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~~GIj\..ATORyC;. , o...\.. ~t""i,,~ . Republic of the Philippin~s _[:1Approved for\ ENERGY R~GULATORY C

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

ERC CASE NO. 2014-006 MC

SOUTH GOTABATO II ELECTRIC 1: COOPERATIVE, INC. (SOCOTECO II ), Applicant. ,x------x

DECISION

jl. Before the Commissio.n for resolution is 'the application filed by South II Electric Cooperative, Inc. (SOCOTECO II) on February 6, 2014 for approval of its Business Separation and Unbundling Plan (BSUP) pursuant to Section 36 of Republic Act 9136 and Rule 10 of its Implementing Rules and Regulations.

In the said .application, SOCOTECO 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 J. Catolico Ave., Lagao, City; .

2. It is the holder of an. exclusive franchise issued by the National Electrification Commission (NEC), to operate an electric . light and power distribution service in the Municipalities of , , Glan, , ERC CASE NO. 2014-006 MC DECISION/December 1, 2014 J:,ag,~",~9.t"t~,_"""""""_"",,,,,,,_,,,,,,,,,,,,,,,,,,,,,,,,,,,_ """"""""""""''''''''''''''''''''''''_'''''''''''__'''''''''_''''''_"""""_",,""'''''''''''''''''''''''''''''''_,,'''''''''''''''''',,__ ,,__''''''_'''''''_,,'''',''''"""""""""""_""

Maasim, Kiamba, Maitum, , Tupi for the Provinces of and and the chartered City of General Santos;

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 II 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 Implementing Rules and Regulations (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, SOCOTECO 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), as amended, and made integral parts hereof as annexes; and ERC CASE NO. 2014-006 MC DECISION/December 1, 2014 ..P~.g5?.1Q.fJ..~ _ _ __ _ " _ _ _ ..,.__.._.__ __.____ .._ ___.___

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

Having found said application to be sufficient in form and in substance, with the required fees having been paid, an Order and a Notice of Public Hearing, both dated March 17, 2014, were issued setting the case for initial hearing on April 7, 2014.

In the same Order, SOCOTECO II 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 date of the scheduled 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.

Likewise, the Offices of the Governors of the Province of South Cotabato and the Province of Sarangani and the Mayors of the City/Municipalities within SOCOTECO 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 4, 2014, SOCOTECO II filed its "Pre-Trial Brief'.

During the April 7, 2014 initial hearing, SOCOTECO II appeared. No intervenor/oppositor appeared nor was there any intervention/opposition registered.

At the said hearing, SOCOTECO II presented proofs of its 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. 2014-006 MC DECISION/December 1, 2014 ..E..9...g.~4.9.f.j ..~ _ ,._.. _. ______.

SOCOTECO II presented Mr. Nicanor J. Gumayagay, Manager of its Finance Services Department, who testified in support of the instant 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. SOCOTECO II, then, was directed to submit additional requirements together with its formal offer of evidence within fifteen (15) days from the said date of hearing.

On April 23, 2014, SOCOTECO II filed its "Formal Offer of Evidence".

On May 7, 2014, SOCOTECO II filed its "Compliance with Directives" .

On December 1, 2014, the Commission issued an Order admitting the "Formal Offer of Evidence" filed by SOCOTECO II for being relevant and material in the evaluation of this case.

DISCUSSION

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

1) Details of Current Structure

SOCOTECO 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 Application for New Service - Residential; 1.2 Application for New Service - Non-Residential; 1.3 Meter Reading and Billing Process; 1.4 Collection Process; 1.5 Disconnection Process; 1.6 Reconnection Process; , ' , ' ERC CASE NO. 2014-006 MC DECISION/December 1, 2014 e?g~~_c.>..L1...s __ _ .._ _ " _ _ _..".._"______..__ _ _ .

1.7 Customer Assistance - Inquiries, Complaints, Concerns; 1.8 Procurement Process (Both for CAPEX and Non- CAPEX) - Below 1 Million Pesos; and 1.9 Procurement Process (Both for CAPEX and Non- CAPEX) - Above 1 Million Pesos.

2) Details of Business Segments

In compliance with the BSUP Filing Package, SOCOTECO 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: a) Distribution Services (OS), b) Distribution Connection Services (DCS), c) Regulated Retail Services (RRS), d) Last Resort Supply Services (LRSS), e) Wholesale Aggregation Services (WA), f) Non-Regulated Retail Services (NRRS), and g) Related Business Services (RB).

a. Distribution Services (OS) - 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 Wholesale Electricity Spot Market (WESM) related meters; the Billing, collection and the provision of customer services directly related to the delivery of electricity. " ERC CASE NO. 2014-006 MC DECISION/December 1, 2014 ..E.~.g~.~_9.t.1.~_ _. .._~ ______.._. . _

b. Distribution Connection Services (DCS) - provide for the capability at each Connection Point to a Distribution System for conveyance of electricity from the facilities of persons which are 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 above services.

c. Regulated Retail Services (RRS) - refer to 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. Last Resort Supply Services (LRSS) - refer to the provision of LRSS services provided by a DU, namely: services pertaining to the sale of electricity to LRSS Customers including billing, collection and the provision of basic customer service.

e. Wholesale Aggregation Services (WA) - are comprised of the Distribution Utility's Services of purchasing electricity in bulk and selling this to other Distribution Utilities.

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

g. 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 the construction and maintenance of customer installation and rentals of poles, transformers and heavy equipment vehicles. ERC CASE NO. 2014-006 MC DECISION/December 1,2014 E~g~I.9l.J~.._ _._ __..___ _ _. ._ __.. ____.. __.

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, SOCOTECO II submitted the number of employees who will be engaged in the activities of each business segment.

SOCOTECO II stated that the present organizational structure of the coop was approved by NEA on October 21, 2011 and this has been adopted by the cooperative. Changes has been made such as re- ranking of some positions to align and conform to the job descriptions made as a result of the evaluation made by Management. In addition, new positions were created to conform to the need of the organization. NEA was appropriately informed.

2.3 Description of Assets

SOCOTECO 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. SOCOTECO II allocated its assets to four (4) business segments only, namely: DS, DCS, RRS, and RS.

3) Accounting Separation

The Accounting Separation Statements and the corresponding accounting principles, policies and procedures used by SOCOTECO II are in accordance with the SSG, as amended. The accounts maintained in the seven (7) segments are reflected in such a way that these are , \ " ERC CASE NO. 2014-006 MC DECISION/December 1, 2014 Page 8 of 15 -______...... • ; ; ;.: :••....; __ - _.__ __ _ .._ _ - _ _ - 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.

SOCOTECO II submitted its Accounting Separation Statements particularly 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 Statement (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, as amended, for the said accounting separation statement. This undertaking ensure the clear separation of the accounts of its regulated and non-regulated business activities.

3.1 Principles to Achieve Accounting Separation

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

3.2 Allocation Principles

SOCOTECO II adopted the allocation methods and principles in accordance with Article III (Information Requirements for Accounting Separation) of the BSG, as amended. Direct allocation approach was used in allocation of accounts, revenues and expenses that directly relate to a certain activity or section. The accounts revenue and expenses that cannot be directly attributed to an activity/section will be allocated using an appropriate 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) items that are directly attributable to a Business Segment are allocated ERC CASE NO. 2014-006 MC DECISION/December 1, 2014 Page 9 of 15

accordingly; (b) items that are indirectly attributable to a Business Segment are allocated using an appropriate allocation method; and (c) items that are unattributable to a Business Segment are allocated using a fair and reasonable method.

SOCOTECO II, in general, adopted the allocation factors based on the principles set forth in the approved ACAM and the BSG, as amended, except for the following:

1) It should use "OS and/or DCS" allocation factor instead of "RRS" for its Street Lights and Signal System account.

2) It should reconcile the difference between its Audited Financial Statements for the year 2011 with the following worksheets: Cash Flow Statement, Statement of Assets and Liabilities and Total Statement of Assets and Liabilities.

3.3 Chart of Account

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

3.4 Basic Accounting Principles

SOCOTECO 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.

It intends to present financial statements with the following frameworks, concepts, characteristics,. and assumptions such as understandability, relevance, ERC CASE NO. 2014-006 MC DECISION/December 1, 2014 Page 10 of 15

reliability, comparability, consistency, going concern and accrual. The calendar year was used as its accounting period in the preparation of financial reports.

It shall comply with the required 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

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

4) Description of Separation

SOCOTECO II, remains as a single entity and will be unbundled through separation of its employees and its assets as maybe appropriate. The separation will be through evaluation of workloads, job description, qualifications and usage in the case of fixed assets. It will allocate its departments to the business segments. However, for departments with unattributable costs, allocation factors will be utilized as prescribed in the ACAM.

It presented a general and detailed structure per business segment and department, identifying which segment performs the activity. , " ERC CASE NO. 2014-006 MC DECISION/December 1, 2014 f~.g..~_.1,jQ.f....1 ~ _ __ .

5) Milestones and Highlights

These include the events participated in by SOCOTECO II from March 2011 onwards in relation to the promulgation of the ACAM for ECs, as well as, the Workshop and Pre-filing Conference, in preparation for the ECs SSUP application, as spearheaded by PHILRECA.

In addition, it submitted an undertaking invoking the implementation of the separation of business segments to ensure that it is compliant with the requirement of the SSG, 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 (SSG)" 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.

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

WHEREFORE, the foregoing premises considered, the application filed by South Cotabato II Electric Cooperative, Inc. (SOCOTECO II) 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.

In the preparation of the Accounting Separation Statement, the BSG as amended requires that transfer pricing policies shall be used . for transactions between business segments. Since SOCOTECO II did not proposed transfer pricing methodology, the calculation of \. ERC CASE NO. 2014-006 MC DECISION/December 1, 2014 ..PC!.g~12...Qf..t~..______.__ ___. ______.___.._. _

transfer prices based on f411yallocated costs using the cost allocation standards without any mark-up is recommended for its services, products and assets transferred between related entities/business segments.

SOCOTECO II is directed to modify its proposed BSUP relative to the following:

1) For its Street Lights and Signal System account, SOCOTECO II is directed to use "OS and/or DCS" allocation factor.

2) In addition, SOCOTECO II should reconcile the difference between its Audited Financial Statements for the year 2011 with the following worksheets: Cash Flow Statement, Statement of Assets and Liabilities and Total Statement of Assets and Liabilities.

It is further directed to breakdown the revenue derived from its Related Business during the year 2011.

Finally, SOCOTECO 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's 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) 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 required to accompany the Accounting Separation Statements in accordance with Section 2.11 of the BSG, as amended; and ;. ,. . '. ERC CASE NO. 2014-006 MC DECISION/December 1, 2014 Page 13 of 1S

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, December 1,2014.

~j) If, (~ ENAIDA G. CRUZ-DUCUT Chairperson ~

.~ On />.J~~ {l. _L ALFREDO J. NON GfORiA VICTORIA G/YAP- TARUC Commissioner Commissioner

JOSEFINA P ... . ., ERC CASE NO. 2014-006 MC DECISION/December 1, 2014 f~_g.~.t~gfJ~ _ __..______. ______.

Copy Furnished:

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

2. South Cotabato II Electric Cooperative, Inc. (SOCOTECO II) J. Catolico Avenue, Lagao, General Santos City

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 Building, Roxas Boulevard Pasay City, Metro Manila 1300

6. House Committee on Energy Batasan Hills, Quezon City, Metro Manila 1126

7. Office of the Municipal Mayor Alabel, South Cotabato

8. Office of the Municipal Mayor Malapatan, South Cotabato

9. Office of the Municipal Mayor Glan, South Cotabato

10. Office of the Municipal Mayor Malungon, South Cotabato

11. Office of the Municipal Mayor , South Cotabato

12. Office of the Municipal Mayor Kiamba, South Cotabato .. >

~: oj ERC CASE NO. 2014-006 MC DECISION/December 1, 2014 .E_9..g.~J~ ott~ ",,,,,,,..__._ __.__.._...... __ __._.._._"'.."'.. 13. Office of the Municipal Mayor Maitum, South Cotabato

14. Office of the Municipal Mayor Polomolok, South Cotabato

15. Office of the Municipal Mayor Tupi, South Cotabato

16. Office of the City Mayor General Santos, South Cotabato

17. Office of the Provincial Governor Sarangani, South Cotabato