Attachment: Technical details in the Water Services Legislation Bill

Local authorities may be unable to forecast the transfer of the “Three Waters” services

Part 6 of Schedule 1AA of the Local Government Act 2002 (inserted by the Water Services Entities Act 2022) does not allow local authorities to include content about “Three Waters” services in their 2024-34 long-term plans.

If the transfer dates of the “Three Waters” assets and liabilities falls on 1 July 2024,¹ an unintended consequence would be that local authorities would be unable to include the transfer of the “Three Waters” services in the forecast financial statements in their 2024-34 long-term plans, because the long-term plans cover the period on and from 1 July 2024. In my view, this would undermine the integrity of the long-term plans because the plans would not comply with generally accepted accounting practice.

If the transfer date of the “Three Waters” assets and liabilities is before 1 July 2024, the forecast financial statements in the long-term plans will not need to include content about “Three Waters” services. The services will have already been transferred.

Section 466’s review requirements should not apply to the asset management plan, the funding and pricing plan, and the infrastructure strategy

New section 466 (inserted by clause 22 of the Bill) requires a WSE to review a “specified document” within five years from the date on which it is finalised (and at least once every five years after the previous review), and provides that a WSE may amend or replace a “specified document” at any time.

Section 466 does not define what a “specified document” is. I presume that the “specified document” has the same meaning as it does in section 465(2): “a document to which the publication requirements in new section 465 apply”. Section 465’s publication requirements apply to a WSE’s asset management plan, funding and pricing plan, and infrastructure strategy.

If that is the case, it is confusing to say that a review is required every five years of the asset management plan, the funding and pricing plan, and the infrastructure strategy because these documents are prepared every three years.² Confusion would be avoided if section 466 listed specific documents.

Regulation-making powers for disclosure requirements should cover annual report and financial statements

Section 474(1)(b) allows regulations to be made about disclosure requirements (financial and service performance) for the statement of intent, asset management plan, funding and pricing plan, and infrastructure strategy.

It is usual practice for information disclosed in the statement of intent to then be reported against in an organisation’s annual report or audited financial statements. To enable the statement of intent disclosures required by regulations to then be reported against in the WSE’s annual report and financial statements, I suggest that the regulation-making power in section 474(1)(b) are expanded to cover disclosure requirements in those documents.

The scope of what a subsidiary of a WSE can perform should be clarified

The Bill includes two provisions that describe the functions of a WSE subsidiary. These are:

• section 13(r) (see clause 7 of the Bill); and
• clause 2(b) of Schedule 5 (see Schedule 2 of the Bill).

Both provisions describe the functions of a WSE subsidiary in relation to the functions of a WSE, by reference to section 13 of the Bill.

However, while section 13(r) covers all the functions of a WSE in section 13(a) to (s), clause 2(b) of Schedule 5 covers only functions that are incidental to, or consequential on, the functions in section 13(a). I recommend clarifying what exactly are the functions of a WSE subsidiary – in other words, whether only section 13(a) is covered, versus section 13(a) to (s).

Some technical details about subsidiaries of WSEs could usefully be changed

A subsidiary of a WSE is a public entity and will therefore come within the Auditor-General’s mandate. I propose a number of changes to Schedule 5 of the Water Services Act 2022 (Schedule 2 of the Bill). They relate to the definition, function, and nature of WSE subsidiaries. These are intended to remove any confusion, inappropriate references, and improve their overall workability.

• Clause 8 requires a subsidiary to give effect to Treaty settlement obligations to the extent that the obligations apply to a WSE “that owns shares in the subsidiary”. Share ownership is not the only way that a company or body corporate can be a subsidiary of a WSE. This makes it unclear whether an entity that is a subsidiary through another form of control must give effect to its parent WSE’s Treaty obligations.
• Clause 11 sets out that a WSE may not lend money (or provide any other financial accommodation) to a subsidiary on terms and conditions more favourable to the subsidiary than if the WSE was (without charging any rate or rate revenue as security) borrowing the money or obtaining the financial accommodation. The reference to “rate or rate revenue” is incorrect and should be changed, because a WSE sets charges, not rates.
• Clause 10 may have an inappropriate reference to “a related party as defined in section 291A of the Companies Act 1993”. Being a “related party” for the purposes of a transaction does not make an entity part of a group for reporting purposes.
• Clause 14 requires the board of a WSE subsidiary to consult with shareholders on a draft statement of intent. This clause might not be necessary because Part 1 of Schedule 8 of the Local Government Act 2002 applies to a WSE subsidiary (see clause 12 of Schedule 5). Part 1 of Schedule 8 of the Local Government Act 2002 already requires the board of a WSE subsidiary to consult with shareholders on a draft statement of intent.
• Clauses 18 to 22 and clause 24 are drafted to suggest that a subsidiary of a WSE can have a subsidiary. If this was intended, the definition of “subsidiary” does not appear to allow for that. It would be helpful if the Bill were amended to clarify the position.
• Clause 26(b) states that the provisions in Schedule 5 apply to a company as if it were a subsidiary of a WSE, if the company is defined as a subsidiary under paragraph (b) of the definition of subsidiary in section 6(1). Clause 26(b) is redundant, because if a company is defined as a subsidiary under paragraph (b) of the definition of subsidiary in section 6(1), it will be a subsidiary to which Schedule 5 applies.

1: "Three Waters” assets and liabilities will be transferred to the new WSEs on the earlier of (a) a date set by Order in Council bringing the rest of the Water Services Entities Act 2022 into force, or (b) 1 July 2024 (see clauses 1, 42, and 43 of Schedule 1 of the Water Services Entities Act 2002, with clauses 42 and 43 inserted by Schedule 1 of the Bill).

2: In keeping with the process provided for in Schedule 3 of the Water Services Entities Act 2022, which provides for how the asset management plan, the funding and pricing plan, and the infrastructure strategy are to be prepared and modified.