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

IN THE MATTER OF THE APPLICATION FOR THE APPROVAL OF THE BUSINESS SEPARATION AND UNBUNDLING PLAN (BSUP), PURSUANT TO THE PROVISION OF SECTION 36 OF R.A. 9136, AND RULE 10 OF ITS IMPLEMENTING RULES AND REGULATIONS

ERC CASE NO. 201 3-011 MC

CAGAYAN II ELECTRIC COOPERATIVE, INC. (CAGELCO II), DO CRETED Applicant. Date: x------x

DECISION

Before this Commission for resolution is the application filed on January 25, 2013 by II Electric Cooperative, Inc. (CAGELCO 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).

In the said application, CAGELCO II alleged, among others,. that:

1. It is an Electric Cooperative (EC) duly organized and existing under apt by virtue of the Republic of the Philippines with /pfincipal office at Macanaya, , Cagayan. GL/ / I ERC Case No. 2013-011 MC DECISION/June 10, 2013 Pacie 2 of 14

2. It is the exclusive holder of a franchise issued by the National Electrification Commission (NEC) to operate an electric light and power distribution service in seventeen (17) municipalities namely: , , Aparri, Ballesteros, , , Claveria, , Gonzaga, Lal-lo, , Pamplona, Sanchez Mira, Sta. Ana, Sta. Praxedes, Sta. Teresita and Calayan Island, all in the Province of Cagayan, and four (4) municipalities, namely: Flora, Sta. Marcela, Luna and Pudtol in the Province of .

3. Section 36 of Republic Act No. 9136 (R.A. 9136) otherwise known as the "Electric Power Industry Reform Act of 2001" or the 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 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, 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 (EC5).

5. 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 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 for the Commission's consideratiptp and approval, a set of Confidentiality Policies qh4 Guidance to be observed by concerned personnq(, bgether with a Board Resolution adopting certain tj ,of 4gations imposed upon Distribution - ERG Case No. 2013-011 MC DECISION/June 10, 2013 Page 3 of 14

Utilities (DUs), among others, as provided under Article V of the Business Separation Guidelines (BSG), attached hereto and made integral parts hereof as Annexes "B" and "C", respectively.

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 March 18, 2013, were issued selling the case for jurisdictional hearing, expository presentation, pre-trial conference and evidentiary hearing on April 15, 2013.

In the same Order, CAGELCO II 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.

On April 10, 2013, CAGELCO II filed its "Pro-Trial Brief'.

During the April 15, 2013 initial hearing, only CAGELCO II appeared. No intervenor/oppositor appeared nor was there any intervention/opposition registered.

At the said hearing, CAGELCO II 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. Teresita F. Ordillo, Officer-In-Charge of its Internal Audit Department (lAD), who testified in support of the application. In the course of her direct examination, additional documents were prese,ned and duly marked as exhibits. The direct examinations having,be4n terminated, the Commission propounded clarificatory question othe said witness.

I. ERC Case No. 2013-011 MC DECISION/June 10, 2013 Pafle 4 of 14

On May 6, 2013, CAGELCO II filed its "Formal Offer of Evidence".

On May 7, 2013, CAGELCO II filed its "Compliance with Directive".

On May 13, 2013, the Commission issued an Order admitting CAGELCO Il's "Formal Offer of Evidence" and declaring the case submitted for resolution.

DISCUSSION

• CAGELCO Ii's BSUP consists of six (6) sections as prescribed in the BSUP Filing Package, as follows:

1) Details of Current Structure

CAGELCO 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 departments or juridical entities, as well as the description of the current process enumerated as follows:

1.1 Meter Reading Process on Low Voltage and High Voltage Consumers 1.2 Billing Process. on Low Voltage and High Voltage Consumers 1.3 Collection Process 1.4 Disconnection Process 1.5 Reconnection Process 1.6 New Service Connection Process 1.7 Consumer Complaints Process 1.8 Procurement of Capital Expenditures and Non-Capital Expenditures Process

2) Details of Business Segments

In compliance witIjthe BSUP Filing Package, CAGELCO II had adequately cØrplied with this requirement and provided the details of its lfu#iness segments including the allocation of costs for each s1rjft4ent, asfollows: ERC Case No. 2013-011 MC DECISION/June 10, 2013 Paae 5 of 14

2.1 Business Segments

Its business segments are classified and defined according to the BSG. These are grouped into seven (7) business segments, namely: a) Distribution Services (DS), b) Distribution Connection Services (DCS), c) Regulated Retail Services (RRS), d) Last Resort Supply Services (LRSS), e) Wholesale Aggregation Services (WAS), f) Non-Regulated Retail Services (NRSS), and Related Business Services (RB).

a. Distribution Services (DS) - which consist of 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. Last Resort Supply Services (LRSS) - the provision of,X\RSS services provided by a DU, namely: serv/c4 pertaining to the sale of electricity to LRSS Cust m rs including billing, collection and the provision ,somer service. ERC Case No. 2013-011 MC DECISION/June 10, 2013 Paqe 6 of 14

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

f. Non-Regulated Retail Services (NRRS) - 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 personnel including: Electricity related services such as the design construction and maintenance of customer installation; and non-electricity related services such as rentals for telecommunications services, testing and rental fees for special equipment rental of vehicles.

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

CAGELCO II stated that there will be sharing of land, land rights and improvements, building, structure and improvement because all of its employees assigned to the Main Office are occupying the same building and employees from sub-offices are required regularly to report to the Main Office. It is noted that in its payroll allocation only six (6) business segments/acflty were used: DS, DCS, RRS, LRSS, WAandRB/ II

- ERC Case No. 2013-011 MC DECISION/June 10, 2013 Page 7 of 14

2.3 Description of Assets

CAGELCO il'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 was noted that CAGELCO II allocated its assets to six (6) business segments only identified as DS, DOS, RRS, LRSS, WA and RB.

3) Accounting Separation

The Accounting Separation Statements and the corresponding accounting principles, policies and procedures used by CAGELCO II are in accordance with the BSG. The accounts maintained in the seven (7) 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.

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

3.1 Principles to Achieve Accounting Separation

In accorda with the Commission's approved ACAM, CA CO II ndertakes to adopt the said man u a ERC Case No. 2013-011 MC DECISION/June 10, 2013 Page 8 of 14

3.2 Allocation Principles

CAGELCO II 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 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 accordingly; b) items that are directly 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.

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

3.3 Chart of Account

CAGELCO 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

CAGELCO II defined its basic accounting principles that are compliant with the BSG in order to properly process itp'2ransactions. These principles were observed/jin the preparation of its financial statemersa wljole as well as in the individual businessfenji ERC Case No. 2013-011 MC DECISION/June 10, 2013 Page 9 of 14

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

CAGELCO 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, particularly, on the provisions related to Prohibition on Discrimination, Disclosure of Information and Prohibition on Cross-subsidies.

4) Description of Separation

CAGELCO 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". Employees, assets and their corresponding costs common to all segments will be segregated by function forming different departments within the same juriØal entity. The assets of CAGELCO II and correspondin costs will be allocated based on logical and acceptablere#od. The method chosen should not in any way increas tfr cospof CAGELCO II. ERC Case No. 201 3-011 MC DECISION/June 10, 2013 Pane 10 of 14

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

5) Milestones and Highlights

This includes the events participated in by CAGELCO II from March 2012 to May 2013 in relation to the promulgation of the ACAM for ECs, as well as, the Workshop and Pre-filing Conference in preparation for the ECs BSUP application as spearheaded by the Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA).

CAGELCO II intends to strengthen its personnel by providing them with the necessary information on BSUP and a clear understanding of their roles. It expects from its employees total commitment to the undertaking.

It also .intends to upgrade its system in Order to maintain their ultimate goal of providing efficient and reliable service to the end-users. It is hope that end-users will make CAGELCO II their first and permanent choice.

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.

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

In the preparatØ4of the Accounting Separation Statement, the BSG requires that/ tansfer pricing policies shall be used for transactions betweq/4usiness segments. Since CAGELCO 11 did ERC Case No. 2013-011 MC DECISION/June 10, 2013 Paqe 11 of 14 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 Cagayan II Electric Cooperative, Inc. (CAGELCO 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.

CAGELCO II is directed to submit the breakdown of the revenue derived from its Related Business during the year 2011, particularly, the Miscellaneous Other Income as reflected in its Audited Financial Statements (AFS);

Finally, CAGELCO 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 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 Cqmliance Report required to accompany the Accoun1tin Separation Statements in accordance with Sectiorf2.ft..1 of the BSG; and ERC Case No. 2013-011 MC DECISION/June 10, 2013 Paae 12 of 14

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, June 10, 2013.

A' ( JVZENAIDA G. CRUZ-DUCUT Chairperson

MARIA tA, STAAEDA JO`E

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

11 BSUP/ERC CASE NO. 2013-011 MC-DECISION ERC Case No. 2013-011 MC DECISION/June 10, 2013 Page 13 of 14

Copy Furnished:

1. LERIOS-AMBOY AND DE LOS REVES LAW OFFICES Units 1609-1610, Tycoon Centre Pearl Drive, Ortigas Center, Pasig City

2. CAGAYAN II ELECTRIC COOPERATIVE, INC. (CAGELCO II) Macanaya, Aparri, Cagayan

3. The Office of the Solicitor General 234 Amorsolo Street, Legaspi Village, Makati City Metro Manila

3. The Commission on Audit Don Mariano Marcos Avenue Diliman, Quezon City, Metro Manila

4. The Committee on Energy Senate of the Philippines GSIS Building, Roxas Blvd., Pasay City, Metro Manila

5. The Comm ittee on Energy House of Representatives Batasan Hills, Quezon City, Metro Manila

6. Office of the President of PCCI Philippine Chamber of Commerce and Industry (PCCI) 3rd Floor, ECC Building, Sen. Gil Puyat Avenue Makati City

7. Office of the Municipal Mayor Abulug, Cagayan

8. Office of the Municipal Mayor Allacapan, Cagayan

9. Office of the Municipal Mayor Aparri, Cagayan

10. Office of the Municipal Mayor Ballesteros, Cagayan

11. Office of the Municipal Mayor Buguey, Cagayan

12. Office of the Municipal Mayor Camalaniugan, Cagayan

13. Office of the Municipal Mayor Claveria, Cagayan

14. Office of the Municipal Mayor Gattaran, Cagayan

15. Office of the Municipal Mayor Gonzaga, Cagayan

16. Office of the Municipal Mayor Lal-lo, Cagayan 4 ERC Case No. 2013-011 MC DECISION/June 10, 2013 Page 14 of 14

17. Office of the Municipal Mayor Lasam, Cagayan

18. Office of the Municipal Mayor Pamplona, Cagayan

19. Office of the Municipal Mayor Sanchez Mira, Cagayan

20. Office of the Municipal Mayor Sta. Ana, Cagayan

21. Office of the Municipal Mayor Sta. Praxedes, Cagayan

22. Office of the Municipal Mayor Sta. Teresita, Cagayan

23. Office of the Municipal Mayor Calayan Island, Cagayan

24. Office of the Municipal Mayor Flora, Apayao

25. Office of the Municipal Mayor Sta. Marcela, Apayao

26. Office of the Municipal Mayor Luna, Apayao

27. Office of the Municipal Mayor Pudtol, Apayao