Republic of the ENERGY REGULATORY COMMISSION San Miguel Avenue, Pasig City Approved for IN THE MATTER OF THE APPLICATION FOR THE APPROVAL OF THE BUSINESS SEPARATION AND UNBUNDLING PLAN (BSUP) PURSUANT TO SECTION 36 OF REPUBLIC ACT NO. 9136 AND RULE 10 OF ITS IMPLEMENTING RULES • AND REGULATIONS ERC CASE NO. 201 3-005 MC I ELECTRIC COOPERATIVE, INC. (CASURECO I), Applicant. 1) 0 C K E P E 13 D1e: r4U.L.. x------x

DECISION

Before this Commission for resolution is the application filed on January 10, 2013 by Camarines Sur I Electric Cooperative, Inc. (CASURECO 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, CASURECO I alleged, among others, that:

It is an Electric Cooperative (EC) duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal office at Puro- Batia, , Camarines Sur.

2. It holds an exclusive franchise issued by the National Electrification Administration (NEA), to operate an electric light and power distribution service in the Municipalities of , Lupi, , , Libmanan, Pamplona, , San Fernando, and , all in the Province of Camarines Sur. ERC Case No. 2013-005 MC DECISION/May 14, 2013 Paae 2 of 13

3. Section 36 of R.A. 9136, provides in part that "any electric power industty 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 said mandate of the EPIRA as well as Rule 10 of its Implementing Rules and Regulations (IRR), the Commission promulgated Resolution No. 49, Series of 2006, or the "Business Separation Guidelines, as Amended' and Resolution No. 07, Series of 2012, adopting the Accounting and Cost Allocation Manual (ACAM) for ECs.

5. Pursuant to and in compliance with the requirements of the foregoing law, rules and resolutions, it is submitting 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.

6. It is, likewise, submitting together with its BSUP, its Accounting Separation Statements for Year 2011 based on its 2011 Audited Financial Statements (AFS).

7. It prays that after due notice and hearing, its proposed 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 January 28, 2013, were issued setting the case for jurisdictional hearing, expository presentation, pre-trial conference and evidentiary hearing on March 4, 2013.

In the same Order, CASURECO 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. ERC Case No. 2013-005 MC DECISION/May 14, 2013 Paae 3 of 13

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 March 4, 2013 initial hearing, only CASURECO I appeared. No intervenor/oppositor appeared nor was there any intervention/opposition registered.

At the said hearing, CASURECO I presented 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 and presented Ms. Lesley Ann M. Jimenez, its Finance Manager, who testified in support of the application. In the course thereof, additional documents were presented and duly marked as exhibits.

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

In the same hearing, the Commission directed CASURECO I to submit the following: 1) Affidavit of Service; 2) Revised Accounting Separation Statements for the years 2010 to 2011; and 3) Basis of its current plantilla personnel.

On various dates, CASURECO I filed its "Compliance(s) with Directive".

On April 3, 2013, CASURECO I filed its "Formal Offer of Evidence" and "Compliance with Directive".

On May 7, 2013, the Commission issued an Order admitting CASURECO l's "Formal Offer of Evidence" and declaring the case submitted for resolution.

DISCUSSION

CASURECO l's BSUP consists of four (4) out of seven (7) as prescribed in the BSUP Filing Package, as follows: ERC Case No. 2013-005 MC DECISION/May 14, 2013 Pace 4 of 13

1) Details of Current Structure

CASURECO 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:

1.1 Service Connection: LIGHT LOAD AND LARGE LOAD Process 1.2 Meter Reading Process 1.3 Read and Bill Process 1.4 Billing Process 1.5 Collection Process 1.6 Collection-Remittance-Deposit Process 1.7 Disconnection Process 1.8 Reconnection Process 1.9 Returning Process of Disconnected Meters 1.10 Meter Testing, Rehabilitation and Sealing Process 1.11 Meter/Transformer Receiving Process 1.12 Requisition Process 1.13 Procurement Process 1.14 Receiving Process 1.15 Material Issuance Process 1.16 Inventory Monitoring and Issuance Process 1.17 Customer Assistance for Inquiries, Complaint's and Concerns Process 1.18 Trouble Response Process

2) Details of Business Segments

In compliance with the BSUP Filing Package, CASURECO 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. These are grouped into four (4) business segments, namely: a) Distribution Services (DS); b) Distribution Connection Services (DCS); c) Regulated Retail Services (RRS); and d) Related Business Services (RB). ERC Case No. 2013-005 MC DECISION/May 14, 2013 PaQe 5 of 13

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 the Wholesale Electricity Spot Market (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 of electricity to end- users who are included among the Captive Market.

d. Related Business Services (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 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. ERC Case No. 2013-005 MC DECISION/May 14, 2013 Pane 6 of 13

In compliance with the aforesaid requirement, CASURECO I submitted the number of employees who will be engaged in the activities of each business segment. It was noted that in its payroll allocation, only three (3) business segments were used, namely: DS, DCS and RRS.

2.3 Description of Assets

CASURECO 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 allocated its assets to four (4) business segments identified as DS, DCS, RRS and RB.

3) Accounting Separation

The Accounting Separation Statements and the corresponding accounting principles, policies and procedures used by CASURECO I are in accordance with the BSG. The accounts maintained in the four (4) 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.

CASURECO 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. It also submitted its Audited Financial Statements (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 BSG for the said accounting separation statement. This undertaking ERC Case No. 2013-005 MC DECISION/May 14, 2013 Paae 7 of 13

clearly separates the accounts of its regulated and non- regulated business activities.

3.1 Principles to Achieve Accounting Separation

In accordance with t he Commission's approved ACAM, CASURECO I undertakes to adopt the said manual in its operation.

3.2 Allocation Principles

CASURECO 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; and b) activities/sections not directly attributable to a certain segment will be allocated using an appropriate factor.

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

However, the Commission noted that its Cash In Bank-General Fund Account should be directly allocated to the business segment to which it is intended for or the source thereof. The NP+DPR factor used is more related to income after depreciation while the above mentioned account can be directly determined either as an expense or an income from a particular business segment.

3.3 Chart of Account ERC Case No. 2013-005 MC DECISION/May 14, 2013 Paae 8 of 13

CASURECO 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 it. It has incorporated the requirements under the EPIRA following the BSG, as amended.

3.4 Basic Accounting Principles

CASURECO I defined its basic accounting principles that are compliant with the BSG in order to properly process its transactions. These principles were observed in the preparation of its financial statements 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) 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 exception on the Accounting Separation Statements.

3.5 Other Requirements Related to Business Separation ERC Case No. 2013-005 MC DECISION/May 14, 2013 Pacie 9 of 13

CASURECO 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

CASURECO 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 CASURECO I and corresponding costs will be allocated based on logical and acceptable method. The method chosen should not in any way increase the cost of CASURECO I.

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

5) Milestones and Highlights

CASURECO I failed to submit its plan for training to be conducted in relation to BSUP for the years 2013 onwards. Thus, it is directed to submit plans for trainings it will conduct 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. ERC Case No. 2013-005 MC DECISION/May 14, 2013 Paqe 10 of 13

CASURECO 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 CASURECO 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 Camarines Sur I Electric Cooperative, Inc. (CASURECO 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, subject to certain conditions and its full compliance with the requirements of the BSG, as amended.

For its Cash in Bank Account, CASURECO I should utilize direct allocation to the usage/cause of said expense or income instead of the NP+DPR factor. In addition, it should submit its plans for Trainings in relation to BSUP for the year 2013 and onwards.

Finally, CASURECO 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 its Accounting Separation Statements in accordance with Section 2.6 of the BSG; ERC Case No. 2013-005 MC DECISION/May 14, 2013 Pacie 11 of 13

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

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.

SO ORDERED.

Pasig City, May 14, 2013.

Z4SA CRUZ-DUCUT 4/ ChairpersonpnaA)

MARIA LSTAEDA Jcti C. REYES Co missioner

(On Leave) ALFREDO J. NON GLRIA LGRIA YAP-TARUC Commissioner Commissioner

pP14SSURECO I BSUP/ERC CASE NO. 2013-005 MC-DECISION ERC Case No. 2013-005 MC DECISION/May 14, 2013 Pacie 12 of 13

Copy Furnished:

1. LERIOS-AMBOY AND DELOS REYES LAW OFFICES Counsels for INEC Units 1609-1610, Tycoon Centre Pearl Drive, Ortigas Avenue, Pasig City

2. CAMARINES StiR I ELECTRIC COOPERATIVE, INC. (CASURECO I) Barangay Puro-Batia, Libmanan, Camarines Sur

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

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

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

6. The 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, Sen. Gil Puyat Avenue Makati City

8. Office of the Provincial Governor Province of Camarines Sur

9. Office of the Municipal Mayor Ragay, Camarines Sur

10. Office of the Municipal Mayor Lupi, Camarines Sur

11. Office of the Municipal Mayor Sipocot, Camarines Sur

12. Office of the Municipal Mayor Cabusao, Camarines Sur

13. Office of the Municipal Mayor Libmanan, Camarines Sur

14. Office of the Municipal Mayor Pamplona, Camarines Sur ERC Case No. 2013-005 MC DECISION/May 14, 2013 Pacie 13 of 13

15. Office of the Municipal Mayor Pasacao, Camarines Sur

16. Office of the Municipal Mayor San Fernando, Camarines Sur

17. Office of the Municipal Mayor Gainza, Camarines Sur

18. Office of the Municipal Mayor Camaligan, Camarines Sur