This is so the game does not have to make detection checks using sensors in systems that you have no presence in.
So there are basically three options.
Normal: The game always do sensor detection calculations (Active and passive sensors) like normal
Never: The game will never perform any sensors checks in systems you the player have no ships in, NPR will never find any ships in them.
Automatic: No sensor checks is made and all NPR and Precursors will automatically know every ship in the system and where they are. Only works if the player have no ships in the system.
This was done to reduce the calculation costs in CPU cycles that can become a bit tedious at times on VB6 Aurora, it is an old and very inefficient programming language and can be used to speed the game up for the player.