During the financial audit, the State Audit Office of Latvia assessed the control system established in the Ministry of Economy (MoE) for the administration of measures to mitigate the consequences of the energy resource price crisis, to which the government allocated 502.96 million euros in 2022. In fact, 351.39 million euros or 70% were spent for the measure to reduce the extreme increase in energy prices in 2022, which can be explained by initially inaccurate estimates of the necessary funding in certain types of support.
“The support measures for the reduction of the extraordinary increase in the prices of energy resources in 2022 are an important and unique event, and the administration of the funds allocated to them is not a usual and typical function of the ministry, for whose implementation one could rely on previously established processes and a control environment. Therefore, during the financial audit, the State Audit Office of Latvia evaluated the internal control and monitoring system as regards spending of the funding of 502.9 million euros allocated to the support measures in particular, as well as evaluated whether it was created in accordance with the purpose and legislation,” indicated Ms Inese Kalvāne, Council Member of the State Audit Office.
In total, seven support measures were provided to beneficiaries, who are households and economic operators, to reduce the extraordinary increase in energy prices: (1) support for the reduction of the electricity system service fee, (2) support for the reduction of the electricity system service fee for economic operators, (3) support for compulsory procurement and for the reduction of power component, (4) support for the reduction of electricity fees, (5) support for the reduction of fees for consumed natural gas for households, (6) support for the reduction of fees for centralized heating services for households, and (7) support for energy-intensive processing industry economic operators. Support was granted to households automatically by transferring price increase compensation to energy traders.
All support measures were administered by the Ministry of Economics and the State Construction Control Bureau of Latvia (SCCB) supervised by it. Support measures were implemented in two support periods: the Ministry of Economics provided administration from December 2021 to 30 April 2022, and the SCCB administered the support from 1 July to 31 December 2022. Support continued until 30 April 2023. The institutions responsible for verifying the information submitted by energy resource traders or price increase compensation beneficiaries established internal control systems which differed from the systems applied up to now significantly, as well as differed between the Ministry of Economics and the SCCB.
During the first support period, a total of 192.42 million euros or 98% of the total funding allocated to the Ministry of Economics was spent. Most of it, that is, 134.85 million euros or 70%, was allocated and used for support to compensate the electricity system service fee. However, the Ministry of Economics has not established a procedure for the uniform monitoring of the allocated state budget funds, as well as for checking information in the bills of compensation beneficiaries. The internal control system established by the Ministry is not sufficient to ensure the compliance of the information included in the bills of energy traders with the amount of compensation actually granted to end-users.
In the second support period, a total of 158.97 million euros or 51% of the total funding granted to the SCCB was spent. A significant part of the financing, that is, 104.87 million euros or 41 %, was allocated to support for compensating electricity fees, however, only 29.52 million euros or 28 % were spent. The audit concluded that the internal control system established by the SCCB ensured that the funds allocated for measures to reduce the extraordinary increase in energy prices were used in accordance with the purpose and legislation. Namely, the SCCB has created a methodology and provides follow-up checks to ensure the use of funds allocated for support.
To ensure that the funds allocated for the measures to reduce the extraordinary increase in energy prices have been used in accordance with the purpose and legislation, the Ministry of Economics must carry out follow-up checks on all measures of the first support period administered by the Ministry of Economics.
One must mention that the audit also identified potential risks related to the effectiveness of the state support mechanism when the purchase prices of energy resources decreased significantly. When electricity exchange price falls below the fixed price ceiling of 160 euros/MWh, as it happened at the end of 2022, there is a risk that traders are not interested in reducing the price of the supplied electricity because a consumer pays a fixed price and the state compensates the trader for a part of the price that exceeds the fixed price ceiling. This is how a situation occurs when electricity can be bought on the stock exchange at an average price of ~110 euros/MWh, households that signed a contract for monthly electricity consumption with an electricity price of 247.45 euros/MWh pay 160 euros/MWh for it, and a trader receives a difference from the state budget between the price determined by the trader and the price ceiling of 87.45 euros/MWh. Although these findings do not affect the audit conclusions on the key audit matter, the State Audit Office of Latvia has drawn the attention of the Ministry of Climate and Energy and the Ministry of Economics to potential risks in order to prevent the inefficient use of budget funds in situations where the energy resource exchange price is lower than the threshold for the application of support determined by the state.
State Audit Office recommendations #PēcRevīzijas
The Ministry of Economics is provided one recommendation, whose implementation will ensure that the funds allocated to measures to reduce the extraordinary increase in energy resource prices administered by the Ministry in 2022 are used appropriately.
On state support for mitigating the consequences of the energy resource price crisis
To reduce the negative social and economic impact of the unprecedented rapid rise in the prices of energy resources on the well-being of the population and the growth of the national economy and to define state support measures terminated at a certain time accordingly, the Saeima (Latvian Parliament) adopted the Law on measures to reduce the extraordinary increase in the prices of energy resources on 27 January 2022. A significant part of the state support measures in the crisis of the extraordinary increase in the prices of energy resources was paid out through the budget of the Ministry of Economics, and it was jointly administered by the Ministry of Economics and the SCCB. The audit investigations covered the tests of internal control procedures for 184,209,816 euros or 52% of the actually provided support.
About the State Audit Office of Latvia
The State Audit Office of the Republic of Latvia is an independent, collegial supreme audit institution. The purpose of its activity is to find out whether the actions with the financial means and property of a public entity are legal, correct, useful and in line with public interests, as well as to provide recommendations for the elimination of discovered irregularities. The State Audit Office conducts audits in accordance with International Standards of Supreme Audit Institutions of the International Organization of Supreme Audit Institutions INTOSAI (ISSAI), whose recognition in Latvia is determined by the Auditor General.
100 years of AUDIT STRENGTH
On 16 August 2023, the State Audit Law will turn 100 years old. With the adoption of this Law, the State Audit Office from a formal de facto institution founded on 2 December 1918 became a de jure independent, collegial supreme audit institution of the Republic of Latvia. The State Audit Office is one of the independent state institutions enshrined in the Satversme (Constitution) of Latvia. The Constitution was signed by Roberts Ivanovs as the secretary of the Constitutional Assembly, who was then confirmed as the Auditor General. He worked as the first Auditor General for 12 years. His signature confirmed the text of our Constitution alongside that of Jānis Čakste.
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