Rejoinder on Discos’ Call for Forensic Audit of Entire Power Sector
By Adetayo Adegbemle
The call by the DISCOS for the inclusion and execution of a comprehensive audit of the entire power sector as one of the conditions that must be met to guarantee their participation in the audit is not only preposterous but also the usual calculated move by the DISCOS to deter the initiative.
While the DISCOS may seem to have germane reasons for their position, it leaves the other Sector participants at loss as to why they should be audited and also raises some key questions which are:
• Why Forensic Audit
• Who in the Power Sector should be Audited?
Why Forensic Audit
Explaining this will entail first understanding what a forensic audit is. It has been defined as the application of accounting techniques in the trailing and collection of forensic evidence, usually for investigation and prosecution of criminal acts such as embezzlement or fraud. While in many cases forensic auditing investigations are used in legal proceedings, they are also used for compliance efforts and prevention of crimes.
Forensic audit also comes into play in helping prevention and risk management. In this case, preventive actions are designed to keep fraud and the accompanying expense of the investigation process to a minimum. Thorough internal audits are conducted to uncover potential pitfalls, after which the required steps are taken to minimize any potential for fraud.
Who in the Power Sector should be Audited?
Who are the revenue collectors in the power sector? The answer can be deduced from the extant laws governing the Nigerian Power Sector. In particular, by virtue of Section 67(1) (b) of EPSRA, the role of the distribution licencee amongst others includes the installation, maintenance and reading of meters, billing and collection. This is also in line with their KPIs under the Performance Agreement entered into with BPE.
It is a well-known fact that the DISCOS are the Sector’s revenue collectors. The sector is a value chain, where the generation companies generate electricity, the transmission company transmits electricity generated while the distribution companies distributes the electricity generated to end-users and collect payments for the electricity.
“It is our considered opinion that attempts directed at correcting the challenges of NESI must be holistic and address all stakeholders along the value chain. Consequently, DisCos, the Transmission Company of Nigeria (TCN), GenCos, gas-to-power and the Nigerian Bulk Electricity Trader (NBET) should all be subjected to forensic audits. Curiously, the government has not say if there are plans to also subject these other stakeholders to the forensic audit giving credence to the allegation that its focus on DisCos is a selective persecution”.
A cursory look at the operations of the market as captured by extant rules such as the market rules, clearly shows that the above quote in the leadership newspaper which is a call for forensic audit of all the market players is misplaced or borne out of ignorance of the operations of the market or a calculated attempt at distracting well intentioned programs of government to buy time to perpetuate the anyhowness in the NESI. Electricity requires huge investments, recouped over very long periods, how can it operate on a voluntary basis?
For transparency and market visibility, the market rules made provision for how market participants can be administered. Section 27.1.2 of the market rules provides for monthly administration of the market by the Market Operator. To audit how much megawatts is generated by GenCos, there are Check meters as well as interface meters. Grid Meter reading is done jointly between the participant’s Representative and TSP Representative Grid meter readings are obtained from two different trading points: GenCo/TSP interface ◦ TSP/DisCo interface. In order to validate the meter readings, Gencos and Discos must sign the documents. Each participant and TSP must send the data to MO before the 5th day of the month for further processing. Metered data is obtained from GenCos and DisCos in respect of energy sent out and energy delivered.(MR: 27.6.4 ). The MO collates, validates, and where necessary, correct the Meter Data received from Participants, in order to establish the Metered Quantities applicable to each Participant for the settlement process (MR.27.6.5). For further transparency, data flow, collating, validating and correcting of data culminate into settlement calculations.
All Energy calculations for Settlement in the Wholesale Electricity Market shall be measured through the Commercial Metering System (MR.27.6.12). Final Settlement Statement Not later the 20 days of each business month, Market Operator shall send to each Participant, the Final Settlement Statement, which shall contain the same information as contained in the preliminary Settlement Statement, but adjusted to rectify any errors (MR.28.2).
From the foregoing, it is rather confusing to know what forensic audit the Discos are calling for from other stakeholders. It is only fair that they allow this process go through as planned so as to exonerate them from any wrong doing and not to constitute themselves as enemies of progress in any and all plans to move the sector forward.
The liquidity gap in the electricity market requires decisive and immediate interventions to ensure that huge investments made in the industry are recouped in the medium and long term. The country’s power sector is riddled with enormous challenges. Worst still, customers believe that the operators are shortchanging them, under-delivering, under performing and over charging the consumers. Indeed, there is also the concern that the DisCos are holding back remittances that should go up the value chain, on the back of sharp practices of estimated billing, resulting in the current market liquidity challenges. But NEC believes the time is ripe to carry out forensic audit of all bank accounts of DisCos and for state governments to provide details of their investments on DisCos. Understandably, the forensic audit has been identified as part of the process of determining the valuation of the DisCos.
On its own, the World Bank indicated that the forensic audit is a pre-condition to the $500 million loan that it is seeking to lend to the DisCos for capital investment.
The Bank insists that the audit is but an assessment to determine the DisCos’ areas of deficiencies, a precursor to identifying the areas of need and investment. As a matter of fact, audits are a necessary regulatory tool and will help to wad-off the misconception of DisCos trying to hide their malpractices. More than anything, the value of audits as a tool to maintain the balance in a monopolistic commercial environment and to establish a foundation for the correction of the liquidity challenges of the Nigerian Electricity Sup- ply Industry-NESI-, cannot be overemphasized.
Currently, the DisCos remain the only source of revenue inflow as the Nigerian electricity market as it is structured today. Therefore, the efficiency and effectiveness of the DisCos in mitigating collection, commercial, and technical losses will determine the health of the electric power delivery value chain. With the DisCos collecting and paying less than what is supplied to the market there are no means of supporting up-stream contracts. Instances abound where the DisCos have paid less than 30% of what was supplied to the market. Such payment performance will not support the up-stream power delivery value chain: TCN, GenCos (and associated gas obligations). Certainly, while we grapple with the issues of market illiquidity, the private/foreign investor options for market development will remain utopian as no meaningful investor, in the absence of sovereign guarantees, will venture into a market as distorted as ours.
In recognition of the fact that the DisCos are the only source of revenue into the market, there is need to engage them on the imperatives for improved billing and revenue collection, and technical loss reduction.
The DisCos have repeatedly stated that a critical factor to improved revenue flows is tariff. In this regard it must be noted that the fact remains that not all that is supplied is billed, and not all that is billed is collected (commercial and collection losses). Therefore, there is a palpable fear that while improved tariffs may result in increased revenue flow, it will not necessarily result in improved commercial and collection efficiencies. Revenues could increase, but efficiencies may not improve with an attendant burgeoning market debts. The Sector presently is being plagued by an excruciating liquidity crisis which has raised questions on the financial propriety of critical stakeholders.
●Adetayo Adegbemle is a public opinion commentator/analyst, researcher, and the convener of PowerUpNigeria, an Electric Power Consumer Right Advocacy Group, based in Lagos. (Twitter: @gbemle, @PowerUpNg)