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

IN THE MATTER OF THE APPLICATION FOR AUTHORITY TO IMPLEMENT AN ENTERPRISE ASSET MANAGEMENT (EAM) SYSTEM, WITH PRAYER FOR PROVISI AL AUTHORITY

ERC CASE NO. 201 3-014 RC

MANILA ELECTRIC COMPANY (), DOCRETEIY Applicant. x------x

ORDER

On January 28, 2013, Manila Electric Company (MERALCO) filed an application for authority to implement an Enterprise Asset Management (EAM) System, with prayer for provisional authority.

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

In order to start integrating and updating its asset information in compliance with the directive of the Commission in its Order dated July 6, 2011, in time for the preparations for the filing of its Fourth Regulatory Period reset application, there is a need to be granted authority to implement the Project as soon as possible;

2. As can be seen from the Gantt Chart for the Project, it will require at least twelve (12)4onths for the Project to be completed with the target qórhpletion by December 2013; ERG CASE NO. 2013-014 RC ORDER/April 8, 2013 Page 2 of 19

3. Thus, there is an urgent need for a provisional authority to be issued for it to immediately start the implementation of the EAM Project and finish the same on schedule in the absence of factors that are beyond its control. Said provisional authority would enable it to realize the efficiency of an integrated asset management system as soon as possible so as to belier serve its consumers;

4. In support of the prayer for the grant of a provisional authority, attached to the application as Annex "E" is the Judicial Affidavit of Mr. Rodulfo C. Despojo, Information System Engineer in its IS-Electric Distribution Management System Office;

5. It prayed that the instant application be approved and that the building block components associated with the Project from the time it is put to service and considered used and useful within the Third Regulatory Period be considered as a deferred amount to be included in its Fourth Regulatory Period reset calculations; and

6. It is, likewise, prayed that pending hearing, a provisional authority be immediately issued authorizing it to implement the EAM Project.

Relative to the prayer for the issuance of a provisional authority, the Commission initially reviewed the instant application.

THE ENTERPRISE ASSET MANAGEMENT (EAM) PROJECT

The EAM Project is MERALCO's tool to improve and update the processes and procedures for the upkeep of relevant and up-to- date asset information. It will support the entire life cycle of work and asset management process and will be used to track all types of electric distribution assets from acquisition to retirement.

EAM means the whole life optimal management of the physical assets of an organization to maximize value. It covers the design, construction, commissioning, operations, maintenance and decommissioning/replacement of plant,/quipment and facilities. "Enterprise" refers to the managemçf of the assets across departments, locations, facilities and ip/qme cases, business units. ERC CASE NO. 201 3-014 RC ORDER/April 8, 2013 Page 3 of 19

By managing assets across the facility, organizations can improve utilization and performance, reduce capital costs and asset-related operating costs, extend asset life and subsequently, improve return on assets.

The EAM Project aims to review and streamline MERALCO's EAM processes and provide an integrated EAM application to manage assets from acquisition to disposal while maximizing operational efficiency and providing information for asset investment decisions.

II. PROCUREMENT AND COST

MERALCO conducted a two (2)-step evaluation process in order to select the most appropriate solution for the integrated asset management system. The first step was to determine whether the existing systems can address the regulatory and business needs. The second step was to determine if acquiring a Commercial-Off- The-Shelf (COTS) would be a better option. It evaluated the total costs needed to implement and maintain the two (2) options in a ten (10) - year period from 2013 to 2022, as shown below:

Ontion 1: Intearate Existina Systems Component Cost (PhP) Migration Cost to the Supported Version 352,981,323 Software Protocol License for Mainframe Interface 49,555,421 Enhancements 1,276,864,589 Infrastructure 175,796,261 Data Communication 1,789,504 O&M Cost 487,569,062 Training Cost and Communication 3,666,900 HW Cost Maintenance 350,949,349 Total Cost 2,699,172,408 ERC CASE NO. 2013-014 RC ORDER/April 8, 2013 Page 4 of 19

Option 2: Acquire a COTS EAM Component Cost (PhP) Software [Capital Expenditure (CAPEX)] 76,713,941 Services (Configuration, Integration, Training) (CAPEX) 187,239,896 Infrastructure (CAPEX) 153,186,362 Data Communication (CAPEX) 1,789,504 Software Maintenance 158,960,687 Maintenance Services 49,527,482 Users Training and Communication 1,833,450 Infrastructure Maintenance Cost 233,659,111 Total Cost 862,910,434

The evaluation results show that acquiring a COTS EAM is more favorable for MERALCO since it has a lower risk of implementation, capable of meeting the schedule, features better quality and technical capabilities and provides better resource availability. It also addresses technology obsolescence. COTS applications are based on new technology and are designed based on the best practices in the industry. MERALCO further evaluated available COTS application in the country with existing local support.

The estimated cost of the EAM Project is PhP371,053,000.00 with the following details:

Project Component Amount (PhP) Software 76,713,941 Services (Consultancy, Business Process Design, Configuration, Integration, Testing, Training, Installation and Post-Implementation Support) 187,239,897 Infrastructure Cost 105,579,362 Data Communication 807,300 Total Amount 371,053,000

The estimated project cost was based on the result of the planning and costing activities done in 2010. Through the help of Indra, MERALCO's outsourcing partner for existing legacy applications, the cost/man hours of system migration and enhancement were determined. In May 2010, it requested for a best practice/high level presentation among ,Øiferent EAM vendors, which was followed by a series of more dqt'4ed system walk through of ERC CASE NO. 201 3-014 RC ORDER/April 8, 2013 Page 5 of 19 their EAM solution. It crafted the Request for Proposal (RFP) considering MERALCO's current asset management requirements and incorporating the best practices gathered from the different vendors. The RFP was released on August 23, 2010 as approved by Networks Group for the functional requirements and CIT Group for the non-functional requirements.

A two (2) - stage bidding was conducted for the said requirement since a detailed technical evaluation is necessary to fully evaluate the acceptability of the received offers. Only the commercial proposals of those evaluated with technically acceptable offers will be considered.

The following possible suppliers were recommended due to the criticality of MERALCO's system and to ensure source reliability, direct accountability and full support to participate in the bidding for the acquisition of EAM solution:

1. IBM Philippines, Inc. 2. Oracle (Philippines) Corp 3. Indra Philippines, Inc. 4. SAP Philippines, Inc.

The technical proposals were evaluated on September 7, 2010 and based on the evaluation findings of both the Networks Process Group and CIT Group, only IBM and Oracle passed the technical evaluation with IBM garnering the highest rating.

III. THE NECESSITY FOR AND THE BENEFITS OF THE EAM PROJ ECT

The EAM Project will address and comply with the Commission's directive in its Order dated August 17, 2011 in ERC Case No. 2010-069 RC.

At present, the conditions of MERALCO's existing systems are as follows:

Its asset management process makes use of different information systems to manage different types of work or activities involving its asss, such as new construction, maintenance work, operqtIos and emergency works. ERC CASE NO. 2013-014 RC ORDER/April 8, 2013 Page 6 of 19

2. All physical asset and historical asset information are currently stored in different systems and in some instances, the information are manually kept as hard copies in its different area or sector offices.

3. Its Fixed Asset Register (FAR), which contains the list of its assets, is not integrated with the foregoing information systems. Thus, any information necessary to update any entry in the FAR will have to be manually lifted or sourced from a particular information system and then, manually transferred or encoded in the FAR.

4. Given the volume of assets installed, operated and maintained throughout its franchise area on a day-to-day basis, the manual encoding and retrieval of asset information in various systems has become unsustainable.

5. The current mainframe legacy systems should be replaced as these are already technology obsolete. This is exemplified by the fact that the mainframe applications could not integrate with the web-based technologies, such as GIS. Most modern mainframes have partially or entirely phased out classic terminal access for users in favor of web-style user interface.

6. Its existing legacy systems, end of maintenance and vendor have already been published by its suppliers. This means that no more replacement parts or compatible service units will be manufactured and thus, can mean a prolonged breakdown of a critical information system. This is crucial as it cannot afford a prolonged breakdown of any of the critical work and asset management systems that caters to more than five (5) million customers throughout its franchise area.

Shown below is an estimate of the manual processes involved in MERALCO's current asset management environment that will be automated once the EAM System is operational and the Full Time Equivalent (FTE) of the labor complement for each task: ERC CASE NO. 2013-014 RC ORDER/April 8, 2013 Page 7 of 19

Particulars Estimated FTE Recognition 1.36 Manual Project Settlement 1.06 Manual Asset Costing 0.30 Operation and Maintenance 3.60 Manual Asset Reporting 1.20 Manual Retirement 2.40 Data Governance 1.04 Manual Asset Record Clean-up 1.04 6.00 Note: FTE is the ratio of the total number of paid hours during a period (part time, full time and contracted) by the number of working hours in that period, Mondays through Fridays.

These efficiencies will be achieved with the interface between EAM and the FAR. The FTEs in the foregoing table are rough estimates of the current complement for each of the processes. The following activities will no longer be done manually with EAM in place:

Reconciliation of data between the work order management systems and the finance system. The project and work order information in the work order management system are referred to when analyzing Operating Expenses (OPEX) and CAPEX Charges that are for transfer to the corresponding asset account in the FAR.

2. Manual reconciliation of data between the finance system and the geographic information system.

On the other hand, once the EAM System is online, the following activities will be done as part of the new asset management procedure where EAM is the central system for managing work orders and keeping physical asset records:

1. Validation of the accuracy of data at the design stage to ensure that only the correct information is encoded in the EAM.

2. More stringent quality ass,uyance initiatives, such as monitoring compliance /4th asset management processes, data integrity a/i4glnformation security policies. ERC CASE NO. 201 3-014 RC ORDER/April 8, 2013 Page 8 of 19

The foregoing are new processes/activities that will be created once the EAM is in place. However, the FTE for the said activities will still depend on the final version of the implemented system.

The benefit that will be derived from the reduction in planned outages due to the EAM System is a reduction of unserved energy as a result of an improved system analysis and planning process. With EAM, the planning for the conduct of preventive maintenance will be improved due to enhanced accessibility and quality of available data. As a result, the history and condition of an asset can readily be verified or assessed and determine whether maintenance activity outside the regular maintenance schedule should be performed. This will result in a reduction in unplanned outages. Examples of preventive maintenance activities are efficient trimming of trees located along electric lines, replacement of equipment before failure occurs and testing activities to check condition of equipment. Reduction in unplanned power interruptions will result to a better service to the customers.

In addition, the EAM will support the entire life cycle of work and asset management process providing Standards and Job Plans templates to perform a specific work. Said templates will include standard work procedures and guidelines and safety checklists, which will form part of executing crews work plan. It also contains Safety Module which will be used to associate safety information, such as job interruption procedures, hazards and hazardous material lists with an asset that workers need to be aware of when they execute the work. It could also be enhanced to provide Asset Managers with tools to perform statistical random audits on executed jobs to check on compliance with technical, safety and procedural requirements. These supports to work management will ensure that forced outages associated with ordinary human error during construction or maintenance activities will be minimized and subsequently eliminated.

MERALCO estimated that unserved energy that can be lessened due to the reduction in unplanned outages as a result of an improved process enabled by the EAM System is about 1,463,819.58 kWh. The said process will not be done away with but will only be shifted from manual to automatic. Moreover, the manual tasks are merely in addition to the other responsibilities of its personnel performing the same. Thus, with the shift from manual to automated process, said personnel will be unburdled with said tasks to focus on other responsibilities within the org,tii/ation. . ERC CASE NO. 201 3-014 RC ORDER/April 8, 2013 Page 9 of 19

IV. RATE IMPACT OF THE PROJECT

The estimated rate impact of the EAM Project is about PhPO.002/kWh over the life of the project assuming that there will be no changes in the Regulatory Asset Base (RAB) other than the addition of the EAM System CAPEX. A major assumption made in the calculation of the Return of Capital is the continued use of the Third Regulatory Period Weighted Average Cost of Capital (WACC) over the next periods. Also, sales used were merely ballpark estimates for purposes of establishing rates.

For the starting year of 2013, the cost of the EAM System once approved will not be factored in MERALCO's rates for the current regulatory period since it does not have an impact in its current rates. However, it prayed that the building block components associated with the EAM Project from the time it is put to service and considered used and useful within the Third Regulatory Period be considered as a deferred amount to be included in its Fourth Regulatory Period reset calculations. The said estimated rate impact for 2013 to 2015 will be the estimated deferred amount that will be factored in its Fourth Regulatory Period reset calculations.

The following assets and their corresponding Net Book Value will be retired upon EAM implementation:

Implementation Net Book Value Particulars Year (PhP) Work Management System 2009 1,014,100.00 Asset Lifecycle Tracking System 2009 17,094,107.00 Total 18,108,207.00

The other systems that will be replaced by the EAM were not included in the foregoing table as they have reached the book value of zero (0) given the depreciable asset life of five (5) years for IS and IT assets. On the other hand, the Mainframe, where the current work order management system is ran, will not be retired yet since other legacy systems will continue tohosted in it upon EAM implementation. It is part of the l'T) plan of MERALCO that the ERC CASE NO. 2013-014 RC ORDER/April 8, 2013 Page 10 of 19

Mainframe will be retired by 2015 subject to the migration of the other critical legacy systems.

As a distribution utilities' RAB is determined by subjecting their asset base to regulatory valuation as part of a regulatory reset process, the effect of the EAM in the RAB will only be determined as part of the next regulatory reset process. In the meantime, shown below is the estimated cost of the EAM System Project and the book value of assets that will be retired once the EAM is operational:

Total CAPEX Cost (PhP) 371,053,000.00 Corresponding Assets for Replacement (PhP) 18,1 08,207.Q0

V. PRAYER FOR ISSUANCE OF PROVISIONAL AUTHORITY

In order for MERALCO to start integrating and updating its asset information in compliance with the Commission's directive in its Order dated July 6, 2011 and in preparation for the timely filing of its Fourth Regulatory Period reset application, the granting of authority to implement the EAM Project is necessary. Under the Rules for Setting Distribution Wheeling Rates (RDWR), it is required to file its Fourth Regulatory Period reset application eighteen (18) months (February 2014) prior to its next regulatory reset for the period July 2015 to June 2019.

To implement the said project, it will require at least twelve (12) months for it to be completed with the target completion by December 2013.

The recovery of the project cost will be addressed in MERALCO's next reset application wherein it will be reviewed together with the other aspects of its operations.

S ERC CASE NO. 201 3-014 RC ORDER/April 8, 2013 Page 11 ofl9

WHEREFORE, the foregoing premises considered, the Commission hereby PROVISIONALLY APPROVES the application filed by Manila Electric Company (MERALCO) for authority to implement its Enterprise Asset Management (EAM) System subject to optimization in the next reset pursuant to the provisions of the RDWR.

SO ORDERED.

Pasig City, April 8, 2013.

A AG. CRUZ-DUCUT (°- Chairperson

MARIA lon REYES

ALFRE 0 J. NON GLO, IA VICTORIA C. Yj\P-TARUC Commissioner Commissioner

M'FAS/NJS'( ERC CASE NO. 2013-014 RC ORDER/April 8, 2013 Page 12 of 19

Copy Furnished:

1. Attys. Jose Ronald V. Valles, Francis Dino Antonio, Carmen Grace Ramos and Paul Soriño 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. President Philippine Chamber of Commerce and Industry (PCCI) 3rd Floor, ECC Building, 355 Sen. Gil Puyat Ave., Makati City

7. The City Mayor City of Manila

8. The City Mayor Quezon City

9. The City Mayor City of Caloocan

10. The City Mayor City of Makati

11. The City Mayor City of Malabon

12. The City Mayor City of Mandaluyong ERC CASE NO. 201 3-014 RC ORDER/April 8, 2013 Page 13 of 19

13. The City Mayor City of Muntinlupa

14. The City Mayor City of ,

15. The City Mayor City of Valenzuela

16. The City Mayor City of Pasig

17. The City Mayor Pasay City

18. The City Mayor City of Paranaque

19. The City Mayor Cavite City

20. The City Mayor Trece Martirez City

21. The City Mayor Las Pinas City

22. The City Mayor San Juan City

23. The City Mayor Lucena City

24. The City Mayor Batangas City

25. The City Mayor San Pablo City, Laguna

26. The City Mayor City of Marikina

27. The City Mayor Antipolo City, Rizal

28. The City Mayor Tagaytay City, Cavite ERC CASE NO. 201 3-014 RC ORDER/April 8, 2013 Page 14 of 19

29. The City Mayor Calamba, Laguna

30. The Municipal Mayor Navotas,

31. The Municipal Mayor Taguig, Metro Manila

32. The Municipal Mayor Pateros, Metro Manila

33. The Municipal Mayor General Aguinaldo, Cavite

34. The Municipal Mayor Magallanes, Cavite

35. The Municipal Mayor Amadeo, Cavite

36. The Municipal Mayor Indang, Cavite

37. The Municipal Mayor Mendez, Cavite

38. The Municipal Mayor Alfonso, Cavite

39. The Municipal Mayor Imus, Cavite

40. The Municipal Mayor Kawit, Cavite

41. The Municipal Mayor Noveleta, Cavite

42. The Municipal Mayor Bacoor, Cavite

43. The Municipal Mayor Maragondon, Cavite 44. The Municipal Mayor Ternate, Cavite ERG GASE NO. 201 3-014 RG ORDER/April 8, 2013 Page 15 of 19

45. The Municipal Mayor Gen. Trias, Cavite

46. The Municipal Mayor Naic, Cavite

47. The Municipal Mayor Rosario, Cavite

48. The Municipal Mayor Tanza, Cavite

49. The Municipal Mayor Dasmarinas, Cavite

50. The Municipal Mayor Gen. Mariano Alvarez, Cavite

51. The Municipal Mayor Silang, Cavite

52. The Municipal Mayor Carmona, Cavite

53. The Municipal Mayor Cainta, Rizal

54. The Municipal Mayor Taytay, Rizal

55. The Municipal Mayor Teresa, Rizal

56. The Municipal Mayor Jala-jala, Rizal

57. The Municipal Mayor Cardona, Rizal

58. The Municipal Mayor Baras, Rizal

59. The Municipal Mayor Angono, Rizal ERC CASE NO. 201 3-014 RC ORDER/April 8, 2013 Page 16 of 19

60. The Municipal Mayor Tanay, Rizal

61. The Municipal Mayor Pililla, Rizal

62. The Municipal Mayor Morong, Rizal

63. The Municipal Mayor Binangonan, Rizal

64. The Municipal Mayor Rodriguez, Rizal

65. The Municipal Mayor San Mateo, Rizal

66. The Municipal Mayor , Bulacan

67. The Municipal Mayor Obando, Bulacan

68. The Municipal Mayor , Bulacan

69. The Municipal Mayor Norzagaray, Bulacan

70. The Municipal Mayor Sta. Maria, Bulacan

71. The Municipal Mayor Angat, Bulacan

72. The Municipal Mayor Doña Remedios Trinidad, Bulacan

73. The Municipal Mayor Plaridel, Bulacan

74. The Municipal Mayor , Bulacan

75. The Municipal Mayor , Bulacan ERC CASE NO. 201 3-014 RC ORDERJApriI 8, 2013 Page 17 of 19

76. The Municipal Mayor , Bulacan

77. The Municipal Mayor Hagonoy, Bulacan

78. The Municipal Mayor , Bulacan

79. The Municipal Mayor Bustos, Bulacan

80. The Municipal Mayor , Bulacan

81. The Municipal Mayor Pandi, Bulacan

82. The Municipal Mayor , Bulacan

83. The Municipal Mayor Bulacan, Bulacan

84. The Municipal Mayor Balagtas, Bulacan

85. The Municipal Mayor Baliwag, Bulacan

86. The Municipal Mayor San Rafael, Bulacan

87. The Municipal Mayor San Miguel, Butacan

88. The Municipal Mayor San Ildefonso, Bulacan

89. The Municipal Mayor Binan, Laguna

90. The Municipal Mayor Sta. Rosa, Laguna

91. The Municipal Mayor Victoria, Laguna ERC CASE NO. 201 3-014 RC ORDER/April 8, 2013 Page 18 of 19

92. The Municipal Mayor Nagcardan, Laguna

93. The Municipal Mayor Magdalena, Laguna

94. The Municipal Mayor Calauan, Laguna

95. The Municipal Mayor Pila, Laguna

96. The Municipal Mayor Sta.Cruz, Laguna

97. The Municipal Mayor Liliw, Laguna

98. The Municipal Mayor San Pedro Tunasan, Laguna

99. The Municipal Mayor Alaminos, Laguna

100. The Municipal Mayor Rizal, Laguna

101. The Municipal Mayor Los Baños, Laguna

102. The Municipal Mayor Cabuyao, Laguna

103. The Municipal Mayor Bay, Laguna

104. The Municipal Mayor Dolores, Quezon

105. The Municipal Mayor Sampaloc, Quezon

106. The Municipal Mayor Pagbilao, Quezon

107. The Municipal Mayor Lucban, Quezon .1 ERC CASE NO. 201 3-014 RC ORDERIApriI 8, 2013 Page 19 of 19

108. The Municipal Mayor Tayabas, Quezon

109. The Municipal Mayor Candelaria, Quezon

110. The Municipal Mayor Sariaya, Quezon

111. The Municipal Mayor San Antonio, Quezon

112. The Municipal Mayor Mauban, Quezon

113. The Municipal Mayor Tiaong, Quezori

114. The Municipal Mayor Majayjay, Quezon

115. The Municipal Mayor Luisiana, Quezon

116. The Municipal Mayor Sto. Tomas, Batangas

117. The Municipal Mayor San Pascual, Batangas

118. The Municipal Mayor ,

119. The Municipal Mayor San Simon, Pampanga

120. The Municipal Mayor , Pampariga