Republic of the Approved for, ENERGY REGULATORY COMMISSION Potihg San Miguel Avenue, Pasig City Www.erc.gw.ph

IN THE MATTER OF THE APPLICATION FOR APPROVAL OF APPLICANT'S (1) BUSINESS SEPARATION AND UNBUNDLING PLAN AND (2) ACCOUNTING AND COST ALLOCATION MANUAL (ACAM) IN ACCORDANCE WITH SECTION 36 OF R.A. 9136 AND RULE 10 OF ITS IMPLEMENTING RULES AND REGULATIONS

ERC CASE NO. 201 2-037 MC

CEBU I ELECTRIC COOPERATIVE, INC. (CEBECO I), o o C U T E I) Applicant. nur LjjIN 1 1 x------x Pr

DECISION

Before this Commission for resolution is the application filed on July 18, 2012 by I Electric Cooperative, Inc. (CEBECO I) for approval of its Business Separation and Unbundling Plan (BSUP) in accordance with 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).

In the said application, CEBECO I alleged, among others, that:

1. It is a non-stocjç non-profit electric cooperative registered with the Natigbl Electrification Administration (NEA) on April 22, 197iursuant to the provision of P.D. 269, as ERC Case No. 201 2-037 MC DECISION/May 14, 2013 Pacie 2 of 16

amended by P.D. 1645. Its franchise to operate was granted on February 7, 1980. Its principal office address is located at Bitoon, , Cebu and CEBECO I is represented by its General Manager Mr. Marlou M. Rendon, also of the same address.

2. It has been granted by NEA the power to operate and distribute electric light and power on an area coverage basis to the following Municipalities and City as follows: Alcantara, Alcoy, Alegria, , Badian, , , Dumanjug, , , , , Ronda, , Santander, , and City, all in the Province of Cebu.

3. Section 36 of R.A. 9136, 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 ERC shall ensure full compliance with this provision."

4. Pursuant to the provision of Section 36 of R.A. 9136 and Rule 10, Section 3 (b) of the 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. The said BSUP attached to the instant application is in accordance with the Business Separation Guidelines (BSG) as well as the BSUP Filing Package of the Commission.

5. in compliance with the requirements of the foregoing law, rules and regulations, it is submitting for the Commission's evaluation and approval, its proposed 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, s bmitting together with its BSUP and its Accounting e aration Statements for Year 2011 based on its 201 Financial Statements. S

S ERC Case No. 201 2-037 MC DECISION/May 14, 2013 Page 3 of 16

7. It prays that after due notice and hearing, its BSUP be approved accordingly.

Having found 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 November 12, 2012, were issued setting the case for jurisdictional hearing, expository presentation, pre-trial conference and evidentiary hearing on November 29, 2012.

In the same Order, CEBECO I was directed to cause the publication of the Notice of Public Hearing, at its own expense, once (lx) in a newspaper of general circulation in the Philippines, at least ten (10) days before the scheduled date of initial hearing.

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.

During the initial hearing on November 29, 2012, only CEBECO I appeared. No intervenor/oppositor appeared nor was there any intervention/opposition registered.

In the same hearing, the Commission directed CEBECO I to submit its "Modified Trial Balance" for the years 2010 and 2011.

CEBECO I, then, presented its proofs of compliance with the Commission's posting and publication of notice requirements which were duly marked as Exhibits "A" to "FF-1", inclusive. Thereafter, it presented Mr. Marlou M. Rendon, its General Manager, who testified in support of the application. In the course thereof, additional documents were presented and marked as exhibits.

The direct examination having been terminated, the Commission propounded clarificatory questions on the said witness.

On December 27, ,2912, CEBECO I filed its "Formal Offer of Evidence" which is herejóy/admitted for being relevant and material in the final resolution of the dase. ERC Case No. 2012-037 MC DECISION/May 14, 2013 Paqe 4 of 16

On January 2, 2013, CEBECO I filed its "Manifestation of Compliance", together with its "Modified Trial Balance" for the years 2010 and 2011.

Subsequently, on January 22, 2013, the Commission issued an Order directing CEBECO I to submit its revised Accounting Separation Statements for the years 2010 and 2011.

On February 26, 2013, CEBECO I submitted its "Manifestation of Compliance", together with its "Revised Accounting Separation Statements" for the years 2010 and 2011.

DISCUSSION

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

1) Details of Current Structure

CEBECO I 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:

a. Read and Bill for Residential and Low Voltage Customers Process;

b. Read and Bill for High Voltage Customers Process;

c. Service Connection for Residential and Low Voltage Customers Process;

on Service Connection for Commercial and Industrial Customers Process; ERC Case No. 201 2-037 MC DECISION/May 14, 2013 Page 5 of 16

e. Disconnection Process;

f. Reconnection Process;

g. Procurement Process for CAPEX and Non-CAPEX;

h. Preparation of Purchase Requisition Slip Process;

Canvassing Process;

j. Awarding Process;

k. Procurement Process;

I. Delivery Process;

m. Consumer Complaint's Handling Process;

n. Trouble Response Process; and

o. Collection Process.

2) Details of Business Segments

In compliance with the BSUP Filing Package, CEBECO I 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. CEBECO I is functionally organized into two (2) activities: Generation and Distribution activities. Its Distribution activities are grouped into seven (7) business segments, namely: 1) Distribution Services (DS); 2) Distribution Connection Services (D9S; 3) Regulated Retail Servibés (RRS); 4) Non-Regy1atd Retail Services (NRRS); 5) Last Resort ERC Case No. 2012-037 MC DECISION/May 14, 2013 Page 6 of 16

Supply Service (LRSS); 6) Wholesale Aggregation Services (WA); and 7) Related Business Service (RB).

A. GENERATION ACTIVITY

a. Electricity Generation and Provision for Ancillary Services - production of electricity, including the use of co-generation facility and embedded generators; provision of ancillary services (using generation assets).

B. DISTRIBUTION ACTIVITY

a. Distribution Services (DS) - which consist in the conveyance of electricity through the distribution system and the control and monitoring of electricity. The provision for Ancillary services; planning, maintenance, augmentation and operation of the Distribution System; provision, installation, commission, testing, repair, maintenance and reading of WESM; the Billing, collection and the provision of customer services directly related to the delivery of electricity;

b. Distribution Connection Services (DCS) - provides for the capability at each Connection Point to a Distribution System for conveyance to facilities of persons directly connected to the Distribution System; planning, installation, maintenance, augmentation, testing and operation of Distribution Connection Assets; and the provision of other services in support of any of the other services;

c. Regulated Retail Services (RRS) - the sale of electricity to end-users who are included in the Captive Market; the billing and collection and the provision of customer services to end- users; Energy trading, including the purchase of electricity and hedging activities; and the Sale Al electricity to end-users who are incluØd among the Captive Market; ERC Case No. 2012-037 MC DECISION/May 14, 2013 Paqe 7 of 16

d. Non-Regulated Retail Services (NRRS) - services of DU to the sale of electricity to end- users who are included in the contestable market or to other customers who are not end- users;

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

ft Wholesale Aggregation (WA) - comprises the Distribution Utility's Services of purchasing electricity in bulk and selling this to other distribution utilities;

g. Related Business Service (RB) - 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 installation; and non- electricity related services such as telecommunications services.

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, CEBECO I submitted the number of employees who will be engaged in the activities of each business segment. It is noted that in its payroll allocation, four (4) business segments/ activity were used: DS, DCS, RRS, RB arçI GS. ERC Case No. 2012-037 MC DECISION/May 14, 2013 Page 8 of 16

2.3 Description of Assets

CEBECO l's assets will be separated based on the same business segments as defined in the BSG.

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. It is noted that on the portion where assets are to be allocated per business segment, only five (5) business segments/activity were used: DS, DCS, RRS, RB and GS.

3) Accounting Separation

The Accounting Separation Statements and the corresponding accounting principles, policies and procedures used by CEBECO I are in accordance with the BSG. The accounts maintained in the Generation Services, as well as, its four (4) distribution 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.

CEBECO I submitted its Statement of Income for the year ended December 31, 2011 and Statement of Assets and Liabilities together with the revenue schedule, cost schedule, and Cash Flow Statements for the same period. CEBECO I also submitted its Audited Financial Statements for the year ended December 31 1 2011

Likewise, it submitted an express statement manifesting the incorporation of Articles II (General Principles for Accounting Separation), Ill (Information Requirements for Accounting Separation) and IV (Business Segments) of the BSG for the said accounting separation statement. This undertaking clearly separates the accounts of its regulated and non- regulated business activities. 'I ERC Case No. 201 2-037 MC DECISION/May 14, 2013 Page 9 of 16

3.1 Principles to Achieve Accounting Separation

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

3.2 Allocation Principles

CEBECO I adopted the allocation methods and principles in accordance with Article Ill (Information Requirements for Accounting Separation) of the BSG. 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 using an appropriated method/factor. After the amounts have been allocated to different activities/sections, the amount will be further apportioned to different segments using the following principles: (a) activities/sections directly attributable to a segment; (b) activities/sections not directly attributable to a certain segment will be allocated using an appropriate factor; and c) items/activities/sections that are unattributable to a business segment are allocated using a fair and reasonable method.

CEBECO I, in general, adopted the allocation factors based on the principles set forth in the approved ACAM and the BSG.

However, the Commission observed that CEBECO I did not follow the proper linking of the allocation factors sheet with the Trial Balance used for each accounts. As such, CEBECO I is hereby directed to do the following:

1. CEBECO I should make the necessary adjustment in linking the allocation factors with the appropriate factors in the Trial Balance accounts in order to properly allocate the cost/revenue to its corresponding business segy6nt. ERC Case No. 2012-037 MC DECISION/May 14, 2013 Page 10 of 16

2. For its Consumer Accounts Receivables (CAR)- Power Bills, CAR-Reinvestment/RFSC, CAR- UCIME, it should be allocated using OPREV (Revenue Allocator); and

3. CEBECO I should reconcile its Audited Financial Statements with the following worksheets: Cash Flow Statement, Total Statement of Assets and Liabilities, Statement of Assets and Liabilities, and Statement of Income.

3.3 Chart of Account

CEBECO I 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 un der the EPIRA following the BSG, as amended.

3.4 Basic Accounting Principles

CEBECO I intends to present the financial statements with the following frameworks, concepts, characteristics and assumptions such as understandability, relevance, reliability, comparability, materiality, consistency, going concern, accrual, etc. The ACAM shall invoke the provisions as provided for in lAS 1 - Presentation of Financial Statements as deemed applicable under the regulatory environment set for the distribution utilities (DU5) by Regulators.

CEBECO I shall comply with the required Accounting Separation Statements prepared for the purposes of the Business Separation Guideline (BSG) 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 BSG, clearly identifying any exceptions and the effect of each such exception on the Accounting Sôration Statements. ERC Case No. 2012-037 MC DECISIONIMay 14, 2013 Page 11 of 16

3.5 Other Requirements Related to Business Separation

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

4) Description of Separation

CEBECO I 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". Employees, assets and their corresponding costs common to all segments will be segregated by function forming different departments within the same juridical entity. The assets of CEBECO I and corresponding costs will be allocated base on logical and acceptable method. The method chosen should not in any way increase the cost of CEBECO I.

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

Presently, CEBECO I has the Power Generation Department which is responsible for the operation and maintenance of its three (3) mini-hydro plants. It manifested that additional personnel will be employed to handle its accounting and billing activities in preparation for future separation of this business segment.

CEBECO I shall adopt two sets of books of accounts described as follows:

1. Main Accounting Book (MAB) - shall be kept for BIR, external audit and other relevant purposes.

2. Accountingaqd Cost Allocation Book (ACAB) - shall be kept in comiince with the Business Separation and Unbundling rcpairerpents of the EPIRA. ERC Case No. 2012-037 MC DECISION/May 14, 2013 Pacie 12 of 16

Both books shall be maintained through a computerized accounting system which shall be developed by the cooperative.

5) Milestones and Highlights

CEBECO I failed to submit its detailed plan for training to be conducted in relation to BSUP for the years 2012 onwards. Thus, CEBECO I is directed to submit its detailed plans for trainings that CEBECO I will be conducted in relation to BSUP for the year 2013 onwards.

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.

CEBECO I 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 CEBECO I did not propose a methodology for such, 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 Cebu I Electric Cooperative, Inc. (CEBECO I) for approval of its Business Separation and Unbundling Plan (BSUP) in accordance with 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, subj to certain conditions and its full compliance with the requirr4ents of the BSG, as amended, to wit: ERC Case No. 201 2-037 MC DECISION/May 14, 2013 Paae 13 of 16

1) CEBECO I is directed to make the necessary adjustment in linking the allocation factors with the appropriate factors in the Trial Balance accounts in order to properly allocate the cost/revenue to its corresponding business segment.

2) For its Consumer Accounts Receivables (CAR)-Power Bills, CAR-Reinvestment/RFSC, CAR-UC/ME, CEBECO I should use OPREV instead of DIRECT allocation. In addition, CEBECO I should submit its detailed plans for Trainings in relation to BSUP for the year 2013 onwards.

3) Reconcile the difference between its Audited Financial Statements with the following worksheets: Cash Flow Statement, Total Statement of Assets and Liabilities, Statement of Assets and Liabilities, and Statement of Income.

Finally, CEBECO I 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;

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

4) The General Information Sheet required to accompany the Accounting Separation Statement in accordance with Section 2.10 of the BSG;

5) The Compliance Report required to accompany the Accounting Separation Statements in accordance with Section 2.11 of the BSG; and r

ERC Case No. 201 2-037 MC DECISION/May 14, 2013 Page 14 of 16

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

SO ORDERED.

Pasig City, May 14, 2013.

D CRUZ-DUCUT Charperson /4-a)

I iYA Ti :1 EDA JOSE/C. REYES

(On Leave) &a4- (p ALFREDO J. NON RIA VICTORIA 9 YAP- TARUC Commissioner Commissiotthr

L B/MFSAS/NJS DECISION BSIJP CEBECO I ERC Case No. 201 2-037 MC DECISION/May 14, 2013 Page 15 of 16

Copy Furnished:

1. Atty. Alan C. Gaviola A.0 Gaviola Law Office Counsel for Applicant CEBECO I Room 203, 2/F Crown Plaza Building 3rd Avenue, North Reclamation Area,

2. Mr. Marlou M. Rendon General Manger Cebu I Electric Cooperative, Inc. (CEBECO I) Bitoon, Dumanjug, Cebu

3. Office of the Solicitor General 134 Amorsolo Street, Legaspi Village City of Makati 1229

4. The Commission on Audit Don Mariano Marcos Avenue Diliman, Quezon City 1121

5. Senate Committee on Energy GSIS Building, Roxas Boulevard Pasay City 1300

6. House of Representatives Committee on Energy Batasan Hills, Quezon City 1126

7. The Office of the Provincial Governor Province of Cebu

8. The Office of the City Mayor City of Carcar, Cebu

9. The Office of the Municipal Mayor Alcantara. Cebu

10. The Office of the Municipal Mayor Alcoy, Cebu

11. The Office of the Municipal Mayor Alegria, Cebu

12. The Office of the Municipal Mayor Argao, Cebu

13. The Office of the Municipal Mayor Badian, Cebu

14. The Office of the Municipal Mayor BariIi, Cebu

15. The Office of the Municipal Mayor Boljoon, Cebu I. ERC Case No. 2012-037 MC DECISION/May 14, 2013 Paae 16 of 16

16. The Office of the Municipal Mayor Dalaguete, Cebu

17. The Office of the Municipal Mayor Dumanjug, Cebu

18. The Office of the Municipal Mayor Ginatilan, Cebu

19. The Office of the Municipal Mayor Malabuyoc, Cebu

20. The Office of the Municipal Mayor Moalboal, Cebu

21. The Office of the Municipal Mayor Oslob, Cebu

22. The Office of the Municipal Mayor Ronda, Cebu

23. The Office of the Municipal Mayor Santander, Cebu

24. The Office of the Municipal Mayor Samboan. Cebu

25. The Office of the Municipal Mayor Sibonga, Cebu

26. Mr. Edgardo G. Lacson President Philippine Chamber of Commerce and Industry (PCCI) 3rd Floor, ECC Building