fcR PPFCtd for Republic of the ENERGY REGULATORY COMMISSIONt San Miguel Avenue, Pasig City \

IN THE MATTER OF THE APPLICATION FOR AUTHORITY TO SUBSTITUTE VARIOUS APPROVED THIRD REGULATORY PERIOD CAPITAL EXPENDITURE PROJECTS WITH THE IMPLEMENTATION SERVICES OF PREPAID ELECTRICITY MANAGEMENT SYSTEM (IS- PEMS) PROJECT, WITH URGENT PRAYER FOR PROVISIONAL AUTHORITY

ERC CASE NO. 201 2-033 RC

MANILA ELECTRIC COMPANY (MERALCO), DOCKETED Applicant DateS J.UL4LZU3L x ------X MV..------

DECISION

Before the Commission for resolution is the application filed on March 9, 2012 by Manila Electric Company (MERALCO) for authority (3td to substitute various approved ThirdS Regulatory Period RP) Capital Expenditure (CAPEX) Projects with its Implementation Services of Prepaid Electricity Management System (IS-PEMS) Project, with urgent prayer for provisional authority.

In the said application, MERALCO alleged, among others, the following:

It is a private corporation duly organized and existing under the laws of the Republic of the Philippines, with principal office located at Lopez Building, Ortigas Avenue, Pasig City; ERG Case No. 201 2-033 RC DECISION/April 15, 2013 Page 2 of 34

2. It has a legislative franchise to construct, operate and maintain an electric power distribution system for the conveyance of electric power to the end-users in the Cities and Municipalities of Metro Manila, Bulacan, and , and certain Cities/Municipalities/Barangays in , , and Pampanga pursuant to Republic Act No. 9209;

3. Section 12.2.4 of the Commission's Position Paper forthe Regulatory Reset for the July 2011 to June 2015 Third Regulatory Period for the First Entry Group of Privately Owned Distribution Utilities Subject to Performance Based Regulation (Position Paper) states that:

"The ERC recognizes that situations may arise where the need for a major capital expenditure project originally planned by a Regulated Entity and approved by the ERC, may change or disappear during the course of the Regulatory Period. At the same time, a need for another major capital project (which could be related or non-related to the original project) could arise.

In these situations, Regulated Entities can submit a request to the ERC to substitute an originally approved capital project with an altered version of the same project, or with a new project" As long as the value of the altered or new capital project does not exceed that approved by the ERC for the original project, the ERC will consider such request.

xxx."1

4. In the course of the current regulatory period, it recognized the urgent need to implement a major CAPEX project as described in the application, to address recently recognized customer requirements, which need was not apparent during the submission of its proposed forecast CAPEX projects in its 3 rd RP Regulatory Reset Application docketed as ERC Case No. 2010-069 RC and more importantly, to comply with recent regulatory i ssu an ces;

Emphasis supplied ERC Case No. 2012-033 RC DECISION/April 15, 2013 Paqe 3 of 34

5. In order to fund the proposed project, it seeks the approval of the Commission to substitute several 3rd approved RP CAPEX projects involving the construction, relocation or improvement of its Business Centers (BCs) and/or offices with its proposed IS-PEMS Project;

6. In 2004 and 2008, it conducted market studies to gauge the level of customer acceptance of its planned Prepaid Retail Electricity Service (PRES) offering. At that time, the projected level of sign-ups were at 36% and 45%, respectively, which prompted it to propose the conduct of a pilot on PRES in the Malabon area at a limited 40,000 smart meters;

7. In 2011, it again conducted a market study which indicated an 83% level of consumer interest. This is attributed to the "prepaid system" being deeply embedded now in the Filipino lifestyle. In addition, most of the respondents of the survey cited benefits in their interest to avail of PRES such as the ability to manage consumption and appliance use, alignment of prepaid payments with paydays, return of their service deposit and relaxation of some application requirements compared to postpaid se rvi ce;

8. Following the significant increase in consumer interest in PRES, coupled with the mandate of ERC Resolution No.15, Series of 2009, or the Rules for Prepaid Retail Electric Service Using a Prepaid Metering Service (PRES Rules), for Distribution Utilities (DU5) offering PRES to provide "easy access to the purchase of electric energy credits for twenty- four (24) hours to ensure

continuous service"2, it had to re-assess the system architecture it proposed in its 3 rd RP filing, which was designated as Prepaid Metering, Billing and Collection System (MER-21) Architecture;

8.1. In its Td RP Regulatory Reset Application, it considered offering PRES in Malabon Area for 40,000 customers whose meters are in Elevated Metering Centers (EMC). Given this limited

2 Section 2.8 of the PRES Rules ERC Case No. 2012-033 RC DECISION/April 15, 2013 Page 4 of 34

implementation, the envisioned PEMS Architecture was simply to allow loading/top-up only via its Malabon Business Center and nearby Auxiliary Business Centers (i.e. Navotas ABC and Caloocan ABC) and receive notifications only via Short Message Service (SMS);

8.2. However, not only was there a significant increase in consumer interest from 2008 to 2011, the survey also showed that upon offering PRES, its customers of all classes in the entire franchise area, not just in Malabon, would demand the service in their specific locality. Thus, the need for a shift from a PRES that would cater to only a single customer demographic type to multiple or variable consumer demographics;

8.3. With the variability of the customer demographics in Metro Manila and following advances in technology driven industries, demand from its customers for different forms of payment outlets are also foreseen. Since this is Prepaid Service, customers are expecting it to offer loading/top-up possibilities via the ubiquitous Telco loading centers (similar to how they embraced Prepaid Cellular Service) such as sari-sari stores, 7-1 1, Ministop and Bayad Centers outlets as well as other business/payment centers near their houses or places of work. 3 Furthermore, 24x7 load availability and wide accessibility is preferred by customers. With these, it is expected that the volume and complexity of PRES transactions, including consumption monitoring and balance inquiries, would likewise increase;

8.4. Thus, comparing the envisioned MER-21 payment option (Malabon Business Center and nearby Auxiliary Business Centers) versus the Customer Touch Points based on the 2011 market study, over-the-counter payment only in its BCs would not be sufficient to comply with customer needs to have an easy access to prepaid credits. Moreover, the original payment option would not be convenient for the customers since they have to travel from their homes or offices to purchase prepaid electricity

These loading/top-up options are collectively referred to as "Customer Touch Points" ERG Case No. 201 2-033 RC DECISION/April 15, 2013 Page 5 of 34

credits at these centers, which would require time and additional expenses on the part of the customers. Considering their current needs and expectations, customers will not be satisfied if the original Prepaid Metering, Billing and Collection System is implemented without more accessible payment centers;

8.5. Its system architecture to support PRES should be sufficiently robust to accept and manage: i) the volume of transactions; ii) consumer expectation of seamless loading, notification, availability of load and close to real-time disconnection/reconnection; complex and overlapping system commands coming from third party applications to PEMS; and iii) transactions between PEMS to the Smart Meter Head-End (Meter Data Collection System);

8.6. It submits its proposed IS-PEMS Project for the approval of the Commission. Furthermore, the approval of the IS-PEMS Project would: (i) pave the way for an increased rollout of PRES in addition to the 40,000-meter implementation as approved in its 3rd RP; and (ii) enhance its operational efficiency by way of allowing consumers as well as its staff and personnel instant service notification and alerts;

8.7. The IS-PEMS Project is one way by which it could assist the Commission in its desire to provide customers the means and the latest technology to empower them to take full control and management of their electricity consumption and for it to enhance its operational efficiency, all in pursuit of the objectives of the PRES Rules;

9. The IS-PEMS Project has two major components - External Integration (with third party applications) and Internal Integration (with its other Information System infrastructures). The integration cost is the same whether 40,000 or more prepaid meters will be installed; ERC Case No. 2012-033 RC DECISION/April 15, 2013 Paqe6of34

External Integration

9.1. External Integration involves integrating its approved MER-21: Prepaid Metering, Billing and Collection System (or simply PEMS) with third party vending systems to comply with Section 2.8 of the PRES Rules, which provides that:

"The DU offering PRES using a pre paid metering system shall allow reasonable means by which the residential customer shall have easy access to the purchase of electric energy credit for twenty four (24) hours to ensure continuous service." (Emphasis supplied)

9.2. Thus, to provide easy access to the purchase of prepaid credits, the IS-PEMS Project will make PEMS:

a) Integrate with Bayad Center System - This will allow more customer touch points through the more than 900 Branches of Bayad Center within MERALCO's franchise area to purchase Prepaid Electricity Credits

b) Integrate with Cellular Mobile Telephone Service (CMTS) Companies - This will allow customers to load and/or reload prepaid electricity credits through Smart, Sun, and Globe from sari-sari stores, convenience stores, and other retailers

c) Integrate with Short Message Service Gateway - This will allow customers to check balance, receive threshold notifications and customer-initiated remote disconnect/reconnect their service (customer initiated) ERC Case No. 201 2-033 RC DECISION/April 15, 2013 Page 7 of 34

9.3. Through this External Integration with third party vending systems, customers will be able to experience PRES similar to their CMTS experience in loading and monitoring account balance with the addition of the Internet and access to Bayad Center. It should be emphasized that as earlier stated, the original system architecture of PEMS involves loading only through its BCs and not on a 24/7 availability;

Internal Integration

9.4. Aside from the objective to integrate PEMS with third party systems, IS-PEMS will also integrate another 3' RP-approved Major CAPEX Project, designated as the Meter Data Management System (MDMS or MER-34), with its other Information Systems, including the PEMS, for a more effective and efficient PRES. The scope of Internal Integration includes:

a. Integration with its Point of Sale - This will allow its Business Centers to send payment information to PEMS and receive acknowledgement of payment received at PEMS

b. Integration with Customer Management System (CMS) - This will allow the CMS and MDMS to synchronize all customer related data to ensure that the MDMS has an up to date model of customer and account configurations. It will also allow CMS to send end-of-month adjustment information to PEMS to debit/credit prepaid balances in PEMS

c. Integration with IVRS - This will allow its Integrated Voice Recording System (IVRS) to obtain account information from PEMS in response to inbound customer calls requesting balance or account state information ERG Case No. 2012-033 RC DECISION/April 15, 2013 Paae 8 of 34

d. Integration with Corporate Email System - This integration will support both PRES and Open Access. It allows the MOMS and PEMS to send system alert emails or reports to its Staff through the Corporate Workgroup System (CWS, an internal Email System)

The internal integration with IVRS and CWS are additional integration areas beyond the scope of the original MER-21;

10. With the above-mentioned components of the proposed IS-PEMS, its consumers availing of PRES would have the most number of options and avenues by which prepaid credits can be purchased, thus, enabling easy access to the purchase of prepaid credits as mandated by the PRES Rules as well as access by which the PRES consumer can monitor his/her account balance and other account information;

11. In contrast, without the IS-PEMS, consumers will have very limited options in purchasing prepaid credits since there is no integration with established, numerous and familiar third party vending systems access from home through the Internet and the convenience of electronic loading via CMTS would not be possible and consumers would not be able to monitor their account balances anytime (or anywhere) they want;

12. In summary, with the approval of the IS-PEMS Project, customers would have easy access to the purchase of prepaid credits in response to customer needs as evidenced by the market study and in compliance with the PRES Rules to implement its Commission-approved 40,000-meter rollout for the 3 rd RP. It would also enable it to implement PRES on a larger scale using the proposed IS-PEMS architecture without additional system-related cost for the benefit of a greater number of customers;

13. In support of the application, it attached the following documents: ERC Case No. 2012-033 RC DECISION/April 15, 2013 Paae 9 of 34

a. Major CAPEX Project Justification (Annex "A"), which document includes a more detailed description of the Project, the various options it considered, the Qualitative and Quantitative Analyses of the options considered;

b. Major Project Information Summary Table/MPRES.xls, which includes the cost breakdown of the Project (Annex "B");

c. Scope of IS-PEMS Project (Annex "C");

d. Gantt Chart (Annex "D"); and

e. Qualitative and Quantitative Analysis Worksheets (Annex "E")

14. The total cost of the IS-PEMS Project is TWO HUNDRED FIFTY-THREE MILLION TWO HUNDRED TWELVE THOUSAND FIVE HUNDRED SEVENTY-FIVE PESOS (PhP253,21 2,575.00);

15. Given that the proposed project is an unforecasted project, thus, was not factored into its yearly Annual Revenue Requirement (ARR) for the 3 rd RP, it is constrained to substitute some of its approved 3 RP Major CAPEX projects involving the construction of various BCs and/or offices with the IS-PEMS to have the budget necessary to implement the proposed Project. The amount of the approved projects to be substituted is TWO HUNDRED NINETY TWO MILLION NINE HUNDRED THOUSAND PESOS (PhP 292,900,000.00);

16. This proposal for project substitution is a result of its ongoing Business Center Rationalization Study to determine which strategy will best serve its customers;

16.1. Currently, it serves a little over five (5) million customers within its 9,337 sq. km . franchise area. Depending on the size and location, the fifty-one (51) customer touch points (mostly BCs) are each serving from 20,000 to 150,000 customers; ERC Case No. 201 2-033 RC DECISION/April 15, 2013 Page 10 of 34

16.2. When the proposal for three (3) new BCs and the relocation or improvement of seven (7) BC5 as part of its 3rd RP major CAPEX projects was submitted to the Commission, it was considered that improving and adding more brick and mortar structures was the best and most economical way to improve customer service and experience. This strategy is now being re-evaluated given the proliferation of medium to large scale commercial areas around its franchise area, such as malls, the implementation of Open Access and Retail Competition (OARC) and possible synergies with other companies;

Expanded Services at Malls

16.3. The malls have evolved to become not just places for recreation (shopping and dining) but also for various services such as medical services, payment of bills, renewal of drivers' licenses, securing an NBI clearance, authenticated birth certificate or passport and other similar services. It was observed that many people have patronized these alternative sites to avail of these services leading to the conclusion that the consumers find these venues to be very convenient;

16.4. In view of this observed phenomenon, the option to bring it closer to its customers by opening more touch points where they can visit during their regular mall trips is strongly being considered. This means that it will be able to provide service from Monday to Sunday during mall hours at more locations all over its franchise area;

16.5. This notwithstanding, the existing BCs can be retained for specialized transactions and to serve as headquarters for its field personnel as well as providing backroom and management support to its mall touch points. Furthermore, for areas without the above-mentioned commercial areas, the need to construct brick and mortar structures is being evaluated; ERC Case No. 201 2-033 RC DECISIONIApriI 15, 2013 Paaell of34

Open Access and Retail Competition (OARC)

16.6. The possible declaration of OARC soon is also a major consideration in this strategy review. While it will still take time for OARC to be declared for the household level, it is best to be more conservative by deferring investments in fixed assets until there is certainty as to where the industry will go as far as OARC is concerned;

Exploring Partnerships with Other Companies

16.7. The possibility of partnering with other companies in terms of shared infrastructure and supportive technology is also being considered. This strategy will be adopted if it will redound to better customer service, more options for customers and lower costs for it; and

16.8. It is in consideration of the above that it would 3R1 substitute several of its approved RP projects regarding the construction or improvement of several BCs with the IS-PEMS project4. However, it has yet to finalize the specific approved projects that would be substituted and will submit the same to the Commission in the course of the proceedings.

17. With the clamor of the customers to avail of PRES and for the same to enjoy the above-mentioned benefits of PRES, such as the ability to manage consumption and appliance use, alignment of prepaid payments with paydays, return of their service deposit and relaxation of some application requirements compared to postpaid service at the earliest possible time, it hopes to be able to immediately start the implementation of PRES to realize a commercial pilot of the System by July 2012 at the earliest for a full commercial roll out by early 2013;

18. In order for it to start implementing PRES in 2012, there is a need to have the necessary integration with external and internal systems already in place prior to its PRES rollout. As above stated, the original PEMS architecture

It is its understanding that such substitution will become effective upon approval, provisional or otherwise, by the Commission of the IS-PEMS Project ERC Case No. 201 2-033 RC DECISION/April 15, 2013 Page 12 of 34

will not be able to comply with the PRES Rules considering the 83% market interest in availing of the PRES. More importantly, customer's experience on prepaid electric service will not be satisfactory if there would be no easy access to purchase the credits or no timely notifications on remaining credits;

19. There is a need for a provisional authority to be issued in its favor for it to immediately start the implementation of the IS-PEMS Project and finish the same in a year's time in the absence of factors that are beyond its control. Said provisional authority would enable it to immediately serve he interest of the consumers and thus, attain the objectives of PRES, particularly, in giving customers a choice for energy management strategies, enhancing operational efficiencies of DUs and promoting demand side management at the soonest. The IS-PEMS is crucial for it to fully implement its PRES program that will cater to the needs and preferences of its customers. Further, since PRES will be offered for the first time in its franchise area, customers should have the most convenient experience of PRES for this program to succeed;

20. The implementation of this project would have no impact to its present rates as the funding for this Project would be taken from approved 3rd RP projects in accordance with the existing rules and regulations of the Commission;

21. In support of the application and its prayer for the grant of a provisional authority, attached as Annexes "F" and "G" of the application are the Judicial Affidavits of Ms. Melinda P. Derpo, Vice President and Head of Marketing, showing the benefits that the public would enjoy as a result of the approval of the application, and Ms. Ma. Miel Cristina G. Lanting, Head of Customer Management System; and

22. It prays that the instant application be approved and that pending hearing, a provisional authority be immediately issued authorizing it to implement the IS-PEMS Project and allow its customers to already enjoy the benefits of PRES. ERC Case No. 2012-033 RC DECISION/April 15, 2013 Paqe 13 of 34

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 22, 2012, were issued setting the case for jurisdictional hearing, expository presentation, pre-trial conference and evidentiary hearing on April 16, 2012.

In the same Order, MERALCO was directed to cause the publication of the Notice of Public Hearing, at its own expense, twice (2x) for two (2) successive weeks in two (2) newspapers of general circulation in the Philippines, with the date of the last publication to be made not later than ten (10) days before the scheduled date of 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 rea&ons 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 Governors of the Provinces and the Mayors of the Cities and Municipalities within the franchise area of MERALCO were furnished with copies of the Order and Notice of Public Hearing for the appropriate posting thereof on their respective bulletin boards.

On April 11, 2012, MERALCO filed its "Pre-trial Brief'.

During the April 16, 2012 initial hearing, only MERALCO appeared. No intervenor/oppositor appeared nor was there any intervention/opposition registered.

In the said hearing, MERALCO presented its proofs of compliance with the Commission's publication and posting of notice requirements which were marked as Exhibits "A" to "5-1", inclusive. Thereafter, it conducted an expository presentation of its application. The Commission propounded clarificatory questions. A pre-trial conference was, then, conducted. ERC Case No. 201 2-033 RC DECISION/April 15, 2013 Paae 14 of 34

Subsequently, MERALCO moved for the issuance of general default. Said motion was granted. It, likewise, manifested its urgent prayer for the issuance of a provisional authority and moved that the same be granted.

In the meantime the Commission took note of the Petition for Intervention" filed on the same date by the National Association of Electricity Consumers for Reforms, Inc. (NASECORE) praying that it be furnished with copies of the application, including its annexes, as soon as possible before the first scheduled hearing to allow it sufficient time to evaluate it and to prepare for the hearing.

Relative thereto, the Commission deferred the presentation of MERALCO's witnesses until the next hearing.

On April 23, 2012, the Commission issued an Order directing MERALCO to furnish NASECORE copies of the application, including its annexes, within five (5) days from receipt thereof and setting the continuation of the hearing on May 8, 2012.

On April 30, 2012, the Commission issued an Order provisionally approving the instant application.

During the May 8, 2012 hearing, only MERALCO appeared. NASECORE failed to appear despite due notice.

In the said hearing, MERALCO presented the following witnesses: 1) Ms. Ma. Miel Cristina C. Lanting, Head of its Customer Management Systems, who testified, among others, on the following: a) the two (2) major components of the IS-PEMS Project, consisting of the External and Internal Integrations; and b) the total project cost of the IS-PEMS Project; and 2) Ms. Melinda P. Derpo, Vice President and Head of its Marketing Office, who testified, among others, on the following: a) MERALCO's 2011 market study to gauge its customers' preference for the PRES; b) the new system architecture for PRES; c) the third party vending systems; and d) the Business Center Rationalization Study. In the course of their respective direct examinations, they identified various documents which were marked as exhibits. ERC Case No. 201 2-033 RC DECISION/April 15, 2013 Page 15 of 34

On May 11, 2012, the Commission issued an Order setting the continuation of the hearing on May 28, 2012 and directing NASECORE to appear at the said hearing to conduct its cross- examination on MERALCO's witnesses, otherwise, it shall be deemed to have waived its right to do so. It was also directed, if it intends to do so, to present evidence or witnesses, and submit their judicial affidavits, copy furnished MERALCO, at least three (3) days prior to the hearing.

During the May 28, 2012 hearing, only MERALCO appeared. It moved that NASECORE be deemed to have waived its right to cross- examine its witnesses for failure to appear at the said hearing despite due notice. Said motion was granted.

In the same hearing, MERALCO recalled to the witness stand, Ms. Derpo, to address the Commission's clarificatory questions.

MERALCO was, then, given a period of five (5) days within which to file its formal offer of evidence.

On June 1, 2012, MERALCO filed its "Formal Offer of Evidence".

On June 4, 2012, the Commission issued an Order directing NASECORE to manifest its intent to present evidence or witnesses, otherwise, it shall be deemed to have waived its right to do so and the instant application shall be deemed submitted for resolution.

On July 31, 2012, the Commission issued an Order declaring. NASECORE to have waived its right to present its evidence considering that it did not make a manifestation on its intention to do so despite the Commission's directive in its Orders dated May 11, 2012 and June 4, 2012. Thus, the Commission declared the instant application submitted for resolution. ERC Case No. 201 2-033 RC DECISION/April 15, 2013 Paae 16 of 34

DISCUSSION

I. LEGAL BASIS OF THE IS-PEMS PROJECT

Section 12.2.4 of the Commission's Position Paper for the Regulatory Reset for the July 2011 to June 2015 Third Regulatory Period for the First Entry Group of Privately Owned Distribution Utilities Subject to Performance Based Regulation (Position Paper) states that:

"The ERC recognizes that situations may arise where the need for a major capital expenditure project originally planned by a Regulated Entity and approved by the ERC, may change or disappear during the course of the Regulatory Period. At the same time, a need for another major capital project (which could be re/a ted or non-related to the original project) could arise.

In these situations, Regulated Entities can submit a request to the ERC to substitute an originally approved capital project with an altered version of the same project, or with a new project "As long as the value of the altered or new capital project does not exceed that approved by the ERC for the original project, the ERC will consider such request x x x"

II. PROJECT DESCRIPTION AND RATIONALE

The IS-PEMS Project has two (2) major components - External Integration (with third party applications) and Internal Integration (with other MERALCO Information System infrastructures).

External Integration

A. Integration of MERALCO PEMS to the following Third Party Systems for Customer Touch-Points in compliance with the PRES ruling: ERC Case No. 2012-033 RC DECISION/April 15, 2013 Paae 17 of 34

Bayad Center System allows more customer touch points through the more than nine hundred (900) branches of Bayad Center within MERALCO's franchise a ea to purchase Prepaid Electricity Credits;

2. Short Message Service Gateway - allows customers to check balance, receive threshold notifications and customer-initiated remote disconnect/reconnect their service (customer initiated); and

3. Cellular Telephone Companies - allows customers to load and/or reload prepaid electricity credits through Smart, Sun and Globe from sari-sari stores, convenience stores, and other retailers.

B. External Integration involves integrating MERALCO's approved MER-21: Prepaid Metering, Billing and Collection System (or simply PEMS) with third party vending systems to comply with Section 2.8 of the PRES Rules, which provides that:

"The DU offering PRES using a prepaid metering system shall allow reasonable means by which the residential customer shall have easy access to the purchase of electric energy credit for twenty four (24) hours to ensure continuous service." (Emphasis supplied)

C. The PRES Rules has been amended through Resolution No. 17, Series of 2012, emphasizing the following:

1. Expansion of the coverage of the PRES to all customer classifications;

2. Approval of the use of all available types of technologies in the implementation of PRES;

3. Adoption of the postpaid retail rate in the particular month the credited load was consumed as the applicable prepaid rate whereby the remaining ERC Case No. 2012-033 RC DECISION/April 15, 2013 Paqe 18 of 34

credits from the previous month's consumption shall be adjusted based on the applicable postpaid retail rate in the succeeding month;

4. Setting up the alarm of a warning device three (3) days before a customer's remaining credit is exhausted which is based on his or her average monthly consumption with a threshold of ten (10) kWh for every one hundred (100) kWh; and

5. Obligatory use of ERC-type approved meters in PRES revenue metering.

D. The Prepaid Metering System (PMS) was defined in the amended PRES Rules as a system with capability to implement PRES using Prepaid Meters that interpolate with a vending system which are compliant with Standard Transfer Specification (STS) 5 or an architecture that creates a network between Advance Meters and DU's meter management and billing systems.

E. This project will also integrate another Third Regulatory Period approved Major Project entitled "Meter Data Management System" (MER 34) with other MERALCO Information Systems (Internal Integration), including the PEMS, to comply with Section 2.1 of Resolution No. 17, Series of 2012 (Adopting Amendments to the Rules for Prepaid Retail Electric Service Using a Prepaid Metering System), which provides that:

"A DU shall file with the ERC for approval an application to provide PRES using a pre paid metering system prior to offering such services to customers." (Emphasis supplied)

Internal Integration

A. Linking of MERALCO Information Systems for an effective and efficient PRES, which includes:

A secure message protocol that allows information to be carried between vending system and Prepaid Meters

ERC Case No. 201 2-033 RC DECISION/April 15, 2013 Paae 19 of 34

1. MERALCO Point of Sale - This will allow MERALCO Business Centers to send payment information to PEMS and receive acknowledgement of payment received at PEMS;

2. Customer Management System (CMS) - This will allow the CMS and Meter Data Management System (MDMS) to synchronize all customer related data to ensure that the MDMS has an up to date model of customer and account configurations. It will also allow CMS to send end-of-month adjustment information to PEMS to debit/credit prepaid balances in PEMS;

3. Integrated Voice Recording System (IVRS) - This will allow MERALCO's IVRS to obtain account information from PEMS in response to inbound customer calls requesting balance or account state information; and

4. Corporate Email System - This integration will support both PRES and Open Access. It allows the MDMS and PEMS to send system alert emails or reports to MERALCO staff through the Corporate Workgroup System (CWS, an internal Email System).

Ill. PROJECT COST

A. The total cost of the integration of the IS-PEMS Project is Two Hundred Fifty-Three Million Two Hundred Twelve Thousand Five Hundred Seventy-Five Pesos (PhP253,21 2,575.00).

B. Given that the proposed project is an unforecasted project and was not factored into MERALCO's yearly ARR for the Third Regulatory Period, it was constrained to substitute some of its approved 3' RP Major CAPEX projects involving the construction of various MERALCO BCs and/or offices with the IS-PEMS to have the budget necessary to implement the proposed Project. The amount of the approved projects to be substituted is Two Hundred Ninety Two Million Nine Hundred Thousand Pesos (PhP292,900,000.00). ERC Case No. 2012-033 RC DECISION/April 15, 2013 Page 20 of 34

IV. OPTIONS CONSIDERED BY MERALCO

A. Alternative I - Operate MERALCO Business Centers 24/7

MERALCO will operate its Business Centers 24/7 in order for its customers to load/reload their prepaid accounts anytime. It will need additional personnel.

B. Alternative 2 - Build Own Vending System with Prepaid Cards Distributed in the Market

MERALCO will purchase a vending system that will allow loading/reloading of prepaid electricity accounts through a reference number from a prepaid card in 200, 300 and 500 denominations available in the market. Prepaid Cards will be distributed and marketed to retailers in maIls, 7-11, sari-sari stores and other establishments. Customer may experience high cost of prepaid cards.

C. Alternative 3 - Integrate PEMS with Third Party Vending System

MERALCO will avail of Implementation Services to integrate PEMS with Third Party Service Provider to allow customer loading/reloading similar to cellular phone electronic loading (Smart eLoad, Sun ExpressLoad, Globe AutoLoad) and loading/reloading from nine hundred (900) Bayad Center branches in its franchise area. Customers will have easy- access through prepaid card retailers and Bayad Centers.

Shown below are the comparative advantages and disadvantages of the alternatives considered by MERALCO:

Alternatives - Advantages Disadvanges Business Center 24/7 availability to Customers will have to Under 24/7 purchase prepaid go to the nearest Operation electricity credits Business Centers for top-up which is time No dependency on consuming and Third Party System incurring transportation costs ERC Case No. 2012-033 RC DECISION/April 15, 2013 Pacie 21 of 34

unless . walking distance

Few MERALCO Business Centers in an area (Municipality, City and Provincial) Own Vending Easy access Customers still need System Using through prepaid to call MERALCO Call Prepaid Cards card retailers (24/7 Center for top-up access in some (Semi-automated) retailers, like 7-1 1) Customers might incur Customers are costs for calling familiar with prepaid MERALCO Center card top-up/loading High cost of prepaid No dependency on cards Third Party System High cost to build distribution network to make prepaid cards available in the market Third Party Vending Easy access Vending System, System through prepaid except through card retailers and MERALCO Business Bayad Centers (24/7 Centers, is dependent access in some on Third Party System retailers, like 7-1 1) performance

Customers are Third Party Vending familiar with mark-up electronic top- up/loading

Fully automated

Shown below is the ten (10) - year Net Present Value (NPV) of costs of the alternatives: .4 ERC Case No. 2012-033 RC DECISION/April 15, 2013 Page 22 of 34

Ten(10)-YearNPVof Alternatives Costs (PhP) Business Center 24/7 Operation 363,810,506.54 Own Vending System Using Prepaid Cards 2,047,890,005.67 Third Party Vending System 216,370,579.58

V. EVALUATION

A. The IS-PEMS project is a substitution project to enhance MERALCO's approved 3 rd RP Project entitled "Prepaid Metering, Billing and Collection" with approved project costs of Seventy Two Million Six Hundred Ninety Eight Thousand Four Hundred Pesos (PhP72,698,400.00).

rd B. The approved 3 RP Project to be substituted involves the construction, relocation or improvement of MERALCO's business centers (BCs) and/or offices geared towards providing its customers with the best value of service considering the current conditions of the times. When the proposal for the three (3) new BCs and the relocation or improvement of seven (7) BCs as part of its 3rd RP major capital projects was approved by the Commission, it was considered, then, that improving and adding more brick and mortar structures was the best and most economical way to improve customer service and experience. The cost of the approved projects to be substituted is Two Hundred Ninety Two Million Nine Hundred Thousand Pesos (PhP292,900,000.00).

C. Instead of implementing the approved BCs, MERALCO considered tapping the proliferation of medium to large scale commercial areas around its franchise area, such as malls, and the implementation of the OARC and possible synergies with other companies.

The malls have evolved to become not just places for recreation (shopping and dining) but also for various services such as medical services, payment of bills, renewal of driver's licenses, securing an NBI clearance, authenticated birth certificate or passport and other similar services. It was observed that many people have patronized these alternative sites to avail of these services leading to the conclusion that the consumers find these venues to be very convenient. ERC Case No. 2012-033 RC DECISION/April 15, 2013 Paqe 23 of 34

In view of this observed phenomenon, the option to bring MERALCO closer to its customers by opening more touch points where they can visit during their regular mall trips is strongly being considered. This means that it will be able to provide service from Monday to Sunday during mall hours at more locations all over its franchise area. This notwithstanding, the existing BCs can be retained for specialized transactions and to serve as headquarters for its field personnel as well as providing backroom and management support to its mall touch points. Furthermore, for areas without the above-mentioned commercial areas, the need to construct brick and mortar structures is also being considered.

D. In order for MERALCO to start implementing PRES in 2012, the integration with external and internal systems should already be in place prior to its PRES rollout. The original PEMS architecture will not be able to comply with the PRES Rules considering the eighty-three percent (83%) market interest in availing of the PRES. More importantly, customer's experience on prepaid electric service will not be satisfactory if there will be no easy access to the purchase of credits or no timely notifications on remaining credits.

E. The IS-PEMS (Revised PEMS Architecture) will cater to multiple or variable consumer demographics and different forms of payment outlets by tapping or offering loading/top-up possibilities via the ubiquitous Telephone Companies (TELCO) loading centers (similar to how they embraced Prepaid Cellular Service), such as sari-sari stores, 7-1 1, Ministop and Bayad Center outlets as well as other business/payment centers near their houses or places of work. The project will address the consumers' preference of 24/7 load availability and wide accessibility.

The diagram below illustrates the simplified revised PEMS architecture:

ERC Case No. 201 2-033 RC DECISION/April 15, 2013 Pane 24 of 34

Customer Service

NI Other ' customerN c InternS Information ceter ]J L Systems System ------VZ ------

Externalinti NM

çQGIobe Prepaid Metering Billing Meter Data Managerneitt and Collection! System System

Information. Meter Reads and U SMSlnquiry Commands j caioir'r NÉe iwae Auto Meter SMS Alerts & • Roedtig 2) Q Nolilications ( (Threshold & Residential Rernctr, Di connect Balance) Customer Meter Meter Data Collection System Payment via Electronic Laced and OTC, Inquiry via SMS (Future; BankslATMs)

Listed below are the high-level schedule milestones based on the provision of facilities by MERALCO in accordance with the contract schedule:

Milestone Completion ndicative No Description 7completion Dates Technical Pilot (Release 1) Ml Design June 18, 2012 MERALCO Hardware installation M2 and make ready May 3, 2012 M3 Build July 5, 2012 M4 Testing August 17, 2012 M5 I Deployment (Go-Live) August 23, 2012 Commercial Pilot (Release 2) M61 Design August 98, 9012 ERC Case No. 2012-033 RC DECISION/April 15, 2013 Paqe 25 of 34

M71 Build October 2, 2012 MB I Testing December 20, 2012 M91 Deployment (Go-Live) December 28, 2012 Stabilization April 26, 2013 Full Commercial Roll-out to the Public April 29, 2013

F. MERALCO intends to offer PRES over the entire Residential market [estimated at around two (2) million accounts] within the next ten (10) years. Offering a prepaid system to this large volume of customers requires a reliable Prepaid Metering Infrastructure that can withstand customer transactions for service application, top-up, credit monitoring, remote management and customer care. Doing all these with an integrated system posts significant benefits than stand-alone systems to both MERALCO and its customers through operational efficiency and customer satisfaction/convenience.

G. The way customers embraced the manner of loading/reloading of their cellular phones via the nearest electronic toad retailer proves to be the most convenient way. Looking at the options, Alternative 3 (Third Party Vending System) ranks first mainly because of customer convenience. Alternative 3 is also the least cost because the integration costs is good for ten (10) years with minimal maintenance cost. Alternative I impacts on customer convenience because the customers have to spend time and money just to go to the nearest MERALCO business center. The frequent they top-up, the more time and money are spent. Alternative 2 replicates what the TELCOs did in the 1990s. This is impractical since the Third Party Vending is already in place, not to mention the financial risks associated with card theft and inventory.

H. It is recommended to capitalize on the IS-PEMS (Alternative 3) to enable integration with Third Party Vending System and offer PRES in the most effective, efficient and convenient way for the consumers.

The approved 3 RP Project cost for substitution is Two Hundred Ninety Two Million Nine Hundred Thousand Pesos (PhP292,900,000.00) while the proposed Project Cost is Two Hundred Fifty Three Million Two Hundred Twelve Thousand Five Hundred Seventy Five Pesos (PhP253,212,575.00). ERC Case No. 2012-033 RC DECISION/April 15, 2013 Page 26 of 34

J. The implementation of the said project will have no impact to the present rates of MERALCO since it will be funded from approved 3rd RP Projects in accordance with the existing rules and regulations of the Commission. However, since the approved projects are higher than the proposed, the difference in the costs will be subject to CAPEX efficiency adjustment during the Regulatory Reset for the 4th RP pursuant to Article 9 of the Rules for Selling Distribution Wheeling Rates (RDWR).

WHEREFORE, the foregoing premises considered, the application filed by Manila Electric Company (MERALCO) for authority to substitute various approved Third Regulatory Period (3 rd RP) Capital Expenditure (CAPEX) projects with the Implementation Services of Prepaid Electricity Management System (IS-PEMS) Project, is hereby APPROVED subject to optimization in its next Regulatory Reset application.

SO ORDERED.

Pasig City, April 15, 2013.

/ A DAG CRUZ-DUCUT ,,z ChairpersonpaA

AfIEDA ES missioner ttv FRt DO J. NON GL RIA VICTORIA Q YAP-TARUC Commissioner Commissioner

i VM/MFAS/NJS ERC Case No. 2012-033 RC DECISION/April 15, 2013 Paqe 27 of 34

Copy Furnished:

1. Attys. Rommel L. Yap, Francis Dino Antonio and Paul Sorino Counsels for MERALCO Manila Electric Company (MERALCO) 7th Floor, Lopez Building, Ortigas Avenue, Pasig City

2. Office of the Solicitor General (OSG) 134 Amorsolo Street, Legaspi Village, City of Makati 1229

3. Commission on Audit (COA) Commonwealth Avenue, Quezon City 1121

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

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

6. Philippine Chamber of Commerce and Industry (PCCI) 3rd Floor, ECC Building, 355 Sen. Gil Puyat Ave., Makati City

7. The Office of the Governor Province of Bulacan

8. The Office of the Governor Province of Cavite

9. The Office of the Governor Province of Rizal

10. The Office of the Governor Province of Batangas

11. The Office of the Governor Province of Laguna

12. The Office of the Governor Province of Quezon

13. The Office of the Governor Province of Pampanga

14. The Office of the City Mayor City of Manila

15. The Office of the City Mayor Quezon City ERG Case No. 2012-033 RC DECISION/April 15, 2013 Paae 28 of 34

16. The Office of the City Mayor City of Caloocan

17. The Office of the City Mayor City of Makati

18. The Office of the City Mayor City of Malabon

19. The Office of the City Mayor City of Mandaluyong

20. The Office of the City Mayor City of Muntinlupa

21. The Office of the City Mayor City of San Jose del Monte, Bulacan

22. The Office of the City Mayor City of Valenzuela

23. The Office of the City Mayor City of Pasig

24. The Office of the City Mayor Pasay City

25. The Office of the City Mayor City of Paranaque

26. The Office of the City Mayor

27. The Office of the City Mayor Trece Martirez City

28. The Office of the City Mayor Las Pinas City

29. The Office of the City Mayor San Juan City

30. The Office of the City Mayor City

31. The Office of the City Mayor

32. The Office of the City Mayor San Pablo City, Laguna

33. The Office of the City Mayor City of Marikina ERC Case No. 201 2-033 RC DECISION/April 15, 2013 Pane 29 of 34

34. The Office of the City Mayor City, Rizal

35. The Office of the City Mayor City, Cavite

36. The Office of the City Mayor Calamba, Laguna

37. The Office of the Municipal Mayor Navotas, Metro Manila

38. The Office of the Municipal Mayor Taguig, Metro Manila

39. The Office of the Municipal Mayor Pateros, Metro Manila

40. The Office of the Municipal Mayor General Aguinaldo, Cavite

41. The Office of the Municipal Mayor Magallanes, Cavite

42. The Office of the Municipal Mayor Amadeo, Cavite

43. The Office of the Municipal Mayor , Cavite

44. The Office of the Municipal Mayor Mendez, Cavite

45. The Office of the Municipal Mayor Alfonso, Cavite

46. The Office of the Municipal Mayor , Cavite

47. The Office of the Municipal Mayor , Cavite

48. The Office of the Municipal Mayor , Cavite

49.The Office of the Municipal Mayor , Cavite

50. The Office of the Municipal Mayor , Cavite

51. The Office of the Municipal Mayor Ternate, Cavite ERC Case No. 2012-033 RC DECISION/April 15, 2013 Pane 30 of 34

52. The Office of the Municipal Mayor Gen. Trias, Cavite

53. The Office of the Municipal Mayor , Cavite

54. The Office of the Municipal Mayor Rosario. Cavite

55. The Office of the Municipal Mayor , Cavite

56. The Office of the Municipal Mayor Dasmariñas, Cavite

57. The Office of the Municipal Mayor Gen. Mariano Alvarez, Cavite

58. The Office of the Municipal Mayor Silang, Cavite

59. The Office of the Municipal Mayor Carmona, Cavite

60. The Office of the Municipal Mayor , Rizal

61. The Office of the Municipal Mayor Taytay, Rizal

62. The Office of the Municipal Mayor Teresa, Rizal

63. The Office of the Municipal Mayor Jala-jala, Rizal

64. The Office of the Municipal Mayor Cardona, Rizal

65. The Office of the Municipal Mayor Baras, Rizal

66. The Office of the Municipal Mayor Angono, Rizal

67. The Office of the Municipal Mayor Tanay, Rizal

68. The Office of the Municipal Mayor Pililla, Rizal

69. The Office of the Municipal Mayor Morong, Rizal ERG Case No. 201 2-033 RC DECISION/April 15, 2013 Paae 31 of 34

70. The Office of the Municipal Mayor , Rizal

71. The Office of the Municipal Mayor Rodriguez, Rizal

72. The Office of the Municipal Mayor San Mateo, Rizal

73. The Office of the Municipal Mayor Meycauayan, Bulacan

74. The Office of the Municipal Mayor Obando, Bulacan

75. The Office of the Municipal Mayor Marilao, Bulacan

76. The Office of the Municipal Mayor Norzagaray, Butacan

77. The Office of the Municipal Mayor Sta. Maria, Bulacan

78. The Office of the Municipal Mayor Angat, Bulacan

79. The Office of the Municipal Mayor Doña Remedios Trinidad, Bulacan

80. The Office of the Municipal Mayor Plaridel, Bulacan

81. The Office of the Municipal Mayor Malolos. Bulacan

82. The Office of the Municipal Mayor Calumpit, Bulacan

83. The Office of the Municipal Mayor Pulilan, Bulacan

84. The Office of the Municipal Mayor Hagonoy, Bulacan

85. The Office of the Municipal Mayor Paombong, Bulacan

86. The Office of the Municipal Mayor Bustos, Bulacan

87. The Office of the Municipal Mayor Guiguinto, Bulacan ERC Case No. 201 2-033 RC DECISIONIApriI 15, 2013 Paae 32 of 34

88. The Office of the Municipal Mayor Pandi, Bulacan

89. The Office of the Municipal Mayor Bocaue, Bulacan

90. The Office of the Municipal Mayor Bulacan, Bulacan

91. The Office of the Municipal Mayor Balagtas, Bulacan

92. The Office of the Municipal Mayor Baliwag, Bulacan

93. The Office of the Municipal Mayor San Rafael, Bulacan

94. The Office of the Municipal Mayor San Miguel, Bulacan

95. The Office of the Municipal Mayor San Ildefonso, Bulacan

96. The Office of the Municipal Mayor Binan, Laguna

97. The Office of the Municipal Mayor Sta. Rosa, Laguna

98. The Office of the Municipal Mayor Victoria, Laguna

99. The Office of the Municipal Mayor Nagcardan, Laguna

100. The Office of the Municipal Mayor Magdalena, Laguna

101. The Office of the Municipal Mayor , Laguna

102. The Office of the Municipal Mayor Pila, Laguna

103. The Office of the Municipal Mayor Sta.Cruz, Laguna

104. The Office of the Municipal Mayor , Laguna

105. The Office of the Municipal Mayor San Pedro Tunasan, Laguna ERG Case No. 201 2-033 RC DECISION/April 15, 2013 Paae 33 of 34

106. The Office of the Municipal Mayor Alaminos, Laguna

107. The Office of the Municipal Mayor Rizal, Laguna

108. The Office of the Municipal Mayor Los Banos, Laguna

109. The Office of the Municipal Mayor , Laguna

110. The Office of the Municipal Mayor Bay, Laguna

111. The Office of the Municipal Mayor Dolores, Quezon

112. The Office of the Municipal Mayor Sampaloc, Quezon

113. The Office of the Municipal Mayor Pagbilao, Quezon

114. The Office of the Municipal Mayor Luoban, Quezon

115. The Office of the Municipal Mayor , Quezon

116. The Office of the Municipal Mayor Candelaria, Quezon

117. The Office of the Municipal Mayor Sariaya, Quezon

118. The Office of the Municipal Mayor San Antonio, Quezon

119. The Office of the Municipal Mayor , Quezon

120. The Office of the Municipal Mayor Tiaong, Quezon

121. The Office of the Municipal Mayor , Quezon

122. The Office of the Municipal Mayor , Quezon

123. The Office of the Municipal Mayor Sto. Tomas, Batangas ERC Case No. 201 2-033 RC DECISION/April 15, 2013 Paae 34 of 34

124. The Office of the Municipal Mayor San Pascual, Batangas

125. The Office of the Municipal Mayor Candaba, Pampanga

126. The Office of the Municipal Mayor San Simon, Pampanga

127. The Office of the Municipal Mayor Apalit, Pampanga

128. National Association of Electricity Consumers for Reforms, Inc. (NASECORE) No. 1 Beta Bayview Homes, San Jose, Tactoban City No. 10 Bayside Court Compound, 680 Quirino Avenue, Tambo, Paranaque City