;,).G\j.\..ATQR'r C. ~'V O~. (,:-\" <\::?, !1j :.~ 1°\1'.~'~prou~d\1 "',~ for': ~ Rep.ublic of.the p.hilippines l.J.J' ~!v:Hll"t.\;liI • . J , I';',~~iJsr.a~~ j ENERGY REGULATORY COMMISSIO. www.erc.go~.ph j San Miguel Avenue, Pasig City Q;---"

IN THE MATTER OF THE APPLICATION FOR APPROVAL OF BUSINESS SEPARATION AND UNBUNDLING PLAN (BSUP) PURSUANT TO SECTION 36 OF REPUBLIC ACT 9136 AND RULE 10 OF ITS IMPLEMENTING RULES AND REGULATIONS

ERC CASE NO. 2013-088 MC

LANAO DEL NORTE ELECTRIC COOPERATIVE, INC.(LANECO), Applicant. x------x

DECISION

Before the Commission for resolutio,,:, is the application filed on December 5, 2013 by Electric Cooperative, Inc. (LANECO) for approval of its business separation and unbundling plan (BSUP) pursuant to Section 36 of Republic Act No. 9136 (R.A. 9136) and Rule 10 of its Implementing Rules and Regulations (IRR).

In the said application, LANECO alleged, among others, that:

1. It is an electric cooperative duly organized and existing under and by virtue of the laws of the Republic of the , with principal offices at Tubod, Lanao del Norte;

2. It is the. holder of an exclusive franchise issued by the National Electrification Commission (NEC) to operate an electric light and power services in the Municipalities of , , Poona , , Bacolod, , , ,, Tangkal, Magsaysay, Tubod, , Lala, Salvador, Kapatagan, , , 8aloi, Province of Lanao del Norte; ERC CASE NO. 2013-088 MC DECISION/October 13, 2014 _p_~g~?.gf 1?_ _."__.._ _".______._

3. Section 36 of Republic Act No. 9136 otherwise known as the Electric Power Industry Reform Act of 2001 or "EPIRA", provides in part that" Any electric power industry participant shall functionally and structurally unbundle its business activities and rates in accordance with the sectors as identified in Section 5 hereof The ERG shall ensure full compliance with this provision':'

4. Pursuant to the said mandate of the EPIRA as well as Rule 10 of its IRR, the Commission promulgated Resolution No. 49, Series of 2006 otherwise known as "Business Separation Guidelines, as Amended' as well as Resolution No. 07, Series of 2012, Adopting the Accounting and Cost Allocation Manual (ACAM) for Electric Cooperatives;

5. Pursuant to and in compliance with the requirements of the foregoing law, rules and resolutions, LANECO is submitting herewith for the Commission's evaluation and approval, its proposed BUSINESS SEPARATION AND UNBUNDLING PLAN (BSUP) for the business separation and structural and functional unbundling of its business activities, with the end in view of separating its distribution activities into appropriate business segments and to have a clear separation of operations and accounts between its regulated and non-regulated activities;

6. It is likewise submitting herewith as annex to the BSUP an Accounting Separation Statements prepared in accordance with the Accounting and Cost Allocation Manual (ACAM) for Electric Cooperatives, based on its Audited Financial Statements for the Year 2011;

7. In addition to the BSUP, it is likewise submitting herewith for the Commission's consideration and approval, a set of Confidentiality Policies and Guidance to be observed by concerned personnel, together with a Board Resolution adopting certain sets of obligations imposed upon Distribution Utilities (DUs), among others, as provided under Article V of the Business Separation Guidelines (BSG), and made integral parts hereof as annexes; and

8. Finally, it prays that after due notice and hearing, its proposed BSUP be approved by the Commission. ERC CASE NO. 2013-088 MC DECISION/October 13, 2014 p.9_g~~_9.fJ.2._..______..__ _ ..______.

Having found the said application sufficient in form and in substance, with the required fees having been paid, an Order and a Notice of Public Hearing, both dated February 17, 2014, were issued setting the case for initial hearing on April 21, 2014.

In the same Order, LANECO was directed to cause the publication of the Notice of Public Hearing, at its own expense, once (1x) in a newspaper of general circulation in the Philippines, with date of publication to be made not later than ten (10) days before the scheduled date of the initial hearing. It was also directed to inform the consumers within its franchise area, by any other means available and appropriate, of the filing of the instant application, its reasons therefor and of the scheduled hearing thereon.

The Office of the Solicitor General (OSG), the Commission on Audit (COA) and the Committees on Energy of both Houses of Congress were furnished with copies of the Order and Notice of Public Hearing and were requested to have their respective duly authorized representatives present at the initial hearing.

Likewise, the Offices of the Provincial Governor of Lanao del Norte and the Mayors of the Municipalities within LANECO's franchise area were furnished with copies of the Order and Notice of Public Hearing for the appropriate posting thereof on their respective bulletin boards.

On April 15, 2014, LANECO filed its "Pre-Trial Brief'.

During the April 21, 2014 initial hearing, only LANECO appeared. No intervenor/oppositor appeared nor was there any intervention/opposition registered.

At the said hearing, LANECO adduced its proofs of compliance with the Commission's posting and publication of notice requirements which were duly marked as Exhibits "B" to "E", inclusive. Thereafter, it conducted an expository presentation of its application.

Upon termination of the expository presentation, LANECO moved for the declaration of general default against all interested parties who failed to manifest their intention to intervene/oppose the instant application. LANECO presented Ms. Jackie Lou Ragpala Bartolo, its Accounting Division Chief, who testified in support of the application. ERC CASE NO. 2013-088 MC DECISION/October 13, 2014 .Eage....•.tgl 1.~..______

The direct examination having been terminated, the Commission propounded c1arificatory questions on the said witness. LANECO was, then, directed to file its formal offer of evidence and submit additional requirements.

On May 13, 2014, LANECO filed its "Formal Offer of Evidence".

On September 24, 2014, the Commission issued an Order admitting LANECO's "Formal Offer of Evidence" and declaring the instant application submitted for resolution.

DISCUSSION

LANECO's BSUP consists of six (6) sections as prescribed in the BSUP Filing Package, as follows:

1) Details of Current Structure

LANECO submitted its profile, the diagrammatic representation of its existing corporate structure, the description of the activities and functions undertaken by each of the different departments, as well as the description of the current processes enumerated as follows:

1.1) Meter Reading 1.2) Billing Process 1.3) Collection Remittance and Deposit Process 1.4) Service Connection Large Load Process 1.5) Disconnection and Reconnection Process 1.6) Capital Expenditures Requisition and Procurement Process 1.7) Non-Capital Expenditures Requisition and Procurement Process 1.8) Membership and Meter Installation for New Connection Process 1.9) Customer Assistance-Inquiries Complaints and Concerns Process 1.10) Disconnected Meters and Returning Process 1.11) Materials Receiving Process 1.12) Materials Issuance Process 1.13) Inventory Monitor and Issuance Process 1.14) Trouble-Response Process ERC CASE NO. 2013-088 MC DECISION/October 13,2014 .'p_~.g_~_~_Q.fJ...~______.______

1.15) Design and Planning Process 1.16) Project Management Process 1.17) Meter Issuance Process 1.18) Meter Rehabilitation Process 1.19) New Meter Testing and Sealing Process

2) Details of Business Segments

In compliance with the BSUP Filing Package, LANECO provided the details of its business segments including the allocation of costs for each segment, as follows:

2.1 Business Segments

Its business segments are classified and defined according to the BSG, as amended. These are grouped into seven (7) business segments, namely: a) Distribution Services (OS); b) Distribution Connection Services (DCS); c) Regulated Retail Services (RRS); d) Last Resort Supply Services (LRSS); e) Non-Regulated Retail Services (NRRS); f) Related Business Services (RB) and g) Wholesale Aggregation Services (WA).

a. Distribution Services (OS) - this segment involves the following distribution services, namely: Conveyance of electricity through a distribution system and the control and monitoring of electricity as it is conveyed through the distribution system (including any service that support such conveyance, control or monitoring or the safe operation of the distribution system); provision of ancillary services that are provided using assets which form p'art of a distribution system (an example of such Ancillary Services is services provided by a series of reactor or a static var compensator); planning, maintenance, augmentation and operation of the distribution system; provision, installation, commissioning, testing, repair, maintenance, and reading of Wholesale Electricity Spot Market (WESM) - related meters that are not used to measure the delivery of electricity to end-users or other customers; billing, collection and the provision of customer services that are directly related to the delivery of electricity to end-users or that relate to the connection of such persons to a distribution system (whether such services are provided to those end-users or to Suppliers or to any other person). ERC CASE NO. 2013-088 MC DECISION/October 13,2014 ..E.9..g.~.J'.~.fJ~ ______..______._ __ ..

b. Distribution Connection Services (DCS) - this segment has the following distribution connection services, namely: Provision of capability at each connection point to a distribution system to deliver or to take electricity from the connection point; and the conveyance of electricity: a) from the facilities of persons which are directly connected to the distribution system, and b) from the connection point to the facilities, planning, installation, maintenance, augmentation, testing and operation of Distribution Connection Assets; and provision of other services that support any of the above services.

c. Regulated Related Services (RRS) - This segment comprises the provision of regulated retail services, namely; services pertaining to the sale of electricity to end-users who belong to the Captive Market, and includes: Billing, collection and the provision of customer services to such end-users in their capacity as electricity consumers; energy trading (including the purchase of electricity and hedging activities) undertaken in connection with the sale of electricity to end-users who belong to the Captive Market; and sale of electricity to said end-users. It also comprises the provision, installation, commissioning, testing, repair, maintenance and reading of meters that are used to measure the delivery of electricity to End-Users who belong to the Captive Market.

d. Non-Regulation Related Services (NRRS) - This segment comprises the provision of non-regulated retail services provided by LANECO, namely; services pertaining to the sale of electricity to end-users who belong to the contestable market or to other customers who are not end-users and includes: billing, collection and the provision of customer services to such end-users in their capacity as electricity consumers or to such other customers in their capacity as purchasers of electricity; the sale of electricity to end-users who belong to the contestable market or other customers who are not end- users; and the provision, installation, commissioning, testing, repair, maintenance and reading of readers that are used to measure the delivery of electricity to end- users who are included in the contestable market or to other customers who are not end-users. ERC CASE NO. 2013-088 MC DECISION/October 13, 2014 .Eag~.z.....Q.f 1~______.

e. Last Resort Supply Services (LRSS) - This segment comprises the provision of Supplier of Last Resort (SOLR) services provided by LANECO namely; services pertaining to the sale of electricity to SOLR Customers, including billing, collection and the provision of basic customer service.

f. Related Business Services (RB) - This segment comprises the provision of all other services, and the carrying out of all other activities that utilize distribution assets, facilities, or staff including: Electricity related services such as the construction and maintenance of customer installations and non-electricity related services such as telecommunications services.

g. Wholesale Aggregation Services (WA) - This segment comprises Distribution Utility's services of purchasing electricity in bulk and selling this to other Distribution Utilities. It also comprises the provision of Wholesale Aggregation services provided by a Distribution Utility, namely services pertaining to the sale of electricity to other Distribution Utilities including billing, collection and the provision of basic customer services.

At present, LANECO does not plan to engage in Last Resort Supply Services, Wholesale Aggregation and Non- Regulated Retail Services, but already included them in its proposed business segments should they be deemed necessary in the future.

2.2 Segregation of Employees to Business Segment

The BSUP Filing Package requires the details of the business segments, such as the number of individuals who are engaged in the activities of the business segment or other business activities of the utility.

In compliance with the aforesaid requirement, LANECO submitted its segregation table of the number of employees who will be engaged in the activities of each business segment. Services that are not directly attributable to a business segment are allocated using allocation factors provided for under the ACAM. ERC CASE NO. 2013-088 MC DECISION/October 13, 2014 f.~ge.~.gLJ.~_ _ _.._.._.._..______.._ _ _ _ _ .

Based on its submitted BSUP, LANECO have segregated its payroll costs to its four (4) existing business segments, namely: OS, DCS, RRS and RB.

2.3 Description of Assets

LANECO's assets will be separated based on the same business segments as defined in the SSG. Separation will be made based on the purpose to which such assets were acquired and being used. Assets that are being used by all business segments are defined accordingly. Where usage is not a reasonable allocation factor, allocation methods described in the ACAM shall be used for the activity undertaken. LANECO submitted a table of asset segregation allocated to the four (4) business segments, namely: OS, DCS, RRS, and RB.

3) Accounting Separation

The Accounting Separation Statements and the corresponding accounting principles, policies and procedures used by LANECO are in accordance with the SSG, as amended. The accounts maintained in the four (4) segments are reflected in such a way that these are separately carried out. As such, the revenues, costs, assets, liabilities, reserves and provisions of said accounts are reasonably allocable to each business segment and are separately identifiable in the books.

LANECO submitted its Statement of Income, Statement of Assets and Liabilities together with the revenue schedule, cost schedule, and Cash Flow Statements for the year ended December 31, 2011 based on its AFS for the year ended December 31, 2011.

Likewise, it submitted an express statement manifesting the incorporation of Articles II (General Principles for Accounting Separation), III (Information Requirements for Accounting Separation) and IV (Business Segments) of the SSG, as amended, for the said accounting separation statement. This undertaking will ensure the clear separation of the accounts of its regulated and non-regulated business activities. ',' ERC CASE NO. 2013-088 MC DECISION/October 13, 2014

.p~.ge_~QfJ...?_ __ __ c ,...... •'-'_ , __ _ .._ __ , , ______.._ _

3.1 Principles to Achieve Accounting Separation

In accordance with the Commission's approved ACAM, LANECO undertakes to adopt the said manual in its operation.

3.2 Allocation Principles

LANECO has adopted the allocation methods and principles in accordance with Article III (Information Requirements for Accounting Separation) of the BSG, as amended. Direct Allocation approach was used in allocation of accounts, revenues and expenses that directly relate to a certain activity or section. The accounts, revenue and expenses that cannot be directly attributed to an activity/section will be allocated on a fair and reasonable basis as documented in the approved ACAM for ECs. After the amounts have been allocated to different activities/sections, the amount will be further apportioned to different segments using the following principles: a) items/activities/sections directly attributable to a segment; b) items/activities/sections not directly attributable to a certain segment will be allocated using an appropriate factor; and c) items/activities/sections that are un-attributable to a Business Segment are allocated using a fair and reasonable method.

LANECO, in general, adopted the allocation factors based on the principles set forth in the approved ACAM and the BSG, as amended.

However, LANECO should reconcile the differences between its Audited Financial Statement for the year 2011 with the following worksheets: Details of its Cash Flow Statements and Statement of Assets and Liabilities.

3.3 Chart of Account

LANECO complied with the Chart of Accounts as provided by the approved ACAM. The chart of accounts establishes the general ledger and subsidiary ledger accounts to be used by it. It has incorporated the ERC CASE NO. 2013-088 MC DECISION/October 13, 2014 Page 10 of 15

requirements under the EPIRA following the BSG, as amended.

3.4 Basic Accounting Principles

LANECO defined its basic accounting principles that are compliant with the BSG, as amended, in order to properly process its transactions. These principles were observed in the preparation of its financial statement as a whole, as well as, in the individual business segments.

It intends. to present financial statements with the following frameworks, concepts, characteristics, and assumptions such as understandability, relevance, reliability, comparability, materiality, consistency, going concerns and accruals. The calendar year was used as its accounting period in the preparation of financial reports.

It shall comply with the Accounting Separation Statements prepared for the purposes of the Business Separation Guideline (BSG), as amended, which will be accompanied by a report prepared, signed and dated by an Auditor (Auditor's Report) that contains the Auditor's opinion on whether the Accounting Separation Statements are presented fairly in accordance with the requirements of the SSG, as amended, clearly identifying any exceptions and the effect of each such exception on the Accounting Separation Statements.

3.5 Other Requirements Related to Business Separation

LANECO submitted its undertaking stating that it will comply with the other requirements related to business separation as provided under Article V of the BSG, as amended, particularly on the provisions related to Prohibition on Discrimination, Disclosure of Information and Prohibition on Cross-Subsidies.

4) Description of Separation

LANECO intends to separate the business segment by the creation of separate divisions or departments within the same juridical

------~------_._~-- --"~------~-~------ERC CASE NO. 2013-088 MC DECISION/October 13,2014 ..E.?.g_~1.2_..Qf.. 1~___.______._ _ _.__.._ .._.._ _._ .__ _

In the preparation of the Accounting Separation Statement, the BSG requires that transfer pricing policies shall be used for transactions between business segments. Since LANECO has no proposed transfer pricing methodology, the calculation of transfer prices based on fully allocated costs using the cost allocation standards without any mark-up is recommended for its services, products and assets transferred between related entities/business segments.

WHEREFORE, the foregoing premises considered, the application filed by Lanao Del Norte Electric Cooperative, Inc. (LANECO) for approval of its Business Separation and Unbundling Plan (SSUP) in accordance with the provisions of Section 36 of Republic Act No. 9136 (the Electric Power Industry Reform Act of 2001 or the EPIRA) and Rule 10 of its Implementing Rules and Regulations (IRR) is hereby APPROVED with modification, subject to the conditions stated herein and its full compliance with the requirements of the BSG, as amended.

LANECO is directed to reconcile the difference between its Audited Financial Statement with the following worksheets: Details of the Cash Flow Statement and Statement of Assets and Liabilities.

Finally, LANECO is directed to submit the following documents within five (5) months from the end of the financial year, as provided in Article II, Section 2.12 of the SSG, as amended:

1) The Accounting Separation Statements prepared by it for the relevant period, in accordance with the approved BSG, as amended, and the Commission approved ACAM;

2) The Management Responsibility Statement that is required to accompany the Accounting Separation Statements in accordance with Section 2.6 of the SSG, as amended;

3) The Auditor's Report on the Accounting Separation Statements prepared in accordance with Section 2.8 of the BSG, as amended;

4) The General Information Sheet that is required to accompany the Accounting Separation Statement in accordance with Section 2.10 of the SSG, as amended; ERC CASE NO. 2013-088 MC DECISION/October 13, 2014 .E..~ge t~.~fJ? ______._,.., , ,., , __ _ _._ _ ._ .

5) The Compliance Report required to accompany the Accounting Separation Statements in accordance with Section 2.11 of the SSG, as amended; and

6) A consolidated copy of the relevant Electric Power Industry Participant's ACAM, where such ACAM has been amended so that it does not correspond with the consolidated copy of the ACAM that has been previously approved by the Commission.

50 ORDERED.

Pasig City, October 13, 2014.

~'iJ /1, {~ ENAIDA G. CRtJZ-DUCUT Chairperson rJ

~ 0, />.~ ~'~f{, ALFREDO~N GifORIA VICTOR~A . YAP-TARUC Commissioner Commls ner

J05EFINA PATRIC '. MAGPALE-A5IRIT Co ssioner

LBB/M~INJS\f~r~'~" c < ERC CASE NO. 2013-088 MC DECISION/October 13, 2014 .E.?g..~11 Q.f J.?______._ _ _ .

Copy Furnished:

1. Atty. Ditas A. Lerios-Amboy Counsel for LANECO Units 1609-1610, Tycoon Center. Pearl Drive, Pasig City, Metro Manila

2. Lanao del Norte Electric Cooperative, Inc. (LANECO) Sagadan, , Tubod, Lanao del Norte

3. Office of the Solicitor General 134 Amorsolo Street, Legaspi Village Makati City, Metro Manila

4. Commission on Audit Commonwealth Avenue Quezon City, Metro Manila

5. Senate Committee on Energy GSIS Bldg. Roxas Blvd., Pasay City Metro Manila

6. House Committee on Energy Batasan Hills, Quezon City, Metro Manila

7. Office of the President Philippine Chamber of Commerce and Industry (PCCI) 3rd Floor, ECC Building, Sen. Gil Puyat Avenue Makati City

8. Office of the Provincial Governor Province of Lanao del Norte

9. Office of the Municipal Mayor Linamon, Lanao del Norte

10. Office of the Municipal Mayor Matungao, Lanao del Norte

11. Office of the Municipal Mayor Kauswagan, Lanao del Norte

12. Office of the Municipal Mayor , Lanao del Norte

13. Office of the Municipal Mayor Bacolod, Lanao del Norte , . ERC CASE NO. 2013-088 MC DECISION/October 13, 2014 f~.g~J.~._~L.1?__._ _..____..______._ _

14. Office of the Municipal Mayor Maigo, Lanao del Norte

15. Office of the Municipal Mayor Tangkal, Lanao del Norte

16. Office of the Municipal Mayor Munai, Lanao del Norte

17. Office of the Municipal Mayor Kolambugan, Lanao del Norte

18. Office of the Municipal Mayor Magsaysay, Lanao del Norte

19. Office of the Municipal Mayor Tubod, Lanao del Norte

20. Office of the Municipal Mayor Baroy, Lanao del Norte

21. Office of the Municipal Mayor Salvador, Lanao del Norte

22. Office of the Municipal Mayor Sapad, Lanao del Norte

23. Office of the Municipal Mayor Lala, Lanao del Norte

24. Office of the Municipal Mayor Kapatagan, Lanao del Norte

25. Office of the Municipal Mayor Sultan Naga Dimaporo (Karomatan) Lanao del Norte

26. Office of the Municipal Mayor Baloi, Lanao del Norte