Umeme and regulator strike deal to end dispute over profit sharing

Saturday May 28 2016

One of the upgraded Umeme substations in Kampala. PHOTO | MORGAN MBABAZI

Umeme — the main electricity distributor in Uganda — and industry regulator Electricity Regulatory Authority have agreed to a consent judgment ending a protracted legal battle that has lasted nearly four years.

Umeme announced the conclusion of the case in a statement on May 18, confirming it had agreed to a consent judgment before the electricity disputes tribunal.

Umeme made two separate appeals to the Electricity Disputes Tribunal in Kampala in 2012 against ERA, following an amendment to its operating licence, arguing that the amended regulations had a direct impact on its revenues.

“The amendment to the licence is oppressive and commercially unviable to the appellant,” Umeme’s documents of appeal to the tribunal read. “It fundamentally changes the yardstick and benchmark of performance by the appellant under the electricity supply licence.”

Before going to the tribunal, Umeme, which holds of a 20-year power distribution concession, signed in  2004, had threatened to pull out of the agreement. The company wrote to the Finance Ministry, warning they would invoke a compensation clause that entitled them to a payout of up to $120 million.

ERA did not budge on the grounds that it was never a party to the concession. In addition, the regulator argued, it has separate legal mandates — to regulate the sector.


ERA gazetted the amended licence that would include: Computation of returns on Umeme’s investments, tax reconciliation, energy distribution losses and bill collection targets.

In the amendment, ERA also included a provision that authorises it to claw back profits outside Umeme’s revenue projects based on the performance of the previous year. The regulator has since then been clawing back the excess profits.

“At the end, it was necessary to reach a middle ground… If the ruling were delivered, Umeme would have been forced to rewrite its books, which in effect, means renegotiating with its financiers any future deals and establishing its actual financial position,” said a source familiar with the dispute.

Andrew Kasirye, Umeme’s lawyer, told The EastAfrican that in view of the technicalities involved, it was prudent that Umeme started the settlement talks “because the tribunal outcome would have affected growth in the sector.

Funding the energy sector

“A Germany firm, KfW, is funding developments in the sector and Umeme needed to come in with a co-funding. We approached the government and the Ministry of Finance and told them that the money can be used to develop the sector, so ERA should negotiate with Umeme,” said Mr Kasirye.

According to the new terms, Umeme has been stopped from earning a return on investments without ERA’s approval, save for emergency situations for which retrospective approval shall be sought. In the past, Umeme used the money and charged 20 per cent return on investments.

This move arose after it emerged that Umeme was making super-normal profits by selling more energy following the coming in of 250MW Bujagali, in addition to Kiira and Naluubale and other smaller hydropower stations that are connected to the national grid.

“It means that at the current tariff, Umeme is earning in excess, yet it did not contribute to the loans for construction of these dams, which are factored into the tariffs. In reality, tariffs should come down because Umeme is making supernormal profits, and ERA said any excess profits should go back to benefit the consumers. Based on Umeme’s projections, they are not entitled to those monies,” said Mr Kabiito.