Umeme, ERA row over investments deepens

Written by Alon Mwesigwa

An electrician works on a transformer

The feud between power distributor Umeme and Electricity Regulatory Authority over unrecognized investments has deepened, with the former saying the regulator's behaviour has hampered its ability to mobilise funds internally.

In its application letter to ERA for the 2016 power tariff, Umeme wants the money it spent between 2009 and 2013 factored into the tariff for it to recover its investments.

Umeme says, in general, the investments unrecognized are $35.7m (Shs 112bn). For the most part of this year, Umeme has written numerous letters to the regulator but it says the latter’s response has often been delayed or sometimes not coming at all.

“Umeme disagrees with the authority’s decision to disallow investments on low-voltage lines, as the allocation under direct operating and maintenance costs (DOMC) is inadequate to cater for the full requirement of low-voltage upgrades to restore and improve the distribution network,” the power distributor writes.

“It should be noted that these assets exist on the network and benefits have accrued to the consumers. And, therefore, Umeme requests that these investments are rightfully included in the company’s asset base for purposes of computing the return on investment and that the associated loss of revenues for the periods is recognized,” one letter reads.

NEVER RECOGNISED

Umeme says between 2009 and 2011, investments worth $8.7m were never recognised. It adds that in 2012 and 2013, it invested $86.5m. And when determining this year’s tariff, the regulator included only $70.7m, disputing the remaining $15.4m.

When it submitted documents to show that it had actually invested the $15.4m, it took the regulator two months to respond, Umeme alleges. Even when it responded, ERA made matters worse in a letter dated June 10, 2015, in which it cut the investments recognised to $59.5m only.

“The amount disallowed here is $27m,” writes Umeme, adding that this amount represents 30 per cent of the initial investment of $85.6m made in 2012 and 2013 period. 

“Umeme reiterates that the above behaviour is inconsistent with the fact that the investments have been completed and benefits have accrued to the respective customers,” Umeme says.

“[This] undermines the company’s investment program and ability to raise internally-generated funds to improve reliability and meet the growth requirements of the distribution network.

“Umeme, therefore, requests the authority to review the above investments and include them in the company’s rate base.”

ERA chief executive officer Dr Benon Mutambi told The Observer in an interview last month that the authority’s relationship with Umeme was “a normal arm's-length.”  

“It is a well-known fact that a regulator will always have to stand up sometimes and disappoint the various stakeholders,” Mutambi said. “It is not the intention of the regulator to disappoint, but the regulator is accountable to the public and all the other stakeholders. Accountability requires that whatever I am going to allow is going to be supported by convincing evidence... When it comes to their capital investments, we always want to make sure that there is no double-counting; that the money we allowed for repairs is actually used for that purpose. ”

“Where the justification provided by a licensee is not convincing enough, it is the duty of the regulator not to allow that kind of cost to be paid by the consumers of the electricity… But of course there are other arguments. One of the examples is a transformer blowing up before its useful life.

So the question is: when it is replaced, who is responsible? Is it a capital investment or a repairs and maintenance? Then we also have a debate of why didn’t the company comprehensively insure those assets so that when those unfortunate events happen, the company is compensated. Our argument is that the consumer is not an insurer to the company,” Mutambi added.

This is not the first time Umeme and ERA are disagreeing on issues concerning the industry. Before the Electricity Disputes Tribunal (EDT), the two institutions have, for a couple of years, been battling the manner in which power tariffs should be set. ERA accuses Umeme of exploiting certain privileges – being allowed to factor all its costs within the power tariff – to ‘fleece’ Ugandans.

The regulator says, for instance, sometimes Umeme’s submission of the amount of money it intends to pay government in income tax is higher than what it actually reimburses to Uganda Revenue Authority.

For instance, ERA says that while in 2008 Umeme wrote to government that it would pay a tax of Shs 12.1bn that year, only Shs 2.9bn was received by the tax body even after the money had been integrated into the tariff.

In 2011, Umeme said it would pay Shs 18.8bn in income tax, but URA received Shs 3.5bn. The regulator says in doing so, Umeme subjected Ugandans to high power tariffs yet more money went into its coffers. The tribunal is yet to resolve these matters.

On unrecognized investments, Mutambi said: “We are not saying that the investments were not done; we are simply saying that we are not convinced by the justification, as of now provided by Umeme that those investments should be capitalized and should, therefore, find themselves within the tariff.”