This Day (Lagos)

28 December 2012

Nigeria: KPMG Power Sector Audit Unravels Abuse of MYTO Framework

Abuja — An audit, which was conducted by KPMG Professional Services on the performance of Nigeria's Electricity Supply Industry (NESI) in relation to the operation of the Multi-year Tariff Order (MYTO), has revealed serious abuse of the cost reflective electricity tariff framework.

The audit, which was inaugurated by the Nigerian Electricity Regulatory Commission (NERC) in 2010, to reconcile the accounts of the Market Operator (MO) with that of other market participants and determine related liabilities within the electricity value chain, revealed that market participants, especially the MO, had misapplied the MYTO mechanism in the management of financial procedures in the sector right from inception in 2008.

Obtained exclusively by THISDAY, the report equally uncovered the various underhand dealings perpetrated in the market during the review period of 2008 to 2010, all of which resulted to over N200 billion of unpaid energy bills owed to market participants.

It thus raised questions on the management of the N178 billion approved by the Federal Government as electricity subsidies to last from 2008 to 2011.

The audit was commissioned by NERC chiefly to determine the efficiency of the electricity subsidy disbursement process as well as the general efficiency of the market settlement process with a view to proffering recommendations to improve the efficiency and effectiveness of the market settlement process.

KPMG was specifically asked to establish the appropriateness of the invoices issued by the MO to all market participants relative to the provisions of the MYTO during the period under review, examine the market settlement accounts used by the MO, and establish the level of adherence with relevant laws, policies and regulations, including the TCN licensing terms and conditions and the MYTO.

Also, KPMG was required to review the adequacy of internal controls in the MO's department of the TCN and advise on appropriate measures to enhance efficiency and controls.

KPMG was also meant to examine records of the MO since the commencement of the MYTO up to 2010, with regards to the settlement accounts and disbursement of the MYTO subsidy, establish adherence or otherwise to the existing guidelines, review and verify the authenticity of loans outstanding against the market participants.

In the 101-page document KPMG stated: "Further to our review of the appropriateness of invoices issued by the MO to market participants over the period July 2008 to March 2010, we noted that MO did not commence the application of MYTO guidelines until April 2009, even though the MYTO became effective from July 2008.

"During the period from April 2009 to March 2010, when MYTO was applied by the MO, the rates were wrongly applied in the computation of amounts due to and from market participants.

"Our re-computation of the value of invoices issued by the MO from July 2008 to March 2010 using the MYTO rates indicated that the amount due to NERC was overstated by N73.8 million, the amount due from the DISCOS Distribution Companies (DISCO) was understated by N34 billion, the amount due to GENCO (Generation Companies), TCN and the MO was understated by N85 billion, N16.5 billion and N273 million respectively."

The report further showed that, "market participants were billed charges not provided for by the MYTO. Such charges include pension fund contributions, VAT, meter maintenance fund, outstanding debt factor and loan repayment.

"These charges were inadvertently omitted from MYTO and charges provided for in the MYTO were wrongly applied to market participants other than those specified in the order.

"For example, the total value of settlement statements issued by the MO to GENCOs is inclusive of N5 billion charged to hydroelectric plants for gas which they do not consume.

"Based on our review, we observed that there was some lack of clarity and understanding of some components of the MYTO which were not clearly specified."

KPMG in its calculation of obligations due to or from market participants stated" "CHQ (Power Holding Company of Nigeria Corporate Headquarters) was overpaid by about N6.17 billion based on the invoice re-calculated in line with MYTO.

"Therefore CHQ owes this amount to the market as a refund, receivables from the DISCOS amount to N124.17 billion: N68.7 billion relate to subsidies requested from the Ministry of Power up to March 2010, while N55.3 billion relate to DISCOS outstanding on collection at the retail market.

"Payments to gas suppliers were reviewed for the period of July 2008 to March 2010 as N11,071,649,681 and the amounts owed to IPPs is $207,767,525."

Reacting to the KPMG findings, sources in the presidency told THISDAY that the report was long made available to the Ministry of Power for appropriate action but it has refused to implements its recommendations.

One of the sources however disclosed that the utilisation of the N178 billion subsidy fund released by the government in 2008 was yet to be justified by market participants, adding that capacity was still very low in the sector, while another N46 billion subsidy for 2012 might have been misappropriated.

"NERC proposes the electricity subsidy in the MYTO to the Federal Government, which in turn mandates the CBN to pay the subsidy amount to the Market Operator.

"In the MYTO-1 framework, a settlement statement is prepared by the Market Operator and sent to the Ministry of Power, which transmits it to NERC and then to Ministry of Finance for payment to the Market Operator.

"But MYTO-2 eliminates the former modalities, such that the settlement statement is prepared by the MO and sent to the Ministry of Finance which sends to CBN and then CBN pays to MO. However, NERC and Ministry of Power have reserved rights to audit the MO to establish acts of irregularities," the source said.

The source further explained: "N178 billion was approved as electricity subsidy in 2008, to last for three years. Disbursement of subsidy claims by operators was based on their collection efficiency, subject, however, to a cap.

The subsidy was to be used to pay for the cost of power, capacity expansion and maintenance of the distribution networks. Sadly, there is very little to show for this as distribution networks are still very weak, generation beyond 4,500 megawatts cannot be evacuated and distributed without critical upgrades to the networks is still lacking.

The presidency source added that here are huge unpaid energy bills owed to the market participants such as Agip, AES, Afam, Egbin, Sapele and TCN.

"The bottom-line is that nothing less than N200 billion in unpaid energy bills is owed to market participants, plus another N16 billion for gas. So where has the subsidy fund gone to?" he asked.

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