Authors: Lee Laanemäe and Tarmo Rahkama, Grant Thornton Baltic head of audit, sworn auditor
On the face of it, the definition set forth in the ELTS might seem quite simple. Pursuant to the definition, an electricity undertaking is a producer[2] engaged in the generation of electricity by means of one or several generating installations[3]. The definition of “small producer"[4] is also elaborated, but the term is not encountered again in the legislation, so it is not certain why space was devoted to the definition. In addition, it is important to note that for the purposes of the ELTS, “generation” does not include the generation of electricity by a generating installation which has a total net capacity not exceeding 100 kW and which is not connected to the system[5]. Consequently, all companies that generate electricity by means of one or several generating installations are considered producers, but not producers that generate electricity by a generating installation which has a total net capacity not exceeding 100 kW and which is not connected to the system.
The ELTS also sets forth the requirements applicable to electricity undertakings. For example, Section 15 sets out the requirements with respect to form of operation, under which an electricity undertaking is defined as a legal person registered in the European Economic Area[6] and having share capital of at least 31,950 euros[7]. Note that these two requirements do not apply to producers who generate electricity at generating installations which they own and which have a total net capacity of less than 200 kW[8]. Nevertheless, if a company generates electricity with more than the aforementioned net capacity at generating installations which they own, they are subject to the above share capital requirement. Chancellor of Justice Ülle Madise has weighed in on this aspect, saying that such a share capital requirement is an unjustified curb on freedom of enterprise[9]. For example, if a company has several generating installations, and the capacity of each separate one is less than 200 kW but the total is more than 200 kW, such an undertaking is subject to the share capital requirement set forth in ELTS. If a company had several generating installations, but their total capacity were less than 200 kW; the capital requirement would not apply, either.
It is important to note that ELTS sets forth separate requirements for the authorisation. Namely, an authorisation is required for generation of electricity[10], the exception being if the electricity is generated by one producer by means of generating installations with a total capacity of less than 200 kW[11].
It might be presumed that since the Parliament has in general set forth more lenient requirements for producers who generate electricity by means of generating installations totalling less than 200 kW net capacity – for example, no requirements for authorisation or restriction on capital – the same trend would also be evident in the case of auditing. Unfortunately, this is not the case. The ELTS requires electricity undertakings to organise auditing of their activity[12]. The power rating of the electricity generating installations makes no difference. Thus, every electricity undertaking must organise the auditing regardless of the generating volume or the type of installation used to generate the electricity (the only exception is producers who generate electricity by a generating installation which has a total net capacity not exceeding 100 kW and which is not connected to the system). This provision of the ELTS means that many smaller companies that generate electricity only for their own use, and which are not bound by the requirement of applying for an authorisation and capital requirements are nevertheless subject to auditing obligations.
In practice, companies generate electricity for supporting their own primary activity (such as agriculture). If the ELTS considers all undertakings that generate electricity (other than producers who generate electricity by a generating installation which has a total net capacity not exceeding 100 kW and which is not connected to the system) to be producers, and they are bound under the ELTS by the obligation to organise auditing of their activity, this brings up the question of what activity the undertaking must audit and what in particular? The entirety of the company’s activities or only the part related to generation of electricity? Considering that Parliament has proceeded from the assumption that the electricity producer audits all activities (i.e., not just electricity generation but its primary activity as well), is this auditing obligation proportional and justified? The general requirements imposed on auditor activity are set forth in the Auditors Activities Act, sections 91 and 92 of which set out the requirements for audit obligation and review.
Unfortunately, what we see right now is a situation where the audit obligation applies not only to companies that may not exceed the micro-enterprise level (assets not more than 175,000 euros and revenue not more than 50,000 euros during the reporting period). For an electricity undertaking, the obligation of auditing the annual report undoubtedly increases the quality and information value of the report, but it is hard to evaluate the benefit that this will generate for consumers compared to the expenses related to complying with this obligation.
The ELTS stipulates that the undertaking is obliged to prepare a balance sheet and income statement by each area of activity, but there is a lack of more detailed guidelines that would serve as a basis for distribution of areas of activity and preparation of the relevant reports. As a result, the company's management must develop more detailed practices on how the income and expenses were distinguished by each area of activity. These principles must be documented and consistently applied as the auditor has its own procedures to carry out in respect to these disclosures. The auditor verifies that the information related to generation of electricity has been disclosed in the report in material part by each area of activity in conformity to the principles established by the management. In summary, a separate paragraph is added to the auditor’s report no whether the stated information is in conformity with the legislation in force and the legal acts enacted thereunder.
As the final conclusion, the question comes up of whether a company that generates electricity but is not subject to audit or review for the purposes of the Auditors Activities Act is obliged to audit its activity in its entirety? Taking into consideration the current market situation, where the number of companies classifiable as electricity undertakings has grown significantly and considering that the ELTS was adopted back on 11 February 2003, it would be a good time for Parliament to adjust the wording of the provisions contained therein and evaluate the proportionality of the aforementioned provisions.
[1] Electricity Market Act, RT I, 13.03.2019, 46. Subsection 1 (1).
[2]Ibid., Section 6.
[3] Ibid., subsection 7 (1)
[4]Ibid., subsection 7 (2) – a producer the net capacity of whose generating installations which are located in Estonia, together with the net capacity of generating installations located in Estonia and owned by producers belonging to the same group as the producer does not exceed 10 MW. Small producers do however have the right to receive support from the transmission system operator for electricity if the electricity was generated using efficient co-generation mode by means of generating installations whose electrical capacity does not exceed 10 MW.
[5]Ibid., subsection 3 (24).
[6]Ibid., subsection 15 (1).
[7]Ibid., subsection 15 (3).
[8]Ibid., subsection 15 (5).
[9]Chancellor of Justice: Electricity Market Act unjustifiably restricts freedom of enterprise. 11 September 2019, online at: https://www.rup.ee/uudised/oigus/oiguskantsler-elektrituruseadus-piirab-p-hjendamatult-ettev-tlusvabadust (Last retrieved 9 December 2019).
[10] clause 22 (1) 1) of the Electricity Market Act.
[11]Ibid, clause 22 (2) 1).
[12]Ibid., subsection 17 (4).
