosure regulation (under Subpart 4 of Part 2 of the Bill), quality regulation (Subpart 5), and price-quality regulation (Subpart 6). Because WSEs are public entities, the Auditor-General will be the auditor if the regulatory regime requires an audit. Although quality regulation is new, information disclosure regulation and price-quality regulation are provided for in similar regulatory regimes under the Commerce Act 1986 and the Telecommunications Act 2001.
Given that the details of the regulatory regime for the water services sector, including any audit requirements, will be determined by the Commerce Commission rather than through legislation, I welcome the opportunity to work with the Commerce Commission on future audit requirements.
Concluding comments
Thank you for the opportunity to make a submission on these Bills. As my Office does with our other submissions on government proposals, we will publish this submission on our website in due course.
Nāku noa, nā
John Ryan
Controller and Auditor-General