NATIONAL TRANSMISSION CORPORATION

EXECUTIVE SUMMARY

A. Introduction

The National Transmission Corporation (TransCo) is a government-owned and

controlled corporation created in June 2001 by virtue of Section 8 of Republic
Act No. 9136, otherwise known as the Electric Power Industry Reform Act
(EPIRA). TransCo started operations as a functional unit of the National Power
Corporation (NPC). TransCo is wholly owned by the Power Sector Assets and
Liabilities Management Corporation (PSALM).

On March 1, 2003 Transco started independent operations and took over the
electrical transmission function of the NPC. Pursuant to EPIRA, TransCo’s
transmission function was mandated to be privatized through outright sale or
concession agreement. On February 28, 2008, the transmission business of
TransCo was privatized through a Concession Agreement (CA) entered into with
National Grid Corporation of the Philippines (NGCP).

On December 01, 2008, congressional franchise to operate the transmission

network was granted to NGCP, thru Republic Act (RA) 9511, “An Act Granting the
NGCP a franchise to Engage in the Business of Conveying or Transmitting
Electricity through High Voltage Back-bone System of Interconnected
Transmission Lines, Substations and Related Facilities, and for other Purposes.”
Transco officially turned over the management and operation of its nationwide
power transmission system to NGCP on January 15, 2009, the commencement
date of the Concession Agreement. The concession period is for 25 years and
renewable for another 25 years. The concession contract amounts to USD3.95
billion, 25% of which, equivalent to USD987.50 million, was paid to PSALM on
commencement date, and the balance in semi-annual installments for 20 years

On April 20, 2009, the Department of Budget and Management approved the
new structure of TransCo consequent to the privatization of its transmission
business. TransCo implemented the new table of organization on July 16, 2009,
with its primary functions as follows:

a. To ensure the concessionaire’s (NGCP) compliance with the terms

and conditions of the CA and the policies and guidelines of the
Department of Energy (DOE);

b. To handle all existing cases including right of way claims which

accrued prior to the Commencement Date of the CA;

c. To divest remaining sub-transmission assets to qualified distribution

utilities; and

d. To undertake operation and maintenance, management and

consultancy and other technical services for the power distribution
systems of the Philippine Economic Zone Authority (PEZA).

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B. Financial Highlights

Comparative Financial Condition

Increase/
2012 2011 (Decrease)
Assets 383,447,406,973 353,071,947,228 30,375,459,745
Liabilities 165,459,580,292 167,501,918,846 (2,042,338,554)
Equity 217,987,826,681 185,570,028,382 32,417,798,299

Results of Operations

Increase/
2012 2011 (Decrease
Income 18,155,165,871 17,553,205,447 601,960,425
Expenses 6,744,202,126 4,840,969,146 1,903,232,980
Net Income 11,410,963,745 12,712,236,301 (1,301,272,556)

Budget Utilization

Approved Budget Obligations Balance

PS 131,843,000 125,036,000 6,807,000
MOOE 14,486,821,000 13,624,655,000 862,166,000
CO 1,777,779,000 400,595,000 1,377,184,000
Total 16,396,443,000 14,150,286,000 2,246,157,000

C. Operational Highlights

For CY 2012, TransCo reported major accomplishments, as follows:

Program
1. Inspection of Transmission Assets.
The inspection focuses on the compliance
of NGCP with the Concession Agreement
(CA), Philippine Grid Code and other
applicable laws and regulation.
Activities
a. Existing Transmission Facilities. The
TRANSCO Inspection Team
conducted verification inspection in all
20 NGCP districts in the Philippines –
North Luzon (7), South Luzon (3),
Visayas (4), and Mindanao (6).

b. Projects Under Construction (PUC)

Monitoring and Inspection. PUCs
refer to the 42 transmission projects
listed in Schedule 2 and defined
under Section 4.02 of the CA. The
CA specifies that NGCP shall manage
the construction and completion of all
PUCs that have not been
commissioned and placed in service
in accordance with the Construction
Management Agreement. Upon

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 completion, PUCs shall immediately
form part of the Transmission Grid.

c. Inspection of New Projects. New

projects initiated by NGCP for the
fulfillment of its responsibilities as the
Grid Owner and System Operator and
guided by the Transmission
Development Plan (TDP) would form
part of the transmission grid and will
be included in TRANSCO’s
transmission assets. During the year
eighteen (18) new projects being
undertaken by NGCP were inspected.

2. Regulatory Compliance Monitoring a. Monitoring on TransCo’s Pending

Application with the ERC.

The Energy Regulatory Commission

(ERC), in its Decision dated July 6,
2011 approved TransCo’s application
filed on December 5, 2008 docketed
as ERC Case No. 2008-061RC: Force
Majeure (FM) Event Regulated FM
Pass-through for Mindanao Tower
Sabotage. As approved by ERC,
TransCo is authorized to collect the
FME pass-through costs from the
Mindanao Grid customers for twenty
four (24) months and is, likewise,
directed to pay the ERC-computed
permit fee. On December 2, 2011,
TRANSCO filed a Motion for
Clarification on the case but at the
same time settled the payment of the
required permit fee to the ERC.
Pending ERC’s action on the MC, a
follow-up Motion to Resolve the case
was again filed to the ERC on
November 9, 2012.

b. Monitoring of Environmental
Compliance of NGCP.

The TransCo Asset Inspection Team

looked into the environmental
compliance of NGCP for Luzon,
Visayas and Mindanao. The team
reviewed the availability of relevant
permits and ensured that copies of
the same are maintained in the
TransCo Data Room.

c. Monitoring of the Updates on the Rate

Cases filed by NGCP with the ERC
and participation to ERC Hearings

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 and Public consultation.

The CA provides that between

TransCo and NGCP, it shall be NGCP
who will be the sole regulated entity
before the ERC. Hence, all rate
cases are now being filed and
attended to by NGCP. TransCo
monitors and studies these rate cases
as these involve the use of TransCo
assets. TransCo, likewise, attends
relevant regulatory hearings
pertaining to other applications of
NGCP. And, in some instances
TransCo has filed for intervention

d. Technical, Legal and Financial

Assessment of NGCP’s Compliance
with the CA.

This activity is jointly conducted by

TransCo and PSALM. During the
conduct of the assessment, the
performance of NGCP vis-à-vis its
obligations under the various
provisions of the CA was evaluated.
NGCP’s attention was called on
those provisions which have not
been complied with as noted by the
team

e. Participation in the ERC Caravan on

Retail Competition and Open Access
Activities (RCOA).

Starting July 2011, TransCo has

participated and joined the ERC
Caravan on Competitive Retail
Electricity Market (CREM) also known
as Retail Competition and Open
Access (RCOA), which gives all
electricity end-users in Luzon and
Visayas with an average monthly
peak demand of one (1) MW and
above for the 12 months preceding 26
December 2011 the right to choose
their own electricity suppliers

3. Divestment of Sub-transmission Assets. In compliance with the mandate of

EPIRA and under the guidelines set
by the ERC, in 2012, TransCo signed
four (4) sale contracts with distribution
utilities (DUs) amounting to about
P428.5 million. This is on top of the
six (6) DUs’ waivers on the acquisition
of subtransmission assets for P316.2

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 million. As of December 31, 2012,
TransCo has signed 105 sale
contracts with 75 DUs/electric
cooperatives/ consortia amounting to
about P5.75 billion. These sales
cover an aggregate length of about
3,900 ckt-kms of sub-transmission
lines and about 35,500 sub-
transmission structures and 865 MVA
of substation capacity. Of the 105
sale contracts, 45 contracts with total
sale price of P2.3 billion have been
approved by the ERC as of year-end
2012 posting in the ERC website.
The rest of the sale contracts are for
ERC filing, evaluation or approval.

4. Handling of ROW and TransCo Cases. Transco continued handling right-of-

way (ROW) claims which accrued
prior to the turnover of the
transmission function to NGCP.
Expropriation cases and claims have
been filed by landowners affected by
TransCo’s transmission facilities. If
unpaid, these landowners may
prevent NGCP personnel doing
maintenance works from entering their
properties. They may also institute
ejectment or recovery of possession
actions to force TransCo to dismantle
and remove the transmission facilities
unless they are fully paid.

5. Management and Operation of Power TransCo’s Utility Management

Systems at PEZA. Department (UMD) manages the
electric power systems of the two
public economic zones at Cavite and
Baguio City of Philippine Economic
Zone Authority (PEZA) and at Bataan
of Authority of Freeport Area of
Bataan (AFAB) by virtue of
management contracts. The UMD
performs preventive maintenance of
electrical distribution equipment to
reduce frequency of interruptions and
monthly energy audit. It also
conducts meter testing, calibration
and upgrade of instrument
transformers and electromechanical
meters among others.

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D. Scope and Objectives of Audit

The audit covered the accounts and operations of the TransCo CY 2012. The
objective of the audit was to render an opinion on the fairness of presentation of
the Corporation’s financial statements and to determine compliance of transactions
with laws, rules and regulations.

E. Independent Auditor’s Report

The Audit Team rendered a qualified opinion on the fairness of the presentation of
the 2012 financial statements for reasons stated in the Independent Auditor’s
Report under Part I of the Report.

F. Significant Comments and Recommendations

Below is a summary of audit observations and recommendations which are

discussed in detail in Part II.A of the Report.

1. The year-end balances of Construction Work in Progress (CWIP) account

and Preliminary Surveys and Investigation (PSI) of P7.883 billion and P2.379
billion, respectively, were not accurately reflected due to:

a. Inclusion under CWIP of cost of completed and energized projects and

dormant accounts amounting to P35.594 million and P864.660 million,
respectively;

b. Non-adjustment and dormancy of PSI account balance of P2.194

billion for the last four years; and

c. Abnormal subsidiary ledger balances for Work Orders of P88.984

million for CWIP account.

We recommended and Management agreed to:

a. Exert extra efforts in identifying and analyzing the CWIP and

PSI accounts to identify the projects already completed, on-
going and abandoned and make the necessary adjustments
where appropriate to reflect the correct balances of the CWIP
and PSI accounts as well as the EPIS and other related
accounts; and

b. Continue analyzing SLs for Work Orders especially those with

negative or abnormal balances and effect the necessary
adjustments thereof.

2. Of the year-end balance of the Court and Other Deposit account, the amount
of P333.298 million representing 53% was not documented, while P26.491
million pertained to deposits with closed bank accounts, hence, the existence
and accuracy could not be ascertained.

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 We recommended and Management agreed to exert extra efforts in
identifying the existence of these bank/court deposits and the status of
the right of way cases, and make the necessary adjusting entries in
order to ascertain the correctness of the Court and Other Deposit
account.

3. Additional cash advances totaling P2.346 million were granted despite non-
liquidation of previous cash advances, and cash advances for local travels
totaling P1.212 million were not liquidated within the prescribed period. Also,
Cash advance for Petty Cash Fund was used to pay cash advances for local
travels and to replenish petty cash fund of other special disbursing officers,
contrary to COA Circular No. 97-002.

We recommended and Management agreed to strictly implement the

provisions of COA Circular No. 97-002.

We invited Management attention to COA Circular No. 2012-004 dated

November 28, 2012 requiring all concerned to settle and liquidate all
outstanding cash advances as of December 31, 2011 on or before
January 31, 2013. Failure of an Accountable Officer to liquidate his
cash advance on or before January 31, 2013 shall constitute cause for
the filing of malversation charge under Article 217, failure to liquidate
cash advance under Article 218, both of the Revised Penal Code or
criminal prosecution under Section 128 of P.D. 1445.

4. The year-end balance of Cash in Bank account carried a PNB savings

account with a balance of P5.789 million although the account was already
closed per bank records.

We recommended and Management agreed to exert extra efforts in

analyzing and reconciling the said closed bank account and effect the
necessary adjustments.

5. The validity and accuracy of the balances of some asset and liability accounts
with total general ledger balances of P2.166 billion and P3.483 billion,
respectively, could not be established due to the existence of abnormal
balances per subsidiary ledgers; and the absence of the names of
debtors/creditors for receivable and payable accounts.

We recommended and Management agreed to exert extra efforts in

determining the causes of the abnormal balances and to identity the
debtors/creditors for certain receivable and liability accounts and make
the necessary adjustments where appropriate in order to present the
correct account balances.

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G. Implementation of Prior Year’s Audit Recommendations.

Of the six prior year’s audit recommendations, four were fully implemented and two
were partially implemented and thus reiterated in this report. Details are found in
Part II.B of this Report.

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