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. 2013-045 MC

BOHOL II ELECTRIC COOPERATIVE, INC.(BOHECO II), Applicant.

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DECISION

Before the Commission for resolution is the application filed by II Electric Cooperative, Inc. (BOHECO II) on April 11, 2013 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, BOHECO 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 Catangay, , Bohol;

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 certain Municipalities of Alicia, Anda, , Buenavista, ,' CPG Island,' Dagdhoy, Danao, Duero, Garcia ERC CASE NO. 2013-045 MC DECISION/August 4,2014 f.ag ..~_..?_...9f....11______.._ ..______

Hernandez, Getafe, , Jagna, Mabini, Pilar, San Miguel, Sierra Bullones, , Trinidad, Ubay and Valencia;

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" 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 Honorable Commission promulgated Resolution No. 49, Series of 2006 otherwise known as uBusiness 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, BOHECO II is submitting herewith for the Honorable 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. 2013-045 MC DECISION/August 4, 2014 J)~R~_~ QfJ..~:L.. ______

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 January 23, 2014, were issued setting the case for initial hearing on February 18, 2014.

In the same Order, BOHECO 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 (08G), 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 Provincial Governor of Bohol and the Mayors of the Municipalities within BOHECO 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 February 13, 2014, BOHECO II filed its "Pre-Trial Brief'.

During the February 18, 2014 initial hearing, BOHECO II appeared. No intervenor/oppositor appeared nor was there any intervention/opposition registered.

At the said hearing, BOHECO 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-1", inclusive. Thereafter, it conducted an expository presentation of its application.

BOHECO II presented, Mr. Saturnino A. Forones, its Internal Auditor, who testified in support of the instant application. In the course thereof, additional documents were presented and marked as exhibits. ERC CASE NO. 2013-045 MC DECISION/August 4, 2014 Pa...g~ 1_Qf..J..:!...______

The direct examination having been terminated, the Commission propounded clarificatory questions on the said witness. BOHECO II, then, was directed to submit its formal offer of evidence within fifteen (15) days from the said date of hearing.

On March 6, 2014, BOHECO II filed its "Formal Offer of Evidence".

On July 21, 2014, the Commission issued an Order admitting the "Formal Offer of Evidence" filed by BOHECO II for being relevant and material in the evaluation of this case.

DISCUSSION

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

1) Details of Current Structure

BOHECO 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, as well as the description of its current processes enumerated as follows:

1.1 Billing and Distribution Process 1.2 Collection Remittance and Deposit Process 1.3 Meter Reading Process 1.4 Disconnection and Reconnection Process 1.5 Materials Receiving Process 1.6 Material Issuance Process 1.7 Inventory Monitor and Issuance Process 1.8 Meter Rehabilitation Process 1.9 New Meter Testing and Sealing Process 1.10 Design and Planning Process 1.11 Trouble Response Process 1.12 Project Management Process 1.13 Capital Expenditures Requisition and Procurement Process 1.14 Non-Capital Expenditures Requisition and Procurement Process ERC CASE NO. 2013-045 MC DECISION/August 4, 2014 .page-? .Q.fJ..:'.:L.______. .______.._

1.15 Membership and New Connection Process 1.16 Customer Assistance-Inquiries Process 1.17 Reconnection Process 1.18 Service Connection Large Process

2) Details of Business Segments

In compliance with the BSUP Filing Package, BOHECO 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

In accordance with the provision of the Business Separation Guidelines, as amended, BOHECO II adopted seven (7) distribution business segments classified as Regulated and Non-Regulated business segments, namely: Distribution Services (DS); (b) Distribution Connection Services (DCS); (c) Regulated Retail Services (RRS); (d) Related Business Services (RB); (e) Non- Regulated Retail Services (NRRS), (f) Last Resort Supply Services (LRSS) and (g) Wholesale Aggregation (WA).

a. Distribution Services (OS) - 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); 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 that support any of the above 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- ERC CASE NO. 2013-045 MC DECISION/August 4, 2014 ..E?.g.~~U?...~L1..i _ _ _.______~______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 Supplier of Last Resort services provided by the cooperative, namely: services pertaining to the sale of electricity to LRSS customers, including billing, collection and the provision of basic customer service.

e. Wholesale Aggregation (WA) - the distribution utility's service of purchasing electricity in bulk and selling this to other distribution utilities, namely: services pertaining to the sale of electricity to other distribution utilities including billing, collection and the provision of basic customer service.

f. Non-Regulated Retail Services (NRRS) - services of DU to the sale of electricity to end-users who are included in the contestable market or to other customers who are not end- users including billing, collection and the provision of basic customer service.

g. Related Business Service (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 non-electricity related services such as telecommunications services.

BOHECO II manifested in this instant application that should there be contestable consumers in the future, it shall undertake the business segments identified as: LRSS, WA and NRRS.

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 engaged in the activities of the business segment or other business activities of the utility.

In compliance with the aforesaid requirement, BOHECO II submitted the number of employees who will be engaged in each of the specified business segment. To ensure that the costs of regulated services and activities shall be allocated on a fair and ERC CASE NO. 2013-045 MC DECISION/August 4,2014 fa.ge-l Q.f..J.~:L.______. _ reasonable bases and, in order to reflect the efficient costs of the respective services and activities, its employees shall be allocated to the business segment where its workload and manhours are segregated. Services that are not directly attributable to a business segment are allocated using the allocation factors provided by the ACAM.

BOHECO II's employees were allocated on four (4) out of seven (7) business segments, namely: OS, DCS, RRS and RB.

2.3 Description of Assets

BOHECO II's assets will be distributed based on the business segments in accordance with the BSG, as amended. The distribution is based on the purpose to which these assets were acquired, installed, constructed and in the over-all operation of the cooperative. BOHECO II's assets were allocated on four (4) out of seven (7) business segments, namely: OS, DCS, RRS and RB.

3) Accounting Separation

The Accounting Separation Statements and the corresponding accounting principles, policies and procedures used by BOHECO II are in accordance with the BSG, as amended. The accounts maintained in the four (4) segments (excluding NRRS, LRSS and WA) 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.

BOHECO 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 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, as amended, for the said accounting separation statement. This undertaking clearly separates the accounts of its regulated and non-regulated business activities. ERC CASE NO. 2013-045 MC DECISION/August 4, 2014 ?~..g_~_~~f..J.1 _ ___._.. .. __ _ __ ._ __ .______

3.1 Principles to Achieve Accounting Separation

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

3.2 Allocation Principles

BOHECO 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 the 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/activities/sections directly attributable to a segment; b) items/activities/sections not directly attributable to a certain segment will be allocated using an appropriate factor; and c) items/activites/sections that are unattributable to a Business Segment are allocated using a fair and reasonable method.

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

However, it was noted that in its Trial Balance, BOHECO II assigned "Land, Land Rights and Improvements", "Structures and Improvements", Miscellaneous General Plant & Equipment" and its corresponding "Accumulated Depreciation-General Plant" accounts to Generation Plant Accounts even when no Generation activity is being undertaken by it. On the other hand, the said accounts were allocated to OS business segment.

Thus, BOHECO II should make the necessary revision in its Trial Balance worksheet in order to properly present its actual and existing business segments. ERC CASE NO. 2013-045 MC DECISION/August 4, 2014 ..E..~g..~_~_C?L1..1______._.______. 3.3 Chart of Accounts

BOHECO " 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 SSG, as amended.

3.4 Basic Accounting Principles

SOHECO 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, 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 in accordance with the Business Separation Guidelines (BSG), as amended, which will be accompanied by a report prepared, signed and dated by an Auditor (Auditor's Report) containing 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

BOHECO 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

BOHECO II remains a single entity and will be unbundled through separation of employees and its assets as deemed ERC CASE NO. 2013-045 MC DECISION/August 4, 2014 -~9...g.~..J.o ..QL14. ______._ _._ __ _ appropriate. The separation will be through evaluation of workloads, job descriptions, 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.

5) Milestones and Highlights

This includes the events participated in by BOHECO II from February 2012 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 BSUP application, as spearheaded by PHILRECA.

BOHECO II plans to conduct series of trainings and seminars to its officers, department managers and employees to let them fully understand the mandates of all the undertakings BOHECO II will be facing.

In addition, it submitted an undertaking regarding the implementation of the separation of business segments to ensure that it is compliant with the requirements of the BSG, 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 (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.

BOHECO II undertakes to develop a plan to comply with the Code of Conduct for Competitive Retail Market Participants promulgated by the Commission. ERC CASE NO. 2013-045 MC DECISION/August 4, 2014 _E_9.g_~1J_Qf..J.:~L __ ._._ _ _ _ _.______._. ._ _.._ _

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 BOHECO II has no proposed transfer pricing methodology, 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 Bohol II Electric Cooperative, Inc. (BOHECO 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.

SOHECO II is directed to modify its Trial Balance being part of its proposed BSUP relative to the following accounts: "Land, Land Rights and Improvements", "Structures and Improvements", Miscellaneous General Plant and Equipment" and "Accumulated Depreciation-General Plant". The said accounts should be properly presented in the Distribution Utility Plant and Equipment instead of Generation Plant accounts.

Finally, SOHECO 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 SSG, as amended:

i) The Accounting Separation Statements prepared for the relevant period, in accordance with the approved SSG, as amended, and the Commission-approved ACAM;

ii) The Management Responsibility Statement required to accompany the Accounting Separation Statements In accordance with Section 2.6 of the SSG, as amended;

iii) The Auditor's Report on the Accounting Separation Statements prepared in accordance with Section 2.8 of the SSG, as amended; .. ERC CASE NO. 2013-045 MC DECISION/August 4, 2014 ..E.9..g..~J..g..gJ. l1______..______.______.

iv) The General Information Sheet required to accompany the Accounting Separation Statement in accordance with Section 2.10 of the SSG, as amended;

v) The Compliance Report required to accompany the Accounting Separation Statements in accordance with Section 2.11 of the SSG, as amended; and

vi) 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, August 4, 2014.

UMvvl) ~\(~ ENAIDA G. CRUZ-DUCUT Chairperson /~

Q,_. jr~~t-. GLFVICTOR~ ~.YAP-TARUC .. Comml loner ERC CASE NO. 2013-045 MC DECISION/August 4, 2014 .P9.ge J..~..0f....1:'.L _ _.______.______._ _.__ .

Copy Furnished:

1. ATTY. DITAS A. LERIOS-AMBOY Counsel for BOHECO II LERIOS-AMBOY & DELOS REYES LAW OFFICE Units 1609-1610, Tyco.o.nCentre Pearl Drive, Ortigas Center Pasig City 1605, Metro. Manila

2. ENGR. JOSE REDMOND ERIC S. ROQUIOS General Manager Bo.ho.lII Electric Co.o.perative, Inc. (BOHECO II) Catangay, Jagna, Bo.ho.l

3. Office of the Solicitor General (OSG) 134 Amo.rso.lo.Street, Legaspi Village City o.f Makati 1229

4. Commission on Audit (COA) Co.mmo.nwealth Avenue, Quezo.n City 1121

5. Senate Committee on Energy GSIS Building, Ro.xas Pasay City 1300

6. House of Representatives Committee on Energy Batasan Hills, Quezo.n City 1126

7. The Office of the Governor Tagbiliran City, Pro.vince o.fBo.ho.l

8. Office of the Mayor Alicia, Bo.ho.l

9. Office of the Mayor Anda, Bo.ho.l

10. Office of the Mayor Bien Unido., Bo.ho.l

11. Office of the Mayor Buenavista, Bo.ho.l

12. Office of the Mayor Candijay, Bo.ho.l ERC CASE NO. 2013-045 MC DECISION/August 4, 2014

..P_a..g_~.Ji...9..f.....14. ..______..______.'c-______._._ _._

13. Office of the Mayor CPG Island, Sohol

14. Office of the Mayor Dagohoy, Sohol

15. Office of the Mayor Danao, Sohol

16. Office of the Mayor Duero, Sohol

17. Office of the Mayor Garcia Hernandez, Sohol

18. Office of the Mayor Getafe, Sohol

19. Office of the Mayor Guindulman, Sohol

20. Office of the Mayor Jagna, Sohol

21. Office of the Mayor Mabini, Sohol

22. Office of the Mayor Pilar, Sohol

23. Office of the Mayor San Miguel, Sohol

24. Office of the Mayor Sierra Sullones, Sohol

25. Office of the Mayor Talibon, Sohol

26. Office of the Mayor Trinidad, Sohol

27. Office of the Mayor Ubay, Sohol

28. Office of the Mayor Valencia, Sohol