Audit Plan for Audit of Power Purchase Agreements in Sri Lanka

01. Introduction

The Electricity sector in Sri Lanka is governed by the Sri Lanka Electricity Act No. 20 of 2009. The
Ceylon Electricity Board (CEB) has, established by CEB Act No. 17 of 1969 (as amended) as a
State Owned Business Enterprise under the Finance Act No 38 of 1971.

Since 1969 to 1995 CEB has heavily depended on the hydro based power generation. This was
low cost power generating source and CEB was able to maintain strong financial position.
Although the Power Plants have not been constructed according to the “Long-term Generation
Expansion plans” and as a result, CEB was unable to meet the increased electricity demand in
the country. The demand of the electricity from the year 2000 to 2016 had increased from 5,268
GWh to 12,875 GWh, which means demand is doubled during that period. In addition to that
the approximate electrification ratio has increased to 100 percent in recent years.

CEB had purchased power from IPP to fill demand gap in the year 1996 due to low generation
capacity. Because of that it had to face financial difficulties. This occurred due to the fact that
electricity has generated or purchased from high cost generation sources.

CEB has been spent Rs.429,855 million for the purchase of electricity from IPP for the years 2011
to 2016 and it has experienced a cumulative gross loss of Rs.52,345 million. The cost of
purchasing electricity from IPP was 38 percent from the cost of sales. Therefore IPP is a major
factor for determining financial performance of CEB.

During the recent past newspapers and other mass media, social groups, politicians, civil society,
etc. had interested in this area and pointed out there are lot of issues in purchasing electricity
from private suppliers. Therefore this area is a strategically important to the CEB as well as
country. Therefore AGDSL has decided to carry out a special audit in this area.

02. Audit Objectives

The primary objective of the audit is to identify whether Private Power Purchase decisions are
taken on best interest of the general public. The secondary objectives are listed out as follows.

- Accuracy and fairness of payments for private electricity producers.

- Evaluate compliance with the power purchase agreement conditions.
- Assess compliance with the requirements of the Electricity Generation License conditions and
other conditions imposed by the Regulators.
- Assess the planning and implementation of power requirement in Sri Lanka.
- Assess the maintain quality and performance standards.
- ……………………………………

03. Audit Process

The audit team gathers the information during the audit and analyse it together with evidence
collected. After the analysis, an audit report which details the record of observations, findings
for each audited institution. The report is sent to the auditee for comments. On receipt of the
 comments, a consolidated audit report is prepared for send to the Committee on Public
Enterprises(CPOE) and thereafter, Cope will be issued directions for corrective actions need to
be taken and the responsible parties are required to develop corrective action plans to address
the findings of the audit. The National Energy Regulator will then monitor the implementation of
the corrective action plans to assist the licensees into complying.

The various stages of the audit process involve the activities depicted in the following table.

Stage Activities
Stage 1: Pre-audit - Establish an audit team.
- Communication with the audited institutions to be audited.
- Prepare audit questionnaire.
- Compile audit programme, agenda, and presentation.

Stage 2: Audit
- Inform the Audit Institution about the audit.
- Conduct the audits and collect evidence.
- Discuss draft audit observations with the Key Management
Personnel(KMP’s)
- Send audit query to the audited institution and regulator for comments.

Stage 3: Post- audit - Consolidate audited institution responses.

- Send draft audit report to the audited institution and regulator for their
perusal before submission to the COPE.

- Submission of final report to the COPE.

- Support for the COPE Investigation.

- Follow up actions on COPE directions.

04. Audit Methodology and Criteria

Risk based methodology shall be followed to conduct audit effectively. First step should be to
identify all the risks to develop the risk universe. These risks should be prioritized based on the
implications. Second step should be to develop an audit program to cover at least all the high
risk areas and other medium and low risk areas based on sensitivity. It might not be possible to
cover all the medium and low risk areas due to time and resource limitation. Audit program
should be designed, specifying the steps to be performed to execute the audit. Audit program
should subject to the changes identified during the process of audit.

The audit questionnaire was the main document used to facilitate the audit. Audit questionnaire
and criteria will be developed based on the following documents.
 - Individual Power Purchase Agreements
- Long Term Generation Expansion Plans
- Policy Decisions
- Standard Power Purchase Agreements (Mini Hydro and Wind Power)
- Public Utilities Commission of Sri Lanka Act No 35 0f 2002
- Sri Lanka Electricity Act No. 20 of 2009
- Ceylon Electricity Act No 17 of 1969
- Policy Guidelines of Public Utilities Commission of Sri Lanka
- Statement of Corporate Intent for Ceylon Electricity Board
- …………………………………………………………

The questionnaire is divided into following sections.

- Electricity Requirement Planning

- Compliance with the agreement conditions
- Payment Procedure
- Plant Performance
- Outage Management
- Asset Management
- Refurbishments and Expansion Plans
- Termination

05. Scope

The scope of work involved the activities detailed in Section 3 Audit Process, of this report. Table
below indicates the power stations that were selected for the audit.

Licensee Year of Power Station Technology Installed Period to be

Establishment Capacity Covered by
the Audit

The following areas to be audited in the selected power stations.

- Review of Systems
- Review of Transactions
- Review of Internal Control
- Review of Operations
- Turbine, generator and associated plant equipment;
- Generator transformers and unit transformers;
- Station control room; and
- Critical spares storage.
 06. Audit Team
The following team members are allocated for the audit

Name Designation Role

Mr. R.M.J. Rathnayake Deputy Auditor General Team Leader
Mr. N.H.A.R.K. Gunarathna Superintendent of Audit Team Manager
Mr. Thisera Audit Examiner Team Member
Ms. Nishanthi Audit Examiner Team Member
Mr. Indrajith Audit Examiner Team Member
Mr. Pradeep Audit Examiner Team Member

07. Timing

Activity Period
Meeting with Management of CEB
Audit planning and interim testing
Audit field work
Issuance of audit report
Report to the COPE

08. Limitations

An audit is not designed to detect all weaknesses in compliance measures as an audit is not
performed continuously throughout the period and the audit procedures performed on a test basis.
Because of the inherent limitations of any internal control structure, it is possible that fraud, error or
non-compliance with laws and regulations may occur and not be detected.

At the initial stage of audit we are not planning to use of technical specialists in this field. Hence the
audit team may not possess such technical expertise. Therefore the relevant technical aspects of
this audit is covered through the explanations given by client’s staff or client’s experts and evidence
gathered throughout the audit period.

The audit report will be formed on the above basis.

09. Key Audit Areas

- Requirement to establishment of private power plants.
- Tendering process for purchase of power from open market
- Evaluate whether the terms and conditions of the agreements are reasonable and best interest
of the general public.
- Sale, purchase and generation is in accordance with the guidelines/ instructions prescribed by
the relevant regulatory authority.
- Verification of Power Purchase Bills.
- Installation, Testing & Repair of plant and equipments.
 10. Information Required

The following information and reports will be considered in the audit.

- Power Generation / Distribution License
- Past audit/reviews
- Annual reports
- Returns to Relevant Authority and metering
- Fee invoice/receipts
- Power Purchase Agreement
- Register of files
- Cash/Bank books maintained
- Bills register/Day book/Control Accounts
- Register of contracts/agreements
- Monthly activity reports, status of inputs, status of equipment, vehicles, inventories etc.
- Inventory statement with Price Stores Ledger
- Different establishment and administration records like service records, personal files, land
acquisition, manpower distribution and utilization
- Progress reports on construction activities

Note: The above list is only illustrative and not exhaustive.

11. Audit Strategy

The audit was undertaken by examination of documents, interviews with key persons and observations
and detailed inspection of power generation units.

The audit will be conducted in following 3 phases.

11.1. Risk and Materiality Assessment

Risk Management a preliminary assessment was made of the risk and materiality of non-
compliance with the required agreement conditions in order to focus the audit effort on areas of
higher compliance risk and identify areas for testing and analysis.

11.2. System Analysis, Assertion Setting and Review

Through discussion, observation and review, a sample of cases or data was analysed relating to
the Licensee’s quality and performance systems and standards against requirements of the
agreement conditions……………….controls of system control unit.

10.3. Fieldwork: Testing and Analysis

Using the results of the risk assessment and systems analysis, detailed testing and analysis was
performed to compare those standards maintained by the Licensee with the relevant clauses of
the agreement.

12. Risk Rating

A risk assessment approach is used to develop the depth of audit and is documented prior to audit. A
“Seven level Audit Priority scale” is used based on the combined rating for “Inherent Risk” and
“Control Adequacy” defined in the following table.

Inherent risk Adequacy of existing controls

Weak Moderate Strong
High Audit Priority 1 Audit Priority 2 Audit Priority 3
Medium Audit Priority 4 Audit Priority 5 Audit Priority 6
Low Audit Priority 7
13. Follow up Actions
Follow-up Reports
- Follow up reports to be submitted at the request of COPE or/and as part of annual audit
process.