OVERVIEW OF POWER DISTRIBUTOR

The power distributor also known as the energy distributor, covers the generation,
transmission, and distribution of power to the general public and industry. It encompasses
various activities related to producing electrical energy from different sources (such as coal,
natural gas, nuclear, hydro, wind, and solar), transmitting it through grids, distributing it to
end-users (residential, commercial, and industrial), and managing the infrastructure
necessary for reliable power supply.

Explanation: This industry has an important role in modern society because it provides the
energy needed for our daily life, economic activities, and technological advancements.

PROCESS AND OPERATIONS

Three Phases of Power Distributor

1. Power Generation – process of converting various forms of energy into electrical energy.
This electricity is produced at power plants or generating stations using different energy
sources.

Types of Sources of Energy

● Conventional Sources of Energy – have been widely used for a long time and are
derived from traditional sources that have undergone substantial commercial
development.

Examples:
1. Thermal Power Plant – a type of power station in which heat energy is
converted to electrical energy.

Explanation: Thermal generation starts with a water tank that carries lots of
water. Underneath the water tank there is chemical energy which is fuel,
coal, natural gas, or biomass that is used to turn the water into superheated
steam. That will rise into a small passage and then in a small tunnel push
around the turbines so they rotate and power the generator. All the excess
water from the steam gets sent down into a condenser and the condenser will
push the water back into the same loop.

2. Hydel Power Plant – also known as hydroelectric power plants, harness the
energy of flowing or falling water to generate electricity.

Explanation: The hydropower plant comprised a reservoir, a dam,

penstocks, turbines and generators. The reservoir stores the “fuel” and
allows operators to control how much water is fed to the turbines. Then the
water from the reservoir is delivered to the turbines through the intake (dam
gates) and penstock. The turbine converts the kinetic energy of moving or
falling water into mechanical energy. The turbine is connected through the
shaft to the rotor of a generator that converts the mechanical energy into
electricity.

3. Nuclear Power Plant – type of power plant that uses the process of nuclear
fission in order to generate electricity.

Explanation: In a nuclear reactor, uranium atoms are split into smaller parts
by changing their molecular structure using the fission process. The energy
released during this split creates heat to produce steam, which is used by a
turbine generator to generate electricity.

● Non-Conventional Sources of Energy – non-conventional sources of energy, also

known as renewable or alternative energy sources, are derived from resources that
are naturally replenished and have a relatively low environmental impact.
 Explanation: Although the main sources of electric power generation are thermal, hydel,
and nuclear power plants, there are still many other non-conventional sources of power
available. These non-conventional sources, like wind power, solar power, MHD generation,
fuel cell, etc. are becoming the promising alternative sources for electric power
generation.

2. Power Transmission – power transmission involves the movement of electrical energy

from power plants to substations and from substations to distribution networks over long
distances.

This is a common carrier business. 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).
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 load centers, necessitating use of long-distance transmission lines.

FUNCTIONS:
1. 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. NGCP does this through regular inspection and repair of lines and
substations, clearing of Right-of-Way obstructions, and timely restoration during and
after natural disasters.

2. System Operations – reliability of power is the company's utmost priority so it closely

monitors the grid and immediately responds to any system disturbance. NGCP acts as
System Operator that balances the supply and demand of power to maintain the quality
of electricity that flows through the grid.

3. Planning and Engineering – building new transmission lines and expanding

substation capacity are equally important as increasing power supply. 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. All of NGCP's projects are well laid out in its 10-year Transmission
Development Plan.

The Main Components of Power Transmission

 Transmission Lines
Explanation: Transmission lines are primarily responsible for transmitting high
voltage electrical power over long distances from power generation facilities, such
as power plants, to distribution substations located closer to the end consumers.
They are made of conductive materials such as aluminum or copper and are
supported by towers or poles.

Importance: By transmitting electricity at higher voltages, they minimize energy

losses during long-distance transportation. Higher voltage transmission lines are
more efficient as they allow the same amount of power to be transmitted with lower
losses. This means that more of the generated electricity reaches the intended
 destination, reducing wastage and increasing overall efficiency. resulting in more
efficient and cost-effective power transmission systems.

This helps meet the demand for electricity in areas far from the point of generation
and facilitates the integration of renewable energy sources (non-conventional
sources)

 Substations – substations are facilities where the voltage of electricity is either

stepped up for transmission or stepped down for distribution. They contain
transformers, circuit breakers, switches, and other equipment to manage and
control the flow of electricity.

Stepped Up for Transmission:

 Voltage is stepped up at power plants or generation facilities using transformers
before the electricity is transmitted over long distances through high-voltage
transmission lines.
 By increasing the voltage level, the power transmission system can efficiently
transport electricity over long distances with minimal losses.

Stepped Down for Distribution:

 Voltage is stepped down at substations located closer to consumers' homes,
businesses, and industrial facilities using transformers.
 Stepping down the voltage is necessary to make electricity safer and more
suitable for use by end-users. Lower voltage reduces the risk of electrical
hazards and is compatible with the electrical devices and appliances used in
homes and businesses.

Explanation: Substations maintain the stability and reliability of the electrical grid by
regulating voltage levels and ensuring compatibility between the high-voltage
transmission system and the lower-voltage distribution system.

The electric grid refers to the interconnected network of power generation,

transmission, and distribution infrastructure that delivers electricity from power plants
to consumers.

 Voltage Regulation
Explanation: Voltage regulation involves controlling and adjusting the voltage
levels of electricity within the power system to ensure they remain within
acceptable limits. Voltage regulation refers to the process of maintaining the
voltage levels within an acceptable range at various points in the electrical power
system.

It is achieved through various methods and devices, including automatic voltage

regulators (AVRs), tap-changing transformers, voltage control relays, and capacitor
banks.

AVRs maintain a stable output voltage within acceptable limits by adjusting the
excitation level of the generator.
Tap-changing transformers adjust the voltage ratio by changing the tap
position on the transformer winding, thereby regulating the output voltage.
Capacitor banks provide reactive power support by supplying capacitive
reactive power to the system, which helps improve power factor and voltage
stability.
Voltage control relays monitor the voltage levels at different points in the
power system.

Importance: Voltage regulation is essential for maintaining the stability and

reliability of the electrical grid. Proper voltage levels are critical for the efficient
 operation of electrical equipment and appliances, preventing damage from
overvoltage or undervoltage conditions. By ensuring consistent voltage levels,
voltage regulation helps optimize power delivery, reduce energy losses, and
enhance the overall performance of the power system.

Explanation: Overvoltage occurs when the voltage in the electrical system exceeds
the specified or nominal voltage level. Overvoltage can result from various factors
such as sudden load changes, switching operations, faults in the system, or
incorrect settings of voltage control devices.

Undervoltage occurs when the voltage in the electrical system falls below the
specified or nominal voltage level. Undervoltage can result from factors such as high
demand exceeding supply capacity, voltage drops in transmission or distribution
lines, faults in the system, or inadequate voltage regulation.

3. Power Distribution – delivering electricity from substations to consumers through local

distribution networks.

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.

Examples of Electric Distribution

 Electric Cooperatives (ECs) – 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.

 Private Distribution Utilities (PDUs) - 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
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.
d. As an archipelago, there are geographic challenges of transmission.
The Philippines relies on submarine cables to interconnect the islands.

 Municipality Unit (MUs) – 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.

THE MAIN COMPONENTS OF POWER DISTRIBUTION

 Distribution Lines – medium-voltage overhead lines or underground cables that carry
electricity from substations to homes, businesses, and industrial facilities within a
localized area.

 Transformers – distribution transformers are installed on utility poles or in ground-

level cabinets to step down the voltage of electricity from the transmission level to
levels suitable for consumer use.

 Protection Devices – circuit breakers, fuses, and other protective devices are
installed along distribution lines to protect against overloads, short circuits, and other
faults, ensuring the safety and reliability of the distribution system.

 Metering and Billing – electricity usage is measured using meters installed at

consumer premises, allowing utilities to accurately bill customers for the electricity
consumed.

INEC BILL
Generation Charges – means a periodic payment made to a generator by a
Transmission and Distribution licensee for the creation and sale of electricity by that
generator. This may include energy payments, capacity payments, and management
payments, as well as any temporary adjustments that may be applied from time to
time.

Transmission Charges – cover the cost of moving electric energy from generating
facilities through high-voltage transmission lines to distribution utility substation
transformers.

System Loss – cost-recovery of power lost due to technical and non-technical system
losses.

Distribution charges – cover the cost of moving electric energy from these
transformers through local, lower-voltage lines that carry electricity to the customer’s
meters.

Reinvestment Fund for Sustainable Capital Expenditure (CAPEX) – aims to fund

the amortization of debt service associated with the expansion, rehabilitation, or
upgrading of existing electric power systems of ECs.

It aligns with their ERC-approved Capital Expenditure Plan and ensures that necessary
investments are made to enhance distribution facilities and meet safety and
performance standards.
 The Lifeline Rate is established under Section 4 of Republic Act 9136 (the Electric
Power Industry Reform Act of 2001 or EPIRA).

- It aims to ensure that low-income households have access to electricity by

offering them a discounted rate.
- The Energy Regulatory Commission (ERC) sets the specific discount levels for the
Lifeline Rate.

Eligibility Criteria:
 Customers who meet any of the following criteria may apply for the
Lifeline Rate:
 Beneficiaries of the Pantawid Pamilyang Pilipino Program (4Ps Act) under
Republic Act No. 11310.
 Customers considered to be living below the poverty threshold set by the
Philippine Statistics Authority (PSA).

Senior Citizen Subsidy – the Senior Citizen Discount on electric bills is a special
benefit provided to our beloved senior citizens.

Franchise tax on electric bills – a charge that covers the cost of utility companies’
use of public space, commonly known as the public “right-of-way.”

The Real Property Tax (RPT) is a component that appears on your electric bill. Let’s
delve into its significance:

 The RPT is a local tax imposed by the local government unit (LGU) on real
properties within its jurisdiction.
 Real properties include land, buildings, and other immovable assets.

Value Added Tax (VAT) – a consumption tax levied on the sale, barter, exchange, or
lease of goods, properties, and services in the Phils. It also applies to the importation of
goods into the country.

Universal charges in an electric bill – fees or surcharges that are imposed by

government or regulatory bodies to support specific programs or initiatives related to
the electricity sector. These charges are typically intended to fund initiatives that
benefit the public or support certain policy objectives.

Explanation: Power generation, transmission, and distribution form the backbone of the
power industry, ensuring the reliable and efficient delivery of electricity to meet the
needs of consumers, businesses, and industries.

AUDIT CONSIDERATION
1. Regulatory Compliance: The power industry operates within a heavily regulated
environment, subject to various regulations related to safety, environmental protection,
energy efficiency, and licensing. Auditors must ensure that power companies comply with
all relevant regulations to avoid fines, penalties, or legal issues that could impact the
financial statements.

2. Revenue Recognition: Given the complex nature of revenue streams in the power
industry (e.g., electricity sales, capacity payments, ancillary services), auditors need to
carefully assess the appropriateness of revenue recognition methods applied by the
company in accordance with accounting standards. This involves verifying the accuracy
and completeness of revenue reported, ensuring it is recognized in the appropriate
accounting period, and assessing the adequacy of related disclosures.

3. Asset Valuation: Power companies own significant assets such as power plants,
transmission infrastructure, and renewable energy installations. Auditors need to evaluate
the valuation of these assets, including considerations such as depreciation methods,
 useful lives, impairment testing, and fair value measurements. This involves assessing the
reasonableness of asset values reported on the balance sheet and ensuring compliance
with accounting standards.
4. Contractual Obligations: Power companies often enter into long-term contracts for the
sale of electricity, fuel supply, and infrastructure construction. Auditors must review these
contracts to ensure they are accounted for correctly, including revenue and expense
recognition, and assess the impact of any renegotiations or modifications on the financial
statements.

5. Going Concern Considerations: Auditors need to assess the power company's ability to
continue as a going concern, considering factors such as long-term investments,
regulatory changes, technological advancements, and market conditions. This assessment
helps ensure that the financial statements provide relevant and reliable information to
users.

Audit Considerations
Special audit considerations may arise in the audit of power industries due to factors like:

 Business activities in the power sector

 Operational scope
 The complexity of the industry
 Regulatory restrictions
 Modern energy production methods and aging infrastructure
 The effects of climate change and changes in dynamics
 Institutional instability and environmental issues
 Growing globalization
 The exposure to complex financial products and transactions has increased over time

Moreover, the following characteristics often set the power industry apart from other
commercial ventures:

 The power industry is capital-intensive which requires significant capital investments in

order to build and maintain the infrastructure required to produce and distribute power.
 The power industry has high fixed costs, which include the cost of constructing and
maintaining power plants, transmission and distribution lines, and other infrastructure.
 Needs long-term investments to thrive, particularly in the case of renewable energy
sources that demand substantial up-front capital expenditures.
 Affected by a variety of regulatory obligations, such as those relating to
consumer protection, safety, and the environment.
 In order to remain competitive and profitable, businesses must be able to
adapt to technological advances.
 Government participation in pricing, supply security, and pressure to lower greenhouse
gas emissions and other pollutants all contribute to the industry's strict regulation.

Pre-Engagement
In the audit of power industry, it is necessary to consider the skills and competence of the
auditor and his assistants to conduct the engagement related to:

● Power Industry Business Operations

Explanation: The power industry encompasses a broad range of business operations

involved in the generation, transmission, distribution, and sale of electricity.

● Compliance with environmental regulations such as emissions

standards, waste management, and other environmental issues.

Explanation: It is crucial to minimize the industry's impact on the environment and

public health.

● Compliance with Ethical Standards

 Explanation: Compliance with ethical standards in the power industry is essential for
fostering trust, maintaining integrity, and upholding responsible business practices.

Here's how the power industry ensures compliance with ethical standards:

 Transparency and Accountability: Power companies strive to be transparent

in their operations, disclosing relevant information to stakeholders, including
investors, regulators, and the public. This transparency helps ensure
accountability for their actions and decisions.
 Fair Treatment of Stakeholders: Ethical standards require power companies
to treat all stakeholders fairly and with respect. This includes employees,
customers, suppliers, investors, and the communities in which they operate. Fair
treatment involves providing safe working conditions, fair wages, and
opportunities for advancement for employees, as well as delivering reliable and
affordable energy services to customers.

Used of specialized accounting principles or standards (Disclosures on industry

and regulatory framework changes, rate regulations, statements of compliance,
significant judgments, accounting estimates & assumptions, segment
information, utility plant and its movements, acquisitions, and other matters)

Audit Planning
The planning stage of the audit is crucial to ensure that the audit is conducted efficiently and
effectively, and that the audit objectives are achieved. With this, in auditing a power industry,
here are several procedures that auditors typically perform:

● Obtain knowledge of the power industry business

This includes the nature of the industry and the scope of its operations.

Auditors need to familiarize themselves with the specific characteristics, operations,

and regulatory environment of the power industry. This includes understanding the
industry's accounting standards specific to the industry, and any unique risks
associated with power generation, transmission, and distribution.

● Preliminary evaluation of the company's financial reporting and regulatory

considerations
The auditor should review the company's financial statements and other information to
gain an understanding of the company's financial reporting standards.

Auditors conduct an initial review of the company's financial statements and

disclosures to identify any significant accounting policies, estimates, or disclosures
specific to the power industry.

● Assessment of the company's internal control system

The auditor should evaluate the company's internal control system and identify any
gaps or weaknesses that could affect the accuracy and completeness of
the financial statements.

In the power industry, internal controls related to financial reporting, regulatory

compliance, and operational processes (such as power generation, transmission, and
distribution) are of particular importance.

● Determination of the audit scope and objectives

The auditor should identify the areas to be audited, including significant accounts and
transactions, and determine the overall objectives of the audit.

Based on the knowledge gained about the power industry, the company's business,
and the results of the preliminary evaluations, auditors determine the specific areas of
focus for the audit. This includes identifying significant accounts, transactions, and
 processes to be audited, as well as setting clear audit objectives to ensure that the
audit provides relevant and reliable information to stakeholders.

● Risk assessment
The auditor should identify the risks associated with the company's
operations and financial reporting, including external and internal risks, and
determine the significance of those risks.

Inherent and control risks related to the power industry, such as regulatory compliance
risks, market risks, operational risks (e.g., equipment failures, supply chain
disruptions), and financial risks (e.g., revenue recognition, valuation of assets and
liabilities).

● Planning of the audit approach

Based on the results of the risk assessment, the auditor should develop a
comprehensive audit plan that outlines the audit approach, the audit procedures to be
performed, and the audit team's responsibilities.

● Communication with the company's management

The auditor should communicate with the company's management to discuss the audit
plan and obtain their input on the audit approach.

RISKS IN THE POWER DISTRIBUTOR

1. Market Risk
 arises from the volatility of energy prices in the market, which can affect the
company's revenue and profitability.
 This is an uncontrollable risk.

Explanation: Example is the shortage of natural gas, which is a crucial resource for
power generation. So, no nagshort ti supply ti natural gas, the power companies might
struggle to meet the demand for electricity.

How to prevent market risk?

● Auditors assess the company's risk management strategies and controls to
mitigate market risk, such as hedging strategies, diversification of revenue
sources, long-term contracts, and scenario analysis to evaluate the potential
impact of market fluctuations on financial performance.

2. Regulatory Risk
● arises from changes in regulations and policies governing the power industry.

Explanation: Regulatory changes can affect the company's operations, such as the
imposition of new taxes or fees, changes in the tariff structure, or the introduction of
new environmental standards.

How to prevent regulatory risk?

● Auditors evaluate the effectiveness of the company's compliance programs,
monitoring systems, and response mechanisms to address regulatory risks.

3. Operational Risk
● arises from the company's day to day operations, including maintenance, safety,
and reliability issues.
 Explanation: Examples of this risk are equipment failure, system breakdowns, and
human error that can result in safety or environmental incidents or cause disruptions in
the company's operations.
How to prevent operational risk?
● Auditors evaluate the effectiveness of preventive and detective controls, incident
response procedures, staff training, and disaster recovery plans to ensure the
company can effectively manage and mitigate operational risks

4. Financial Risk
● arises from the company's financial structure, including debt levels, credit
ratings, and interest rates.

Explanation: Changes in interest rates or credit ratings can affect the company's cost
of capital and lead to financial risks.

How to prevent financial risk?

● Auditors evaluate the company's financial risk management strategies, debt
covenants, cash flow projections, and capital adequacy to ensure the company
can effectively manage and mitigate financial risks.

5. Political Risk
● arises from political instability or changes in the government's policies and
regulations. This includes expropriation of assets, nationalization of the industry,
or changes in tax policies.

How to prevent political risk?

● To mitigate political risk as a power distributor, it's essential to establish strong
relationships and engage in transparent communication with government
officials at all levels.

SOURCE OF REVENUES
Sale of Electricity:
 The revenue from the sale of electricity refers to the total income generated by an
entity from selling electrical energy to customers or users. This revenue is derived from
the charges levied on customers based on their electricity consumption, pricing plans,
tariffs, and contractual agreements.
 Revenue is generated based on the amount of electricity consumed by customers,
typically measured in kilowatt-hours (kWh) or megawatt-hours (MWh).
 A tariff is a tax imposed by one country on the goods and services imported from
another country to influence it, raise revenues, or protect competitive advantages.

Sale of other services: The revenue from the sale of other services in the power industry
includes income generated by offering ancillary services or value-added offerings beyond the
sale of electricity. These services complement the core business of power companies and
contribute to their overall revenue streams.

● Value-added offerings in the power industry refer to additional products, services, or

solutions provided by power companies to enhance customer value, differentiate their
offerings, and address specific needs or preferences of customers. These value-added
offerings go beyond the core service of supplying electricity and provide additional
benefits, features, or functionalities that add value to the customer experience. Value-
added offerings aim to improve customer satisfaction, increase loyalty, and generate
additional revenue for power companies.
 Examples: Renewable Energy Solutions: Power companies can offer renewable
energy solutions such as solar panels, wind turbines, and energy storage systems to
customers interested in generating their own clean energy. They may provide
installation, maintenance, and financing services for these renewable energy systems.

● Ancillary services in the power industry refer to a set of specialized services and
functions provided by power system operators or market participants to support the
reliable, stable, and efficient operation of the electric grid.

The electric grid refers to the interconnected network of power generation,

transmission, and distribution infrastructure that delivers electricity from power plants
to consumers.

Examples: Energy Management Software: Power companies develop and offer

energy management software and platforms to help customers monitor, analyze, and
manage their energy usage. These software solutions provide insights into energy
consumption patterns, identify energy-saving opportunities, and enable customers to
optimize their energy use and reduce costs.

SOURCE OF EXPENSES
Operations and Maintenance Costs: O&M costs encompass the expenses associated with
operating and maintaining power generation facilities, transmission lines, substations, and
distribution networks. This includes costs related to labor, equipment maintenance, repairs,
spare parts, and preventive maintenance activities to ensure the reliability and efficiency of
power infrastructure.

Purchased Power Costs: Power companies may incur expenses from purchasing electricity
from third-party generators or wholesale markets to meet customer demand when their own
generation capacity is insufficient or during peak demand periods. Purchased power costs vary
based on market prices, contractual agreements, and supply-demand dynamics in the
electricity market.

Regulatory Compliance Costs: Regulatory compliance costs include expenses associated

with complying with environmental regulations, safety standards, and licensing requirements
imposed by regulatory agencies or government authorities. Power companies invest in
environmental controls, emission reduction technologies, and regulatory reporting to ensure
compliance with regulatory obligations.

Administrative and Overhead Expenses: Administrative and overhead expenses

encompass general and administrative costs incurred by power companies to support their
day-to-day operations, including salaries, wages, benefits, office rent, utilities, insurance,
marketing, and administrative overhead.

Depreciation and Amortization: Depreciation and amortization expenses represent the

systematic allocation of the cost of long-lived assets, such as power plants, transmission lines,
and distribution equipment, over their useful lives. These expenses reflect the gradual wear
and tear, obsolescence, or expiration of asset values over time and impact the profitability of
power companies.

Taxes and Government Levies: Taxes and government levies include corporate income
taxes, property taxes, excise taxes, royalties, and other levies imposed by government
authorities on the operations, assets, or revenue of power companies.

Fuel Costs: Fuel costs are a significant expense for power generation companies, especially
those using fossil fuels such as coal, natural gas, and oil to generate electricity. The cost of
procuring, transporting, and storing fuel directly impacts the operating expenses of power
plants.

OVERVIEW OF TELECOMMUNICATION INDUSTRY

Telecommunication is the transmission of information over significant distances to
communicate. The telecommunications industry can be classified into the equipment sector
and the services sector.

● Equipment Sector comprises companies that manufacture products that are used by
both customers and other companies in the same sector. Equipment sector includes
satellite and broadcast network equipment, wireless equipment, as well as computer
networking equipment.

● Service Sector comprises wired, wireless services and internet and other broadband
services.

In the modern age of electricity and electronics, telecommunications now also include
the use of electrical devices such as telegraphs, telephones, and the use of radio and
microwave communications, as well as and their associated electronics, plus the use of
the orbiting satellites and the Internet.

This 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.

Deregulation of the Telecommunications Industry

In 1995, Former President Fidel V. Ramos deregulated the telecommunications
industry, signing the Republic Act 7925 or the Public Telecommunications Policy Act of
the Philippines.

RA 7925 aims to promote and govern the development of Philippine

telecommunications and ensure the efficient delivery of public telecommunications
services. It applies to all public telecommunications entities operating within the
Philippines.

Regulatory Frameworks
 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.
How does a Telecom Audit Work?
● A telecommunications audit begins by collecting all telecom bills, contracts, and
service agreements. Expert auditors then analyze this data, looking for billing
errors, unused services, or areas where better rates can be negotiated with
telecom service providers.

● Recommendations are made based on findings, including renegotiating

contracts, eliminating redundant services, or transitioning to more cost-effective
solutions.
As of my last update, the duopoly companies in the Philippines' telecommunications industry
are PLDT Inc. (formerly known as the Philippine Long Distance Telephone Company) and
Globe Telecom. These two companies have historically dominated the market, controlling the
majority of the telecommunications infrastructure and services in the country.

PROCESSES AND OPERATIONS

● Signal Generation: info is generated, such as voice, data, or video.

Voice: In the case of voice communication, signal generation involves converting

spoken words into electrical signals. This process typically occurs through a
microphone or other audio input device. The electrical signals represent the analog
waveform of the voice, which can then be digitized for transmission over digital
networks or transmitted directly over analog networks.

Data: For data communication, signal generation involves the creation of digital data
packets. These packets may contain text, images, files, or any other digital
information. The data can be generated by users through input devices such as
keyboards or sensors, or it may be generated automatically by computer systems or
other devices.

Video: Video signal generation involves capturing visual images through a camera or
other video input device. The images are then converted into electrical signals
representing the color and intensity of each pixel. These signals can be transmitted
over analog or digital networks to display the video content on a receiving device such
as a television or computer monitor.

● Encoding: The information is encoded into a format suitable for transmission, often in
digital form.

Explanation: When data or information needs to be sent from one point to another
(such as from a sender to a receiver), it must be transformed into a format that can be
efficiently transmitted over communication channels.

● Transmission: The encoded information is transmitted over a medium, such as cables,

fiber-optic lines, or wireless signals.

Purpose: It enables communication between devices, networks, or individuals.

Medium: The encoded information travels through a transmission medium, which can
be:

● Cables: Physical copper or fiber-optic cables that carry electrical signals.

● Fiber-Optic Lines: Thin glass or plastic fibers that transmit light signals.
● Wireless Signals: Electromagnetic waves (radio waves, microwaves, or
infrared) used for wireless communication.

Examples:
1. When you make a phone call, your voice is encoded and transmitted over phone
lines or cellular networks.
2. Internet data (such as web pages, emails, or videos) is transmitted via fiber-optic
cables or wireless connections.
3. Satellite communication involves transmitting signals to and from satellites
orbiting Earth.

● Reception: Transmitted signal is received by the intended recipient.

Examples:
  When you pick up your phone and hear someone’s voice during a call, that’s the
result of successful reception.
 Receiving an email in your inbox or a text message on your mobile device also
involves reception.

● Decoding: Received signal is decoded back into its original format.

Explanation: Decoding refers to the process of reversing the encoding that was
applied to a signal during transmission.

 When a signal (such as audio, video, or data) is transmitted, it is often encoded

into a specific format for efficient transmission and error correction.
 Decoding ensures that the original information can be retrieved from the
received signal.

● Processing: The decoded information may undergo further processing, such as

amplification or filtering.

Explanation: Processing refers to the manipulation or modification of information after

it has been decoded.

Purpose: Various processing techniques are applied to enhance, optimize, or adapt

the received data for specific purposes.

● Delivery: The processed information is delivered to the end user, whether it's a phone
call, internet data, or television broadcast.
Explanation: "Delivery" in the context of telecommunications refers to the final step
in the communication process, where the processed information is delivered to the end
user or recipient. This step ensures that the transmitted data reaches its intended
destination and can be consumed or utilized by the user.

● Feedback: In some cases, feedback or acknowledgment signals may be sent back to

the sender to confirm successful transmission.

Explanation: Feedback refers to the process of providing information from the

receiver back to the sender regarding the status or success of a transmitted message.

Purpose: It serves several purposes, including:

 Confirmation: To acknowledge that the message was successfully received and
understood.
 Error Detection: To identify any issues during transmission (such as data
corruption or loss).
 Flow Control: To regulate the rate of data transmission.

Throughout this process, various technologies and protocols are employed to ensure
efficient and reliable communication.

AUDIT CONSIDERATION
1. Regulatory Compliance: Verify compliance with telecommunications regulations and
licensing requirements. Ensure adherence to data protection and privacy laws, especially
regarding customer information. The telecommunications industry is subject to stringent
regulatory requirements, including those related to privacy, data protection, network
neutrality, and licensing agreements. Auditors need to evaluate the company's compliance
with applicable regulations and assess any potential risks of non-compliance.

Explanation: Auditors check if the company is following the government regulations and
licensing requirements related to telecommunications.
2. Capital Expenditures: Telecommunication companies often invest significant capital in
network infrastructure and technology upgrades. Auditors should evaluate the accuracy of
capital expenditure records, assess the appropriateness of depreciation methods, and
consider the impairment risk associated with capital assets.

3. Cybersecurity: Telecommunication companies are prime targets for cyberattacks due to

the sensitive nature of the data they handle and their critical infrastructure. Auditors need
to assess the effectiveness of cybersecurity measures, including network security
protocols, data encryption, and incident response plans.

4. Customer Data Privacy: With the collection and storage of vast amounts of customer
data, telecommunication companies face increasing scrutiny regarding data privacy and
protection regulations. Auditors should evaluate the company's data privacy policies and
procedures, including data access controls and compliance with relevant privacy laws.

5. Revenue Recognition
● Examine revenue recognition practices, ensuring they align with industry standards
(e.g., IFRS 15 or ASC 606).
● Review billing systems to confirm accurate invoicing and revenue reporting.

Explanation: Auditors make sure the company counts its money correctly from all the
services they provide, like calls, internet, and more. Auditors examine the company's
revenue recognition policies and procedures to ensure they align with the relevant
accounting standards, such as the International Financial Reporting Standards (IFRS) or
Generally Accepted Accounting Principles (GAAP). They assess whether company
recognizes revenue at the appropriate time.

6. Network Infrastructure and Technology: Telecommunications companies invest

heavily in network infrastructure and technology to support their operations.

Explanation: Telecom companies spend a lot on their network. Auditors (financial

checkers) need to understand how the company counts the value of these networks,
tracks their costs, checks for any damage, and calculates their use over time. This is to
make sure the company's money records accurately show how important and well-kept
these networks are in their financial papers.

Auditors need to understand the company's network assets, including their valuation,
capitalization of costs, impairment testing, and depreciation/amortization methods.

AUDIT RISKS
● Customer Billing and Collection Risks
Telecommunications companies rely on accurate billing and collection processes to
generate revenue. Auditors should assess the risk of billing errors, such as incorrect tariff
rates, billing for unauthorized services, or failure to bill customers accurately and timely.
They should also evaluate the risk of uncollectible accounts receivable and assess the
adequacy of the company's allowance for doubtful accounts. It refers to the potential
financial losses or uncertainties that arise from customers' failure or delay in paying for
goods or services rendered by a business.

Explanations: It encompasses the risk associated with billing inaccuracies, delayed

payments, non-payment, disputes over invoiced amounts, and the inability to collect
outstanding receivables from customers.

Prevent: Auditors assess the effectiveness of internal controls related to customer billing
and collection processes. They evaluate the design and implementation of controls such as
segregation of duties, authorization procedures, and access controls to prevent
unauthorized or fraudulent activities. By identifying weaknesses in internal controls,
 auditors help management strengthen controls to mitigate risks associated with inaccurate
billing or unauthorized collection.

Auditors perform substantive testing to verify the accuracy and completeness of customer
billing and collection transactions. This includes examining supporting documentation such
as sales contracts, invoices, and payment records to ensure transactions are properly
recorded and reflect the underlying economic substance. Through substantive testing,
auditors detect errors or irregularities in billing and collection processes, reducing the risk
of financial misstatement.

● Cybersecurity and Data Privacy: Telecommunications companies are increasingly

susceptible to cybersecurity threats and data breaches due to the vast amounts of
sensitive customer information they handle.

Auditors need to evaluate the effectiveness of cybersecurity controls, data privacy

compliance, and risk management processes to safeguard sensitive customer information.
This involves assessing the company's cybersecurity policies and procedures and ensuring
that appropriate controls are in place to protect against cybersecurity and data privacy.

Prevent:
 Firstly, auditors evaluate the adequacy of cybersecurity policies and procedures
implemented by organizations to safeguard sensitive data. They assess the design
and implementation of controls such as access management, data encryption,
network security, and incident response plans to prevent unauthorized access to
systems and protect data from cyber threats. By identifying gaps in cybersecurity
policies and procedures, auditors help organizations strengthen their defenses
against potential security breaches and data breaches.

 Secondly, auditors assess the effectiveness of technical controls deployed to protect

against cyber threats and vulnerabilities. This includes reviewing configurations of
firewalls, intrusion detection systems, antivirus software, and other cybersecurity
tools to ensure they are properly configured and updated to defend against evolving
cyber threats. Auditors also examine patch management processes to identify and
remediate vulnerabilities in software and systems that could be exploited by cyber
attackers.

● Competition and Market Risks: The telecommunications industry is highly competitive,

with rapid technological advancements and changing consumer preferences. Auditors
should assess the risk of market competition, including pricing pressures, market share
erosion, and the risk of losing key customers to competitors. They should also evaluate the
company's strategies for product innovation, market expansion, and customer retention.

Competition and market risks refer to the potential threats and challenges that arise from
competitive dynamics and market uncertainties within an industry or sector. These risks
stem from various factors, including intense competition among industry players, changes
in market conditions, shifts in consumer preferences, and regulatory changes affecting
market structure and dynamics.

Prevent:
 Firstly, auditors scrutinize financial statements and disclosures to ensure accuracy
and transparency in reporting. By meticulously reviewing financial data, including
revenues, expenses, and profitability metrics, auditors verify that companies
present a true and fair view of their financial performance. This verification process
helps prevent market risks stemming from misleading financial information, such as
inflated revenues or understated expenses, which could distort market perceptions
and mislead investors.
  Secondly, auditors assess internal controls and risk management practices to
identify vulnerabilities that could expose companies to competition and market
risks. Through comprehensive risk assessments and testing of internal controls,
auditors evaluate the effectiveness of measures in place to mitigate risks related to
pricing, market volatility, and competitive pressures. By identifying weaknesses in
control environments, auditors provide recommendations to strengthen risk
management frameworks and safeguard companies against potential market
disruptions and competitive threats.

● Capital Expenditure and Investment Risks: Telecommunications companies often

make significant investments in network infrastructure, spectrum licenses, and technology
upgrades. Auditors should assess the risk of overvaluation, impairment, or inadequate
disclosure of these investments in the financial statements. They should also evaluate the
company's capital expenditure policies, investment decisions, and risk management
practices related to capital projects.

It refers to the uncertainties and potential negative outcomes associated with allocating
financial resources towards long-term investments in assets or projects aimed at
generating future benefits or returns for a business or organization.

These risks arise from various factors that may impact the expected returns, cost
structures, and overall viability of capital investments.

Prevent:
 Firstly, auditors assess the rationale and justification behind capital expenditure
decisions to ensure they align with the organization's strategic objectives and
provide long-term value. They review investment proposals, capital budgeting
processes, and project evaluations to evaluate the economic viability, potential
returns, and risk factors associated with capital projects. By scrutinizing investment
decisions, auditors help mitigate risks related to overinvestment,
underperformance, or misallocation of capital resources, thereby safeguarding the
organization's financial sustainability.

 Secondly, auditors evaluate the accuracy and completeness of financial information

related to capital expenditures and investments. They examine financial
statements, supporting documentation, and accounting records to verify the proper
classification, valuation, and disclosure of capital assets, investments, and related
transactions. By ensuring the integrity of financial reporting, auditors help mitigate
risks associated with misstatement or manipulation of financial information,
enhancing transparency and reliability for stakeholders.

Additionally, auditors assess the adequacy of internal controls governing capital

expenditure processes and investment activities. They review control procedures
such as authorization, documentation, and monitoring to prevent fraud, errors, or
unauthorized use of funds in capital projects and investment portfolios. By
evaluating internal controls, auditors help mitigate risks related to mismanagement,
embezzlement, or misuse of capital resources, promoting accountability and
compliance with regulatory requirements.
SOURCE OF REVENUE
Service Revenues – type of income that an organization earns from rendering a service.

● Mobile Communication Services

○ Voice Calls: Subscribers pay for voice call services, either through prepaid
credits or postpaid plans.

○ Text Messaging (SMS): Revenue is generated from charges for sending text
messages, and these may be included in prepaid or postpaid plans.

● Mobile Data Services

○ Internet Data Plans: Globe Telecom offers various mobile data plans, where
users pay for a certain amount of data to access the internet on their mobile
devices.

○ Data Add-ons: Subscribers can purchase additional data beyond their plan
limits, contributing to incremental service revenue.

● Fixed-Line Services
○ Landline Services: Globe Telecom provides fixed-line services, and subscribers
pay for monthly plans that include features such as unlimited local calls or
bundled long-distance minutes.

○ Broadband Internet: Service revenue is generated from residential and

business broadband internet plans, which may offer different speeds and data
allowances.

Non-Service revenues – income generated by a business that does not result directly from
providing its core products or services.

● Handset Sales: Globe Telecom may generate revenue by selling mobile handsets and
devices directly to consumers.
● Roaming Charges: When Globe Telecom's subscribers use their mobile phones while
traveling abroad, the company may earn non-service revenue through roaming
charges.
● Interconnection Fees: Globe Telecom may charge interconnection fees to other
telecommunications carriers when calls or messages are transmitted between different
networks.
● Equipment Leasing or Rental: The company may offer equipment leasing or rental
services, allowing customers to use telecommunications equipment on a temporary or
contractual basis.

SOURCE OF EXPENSES
● General, Selling, and Administrative Expenses (GSA)
In the context of a telecommunications company, this could include salaries for
customer service representatives, sales and marketing expenses, administrative staff
salaries, and general office expenses.

● Depreciation and Amortization

In the case of a telecommunications company, this could include the depreciation of
equipment such as routers, switches, servers, and other infrastructure assets, as well
as the amortization of intangible assets like patents or licenses.

● Cost of Inventories Sold

 This expense represents the cost of goods sold (COGS), For a telecommunications
company, this could include the cost of purchasing network equipment, devices, SIM
cards, or other hardware that is sold to customers.

● Interconnect Costs
Interconnect costs refer to the charges incurred by a telecommunications company
when its customers make calls, send messages, or use data on networks owned by
other telecommunications companies. These costs typically arise from agreements
between different carriers for the use of each other's networks to complete calls or data
transmissions.

● Financing Costs
For a telecommunications company, financing costs could arise from borrowing money
to invest in network infrastructure, fund expansion projects, or manage working capital
needs.

● Impairment and Other Losses

In the context of a telecommunications company, impairment losses might arise from
writing down the value of assets such as network infrastructure or goodwill associated
with acquisitions. Other losses could include write-offs for bad debts, legal settlements,
or other unexpected expenses.

Differences between Power and Telecommunications Industry

The power industry and the telecommunications industry are distinct sectors with different
focuses, functions, and technologies. Here are some key differences between the two:

Nature of Service:
● Power Industry: The power industry is primarily concerned with generating,
transmitting, and distributing electrical energy to consumers for various purposes
such as lighting, heating, and powering electronic devices.

● Telecommunications Industry: The telecommunications industry is focused on

transmitting and receiving information over long distances through various means
such as voice, data, and video communication.

Infrastructure:
● Power Industry: The power industry relies on a network of power plants,
substations, transformers, and power lines to generate and distribute electricity. It
involves the physical infrastructure required for the production and transmission of
electrical energy.

● Telecommunications Industry: The telecommunications industry relies on a

network of communication towers, cables, satellites, and switching centers to
transmit data, voice, and video signals. It involves both physical infrastructure and
digital networks for communication.

Technology:
● Power Industry: The power industry utilizes technologies such as generators,
transformers, and electrical grids to generate and distribute electricity. It involves
the use of electrical engineering principles and technologies.

● Telecommunications Industry: The telecommunications industry utilizes

technologies such as fiber optics, radio waves, and digital switching systems for
transmitting information. It involves the use of communication technologies and
protocols.

Regulation:
 ● Power Industry: The power industry is often subject to strict regulations and
oversight due to safety, environmental, and reliability concerns. Regulations may
vary depending on the region and jurisdiction.

● Telecommunications Industry: The telecommunications industry is also

regulated, but regulations may focus more on issues such as competition, spectrum
allocation, and consumer protection. Regulatory frameworks may differ between
countries and regions.

Consumer Interaction:
● Power Industry: Consumers interact with the power industry primarily through the
consumption of electricity, paying utility bills, and occasionally participating in
energy efficiency programs or renewable energy initiatives.

● Telecommunications Industry: Consumers interact with the telecommunications

industry through various services such as making phone calls, accessing the
internet, subscribing to television services, and using mobile applications.

Overall, while both the power industry and the telecommunications industry are essential for
modern society's functioning, they serve different purposes, rely on distinct infrastructures
and technologies, and are subject to different regulatory frameworks.