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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

ERe CASE NO. 2013-087 Me

ISABElA II El,ECTRIC COOPERATIVE, INC. (ISELCO II), Applicant. )( w )(

DECISION

Before the Commission for resolution is the application fileq on November 20, 2013 by II Electric Cooperative, Inc. (ISELCO II) 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, ISELCO II 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 Alibagu, lIagan City, Isabela;

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 city of lIagan, and certain Municipalities in the Province of Isabela namely: , Burgos, Aurora, San Manuel, Roxas, Malig, , Quezon, San Pablo, Santa Maria, , Sto. Tomas, , , Naguilian, Benito Soliven, San Mariano, , and . However, th~ ERC CASE NO. 2013-087 MC DECISION/October 7,2014 f9..g~2 Qfj..z_ ___ _. __ .___.______.__

coastal towns of Divilican and Maconacon were already waived for Qualified Third Party (QTP);

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, ISELCO II 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 ERC CASE NO. 2013-087 MC DECISION/October 7, 2014

...E~g_~.A_g.L1.I_ _._ _ _ _ _ ...... ~__ ._._nH.______.

8. Finally, it prays that after due notice and hearing, its proposed BSUP be approved by the Commission.

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 14, 2014.

In the same Order, ISELCO " 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 Isabela and the Mayors of the City and Municipalities within ISELCO II'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 7, 2014, ISELCO II filed its "Pre-Trial Brief'.

During the April 14, 2014 initial hearing, only ISELCO " appeared. No intervenor/oppositor appeared nor there was any intervention/opposition registered.

At the said hearing, ISELCO II 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. ERC CASE NO. 2013-087 MC DECISION/October 7, 2014 ..p~.g..~_.4._QfJ.I.__ ___" ______..__ _._ _ __ ._ ..__.__._

Upon termination of the expository presentation, ISELCO II moved for the declaration of general default against all interested parties who failed to manifest and/or declare intentions to intervene/oppose the instant application. ISELCO II presented Ms. Zenaida M. Paguirigan, its Accounting Division Chief, who testified in support of the application.

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

On April 30, 2014, ISELCO II filed its "Formal Offer of Evidence".

On September 17, 2014, the Commission issued an Order admitting ISELCO II's "Formal Offer of Evidence" and declaring the instant application submitted for resolution.

DISCUSSION

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

1) Details of Current Structure

ISELCO II submitted its profile, the diagrammatic representation of its existing corporate structure, the description of the activities and functions undertaken by each of the different department or juridical entities, as well as the description of the current process enumerated as follows:

1.1 Billing and Distribution Process; 1.2 Collection Remittance and Deposit Process; 1.3 Service Connection for Large Load Process; 1.4 Meter Reading Process; 1.5 Disconnection Process; 1.6 Reconnection Process; 1.7 Requisition and Procurement Process (CAPEX & NON-CAPEX); 1.8 Membership Process; 1.9 Complaint Process; ERC CASE NO. 2013-087.MC DECISION/October 7, 2014 Page 5 of 17

1.10 Materials Receiving Process; 1.11 Materials Issuance Process; 1.12 Inventory Monitor and Issuance Process; 1.13 Trouble Response Process; 1.14 Design and Planning Section Process; 1.15 Project Management Process; 1.16 Meter Issuance Process; 1.17 Meter Rehabilitation Process; 1.18 New Meter Testing and Sealing Process.

2) Details of Business Segments

In compliance with the BSUP Filing Package, ISELCO II had adequately complied with this requirement and 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: 1) Distribution Services (OS); 2) Distribution Connection Services (DCS); 3) Regulated Retail Services (RRS); 4) Last Resort Supply Services (LRSS); 5) Wholesale Aggregation (WA); 6) Non-Regulated Retail Services (NRRS); and 7) Related Businesses (RB).

a. Distribution Services (OS) - This segment has the following distribution services, namely: Conveyance of electricity through a Distribution System and the control and monitoring of electricity; Provision of Ancillary Services (if any) using assets which form part of a Distribution System; Planning, maintenance, augmentation and operation of the Distribution System; Provision, installation, commissioning, testing, repair, maintenance and reading of WESM-related meters; Billing, collection and the provision of customer services that are directly related to the delivery of electricity.

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 ERC CASE NO. 2013-087 MC DECISION/October 7, 2014 p.~-g.~~gi.1Z_ _ _...... ______- _ _ _ - .._ _ _ --"-"'---

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 of persons which are directly connected to the Distribution System; 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 are included in 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 are included in the Captive Market; and Sale of electricity to end-users who are included in the Captive Market. 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 are included on the Captive Market.

d. Last Resort Supply Services (LRSS) - This segment comprises the provision of Supplier of last Resort (SOLR) services provided by ISELCO II as Distribution Utility namely; services pertaining to the sale of electricity to SOLR Customers, including billing, collection, basic customer service, and energy trading.

e. Wholesale Aggregation (WA) - This segment comprises the Distribution Utility's service of purchasing electricity in bulk and selling this to other Distribution Utilities; services pertaining to the sale of electricity to other Distribution Utilities including billing, collection and the provision of basic customer service.

f. Non- Regulated Related Services (NRRS) - This segment comprises the provision of non-regulated retail services provided by a Distribution Utility, namely: services pertaining to the sale of electricity to the contestable market or to other customers who are not ERC CASE NO. 2013-087 MC DECISION/October 7, 2014 .p~.g.~.l-.Q.f.J~L.______.______

end-users and includes - billing, collection and the provision. of customer services; Energy trading undertaken in connection with the sale of electricity; and Sale of electricity. Non-Regulated retail services also comprise the provision, installation, commissioning, testing, repair, maintenance and reading of meters that are used to measure the delivery of electricity to the contestable market or to other customers who are not end-users (whether such services are provided to those end-users or other customers, to Suppliers or to any other person).

g. Related Business (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.

At present, ISELCO II has only four (4) active business segments namely: OS, DCS, RRS and RB. The remaining three business segments will be incorporated once any become operational. In the event that the three (3) business segments (LRRS, WA and NRRS) become operational, ISELCO II shall comply with the additional requirements set by the Commission.

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, ISELCO II submitted its segregation table of the number of employees who will be engaged in the activities of each business segment. It is noted that common employees will do multi-tasking across three (3) or more businesses . .Services that are not directly attributable to a business segment are allocated using allocation factors provided for by the ACAM. ERC CASE NO. 2013-087 MC DECISION/October 7,2014 Page 8 of 17

2.3 Description of Assets

ISELCO II's assets will be separated based on the same business segments as defined in the SSG, as amended. 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.

ISELCO II has segregated its assets to three (3) of its seven (7) proposed business segments only, namely: DS, DCS, and RRS.

If changes on the payroll and asset allocation related to the above-mentioned segments become necessary, it shall . inform the Commission of the consequent modifications of its SSUP.

3) Accounting Separation

The Accounting Separation Statements and the corresponding accounting principles, policies and procedures used by ISELCO II are in accordance with the SSG, as amended. The accounts maintained in its business segments are reflected in such a way that these are separately being carried out by separate companies. 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.

ISELCO II submitted its Accounting Separation Statements, particularly 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 in accordance with its AFS for the year ended December 31,2011. ERC CASE NO. 2013-087 MC DECISION/October 7,2014 _P~g..~._.~_QL1I.._ _ ___.______,,',,: ______.._ __..___ .._

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 BSG, as amended, for the said accounting separation statement. This undertaking clearly separates the accounts of its regulated and non-regulated business activities.

3.1 Principles to AchieveAccounting Separation

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

In addition, the following policies shall be observed:

~ Procurement procedure based on its BOD Resolution No. 10-01 dated October 12,2010;

~ All acquisition and construction of new assets should be in accordance with the ERC approved Capital Expenditure plan filed by the coop. Subsequent repairs and maintenance are capitalized if and when it extends the life of the asset or increases its capacity.

~ Depreciation Policy was based from the National Electrification Administration (NEA) memorandum on Depreciation of Fixed Assets, as follows: ERC CASE NO. 2013-087 MC DECISION/October 7, 2014 Page 10 of 17

Depreciation Rate Useful Life

3% 33 3% 33 3.33% 30 3% 33 3.33% 30 3% 33 4% 25 3% 33 o o 20% 5 rs o o o 10% 10 rs. o 10% 10 rs. o

3.2 Allocation Principles

ISELCO II has adopted the allocation methods and principles in accordance with Article III (Information Requirements for Accounting Separation) of the SSG, 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. ERC CASE NO. 2013-087 MC DECISION/October 7, 2014 .E.~g.~1J ofJ7 ______...... _..______._

ISELCO II's overall revenue, costs, assets, liabilities and capital obtained from the income statement and balance sheet should be directly assigned to the segment that caused the revenue, costs, assets, liabilities and capital. However, for those accounts that cannot be directly assigned, the allocation factor should be used .

. ISELCO II, in general, adopted the allocation factors based on the principles set forth in the approved ACAM and the SSG, as amended, except for the proper linking of the Payroll Allocation sheet with the Allocation Factor sheet and the Trial Balance.

ISELCO II should be directed to make the necessary adjustment as mentioned above and to correct the Statement of Assets and Liabilities, Detailed Statement of Assets and Liabilities and Cash Flow Statement to tally with the Audited Financial Statement figures.

3.3 Chart of Account

ISELCO II 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 the Cooperative. It has incorporated the requirements under the EPIRA following the BSG, as amended.

3.4 Basic Accounting Principles

ISELCO II 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. ERC CASE NO. 2013-087 MC DECISION/October 7, 2014 J:)_~.g_~_t~Qf 1I..______._.._ _ __.____ .__

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 (SSG), 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 exception on the Accounting Separation Statements.

3.5 Other Requirements Related to Business Separation

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

4) Description of Separation

ISELCO II intends to separate the business segment by the creation of separate divisions or departments within the same juridical entity that undertakes the activities. All directly attributable employees, assets and cost will be grouped into their corresponding "business segment". All directly attributable employees, assets and costs will be grouped into their corresponding costs common to all segments will be segregated by function forming different departments within the same juridical entity. The assets of ISELCO II and corresponding costs will be allocated base on logical and acceptable method. The method chosen should not in any way increase the cost of ISELCO II. ERC CASE NO. 2013-087 MC DECISION/October 7, 2014 pa.g~J...~__Q.L11..__ __._ _._ _",__"._.______._ _ _ .._._._ _.___ _ _._ __

It presented a general and detailed structure per business segment and department, identifying which segment performs the activity.

5) Milestones and Highlights

This included the events participated in by ISELCO II in relation to the promulgation of the ACAM for ECs from February 2012 onwards. It also stated that it will require all of its employees to attend seminars, competency trainings and workshops to enhance their knowledge of the activity of each business segment.

In addition, it submitted an undertaking involving the implementation of the separation of business segments to ensure that it is compliant with the requirements of the BSG, as amended.

6) Programs for Code of Conduct

On June 21, 2006, the Commission promulgated Resolution No. 49, Series of 2006, entitled "A Resolution Amending the Business Separation Guidelines (BSG)" to incorporate additional business segments and activities as well as to make it consistent with the "Code of Conduct for Competitive Retail Market Participants" which prescribes the operational separation between a distribution utility's regulated and non- regulated business activities.

ISELCO II undertakes to develop a plan to comply with the Code of Conduct for Competitive Retail Market Participants promulgated by the Commission.

In the preparation of the Accounting Separation Statement, the BSG requires that transfer pricing policies shall be used for transactions between business segments. Since ISELCO II 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. ERC CASE NO. 2013-087 MC DECISION/October 7,2014 ..Pa..g~_1.~t~L1.z..__.. _.._.__ _ _ " ______.______.

WHEREFORE, the foregoing premises considered, the application filed by Isabela II Electric Cooperative, Inc. (ISELCO II) for approval of its Business Separation and Unbundling Plan (BSUP) 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.

In addition, ISELCO II is directed to reconcile the difference between its Audited Financial Statement with the following worksheets: 1) Detailed Statement of Assets and Liabilities; 2) Total Statement of Assets and Liabilities; and 3) Cash Flow Statements in its BSUP model.

Finally, ISELCO II 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 BSG, 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 required to accompany the Accounting Separation Statements in accordance with Section 2.6 of the BSG, 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 required to accompany the Accounting Separation Statement in accordance with Section 2.10 of the BSG, as amended;

5) The Compliance Report that is required to accompany the Accounting Separation Statements in accordance with Section 2.11 of the BSG, as amended; and ERC CASE NO. 2013-087 MC DECISION/October 7, 2014 ..E9...g~J..~gf.JL _.._ _ _.._ ..______.

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 7, 2014.

~p /it (C~ ZENAIDA G. CRUZ-DUCUT Chairperson rW

,,-- "\ I'~. ALF~~ G~~ORIA ICTORIA cf>YAP-TARUC[ Commissioner commlss~er

J05EFINA PAT CI . AGPALE-A5IRIT Com ERC CASE NO. 2013-087 MC DECISION/October 7, 2014 ..P~g.~J_.~QfJ_Z..______.______

Copy Furnished:

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

2. lsabela Electric Cooperative, Inc. (ISELCO II) Alibagu, lIagan, Isabela

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 of PCCI Philippine Chamber of Commerce and Industry (PCCI) 3rd Floor, ECC Building 355 Sen. Gil Puyat Ave., Makati City

8. Office of the Provincial Governor Province of Isabela

9. Office of the Municipal Mayor Santa Maria,lsabela

10.Office of the Municipal Mayor San Pablo, Isabela

11.0ffice of the Municipal Mayor Cabagan, Isabela

12.0ffice of the Municipal Mayor Maconacon, Isabela

13.Office of the Municipal Mayor Quezon, Isabela ERC CASE NO. 2013-087 MC DECISION/October 7,2014 J:.~g..~..17._Qf..J.Z ..__ _ _.__ _..______._.._ .. _ _._ ___ _. __._.

14.Office of the Municipal Mayor Santo Tomas, Isabela

15.0ffice of the Municipal Mayor Tumauini, Isabela

16.Office of the Municipal Mayor Divilacan, Isabela

17.0ffice of the Municipal Mayor Delfin Albano (Magsaysay), Isabela

18.0ffice of the Municipal Mayor Malig, Isabela

19.Office of the Municipal Mayor Quirino, Isabela

20.Office of the Municipal Mayor Roxas, Isabela

21.0ffice of the Municipal Mayor San Manuel, Isabela

22.0ffice of the Municipal Mayor Aurora, Isabela

23.Office of the Municipal Mayor Burgos, Isabela

24.Office of the Municipal Mayor Gamu, Isabela

25.Office of the Municipal Mayor Naguilian, Isabela

26.Office of the Municipal Mayor Benito Soliven, Isabela

27.0ffice of the Municipal Mayor San Mariano, Isabela

28.Office of the Municipal Mayor Palanan, Isabela

29.Office of the City Mayor !lagan, Isabela