Although the tariffs of the electricity distribution system’s services of the joint stock company “Sadales tīkls” are calculated in accordance with the methodology established by the Public Utilities Commission, it cannot be said that the tariffs fully ensure the interests of the services’ users as specified in the law. The costs included in the tariffs are not economically justified and necessary in all cases for the provision of the distribution services.
The State Audit Office came to this conclusion after auditing the economic validity of the costs that are included in the electricity distribution system’s service tariffs and their compliance with the principles of economy, efficiency and effectiveness. The new service tariffs are in force since August 2016. Summarizing the conclusions of the audit, the State Audit Office has provided nine recommendations for cost containment to the company “Sadales tīkls” and it calls for these recommendations to be taken into account while continuing the optimization of costs within the company “Sadales tīkls” and improvement of efficiency.
The revenues of “Sadales tīkls” are made up of payments from all residents of Latvia for the electricity distribution services, and in fact users are not able to choose a different provider. A public service provider that works in a monopoly position must be motivated to improve internal processes and limit costs as its revenue is guaranteed. However, the audit concluded that the capital company’s possibilities are not yet exhausted in this regard. In the opinion of the State Audit Office, it is also necessary to improve the traceability and control of the decision making process in order to provide assurance about the productive use of resources, for example, in capital investment planning as well as in the use of light commercial and special transport vehicles.
The state auditor Elita Krūmiņa points out: “The public service tariff should not only ensure the development and profit of the service provider, but also cater to the interests of the users of this service: the possibility to obtain uninterrupted, safe and high quality service at an economically reasonable price in the long term. In our opinion, the service provider must be able to assure that all means of reducing costs and optimizing resources are being used before requesting an increase in tariffs.”
When evaluating capital investment planning for the development of the electricity network, its modernization and improvement of safety, the State Audit Office has not been convinced that annual investments which amount to 62 million euro are subject to prioritization. The planning process is not traceable, there is no united list for the evaluation of investment objects that would show the overall needs. The management of the company “Sadales tīkls” does not monitor the capital investment planning process. During the audit, “Sadales tīkls” has already begun work on improving it.
An important part of the electricity tariff is the remuneration of the employees that work at “Sadales tīkls”. When assessing the efficiency of the remuneration system and motivation opportunities for the employee, the State Audit Office recognizes that “Sadales tīkls” is a socially responsible employer and the remuneration system is undoubtedly competitive and motivating to the employees. Compared to the enterprises in the sector as well as the state services, the employer’s social payments of “Sadales tīkls” are above average. However, there is a need to improve the link between remuneration and performance, as currently the benefits and guarantees are not dependent on employee performance. In the event of the employment’s termination, “Sadales tīkls” pays generous benefits and compensations that arise from a collective labour agreement – the discharge payment is on average five times higher than what is stipulated in the Labour Law. For example, in 2017, the compensation paid to 39 employees that were in pre-retirement age was 1.57 million euro or on average of 40 381 euro per employee. The company “Sadales tīkls” is a public service provider whose services cannot be chosen by the electricity users and whose operating costs are included in the tariffs of the services that are paid for by every electricity user. The State Audit Office believes that such a policy of benefits puts into question the social responsibility of “Sadales tīkls” towards its customers.
When checking the economic benefits and the reasonableness of the lease of special equipment, the State Audit Office draws attention to the fact that, immediately after their acquisition, the new equipment units purchased by “Sadales tīkls” were sold to the joint stock company AS “Latvenergo” that leases this equipment to “Sadales tīkls”. By using such a transaction structure, some redistribution of funds between the companies within the concern may be happening cover costs not related to the electricity distribution system. According to the auditors’ estimates, over the course of five years, the company “Sadales tīkls” lost profits of approximately 2 million euro from this transaction. The auditors also point to weaknesses in the planning of the special equipment’s replacement and inadequate use of the special equipment; therefore, it cannot be said that the investment decisions made by the company “Sadales tīkls” are reasonably thought out and economically justified.
When assessing the cost of vehicle services, fuel and repairs, the auditors concluded that there was no control system for the use of vehicles in the company “Sadales tīkls”, and their users should not be accountable for the routes and objectives of the trips, and the vehicles that are transferred to the use of staff are in most cases used to travel to and from work, and not to perform work duties. Over 2 years such trips have cost 1.14 million euro. The auditors consider that the costs of management, maintenance and renewal of vehicles that are included in the electricity distribution system’s service tariff as well as fuel and repair costs can be reduced.
The State Audit Office hopes that the work carried out in this audit will also be useful to the Regulator in assessing the need for changes in the determination of electricity distribution systems’ service tariffs.