Auditing Power, Water, and Telecommunications

Industry

Prepared by:
Richelda Barsaga
Jonalyn Joy Mendoza
Power Industry
 covers the generation, transmission, distribution and sale of power to the general
public and industry

Water Industry
 provides drinking water and wastewater services (including sewage treatment) to
residential, commercial, and industrial sectors of the economy.

Telecommunication Sector
 is made up of companies that make communication possible on a global scale,
whether it is through the phone or the Internet, through airwaves or cables, through
wires or wirelessly.
 Nature, Background, and Overview of Specialized
Industry
Power Industry
• The electric power industry started in the Philippines as a private sector-led industry in 1890
and remained so until the late 1960s.
Executive Order (EO) 215
• reversing the policy of granting generation monopoly to NPC
and entertained proposals from independent power producers
(IPPs) for build-operate-transfer (BOT) and build-own-operate
(BOO) arrangements for new generating capacity

Executive Order 215 s. 1987

• specifically allow the private sector to generate electricity and
categorically state that "the generation of electricity, unlike the
transmission and distribution of electricity, is not a natural
monopoly and can be undertaken by more than one entity."
1. Power Generation - Power generation in the Philippines is not considered as a
public utility operation, which means interested parties do not need to secure a
congressional franchise to operate a power generation company.

Types of source of energy

a. Conventional sources – coal, gas, oil, hydropower, and nuclear power
b. Non-conventional sources – solar, wind, biogas (from organic wastes), and
bagasse (byproduct of sugarcane).
2. Power Transmission – this is a common carrier business (i.e. regulated by the
government, serves its franchise area without discrimination, responsible for any losses
incurred during delivery).

National Grid Corporation of the Philippines (NGCP)

 is the transmission system operator for three grids constituting the Philippine grid and as a
franchise holder, it is in charge of operating, maintaining, and developing the country's
state-owned power grid

Philippine transmission system is composed of three (3) grids

• Luzon Grid
• Visayas Grid
• Mindanao Grid

Functions
1. Operations and Maintenance
2. System Operations
3. Planning and Engineering
3. Power distribution - The circulation of electricity to end-users is a controlled common
carrier business requiring a national franchise.

a. Electric Cooperatives (“ECs”) are entities owned by the member-consumers within the
vicinity covered by the said entity.
b. Private Distribution Utilities (“PDUs”) are electric distribution companies that are owned
by private entities
Philippines has higher electricity costs due to;
1. High Lack of Subsidies
2. Intrinsic Cost of Supply and Transmission due to:

• Dependence on expensive imported fossil fuel for generating electricity and no tax or
tariff relief given for fuel imports used for power generation
• Relatively low generating capacity of the Philippines.
• Relatively small and fragmented grid size result into transmission losses, no economies
of scale, and inefficient operations.
• As an archipelago, there are geographic challenges of transmission.

c. Municipality Unit (“MUs") are entities that are owned by the local government.
Water Utility Industry
The following agencies are involved in water supply and distribution:
• the Metropolitan Waterworks and Sewerage Services (MWSS) and its two
concessionaires
• the Local Water Utilities Administration (LWUA) and its water district offices
for other cities and municipalities
• the Departments of Interior and Local Government (DILG) and Public
Works and Highway (DPWH) and local governments which manage
community water systems

The water infrastructure provided is classified into three levels:

1. Level I – Stand-alone water points (e.g. handpumps, shallow wells,
rainwater collectors) serving an average of 15 households within a 250-
meter distance;
2. Level II - Piped water with a communal water point (e.g. borewell, spring
system) serving an average of 4–6 households within a 25-meter
distance;
3. Level III - Piped water supply with a private water point (e.g. house
connection) based on daily water demand of more than 100 liters per
person.
Service providers for this sector
1. Local Government Units
2. Water Districts
3. Large-scale private operators
4. Small-scale independent providers

Common water sources and water treatment plants

5. Water Sources
a. Angat Dam
b. Ipo Dam
c. La Mesa Dam

2. Water Treatment Plants - Raw water undergoes several treatment processes before it passes
the standards for potable water.
a. Balara treatment plant
b. East La Mesa treatment plant
c. Cardona treatment plan

Conventional water treatment consists of the following processes:

• coagulation/flocculation
• Sedimentation
• filtration and disinfection/chlorination.
 Telecommunications Industry
 The industry was deregulated in 1995 when President Fidel Ramos signed Republic Act
7925 (The Public Telecommunications Policy Act of the Philippines). This law opened the
sector to more private players and improved the provision of telecom services are better and
fairer rates.

Some of the regulatory frameworks relative to this industry are listed below:
• Republic Act No. 3846, An act providing for the regulation of radio stations and
radio communications in the Philippine Islands, and for other purposes.
• Republic Act No. 6849, An act providing for the installation, operation and maintenance
of public telephones in each and every municipality in the Philippines,
appropriating funds therefor and for other purposes.
• Republic Act No. 7925, An act to promote and govern the development of
Philippine telecommunications and the delivery of public telecommunications services.
• Republic Act No. 10844, An act creating the Department of Information and
Communications Technology (DICT), defining its powers and functions appropriating
funds thereof, and for other purposes.
• As disruptive as this industry can get, its key players are striving to
catch up with each of the industries market segments’ new
technologies

1. Mobile Market with 126 million subscribers as of 2016;

2. Broadband Market
a. Wi-Max
b. Wi-Fi
3. Fixed Line Market
a. Fixed Line Voice
b. Fixed Line Data Market
4. International Long Distance Market
5. Hybrids
Updates & Statistics of the Specialized Industry in
the Philippines
Power Industry
Water Utility Industry
Telecommunications Industry
Key Market Trends
1. The Impact of COVID-19 on the Power, Water, and Telecommunications
Industry
2. Alternative Sources of Energy
3. Internet of Things (IoT)
a. Forgoing Partnerships
b. Mediation
4. New business models
5. Seamless online billing
6. Integrated water system
7. Mobile banking
 Audit Considerations
Industry Challenges

• COVID 19 pandemic such as decline in energy demand, coal utilization in the spot
market, collection efficiencies of Electric Cooperatives, and delays in renewable energy
projects.
• Increasing public concerns on increasing rates and billings
• New power generation technologies, aging infrastructure • Impact of climate change
and shifting dynamics
• Managing regulatory risks
• Managing fraud
• Uncontrollable risks such as shortage of natural gas
• Land acquisitions
• Tariffs – as of June 2020, power tariffs in the Philippines are among the highest in Asia.
• Disclosures on industry and regulatory framework changes, rate regulations, statement
of compliance, significant judgments, accounting estimates & assumptions,
segment information, utility plant and its movements, acquisitions, and other matters.
 – President Duterte signed into law Republic Act No. 11494, the Bayanihan to
Recover as One Act (“Bayanihan 2”)
– The DOE directed all distribution utilities to implement a non-disconnection policy
due to non-payment of bills for all electricity 66 consumer whose consumption
levels are within the lifeline rate set by the ERC.

• For water utility industries, Non-revenue water (NRW) is defined as the difference
between the amount of water put into the distribution system and the amount
of water billed to consumers. It is usually used as an indicator for water utility
performance. High levels of non-revenue water usually indicate low-quality water
utility. It has three components:
 Physical losses
 Commercial losses
 Unbilled authorized consumption
• Environmental concerns and institutional fragmentation
• For telco companies, inability to contain and reduce costs poses a risk with revenues
from legacy services remaining either static or falling and the revenue potential of new
services uncertain, many operators need to cut costs.
• Both a challenge and an opportunity, risk on disruption
of blockchain technology can be counted as one of the
industry challenges as well. Interest in the technology
continues to grow, resulting from its potential to overhaul
business models while improving processes such as
roaming and identity management. As more telco
companies experiment with blockchain applications, it’s
apparent that many value-added opportunities exist
 Key Audit Procedures:
1. Revenue Recognition Principles and Test of Reasonableness
a. For power industry, distribution retail rate components, as proper billing is the key aspect
in distribution.
b. For water industry, the water billing components:
i. Basic charge
ii. Foreign Currency Different Adjustment (FCDA)
iii. Environmental Charge
iv. Sewer Charge
v. Maintenance Service Charge
vi. Other charges such as VAT, prior billings, etc
c. Tax Incentives;
d. Carbon credit-related income
2. Property, Plant, and Equipment – PPE usually comprise the biggest asset account on
the balance sheet of most plant owners and project developers, since most aspects of the
wind power industry are capital intensive
3. Cost-recovery - the operation ratio (O) of a certain water service provider reflects its
cost-recovery situation, where O is the operation cost, C is the total annual cost, and R is
the annual revenue.
4. Safety Auditing through workplace inspections, employee safety perception
surveys, and work/behavioral observations
a. Safety Management Audits
5. Operational Audits
a. Generation Phase
i. Installed capacity and capacity utilization
ii. Plant load factor
iii. Planned outage
iv. Forced outage
v. Reserve outage
vi. Loss due to backing down – due grid failure, shortage of raw materials
or reduced demand from consumers
vii. Plant availability
viii. Calorific value of fuel – amount of heat released with the burning of coal
ix. Station heat rate
x. Power quantity reconciliation
xi. Fuel supply agreement
xii. Man-power deployment
xiii. Stacking loss
 b. Transmission
i. Operational performance
ii. Voltage management
iii. Transmission losses
iv. Tariff determination
v. Grid management
vi. Material management
c. Distribution
i. Aggregate technical and commercial losses
ii. Transformer and its installed capacity
iii. Repairs and maintenance of distribution transformer
iv. Power factor (ratio between real power to do the actual work and the apparent
power supplied by circuit) and capacitor bank (develops the power factor by regulating the
current flow.
v. Tariff fixation
6. Regulatory Compliance Audits

a) Assess the applicable safety regulations, as well as the more

significant national safety standards and codes that apply to the
operations.
b) Assess the level of compliance of the operations to the safety
regulations, standards and codes.
c) Include field verification samplings of operating centers.
d) Acknowledge the organization’s activities that meet the regulatory
requirements.
e) Identify non-compliance issues that need to be addressed.
f) Assist in a due diligence defense in case of a serious accident.
7. Other considerations:
a. Fuel accounting;
b. Cost Centers
i. Boiler
ii. Turbine & Generator
iii. Cost Handling Plant
iv. Demineralization Plant
v. Hydrogen-generating Plant
vi. Fuel Oil Handling Plant
vii. Ash Handling Plant
viii. Maintenance Costs
ix. Instrumentation Control
c. Inventory costing method and wastage
d. Insurance;
e. High debt-to-equity ratio as a risk factor.