Republic of the ENERGY REGULATORY COMMISSION San Miguel Avenue, Pasig City

IN THE MATTER OF THE APPLICATION FOR AUTHORITY TO INCLUDE IN CUSTOMER'S BILL A TAX RECOVERY ADJUSTMENT CLAUSE (TRAC) FOR FRANCHISE TAXES PAID IN THE PROVINCE OF AND BUSINESS TAX PAID IN THE MUNICIPALITIES OF , , AND ALL IN THE PROVINCE OF LAGUNA

ERC CASE NO. 2013-002 CF

FIRST ,LAGUNA ELECTRIC COOPERATIVE, INC. (FLECO), Applicant. x------x

DECISION

Before this Commission for resolution is the application filed on January 8, 2013 by the First Laguna Electric Cooperative, Inc, (FLECO) for authority to include in its customer's bill a Tax Recovery Adjustment Clause (TRAC) for franchise taxes paid to the Province of Laguna and business taxes paid to the Municipalities of Pangil, Lumban, Pagsanjan and Pakil, all in the Province of Laguna.

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

1. It is a non-stock non-profit electric cooperative (EC) duly organized and existing under and by virtue of the laws of the Republic of the Philippines. It is represented by its Board President, Mr. Gabriel C. Adefuin, It has its principal office at Lewin, Lumban, Laguna; " ERC CASE NO. 2013-002 CF DECISION/April 28, 2014 Page 2 of 18

2. It is the exclusive holder of a franchise issued by the National Electrification Administration (NEA) to operate an electric light and power services in the Municipalities of , Pagsanjan, Lumban, Kalayaan, , Pakil, Pangil, , , , and Sta. Maria, all in the Province of Laguna;

3. The Office of the Provincial Treasurer of Laguna assessed it of its arrears on its basic franchise tax liabilities for the following years:

Taxable Gross Franchise Taxable Year Receipt Tax Year (PhP) (PhP) . 2007 85,813,974.07 2008 429,069.87 2008 84,663,541.25 2009 423,317.70 2009 95,977,795.73 2010 479,888.95 2010 154,707,214.16 2011 773,536.07 2011 77,978,171.04 2012 389,890.86 Total 2,495,703.45 Governor's Permit Add: 100.00 Fee PTO Certification Fee 50.00 Grand Total 2,495,853.45

4. It paid the basic franchise tax to the Province of Laguna in the total amount of PhP2,495,853.44, as follows:

Official Receipt No. Payment CV No. and Date and Date (PhP) 128702 - 7/25/12 LA 0148339 - 7/30/12 624,075.86 128867 - 8/28/12 LA 037141 -8/31/12 623,925.86 129027 - 9/25/12 LA0394999 - 9/28/12 623,925.86 129178 -10/25/12 LA0532725 - 10/30/12 623,925.86 Total 2,495,853.44 • ERC CASE NO. 2013-002 CF DECISION/April 28, 2014 Page 3 of 18

5. It proposes to recover the franchise tax paid in six (6) months recovery period using a projected kWh sales of 36,371,005 kWh, to wit:

Summary of the Projected kWh Sales for Eleven (11) Municipalities of Laguna Area Projected kWh Sales Cavinti 4,057,269 Pagsanjan 15,483,761 Lumban 9,822,585 Kalayaan 4,151,986 Paete 7,970,152 Pakil 4,494,293 Pangil 4,980,924 Siniloan 10,609,928 Famy 2,543,747 Mabitac 4,185,502 Sta. Maria 4,439,850 Total Divide by 2 72,742,010 2

Six Months Projected kWh Sales 36,371,005

6. The proposed Tax Recovery Adjustment Charge (TRAC) is PhPO.0686/kWhr computed as follows:

Total Paid/Unpaid Franchise Tax PhP2,495,583.44 Projected Semi-annual kWh Sales for Eleven (11) Municipalities in Laguna, within the franchise area of the applicant 36,371,005 kWhr TRAC PhPO.0686/kWhr • ERC CASE NO. 2013-002 CF DECISION/April 28, 2014 Page 4 of 18

7. The Office of the Municipal Treasurer of Pangil, Laguna assessed it of its arrears on its basic business tax liabilities for the following years:

Taxable Business Tax Particulars Years (PhP) Municipal Taxes and Fees 2011 1,650.00 Mayor's Permit 2012 775.00 Gross Sales Tax-1St Qtr. 2012 6,345.00 Gross Sales Tax-2na Qtr. 2012 6,345.00 Gross Sales Tax-23r Qtr. 2012 6,345.00 Gross Sales Tax-4th Qtr. 2012 6,345.00 TOTAL 27,805.00

8. It paid the basic business tax to the Municipality of Pangil, Laguna in the total amount of PhP27,805.00 as follows:

CV/JV No. and Date Official Receipt Payment No. (PhP) 11-02-093-02/28/12 9083400, 9083392 1,650.00 and 9001102 12-01-056-01/18/12 775.00

014789,0148811 01/27/12 and others 6,345.00 0489065 12852-06/28/12 0174736 6,345.00 129094-10/09/12 0411554 6,345.00 Unpaid-4th Quarter, 12 - 6,345.00 Total 27,805.00

9. It proposes to recover the business tax paid in six (6) months recovery period using a projected kWh sales of 2,490,462 kWhr, to wit: ERC CASE NO. 2013-002 CF DECISION/April 28, 2014 Page 5 of 18

Projected kWh Sales for Pangil, Municipality of Laguna Area Projected kWh Sales PanQil 4,980,924 Total Divide by 2 4,980,924 2

Six Months Projected kWh Sales 2,490,462

10. The proposed Tax Recovery Adjustment Charge (TRAC) is PhPO.0112/kWhr computed as follows:

Total Paid/Unpaid Franchise Tax PhP27,805.00 Projected Semi-annual kWh Sales for Pangil Municipality of Laguna, within the franchise area of the 2,490,462 kWhr applicant TRAC PhPO.0112/kWhr

11. The Office of the Municipal Treasurer of Lumban, Laguna assessed it of arrears on its basic business tax liabilities for the following years:

Taxable Particulars Business Tax Year Mayor's Permit and ReQulatory Charges 2012 2,600.00 Gross Sales Tax 2012 53,247.00 Total PhP55,847.00

12. It paid the basic business tax to the Municipality of Lumban, Laguna in the total amount of PhP55,847.00, as follows: ERC CASE NO. 2013-002 CF DECISION/April 28, 2014 Page 6 of 18

CV/JV No. and Date Official Receipt No. Payment and Date (PhP) 127826-02/27/12 0685469 4/16/12 2,600.00 12782-2/24/12 0685469 4/16/12 53,247.00 Total 55,847.00

13. It proposes to recover the business tax paid in six (6) months recovery period using a projected kWh sales of 4,911,292 kWhr, to wit:

Projected kWh Sales for Lumban, Municipality of Laguna

.Area Projected kWh Sales . Lumban 9,822,585 Total Divide by 2 9,822,585 2 Six Months Projected kWh 4,911,292 Sales

14. The proposed Tax Recovery Adjustment Charge (TRAC) is PhPO.0114/kWhr computed as follows:

Total Paid/Unpaid Franchise Tax PhP55,847.00 Projected Semi-annual kWh Sales for Lumban Municipality of Laguna, within the franchise area of the applicant 4,911,292 kWhr TRAC PhPO.0114/kWhr ERC CASE NO. 2013-002 CF DECISION/April 28, 2014 Page 7 of 18

15. In 2006, the Municipality of Pagsanjan, Laguna implemented Tax Ordinance No. 01-2006, supplementing the Municipal Revenue Code of the Municipality of Pagsanjan, duly approved by the Sangguniang Sayan dated March 27, 2006;

16. On June 13, 2006, it sought the approval to recover from the consumers of Pagsanjan, Laguna the municipal taxes being imposed by the said municipality, through a letter addressed to the Chairman of the Commission;

17. When the Commission failed to reply to the said letter within reasonable period of time, it implemented the recovery thereof from the consumers of Pagsanjan, Laguna and accordingly remitted the same to the Municipality of Pagsanjan, Laguna;

18. It is requesting the Commission to confirm the aforesaid recovery and payment of the municipal business tax and to continue the same practice;

19. Likewise, the Municipality of Pakil, Laguna implemented Municipal Ordinance No. 05-S-2006, duly approved by the Sangguniang Sayan dated September, 2006;

20. On February 19, 2007, it sought the approval to recover from the consumers of Pakil, Laguna the municipal business tax being imposed by the said municipality, through a letter addressed to the Chairman of the Commission;

21. When the Commission failed to reply to the said letter within a reasonable period of time, it implemented the recovery thereof from the consumers of Pakil, Laguna and, accordingly, remitted the same to the Municipality of Pakil, Laguna; ,. ., ERC CASE NO. 2013-002 CF DECISION/April 28, 2014 Page 8 of 18

22. It is requesting the Commission to confirm the aforementioned payment of the Municipal business tax and to continue the same practice;

23. This application is being filed pursuant to Formula 5b, Section 6, Article 2 of the Commission's Resolution No. 16, Series of 2009; and

24. It prays that the Commission, after due notice and hearing, its application be approved and authorize it to: a) include in its bills to customers in the Province of Laguna a Tax Recovery Adjustment Clause (TRAC) of PhPO.071459/kWhr until such time that the franchise tax paid in the amount of PhP2,495,583.44 has been fully recovered; b) to include also in its bills to consumers in the Municipality of Lumban, Laguna a TRAC of PhPO.0114/kWhr until such time that the business tax paid in the amount of PhP55,847.00 has been fully recovered; c) to likewise include in its bills to consumers in the Municipality of Pangil, Laguna a TRAC of PhPO.0112/kWhr until such time that the business tax paid in the amount of PhP27,805.00 has been fully recovered; d) to also pass on to its customers all current Franchise Taxes in the Province of Laguna and Business Taxes in the Municipalities of Pangil and Lumban, both in the Province of Laguna, based on the approved Tax Recovery Adjustment Clause (TRAC) formula; and e) confirming the recovery and payment of municipal taxes in the Municipalities of Pagsanjan and Pakil, both in the Province of Laguna, and to continue the said practice of recovery and payment.

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 March 18, 2013, were issued setting the case for jurisdictional hearing, expository presentation, pre-trial conference and evidentiary hearing on April 11, 2013. ERC CASE NO. 2013-002 CF DECISION/April 28, 2014 Page 9 of 18

In the same Order, FLECO 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 the date of the 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 and the Mayors of the Municipalities within the franchise area of FLECO were furnished with copies of the Order and Notice of Public Hearing for the appropriate posting thereof on their respective bulletin boards.

During the April 11, 2013 initial hearing, only FLECO appeared. No intervenor/oppositor appeared nor was there any intervention/opposition registered.

In the said hearing, FLECO filed its "Pre-Trial Brief' and presented its proofs of compliance with the Commission's posting and publication of notice requirements which were duly marked as Exhibits "A" to "H-3", inclusive. Thereafter, it conducted an expository presentation of its application and presented as witness, Ms. Belinda A. Lugmao, its Officer-in-Charge (OIG) Manager for Finance Services Department, 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 c1arificatory questions on the said witness. FLECO was, then, directed to submit various documents and its formal offer of evidence.

On May 9,2013, FLECO filed a "Motion for Extension of Time". ERC CASE NO. 2013-002 CF DECISIONIAprii 28, 2014 Page 10 of 18

On June 6 and 11, 2013, FLECO filed its "Compliance" and "Formal Offer of Evidence", respectively.

On February 10, 2014, the Commission issued an Order directing FLECO to submit its sales per customer classes for the years 2007 to 2012 for the Municipalities of Pagsanjan and Pakil, Laguna. Subsequently, on March 3, 2014, FLECO filed its "Compliance" .

On April 8, 2014, the Commission issued an Order admitting FLECO's "Formal Offer of Evidence" for being material and relevant in the resolution of the instant application.

DISCUSSION

Section 5, Article X of the 1987 Constitution of the Republic of the Philippines provides that "each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local governments."

In relation thereto, the Local Government Code (LGC) modified the revenue raising powers of the local governments under the then Local Tax Code, the pertinent portions of which are as follows:

A. "Section 129. Power to Create Sources of Revenue ....: Each local government unit shall exercise its power to create its own sources of revenue and to levy taxes, fees and charges subject to the provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local government units."

B. "Section 132. Local Taxing Authority - The power to impose a tax, fee or charge or to generate revenue under this Code shall be exercised by the Sanggunian of the local government unit concerned through an appropriate ordinance." ERC CASE NO. 2013-002 CF DECISION/April 28, 2014 Page 11 of 18

C. "Section 137. Franchise Tax - Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at the rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction."

D. "Section 142. Scope of Taxing Power - Except as otherwise provided in this Code, municipalities may levy taxes, fees, and charges not otherwise levied by provinces."

E. "Section 143. Tax on Business - The municipality may impose taxes on the following business:

xxx

(h) On any business, not otherwise specified in the preceding paragraphs which the sanggunian concerned may deem proper to tax. x x x.

F. "Section 151. Scope of Taxing Powers - Except. as otherwise provided in this Code, the city may levy the taxes, fees, and charges which the province or municipality may impose; Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of this Code. The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes. "

G. "Section 186. Power to Levy Other Taxes, Fees or Charges - Local government units may exercise the power to levy taxes, fees or charges on any base or subject not otherwise specifically enumerated herein or taxed under the provisions of the National Internal Revenue Code, as amended, or other applicable laws: Provided, That the taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy: Provided, further, That the ordinance levying such ERC CASE NO. 2013-002 CF DECISION/April 28, 2014 Page 12 of 18

taxes, fees or charges shall not be enacted without any prior public hearing conducted for the purpose."

H. "Section 191. Authority of Local Government Units to Adjust Rates of Tax Ordinance - Local government units shall have the authority to adjust the tax rates as prescribed herein not oftener than once every five (5) years, but in no case shall such adjustment exceed ten percent (10%) of the rates fixed under this Code."

Consistent with the foregoing, on July 31, 2009, the Commission issued Resolution No. 16, Series of 2009, entitled "A Resolution Adopting the Rules Governing the Automatic Cost Adjustment and True-Up Mechanism and Corresponding Confirmation Process for Distribution Utilities".

In support of its application, FLECO submitted to the Commission the following documents:

a. Certified True Copy of Tax Ordinances of the Province of Laguna, Municipality of Pagsanjan, Pakil, Pangil and Lumban;

b. Board Resolution Authorizing the Tax Recovery;

c. Projected Sales and TRAC computation;

d. Summary of Payments;

e. Copy of Official Receipts; and

f. Affidavit of Publication.

Taking into consideration the procedure adopted in the determination of gross receipts as provided in the Resolution and in congruence with the Department of Finance's Local Finance Circular No. 1-07, dated June 28, 2007, which defines ECs gross receipts in Section 3(b)( 1) and (b)(2), to wit: ", ERC CASE NO. 2013-002 CF DECISION/April 28, 2014 Page 13 of 18

"1) Before the effectivity of the EPIRA Law (1997- 2001), franchise and business taxes shall be based on the total gross receipts pursuant to Section 131(n) of the LGC.

2) Upon the effectivity of the EPIRA Law (2002), the basis shall be as follows:

Gross Receipts: Less: NPC Charges Transco Charges Reinvestment Fund Universal Charges"

As provided in Section 6, Formula 5(8) of the Resolution, the . formula for franchise tax rate shall be:

Uta+ Bta TRAC = (------) + OFBA

STRAC

Where:

TRAC = Tax Recovery Adjustment Charge expressed in Peso/kWh applied to the customer's monthly billing until such time the total franchise and business taxes paid to the local government shall have been fully recovered;

Uta = Local franchise Tax (excluding penalty and surcharge) paid prior to the implementation of the approved franchise tax rate; " ERC CASE NO, 2013-002 CF DECISIONIApril 28, 2014 Page 14 of 18

Bta = Business Tax (excluding penalty and surcharge) paid prior to the implementation of the approved business tax formula;

STRAC = Projected kWh sales for a particular proposed recovery period or as determined by ERC; and

TRAC = Other Franchise and Business Taxes Cost Adjustments, refer to adjustments deemed necessary by the Cost Adjustments, refer to adjustments deemed necessary by the Commission after prior verification and confirmation, and the TROUR determined using the formula provided in Article 4, Section 6.2 hereof.

Franchise Projected Recovery Recovery Province Tax Due Monthly Option Rate (PhP) kWh Sales (Months) (PhP/kWh) Laguna 2,495,853.48 5,655,639 12 0.0368

. Business Projected Recovery Recovery Municipality Tax Due Monthly Option Rate (PhP) kWh Sales (Months) (PhP/kWh) Lumban 56,782.51 771,451 12 0.0061 Pangil 19,435.00 369,821 12 0.0044 Pagsanjan 16,508.05 1,238,451 1 0.0133 Pakil 6,487.58 348,508 1 0.0186

WHEREFORE, the foregoing premises considered, the application filed by First Laguna Electric Cooperative, Inc. (FLECO) for authority to include for authority to include in customer's bill a Tax Recovery Adjustment Clause (TRAC) for franchise tax paid in the Province of Laguna and business taxes paid to the municipalities of Pangil, Lumban, Pagsanjan and Pakil, all in the Province of Laguna is hereby APPROVED. ERC CASE NO. 2013-002 CF DECISION/April 28, 2014 Page 15 of 18

Accordingly, FLECO is hereby authorized to recover the following franchise and business taxes starting the next billing cycle from receipt hereof until such time that the full amount shall have been fully recovered:

a) The franchise taxes paid in the Province of Laguna for the years 2007 to 2011 amounting to PhP2,495,853.48, equivalent to PhPO.0368/kWh;

b) The business tax paid to the Municipality of Lumban for the year 2012 amounting to PhP56,782.71, equivalent to 0.0061/kWh;

c) The business tax paid to the Municipality of Pangil for the year 2012 amounting to PhP19,435.00, equivalent to PhPO.0044/kWh;

d) The business taxes paid to the Municipality of Pagsanjan for the years 2007 to 2012 amounting to PhP16,508.05, equivalent to PhPO.0133/kWh; and

e) The business taxes paid to the Municipality of Pakil for the years 2007 to 2012 amounting to PhP6,487.58, equivalent to PhPO.0186/kWh.

In connection therewith, FLECO is hereby directed to:

a) Submit within ten (10) days from its initial implementation, a sworn statement indicating its compliance with the Order;

b) Reflect the Tax Recovery Adjustment Charges as a separate line item in the bill using the phrase "TRAC"; and ERC CASE NO. 2013-002 CF DECISION/April 28, 2014 Page 16 of 18

c) Accomplish and submit in accordance with the prescribed format, on or before the 30th day of the following month, together with the monthly reportorial requirement, and every month thereafter until the amount shall have been fully recovered ..

50 ORDERED.

Pasig City, April 28, 2014.

MrrilG.dR~ Chairperson ~ ,

QwAv/ (On Official Travel) ALFREDO J. NON GLORIA VICTORIA C. YAP-TARUC Commissioner Commissioner

J05EFINA PATRI AGPALE-A5IRIT Co mi sioner

01 JS/FLECO/ERC CASE NO. 2013-002 CF-DECISION ERC CASE NO. 2013-002 CF DECISION/April 28, 2014 Page 17 of 18

Copy Furnished:

1. ATTY. ARNIDO O.INUMERABLE Counsel for Applicant FLECO 405 Elisa Street, UE Village, ,

2. FIRST LAGUNA ELECTRICCOOPERATIVE,INC. (FLECO) Barangay Lewin, Lumban, Laguna

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

4. The Commission on Audit Commonwealth Avenue 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) 3'd Floor, ECC Building, Sen. Gil Puyat Avenue Makati City

8. Office of the Provincial Governor Province of Laguna

9. Office of the Municipal Mayor Pagsanjan, Laguna

10. Office of the Municipal Mayor Cavinti, Laguna

11. Office of the Municipal Mayor Lumban, Laguna

12. . Office of the Municipal Mayor Kalayaan, Laguna

13. Office of the Municipal Mayor Paete, Laguna

14. Office of the Municipal Mayor Pakil, Laguna

15. Office of the Municipal Mayor Pangil, Laguna .••. .7!'- ERC CASE NO. 2013-002 CF DECISION/April 28, 2014 Page 18 of 18

16. Office of the Municipal Mayor Siniloan, Laguna

17. Office of the Municipal Mayor Famy, Laguna

18. Office of the Municipal Mayor Mabitac, Laguna

19. Office of the Municipal Mayor Santa Maria, Laguna