Company LOGO Standardizing Accounting and Reporting Requirements: The Mongolia Experience Workshop on Regulatory Monitoring of the Electricity Sector January 31-February 2,2006 Almaty, Kazakhstan Ganchimeg Mujaan, ERA,Mongolia

Mongolian energy sector review Before restructuring: Vertical organizational structure Technical and economic actions of entities implemented under strict instructions of the Government implementing agency: -approve budget and business plans -distribution of funds and subsidies -reallocation of funds between entities Most energy entities were operating at a loss Large amount of debt incurred in the sector No accounting by type of activities

First steps toward restructuring of energy sector started in 1998 The legal framework and basis for unbundling of the vertically integrated energy sector were provided by the new energy law approved in February 1, Establishment of Energy Regulatory Authority in July, 2001 Establishment of 18 independent companies responsible for generation, transmission, distribution, supply and dispatch 41% of shares owned by the Ministry of Infrastructure, 39% by the State Property Committee and 20% by the Ministry of Finance Restructuring of Mongolian energy sector

General information about Mongolian energy system The Central Energy System concentrates 96% of the total electricity production, while the Western Energy System (WES) and the Eastern Energy System (EES) produced about 1% each. Isolated production made the difference.

Licenses issued by ERA Total of 45 companies holding 114 licenses 1.Electricity generation7 2.Heat generation10 3.Transmission company2 4.Electricity distribution 15 5.Electricity supply17 6.Heat distribution 25 7.Heat supply27 8.Electricity importing7 9.Construction 3 10.Dispatching 1

Monitoring of Licensee activities The ERA monitors Licensees activities with different methods: Reviews Licensee technical, economic, and financial data, plus other necessary statistics according to standard ERA formats regularly on monthly, quarterly and yearly basis Monthly review of electricity and heat generation, import & export, station own use, transmission and distribution loss, accounts receivable and payable status of Licensees On-site inspections of Licensee’s activities when necessary Benchmarking

Monitoring of Licensee activities Monitoring is performed by separate functional departments: 1.Licensing Department is responsible for monitoring production and the necessary technical data 2.Tariff Department is responsible for monitoring the financial and economic activities of Licensees. 3.Legal, Information and Administration Department is monitoring consumer complaints and quality of supply. General report of Licensee activities including technical, economic and quality of service indicators, is performed by the Tariff Department quarterly and presented to the Board of Regulators for final evaluation. Results are open to the public through media and ERA Website.

The Uniform System of Accounts (USOA) is issued under the authority of the ERA in accordance with the power afforded it by the Law of Mongolia on Energy The USOA is intended to support consistency in regulation of the energy sector of Mongolia and will be relied upon to support the development of cost-based tariffs for each Licensee Standardizing accounting and reporting requirements

Under the law on Energy, Licensees are obligated: To keep financial and accounting records for each licensed activity separately from records of activities not specified in the license To submit audited financial statements to the ERA every year To provide accurate information required by the licensor necessary to evaluate technical and economic performance of the Licensee on a timely basis Legal basis for standardizing accounting and reporting requirements

The need for Uniform System of Accounts Uniform System of Accounts is used for maintaining Licensee books of account and reporting of financial results in rate proceedings Conformity with this accounting system, verified by Regulator through periodic audits, assures that reported financial results both to the investment community and in rate proceedings or periodic reports to the Regulator are consistent between companies and can be properly understood The USOA was developed by the Economic Policy Reform and Competitiveness Project, under the auspices of USAID, with implementation supported by a local auditing company

Standardizing accounting and reporting requirements The Uniform System of Accounts (USOA) will enables Licensees to record, maintain and report financial data in the manner mandated by the Energy Regulatory Authority of Mongolia (ERA), while maintaining the ability to meet all other local financial and tax reporting requirements Licensees are encouraged to utilize any necessary sub-accounts and/or account prefixes to accommodate management accounting and additional information needs The USOA is in conformity with International Accounting and Financial Reporting Standards (IAFRS) as required by the Accounting Law of Mongolia

The USOA is in conformity with the chart of accounts coding scheme developed by the Ministry of Finance. The USOA was officially approved and implementation mandated by Ministry of Finance ordinance No. 7 “Approving the Energy Sector Chart of Accounts and Instruction”dated January 12, The USOA was presented to Licensee and ERA personnel in a series of workshops held in the spring of Five generating Licensees located in the Central Energy System have begun implementing the USOA since January 1, Standardizing accounting and reporting requirements

Implementation in the Generation companies was accomplished via performing three restatements of completed financial statements for each entity The second and third quarters of 2004 were done to familiarize the participants with the process and identify issues, and the 2004 final quarter was done to obtain the opening balances for 2005 Actual conversion to the USOA, meaning that source data entry was performed using the new system, was accomplished effective January 1, 2005 A similar procedure was used for the remaining six primary Licensees during 2005, retroactive to January 1 Standardizing accounting and reporting requirements

The coding scheme is essential for the purpose of developing uniform reporting system of accounting. Following information was the basis for developing the USOA: The Ministry of Finance and Economy ordinance no. 116 “Chart of Accounts and Instructions” released in 2000 The previous charts of accounts used by Licensees Licensees’ needs and requirements were considered to develop the USOA; The ERA will use only the main coding (first 5 digits) for purposes of regulating and analyzing financial information submitted by the Licensees Management of the Licensees will use sub-accounts for their decision-making purposes Standardizing accounting and reporting requirements

Each Licensee shall keep its books of account, and all other books, records, and memoranda which support the entries in such books of account so as to be able to readily furnish full information as to any item included in any account, to the ERA at their request Each entry shall be supported by such detailed information as will permit ready identification, analysis and verification of all facts relevant thereto The books and records include not only accounting records in the technical sense, but all other records which may be useful in developing the history of or facts relating to any transaction This includes, but is not limited to: material supply contracts, invoices, payment records, receipts, inventory records and other supporting documentation Records and books of account

Companies were using different chart of accounts and different financial software The need for structural change of management information systems, functional changes for staff, and challenging & time consuming work on conversion and separation of old accounts into new USOA created some resistance from some Licensees Collaboration of Licensees’ accounting and planning departments was generally insufficient Substantial changes in revenue and cost elements included in business plans Challenges of implementation of USOA

All Licensees of the Sector will be using Uniform System of Accounts Financial software will be modified in order to meet ERA’s financial reporting requirements Costs recorded according to international accounting standards Licensee’s financial statement shows all detailed information required for rate proceedings Permits reporting of more true and fair financial statements for Licensees Advantages of standardized reporting

Separation of Licensees’ costs into electricity and heat generation, voltage levels, and capacity and energy costs for generation Good basis for evaluation of Licensees costs and comparative analysis thereof Enables ERA to take overall control of Licensees financial indicators through periodic auditing

Findings during the implementation of USOA Financial reports of the entities under the USOA have served to clearly demonstrate that the sector is not financially viable. Information has been communicated to those in a position to mandate policy within the sector and government. In summary, whereas the initial financial reports showed a profit of approximately 500 million MNT, incorporating the changes resulting only from the restatements of the five gencos the sector resulted in a sector loss approaching 12 billion (note: billion) MNT.

Continuous implementation of USOA Improvement of auditing capacity of ERA Continuous work to implement USOA for all existing and new Licensees Use of restated accounts for establishment of rates Development of two-part tariffs for energy and capacity Improvement of quality of monitoring financial indicators of companies

Uniform system of accounts ( example) Followed by Non current assets, Current assets, Current liabilities, Equity

Uniform system of accounts ( example )

Followed by Administrative expenses, Maintenance expenses,Sales expenses, Billing& collection expenses, Non operating expenses