MODULE 6

Auditing Power, Water, and Telecommunications Industry

Overview:

To define briefly, the power industry covers the generation, transmission,

distribution and sale of power to the general public and industry. Meanwhile, the
water industry provides drinking water and wastewater services (including sewage
treatment) to residential, commercial, and industrial sectors of the economy.
Typically, public utilities operate water supply networks. Lastly, the
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.
 Utilities and telecommunications are essential services that play a vital role in
economic and social development. Quality utilities are a prerequisite for effective
poverty eradication. Governments are ultimately responsible for ensuring reliable
universal access of service under accountable regulatory frameworks. Increased
competition in the utilities sectors in recent years has entailed changes in
regulatory frameworks and ownership structures of enterprises, in addition to
business diversification.

Further, remarkable progress in telecommunications technology has had, and will

continue to have, an enormous impact on telecommunications manufacturing and
service industries. In particular, digital technology that integrates transmission,
switching, processing, and retrieval of information provides opportunities to merge
various service modes into an integrated whole. This digitalization, merging the
communications and computation functions, has been made possible by dramatic
advances in device and material technology, including integrated circuits and
optical fibers. As the role of digital processing increases, systems and services
become more intelligent and labor- saving on the one hand, and more software-
intensive on the other.
These industries are highly interdependent, highly regulated, and any risk
imposed on its continuance will not only mean a threat to its own and related
industries, but a peril to the whole economy as well.

Module Objectives:
Know the nature and background of the particular specialized industry;
Learn the overview, statistics, and updates of the specialized industry in the
Philippine setting;
Identify the different audit considerations and trends for the industry.
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; the government pursued
rural electrification through the cooperative business model starting in 1969; the
monopoly of generation by the National Power Corporation (NPC) started in 1973;
and then the re-entry of private sector in the generation sector through independent
owner producers (IPPs) started in 1987. Prior to the 2001 restructuring under the
Electric Power Industry Reform Act (“EPIRA”), the electric power industry had a
vertically integrated generation and transmission sector through the NPC and
wholesale power purchases from the IPPs were predominantly through the NPC
(see diagram below). Distribution utilities were local monopolies in their respective
service areas.
 On August 14, 1969, Republic Act 6038 created the National Electrification
Administration (NEA) and laid the groundwork for accelerated electrification in the
countryside. The law provided a framework for rural electrification through not-for-
profit cooperatives as a business model and loans and technical assistance from
the NEA. In 1972, then President Ferdinand Marcos imposed Martial Law and
shortly thereafter, the Marcos administration seized the assets of Meralco.

After almost one and a half decades of government dominance in the electric
power industry, in 1986, the administration of then president Corazon Aquino
reverted Meralco to private ownership. The administration then decided not to
operate the Bataan Nuclear Power Plant “for reasons of safety and economy” (EO
55 s. 1986). In 1987, Aquino issued 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. EO 215 s. 1987
amended PD 40 to 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." The first BOT contract for a power plant was then signed in 1989
by the NPC and Hopewell Energy Management, Ltd.

To facilitate the privatization process, the EPIRA provided for the creation of the
Power Sector Assets and Liabilities Management Corporation (PSALM) to take
over all existing generation assets and liabilities of the NPC. PSALM was also
tasked to use the revenue generated to pay the outstanding debt of the NPC.
Furthermore, Executive Order No. 215 series of 1987, which allows private sector
to generate electricity, classifies four types of generating plants: (1) co-generation
units or the simultaneous generation of both electricity and heat from the same fuel,
(2) electric generating plants intending to sell their production to the grids, (3)
electric generating plants intended primarily for the internal use of the owner, and
(4) electric generating plants outside the NPC grids.
The latest EPIRA status report released by the Department of Energy (DOE),
which covers November 2014 to April 2015 period, highlights the privatization of
the remaining generation assets, particularly the Power Barges (PBs) 101-104 as
well as the transfer of contract to an Independent Power Producer Administrator
(IPPA) of Unified Leyte Geothermal Power Plant (ULGPP) for the Bulk Energy. As
of June 2015 4, the privatization level of NPC generating facilities has reached
89.7%, following the successful bid of Naga Power Plant Complex in March 2014.
Meanwhile, the proposed closing and turn-over schedule of Angat Hydro-electric
Power Plant to Korean Water
Resources, Inc. was officially done in October of the same year. Another entity
established by the EPIRA is the Energy Regulatory Commission (ERC). Its main
task is to promote competition, encourage market development, and enforce
regulations in the newly restructured market. This is because, contrary to PD 40,
power generation under the EPIRA was not considered a public utility operation, as
stated in Section 6 of RA 9136 otherwise known as EPIRA Act of 2001. This made
the generation sector of the industry competitive and opens to other players in the
market. Under the EPIRA, any person or entity engaged in generation and supply
shall not be required to apply for a national franchise; provided that it secures a
certificate of compliance from the ERC. Thus, the industry changed in tranches and
was restructured as illustrated by the diagram below.
To briefly discuss the phases the power industry’s supply chain:

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. However, power
generation is regulated by the Energy Regulatory Commission (ERC) who must
issue a certificate of compliance to interested parties to ensure that the standards
set forth in the Electric Power Industry Reform Act of 2001 (EPIRA) are followed.
The ERC is also responsible for determining any power abuse or anti-competitive
behavior. Electricity in the Philippines is produced from various sources such as
coal, oil, natural gas, biomass, hydroelectric, solar, wind, and geothermal sources.
The allocation of electricity production can be seen in the table below.
 Types of source of energy are enumerated below:

a.Conventional sources – coal, gas, oil, hydropower, and nuclear power; and
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). It is regulated by the ERC who has rate-making
powers and the final say in the valuation of transmission assets. Pursuant to the
Electric Power Industry Reform Act (EPIRA) and the Transmission Development
Plan or TDP, maintenance and operations of the nationwide transmission system
was subjected to competitive public bidding conducted by the Power Sector
Assets and Liabilities Management (PSALM). The National Grid Corporation of the
Philippines (NGCP) was the highest bidder. It assumed control of the national
transmission system from the National Transmission Corporation (TransCo), whom
assumed the same function from the now defunct National Power Corporation (by
way of RA 9511 enacting congressional franchise for a total of 50 years).
a.The 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. The Philippine transmission system is
composed of three grids, the Luzon Grid, Visayas Grid, and Mindanao Grid.
One characteristic of the grids is that most bulk generation sites are found far
from the load centers, necessitating use of long-distance transmission lines.
b. Functions:

i.Operations and Maintenance - NGCP's task is to ensure that the country's

transmission assets are in optimal condition to convey safe, quality, and reliable
electricity. iii.

ii.System Operations - NGCP acts as System Operator that balances the supply
and demand of power to maintain the quality of electricity that flows through the
grid.
Planning and Engineering - NGCP ensures that the grid is prepared whenever
new plants come online and when the demand for power in a certain area
increases by anticipating these scenarios and constructing new facilities.
3. Power distribution - The circulation of electricity to end-users is a controlled
common carrier business requiring a national franchise. The power to grant national
franchises is
exclusively vested to the Congress of the Philippines. Distribution of electric power to
all end-users or consumers of electricity may be handled by private distribution
utilities, cooperatives, local government units presently undertaking this function
and other duly authorized entities, under the regulation of the ERC.

A distribution utility has the task to provide distribution services and connections to its
system for any end-user within its franchise area, as there are different distribution
utilities available for different areas, consistent with the distribution code. They are
required to provide open and non-discriminatory access to its distribution system to
all users.
Retail rates charged by distribution utilities are subject to regulation of the ERC
under the principle of full recovery, that is, distribution utilities subdivide their retail
rate into two distinct categories, namely pass through charges and wheeling
charges. Pass through charge follows the principle of full economic recovery where
a distribution utility may pass on all the charges it incurred in the distribution of
power such as the price of the power, transmission charge, systems loss charge,
etc. to its customers. The wheeling charge is an additional premium charged to the
customer akin to a mark-up on the cost of power acquired by the distribution utility.
The wheeling charge follows the principle of reasonable return on base (RORB)
which allows the distribution utility to operate viably as determined by the ERC.
a.Electric Cooperatives (“ECs”) are entities owned by the member-consumers
within the vicinity covered by the said entity. These are controlled by a Board of
Directors elected by member-consumers and their management and operations
supervised by the National Electrification Administration.
b.Private Distribution Utilities (“PDUs”) are electric distribution companies that are
owned by private entities. As of 2018, if ranked based on output, the main
distribution utilities across the country include the following Private Distribution
Utilities (“PDUs”):
The Manila Electric Company (“MERALCO”), the largest electric distribution utility in
the Philippines, has the 24th highest weighted average retail tariffs among 46
countries. As compared to its neighboring countries, Philippines has higher electricity
costs due to:
1.Lack of Subsidies; and
2.High Intrinsic Cost of Supply and Transmission due to:
a. Dependence on expensive imported fossil fuel for generating electricity and no
tax or tariff relief given for fuel imports used for power generation;
b.Relatively low generating capacity of the Philippines. The current supply of
electricity is forecasted to be overtaken by the demand of the country;
c.Relatively small and fragmented grid size result into transmission losses, no
economies of scale, and inefficient operations; and
b. As an archipelago, there are geographic challenges of transmission. The
Philippines relies on submarine cables to interconnect the islands.
c. Municipality Unit (“MUs") are entities that are owned by the local government.
The local government officials, who are elected by the end-users within the
municipality, regulates, controls, and manages the utilities.

Water Utility Industry

The Philippines’ water supply system dates back to 1946, after the country
declared independence. The main components of water resources management in
the Philippines are vested in the mandates of the various government agencies
that undertake most of the water resources programs and projects in the country.
There are more than thirty such agencies and offices, each dealing with a particular
aspect of water resources development. Thus, there are separate agencies dealing
mainly with each of the sectors of water supply, irrigation, hydropower, flood control,
pollution, watershed management, etc.

Under this setting, the National Water Resources Board (NWRB) was created in
1974 as the authoritative national organization to coordinate and integrate all
activities in water resources development and management. Its main objective is to
achieve scientific and orderly development and management of all the water
resources of the Philippines consistent with the principles of optimum usage,
conservation and protection to meet present and future needs.

Fragmentation among water-related agencies is evident in three areas of concern:

water supply and distribution, economic and resource regulation, and planning and
The following agencies are involved in water supply and distribution:
the Metropolitan Waterworks and Sewerage Services (MWSS) and its two
concessionaires (after it was privatized in 1997) for Metro Manila, servicing
62.68 percent of its total population;
the Local Water Utilities Administration (LWUA) and its water district offices for
other cities and municipalities, servicing 58 percent of the total urban population
within its area of responsibility; and
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 are also listed down below, by which different
tariff structures and levels according to the respective management model are
imposed.
1.Local Government Units
2.Water Districts
3.Large-scale private operators
4.Small-scale independent providers

Common water sources and water treatment plants for this industry includes but
not limited to the following:
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. Conventional water treatment
consists of the following processes: coagulation/flocculation, sedimentation,
filtration and disinfection/chlorination.
a.Balara treatment plant
b.East La Mesa treatment plant
c.Cardona treatment plant

To ensure that the water delivered to the customers satisfies regulatory standards
on quality, the Company’s Laboratory Services Department processes an average of
around 900 water samples from the distribution network per month. The samples
are collected on a regular basis from strategically located sampling points all over
the East Zone. This number of sampling points surpasses the regulatory
requirement and all results of the sampling have been consistently 100% compliant
Philippine National Standards for Drinking Water (PNSDW), five percent above the
requirement.

After distribution and of water, the waste water (used water basically) will undergo
sewerage. Sewerage services include the operation and maintenance of networks
of sewer pipelines that collect and convey sewage to a Sewage Treatment Plant
(STP) which then clean the wastewater before safely returning it to our water
bodies. Through a variety of mechanisms and processes, these treatment plants
produce treated wastewater safe enough for re-use or discharge to receiving bodies
of water.
 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. The industry was deregulated in 1995,
leading to the creation of many telecommunication service providers for mobile,
fixed-line, Internet and other services.
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.
The surge of digital users in the Philippines has been on the rise in recent years.
Time spent on the internet by Filipinos, which was the highest among other Asian
countries, led to more demands for improving fixed broadband services from the
country's internet service providers despite its growth in numbers. The lack of
dependable broadband connections in the Philippines able to provide higher internet
speed, halts better user experience, resulting to one of the lowest fixed subscription
growths among the Asia-Pacific region in 2018.
 Despite several telecommunication service providers, the Philippines
telecommunications industry has long been dominated by legacy players Philippine
Long-Distance Telephone Company (PLDT) and Globe Telecom.
All players are expected to upgrade their network capabilities, install fiber-optic
and sub-sea systems and cables, purchase modern networking
equipment/storage/servers, and utilize cloud and cybersecurity services. 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
As of 2021, the cost of electricity produced for coal amount to PHP 4.18/KWh. The
cost is primarily comprised of fuel and capital recovery costs. The effect of variable
and O&M costs are low. Based on ERC rate cases that were found, geothermal
energy was found to have the lowest cost of electricity per KWh at
PHP4.07/KWh, this pertains to the BACMAN geothermal plant in Pampanga with
the rate case application filed as of 2018. For the top ranking Private Distribution
Utilities per grid, see Private Distribution Utilities section.
Water Utility Industry
The leading companies on this industry are ranked below in terms of revenue and size:
Telecommunications Industry
According to Statista, the following are the fastest internet providers as of
June
2020.
Despite this, PLDT and Globe Telecom, remained at the top spot with a 2020
CAPEX that is above $ 1 billion. Meanwhile, a new ISP, Dito plans aims to spend
$5 billion on the rollout of its services in the next 5 years. All players are price
sensitive and do have a bias of purchasing equipment from China.
Key Market Trends
1.The Impact of COVID-19 on the Power, Water, and Telecommunications
Industry
With the prevalent economic impact of the pandemic, the power industry is
expected to have
a decline in energy demand, coal utilization in the spot market, collection
efficiencies of Electric Cooperatives, and delays in renewable energy projects.
Nonetheless, the global telecom market has shown substantial growth over 2015-
2021 not only due to the adoption of advanced infrastructures, but also as the
global need for stable internet connection arose along with the remote work setup
during the pandemic.
2.Alternative Sources of Energy
a.The conventional thermal power segment held a significant market share in
2018, and it is likely to dominate the market in the forecast period.
b. The Philippines government has planned to phase out its coal usage by 2040 and
focus more on energy production from natural gas and renewable. This, in turn, is
expected to create several opportunities for the power generation EPC companies
in the near future.
c. The upcoming and ongoing projects of power plants are likely to drive the power
EPC generation market in the Philippines, during the forecast period.
3. Internet of Things (IoT) - The utility industry has been witnessing a revolution of
sorts thanks to the Internet of Things (IoT). IoT, which connects previously ‘mute’
objects to the internet, empowers consumers to be in control of the utilities they use.
Yes, they can heat their homes, switch on their lights and fill their bath tubs remotely
with a few clicks from a device. More importantly, it also allows consumers to
monitor and manage the amount of the earth’s resources they use.
a.Forging Partnerships - To offer subscribers convenience – and to secure new
revenue streams – mobile operators have forged innovative partnerships. Smart
metering based on M2M (Machine to Machine) technology is effectively distributing
and managing the
electricity supply, i.e. Kuryente Load, a prepaid electricity service by MERALCO.
Forming strategic partnerships with telecoms operators is a win-win. It strengthens
the proposition for both companies and allows both organizations to maximize the
IoT potential.
b.Mediation: Mobile operators use robust mediation solutions to manage and monitor
multiple devices that are online 24/7/365. With the advent of IoT, utility companies
will similarly have intelligent – smart – meters and multiple “always connected”
devices. Telecoms mediation solutions can effectively integrate and manage these
devices for utility companies for smarter billing.
3.New business models - Some companies in the mobile industry have launched
Mobile Virtual Network Operators (MVNOs). That is when a company sells mobile
phone services by making use of another telco’s existing network infrastructure.
As telcos look to collaborate, utility-based MVNOs may not be a far-fetched idea.
The technology being utilized within the telecommunications industry to manage
subscriber databases, the HLR (Home Location Register), can also be used by
utility companies.

4.Seamless online billing - Mobile operators have deployed real-time Online

Charging Systems (OCS) to make it easy for subscribers to pay their bills. Prepaid
vouchers can be purchased over the counter and credit can be added almost
instantaneously. Utility companies should look to introduce such schemes that can
add energy or water credit. The technology available in telecoms can be adapted
to match specific serial numbers to smart meters for seamless ‘topping up’. This
could be an effective solution for utility companies who have to extend their grids to
areas where post-paid billing is not an option.
6.Integrated water systems - In October 2011, a bill (commonly referred to as “the
Angara bill” after its proponent) was filed with Congress, that sought to adopt the
integrated water resources management (IWRM) approach to water supply
management by dividing the country into provincial water resource zones, within
which all water utilities would be synergized and integrated.

7.Mobile banking - Internet banking allowed customers to accomplish transactions

through computers and the Internet. It was at this point that banks started to veer
away from their traditional bricks and mortar operations, integrating both online and
offline operations into their physical presence.
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.
oOn September 11, 2020, President Duterte signed into law Republic Act No.
11494, the Bayanihan to Recover as One Act (“Bayanihan 2”) which serves as
the government’s second coronavirus pandemic relief measure. In an Advisory
dated September 23, 2020, the DOE directed power sector entities to observe
the grace period and staggered payment for unpaid bills provided under the
Bayanihan 2.
oIn an Advisory dated February 5, 2021, the DOE directed all distribution utilities
to implement a non-disconnection policy due to non-payment of bills for all
electricity
 consumer whose consumption levels are within the lifeline rate set by the ERC.
The policy shall apply to all unpaid regular bills and installment payments relative
to various advisories of DOE and 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:
oPhysical losses, which consist of leakage from the system caused by poor
operations
and maintenance, the lack of active leakage control, and poor quality of
underground assets.
 oCommercial losses, caused by under-registration of water meters, errors in data
handling, and theft.
oUnbilled authorized consumption, which includes water used by a specific utility
for operational purposes (e.g. firefighting and specific consumer groups).
Environmental concerns and institutional fragmentation - More than 30 different
agencies in the Philippines have some role in water resources and water supply
and sanitation, but there is currently no single department or body with overall
responsibility for sector policy and coordination, or for overseeing implementation
of sector reforms, especially outside Metro Manila.
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 - this covers the cost of operating, maintaining, improving and
expanding the distribution network, as well as the facilities responsible for bringing
potable water to the end-user. The Basic Charge is based on the latest approved
tariff schedule.
ii.Foreign Currency Different Adjustment (FCDA) - this is a percentage of the basic
charge which accounts for fluctuations of the Philippine Peso against other
countries' currencies subject to periodic review and adjustment. The FCDA for the
iii.

second quarter of 2015 is 0.18% of the Basic Charge. Environmental Charge - this
is for the mitigation of environmental impacts in
the course of water and wastewater operation. It is 20% of the Basic Charge
applicable to all customers.
iv.Sewer Charge - 0% of the Basic Charge is added for Residential and Semi-
Business customers with a sewer line connection. 30% of Basic Charge, on the
other hand, is charged for Commercial and Industrial customers.
v.Maintenance Service Charge - this covers the maintenance of the water meter. The
charge changes depending on the size of the water meter. The minimum charge is
1.50 Philippine pesos for a 13mm-sized meter.
vi.Other charges such as VAT, prior billings, etc.

c.Tax Incentives;
d.Carbon credit-related income - Carbon credit, also known as emission permit,
allows the holder to emit a specified amount of greenhouse gases. One carbon
credit is equivalent to one ton of carbon dioxide. The features of carbon credits do
vary such that the terms and conditions attached to them often result in a broad
range of accounting issues. The revenue from carbon credits is calculated by the
amount of carbon emission that would have been emitted had fossil fuel or other
polluting power generator been used to produce the same MW of power. One of the
methods to calculate the carbon reduction emission may be based on the
generation-weighted average emission factor of all facilities generating RE, multiplied
by the amount of electricity generated by the company’s wind power plant during the
year. Revenue from the sale of carbon credits can be recognized on an accrual
basis when verification and certification processes have been completed. More
importantly, the important criteria of PAS 18, Revenue, should have been met,
namely: that the economic benefits associated with the transaction will flow to the
company and such economic benefits can be estimated reliably. Since diverse
accounting practices are applied, management’s judgment plays a crucial role in
determining the appropriate treatment of assets, revenue and expenses of wind
power companies. (Loyola, n.d.)

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. Depreciation of wind
turbines and sale of electricity during the commissioning period are also important
areas to consider. If any of the wind turbines is individually capable of generating
power, depreciation should start even if other wind turbines are still under
construction.

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. An operation ratio under 1 means that revenues cover
the costs of operation and maintenance. In a study last 2004, only 5 out of 45 had
an operating ratio of more than 1, reflecting a poor operation ratio among the
majority of the participating utilities. All the loss- making providers were operated
directly by LGUs and were mostly characterized by a high share of non-revenue
water, poor service continuity, low tariffs, and low coverage within their respective
service areas.

4.Safety Auditing through workplace inspections, employee safety perception

surveys, and work/behavioral observations
a.Safety Management Audits - The Safety Management Audit goes beyond
regulatory compliance and assesses the safety programs the organization has in
a.place to sustain or improve the current level of performance. The Safety
Management Audit assesses more than the mere existence of safety policies and
programs. The audit examines the quality and effectiveness of the activities to
provide a thorough evaluation of the state of safety management in the company.

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
xiv.Operational performance
xv.Voltage management
xvi.Transmission losses
xvii.Tariff determination
xviii.Grid management
xix.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
a.Inventory costing method and wastage
b.Insurance;
c.High debt-to-equity ratio as a risk factor.
Assessments:
1.State the nature and background of the specialized industry.
2.What are the relevant statistics, and updates of the specialized industry in the
Philippine setting?
3.Identify the different audit and accounting considerations and trends for the
industry.
4.Look for at least one audited financial statements of companies under each
specialized industry (Power, Water, and Telecommunications) in the Philippines
and list down your observations from audit report to the financial statements.