':;;,GIJLATORy c. ~~ O~ ~.Ar\..\:) ~ ~ Republic of the It Jipproved for % ENERGY REGULATORY COMMISSIO Posting Z San Miguel Avenue, Pasig City wwv 'rc,g .ph

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

ERC CASE NO. 2013-047 Me

DOCKBTBD Date:,P.f;~-.QJ .._2O.13 ~y:.._._-f}._ _ ~..

DECISION

Before this Commission for resolution is the application filed on April 11, 2013 by del Norte Electric Cooperative, Inc. (DANECO) for approval of its Business Separation and Unbundling Plan (BSUP) in accordance with Section 36 of Republic Act No. 9136 (the Electric Power Industry Reform Act of 2001 or the EPIRA) and Rule 10 of its Implementing Rules and Regulations (IRR).

In the said application, DANECO alleged, among others, that:

1. It is an Electric Cooperative (EC) duly organized and existing under and by virtue of the laws of the Republic of the Philippines. It has its principal offices at Kilometer 100 National Highway, Municipality of , Compostela Valley Province; ERC Case No. 2013-047 MC DECISION/November 11, 2013 Page 2 of 18

2. It is the holder of an exclusive franchise issued by the National Electrification Commission (NEC), to operate an electric light and power distribution service in the Cities of Samal and and in the Municipalities of Asuncion, , , San Isidro, , all in the Province of and in the eleven (11) Municipalities of Compostela, Laak, Mabini, Maco, , , , Montevista, , and in Compostela Valley Province;

3. Section 36 of Republic Act No. 9136 (R.A. 9136), otherwise known as the "Electric Power Industry Reform Act of 2001" or the EPIRA, provides in part that "Any electric power industry participant shall functionally and structurally unbundle its business activities and rates in accordance with the sectors as identified in Section 5 hereof The ERG shall ensure full compliance with this provision" ,.

4. Pursuant to the said mandate of the EPIRA as well as Rule 10 of its IRR, the Commission promulgated Resolution No. 49, Series of 2006 otherwise known as "Business Separation Guidelines, as Amended' as well as Resolution No. 07, Series of 2012, adopting the Accounting and Cost Allocation Manual (ACAM) for ECs;

5. Pursuant to and in compliance with the requirements of the foregoing law, rules and resolutions, it is submitting herewith for the Commission's evaluation and approval, its proposed Business Separation and Unbundling Plan (BSUP) for the business separation and structural and functional unbundling of its business activities, with the end in view of separating its distribution activities into appropriate business segments and to have a clear separation of operations and accounts between its regulated and non-regulated activities;

6. It is likewise submitting herewith as Annex to the BSUP and Accounting Separation Statements prepared in accordance with the ACAM for EC, based on its Audited Financial Statements (AFS) for the Year 2011; ERC Case No. 2013-047 MC DECISION/November 11, 2013 Page 3 of 18

7. Finally, it is likewise submitting 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 (BSGt;'')s amended; and ''0

8. It prays that after due notice and hearing, its BSUP and ACAM be approved by the Commission.

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 May 20, 2013, were issued setting the case for jurisdictional hearing, expository presentation, pre-trial conference and evidentiary hearing on June 20,2013.

In the same Order, DANECO 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, at least 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 reasons 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.

On June 11, 2013, DANECO filed its "Pre- Trial Brief'.

During the June 20, 2013 initial hearing, only DANECO appeared. No intervenor/oppositor appeared nor was there any intervention/opposition registered. ERC Case No. 2013-047 MC DECISION/November 11, 2013 Page 4 of 18

At the said hearing, DANECO presented its proofs of compliance with the Commission's posting and publication of notice requirements which were duly marked as Exhibits "A" to "F-1", inclusive. Thereafter, it conducted and expository presentation and presented its lone witness, Ms. Josephine N. Armidilla, its Accountant, who testified in support of the application. In the course of her direct examination, additional documents were presented and duly marked as exhibits.

The direct examination having been terminated, the Commission propounded c1arificatory questions on the said witness. DANECO was, then, directed to submit its revised Accounting Separation Statement, BSUP model and formal offer of evidence.

On July 11, 2013, DANECO filed its "Compliance with Directives" and "Formal Offer of Evidence".

On October 29, 2013, the Commission issued an Order admitting DANECO's "Formal Offer of Evidence" and declaring the case submitted for resolution.

DISCUSSION

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

1) Details of Current Structure

DANECO submitted its. profile, the diagrammatic representation of its existing corporate structure, the description of the activities and functions undertaken by each of the different department or juridical entities, as well as the description of the current process enumerated as follows:

1.1 Meter Reading and Billing Process; 1.2 Collection Process; 1.3 Disconnection Process; 1.4 Reconnection Process; 1.5 New Service Connection; 1.6 Complaint Process; 1.7 Procurement Process; '1 ERC Case No. 2013-047 MC DECISION/November 11, 2013 Page 5 of 18

1.7.1 Capital Expenditure Procurement Process 1.7.2 Non-Capital Expenditures Procurement Process

2) Details of Business Segments

In compliance with the BSUP Filing Package, DANECO had adequately complied with this requirement and provided the details of its business segments including the allocation of costs for each segment, as follows:

2.1 Business Segments

Its business segments are classified and defined according to the BSG. These are grouped into seven (7) business segments, namely: 1) Distribution Services (OS); 2) Distribution Connection Services (DCS); 3) Regulated Retail Services (RRS); 4) Last Resort Supply Services (LRSS); (5) Non-Regulated Retail Services (NRRS); (6) Related Businesses (RB); and (7) Wholesale Aggregation (WA).

a. Distribution Services (OS) - This segment has the following distribution services: Conveyance of electricity through a Distribution System and the control and monitoring of electricity as it is conveyed through the Distribution System (including any services that support such conveyance, control or monitoring or the safe operation of the Distribution System); planning, maintenance, augmentation and operation of the Distribution System; billing , collection and the provision of customer services that are directly related to the delivery of electricity to end-users or to that relate to the connection of such persons to a Distribution System (whether such services are provided to those end-users or to Suppliers or to any other person);

b. Distribution Connection Services (DCS) - This segment has the following distribution connection services - Provision of capability at each Connection Point to a Distribution System to deliver electricity or 'I ERC Case No. 2013-047 MC DECISION/November 11, 2013 Page 6 of 18

to take electricity from the Connection Point and the conveyance of electricity: (a) from the facilities of persons which are directly connected to the Distribution System; (b) from the Connection Point to the facilities of persons which are directly connected to the Distribution System; planning, installation, maintenance, augmentation, testing and operation of Distribution Connection Assets; and provision of other services that support any of the above services.

c. Regulated Related Services (RRS) - This segment comprises the provision of regulated retail services, pertaining to the sale of electricity to end-users who are included in the Captive Market, and includes: Billing, collection and the provision of customer services to such end-users in their capacity as electricity consumers; energy trading (including the purchase of electricity and hedging activities) undertaken in connection with the sale of electricity to end-users who are included in the Captive Market; and sale of electricity to end-users who are included on the Captive Market.

d. Last Resort Supply Services (LRSS) - This segment comprises the provision of Supplier of Last Resort (SOLR) services provided by a Distribution Utility namely: services pertaining to the sale of electricity to SOLR Customers, including billing, collection and the provision of basic customer service.

e. Non-Regulated Related Services (NRRS) - This segment comprises the provision of non-regulated retail services provided by a Distribution Utility pertaining to the sale of electricity to end-users who are included in the contestable market or to other customers who are not end-users and includes: billing, collection and the provision of customer services to such end-users in their capacity as electricity consumers; or to such other customers in their capacity as purchasers of electricity; energy trading (including the purchase of electricity and hedging activities) undertaken in connection with the sale of electricity to end-users who are included ERC Case No. 2013-047 MC DECISION/November 11, 2013 Page 7 of 18

in the contestable market or to other customers who are not end-users; and sale of electricity to end- users who are included in the contestable market or to other customers who are not end-users.

f) Wholesale Aggregation (WA) - This segment comprises the Distribution Utility's service of purchasing electricity in bulk and selling this to other Distribution Utilities including billing, collection and the provision of basic customer service.

g. Related Business (RB) - This segment comprises 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 installations and non-electricity related services such as telecommunications services like pole rentals, testing and rental fees for special equipment like transformer, . rental of heavy equipment.

DANECO manifested that the LRSS, NRRS and WA business segments are intended in preparation for future business which it may undertake once the implementation of the Retail Competition and Open Access (RCOA) starts.

The Commission has found DANECO's proposed business segments acceptable.

2.2 Segregation of Employees to Business Segment

The BSUP Filing Package requires the details of the business segments, such as the number of individuals who are engaged in the activities of the business segment or other business activities of the utility.

In compliance with the aforesaid requirement, DANECO submitted its segregation table of the number of employees who will be engaged in the activities of each business segment. It shall maintain its current organizational structure but will assign the employees to ERC Case No. 2013-047 MC DECISION/November 11, 2013 Page 8 of 18

the different business segments accordingly and that the corresponding cost relative to their services.

At present, DANECO's employees are allocated to four (4) of its proposed business segment namely OS, DCS, RRS, and RB. However, in the payroll allocation submitted by DANECO, it did not allocate salaries of employees who will be assigned to RB business segment considering that it assigned staff to this segment and has incurred revenue and expenses for RY2011.

It manifested that in the event of NRRS, LRSS, and WA services, the General Manager together with the Department Managers shall supervise and facilitate its operations.

2.3 Description of Assets

DANECO's assets will be separated based on the same business segments as defined in the BSG. Separation will be made based on the purpose to which such assets were acquired and being used. Assets that are being used by all business segments are defined accordingly. Where usage is not a reasonable allocation factor, allocation methods described in the ACAM shall be used for the activity undertaken. Based on the CY 2011 Audited Financial Statement, DANECO has segregated its assets to four (4) business segments namely, OS, DCS, RRS and RB.

If changes on the payroll and asset allocation related to the above-mentioned segments become necessary, it shall inform the Commission of the consequent modifications of its BSUP.

3) Accounting Separation

The Accounting Separation Statements and the corresponding accounting principles, policies and procedures used by DANECO are in accordance with the BSG. The accounts maintained in the four (4) segments are reflected in such a way that these are separately being carried out by separate '/ ERC Case No. 2013-047 MC DECISION/November 11, 2013 Page 9 of 18

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.

DANECO submitted its Statement of Income, Statement of Assets and Liabilities together with the revenue schedule, cost schedule, and Cash Flow Statements for the year ended December 31, 2011 based on its AFS for the year ended December 31,2011.

Likewise, it submitted an express statement manifesting the incorporation of Articles II (General Principles for Accounting Separation), III (Information Requirements for Accounting Separation) and IV (Business Segments) of the BSG for the said accounting separation statement. This undertaking clearly separates the accounts of its regulated and non- regulated business activities.

3.1 Principles to Achieve Accounting Separation

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

In addition, the following policies shall be observed:

• In the absence of a regular set of Board of Directors since March 2001, all check disbursements regardless of the amount are signed by both the Finance Services Manager and General Manager;

• Procurement procedure based on MSEC Resolution NO.1 0-01 dated October 12, 2010;

• All acquisition and construction of new assets should be in accordance with the ERC approved Capital Expenditure plan filed by the coop. Subsequent repairs and maintenance are capitalized if and when it extends the life of the asset or increases its capacity. '/ ERC Case No. 2013-047 MC DECISION/November 11, 2013 Page 10 of 18

• Depreciation Policy was based from the National Electrification Administration (NEA) memorandum on Depreciation of Fixed Assets, as follows:

De reciation Rate Useful Life

3% 33 rs. 3% 33 rs. 3.33% 30 rs.

3% 33 rs. 3.33% 30 rs. 3% 33 rs. 4% 25 rs.

3% 33 rs.

0 0 20% 5 rs. 0 0

0 10% 10 rs. 0 10% 10 rs. 0

3.2 Allocation Principles

DANECO has adopted the allocation methods and principles in accordance with Article III (Information Requirements for Accounting Separation) of the SSG. Direct allocation approach was used in allocation of accounts, revenues and expenses that directly relate to a certain activity or section. The accounts, revenue and expenses that cannot be directly attributed to an activity/section will be allocated on a fair and reasonable basis as documented in the approved ACAM for ECs. 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) ERC Case No. 2013-047 MC DECISION/November 11, 2013 Page 11 of 18

items/activities/sections that are un-attributable to a Business Segment are allocated using a fair and reasonable method.

DANECO's overall revenue, costs, assets, liabilities and capital obtained from the income statement and balance sheet should be directly assigned to the segment that cause the revenue, costs, assets, liabilities and capital. However, for those accounts that cannot be directly assigned, the allocation factor should be used.

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

In the Payroll allocation Sheet, DANECO did not allocate the salary and wages of staff segregated under the RB segment. It should allocate a portion of the salaries of the staff assigned under the RB segment of the Payroll allocation to properly segregate cost related to RB segment in the Allocation Factor and Trial Balance sheets.

In its Trial Balance, DANECO used the allocation factor "PEXAG" for some accounts, however, this is not linked to the allocation factor sheet.

The accounts "Accrued Payroll" and "SSS and Phi/health Contribution Payable" were allocated either using the "DIRECT" or "PEXAG" allocation factor but are not linked to the allocation factor sheet.

DANECO should be directed to make the necessary adjustment in the proper allocation factors to use in the Trial Balance accounts and the proper linking of the Payroll Allocation sheet, Allocation Factor Sheet and Trial Balance Sheet to reflect the segregation of cosUrevenue to its corresponding business segments. '" ERC Case No. 2013-047 MC DECISION/November 11, 2013 Page 12 of 18

3.3 Chart of Account

DANECO 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 the Cooperative. It has incorporated the requirements under the EPIRA following the SSG, as amended.

3.4 Basic Accounting Principles

DANECO defined its basic accounting principles that are compliant with the SSG 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 for the purposes of the Susiness Separation Guideline (SSG) which will be accompanied by a report prepared, signed and dated by an Auditor (Auditor's Report) that contains the Auditor's opinion on whether the Accounting Separation Statements are presented fairly in accordance with the requirements of the SSG, clearly identifying any exceptions and the effect of each exception on the Accounting Separation Statements.

3.5 Other Requirements Related to Business Separation

DANECO submitted its undertaking stating that it will comply with the other requirements related to business separation as provided under Article V of the SSG, particularly, on the provisions related to Prohibition on Discrimination, Disclosure of Information and Prohibition on Cross-subsidies. ERC Case No. 2013-047 MC DECISION/November 11, 2013 Page 13 of 18

4) Description of Separation

DANECO intends to separate the business segment by the creation of separate divisions or departments within the same juridical entity that undertakes the activities. All directly attributable employees, assets and cost will be grouped into their corresponding "business segment". All directly attributable employees, assets and costs will be grouped into their corresponding costs common to all segments will be segregated by function forming different departments within the same juridical entity. The assets of DANECO and corresponding costs will be allocated base on logical and acceptable method. The method chosen should not in any way increase the cost of DANECO.

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

5) Milestones and Highlights

DANECO manifested that it will conduct an orientation seminar to all employees regarding the new organizational set-up of the EC, allowing them to expressly allocate their responsibilities to the different functions and processes of the EC's different business segments.

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

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. ERC Case No. 2013-047 MC DECISION/November 11, 2013 Page 14 of 18

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

In the preparation of the Accounting Separation Statement, the BSG requires that transfer pricing policies shall be used for transactions between business segments. Since DANECO 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 Davao Del Norte Electric Cooperative, Inc. (DANECO) for approval of its Business Separation and Unbundling Plan (BSUP) in accordance with the provisions of 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 conditions and full compliance with the requirements of the BSG, as amended.

In addition, DANECO is directed to modify the following relative to its BSUP:

, 1) Payroll Allocation - It should allocate portion of the salary and wages of staff assigned to RB business segment and make the necessary correction in linking the Payroll Allocation sheet and Allocation factor sheet in order to properly allocate its payroll cost in the Trial Balance.

2) For accounts that use the allocation factor "PEXAG", it should link said accounts with the allocation factor sheet in order to reflect the necessary adjustments in the Trial Balance. ERC Case No. 2013-047 MC DECISION/November 11, 2013 Page 15 of 18

3) The accounts "Accrued Payroll" and "SSS and Phi/health Contribution Payable" were allocated either using the "DIRECT" or "PEXAG" allocation factor but were not linked to the allocation factor sheet.

DANECO is directed to make the necessary adjustment in the proper allocation factors in the Trial Balance accounts and the proper linking of the Payroll Allocation sheet, Allocation Factor Sheet and Trial Balance Sheet to reflect the segregation of cost/revenue to its corresponding business segments.

Likewise, DANECO is directed to further breakdown the revenue derived from its Related Business during the year 2011. In the event that DANECO implements its re-organizational plan, it should submit its revised BSUP model.

Finally, DANECO is directed to submit the following documents within five (5) months from the end of the financial year, as provided in Article II, Section 2.12 of the BSG, as amended:

1) The Accounting Separation Statements for the relevant period, in accordance with the approved BSG, as amended and the Commission approved ACAM;

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

3) The Auditor's Report on the Accounting Separation Statements prepared in accordance with Section 2.8 of the BSG, as amended;

4) The General Information Sheet that is required to accompany the Accounting Separation Statement in accordance with Section 2.10 of the BSG, as amended;

5) The Compliance Report that is required to accompany the Accounting Separation Statements in accordance with Section 2.11 of the BSG, as amended; and ERC Case No. 2013-047 MC DECISION/November 11, 2013 Page 16 of 18

6) A consolidated copy of the relevant Electric Power Industry Participant's ACAM, where such ACAM has been amended, so that it does not correspond with the consolidated copy of the ACAM that has been previously approved by the Commission.

50 ORDERED.

Pasig City, November 11,2013 .

. j,(~ NAIDA G/CkUZ-DUCUT Chairperson ~

Or. n. ;v..~,rP." ALF~~N G4~ VICTORIA cfYAP-TARUC Commissioner Commissioner

J05EFINA PAT I A. MAGPALE A51RIT C

INJAco BSUP/ERCCASENO.2013-047 MC-DECISION , ERC Case No. 2013-047 MC DECISION/November 11, 2013 Page 17 of 18

Copy Furnished:

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

2. DAVAO DEL NORTE ELECTRIC COOPERATIVE, INC. (DANECO) Kilometer 100 National Highway, Municipality of Montevista Compostela Valley Province

3. The Office of the Solicitor General 134 Amorsolo Street, Legaspi Village Makati City, Metro Manila

4. The Commission on Audit Commonwealth Avenue Quezon City, Metro Manila

5. The Senate Committee on Energy GSIS Bldg., Roxas Blvd., Pasay City Metro Manila

6. The House Committee on Energy Batasan Hills, Quirino City, Metro Manila

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

8. Office of the City Mayor Tagum City, Davao del Norte

9. Office of the City Mayor Samal City, Davao del Norte

10. Office of the Municipal Mayor Asuncion, Davao del Norte

11. Office of the Municipal Mayor Kapalong, Davao del Norte

12. Office of the Municipal Mayor New Corella, Davao del Norte

13. Office of the Municipal Mayor Talaingod, Davao del Norte

14. Office of the Municipal Mayor Compostela, Davao del Norte ERC Case No. 2013-047 MC DECISION/November 11, 2013 Page 18 of 18

15. Office of the Municipal Mayor Laak,DavaodelNorte

16. Office of the Municipal Mayor Mabini, Davao del Norte

17. Office of the Municipal Mayor Maco, Davao del Norte

18.0ffice of the Municipal Mayor Montevista, Davao del Norte

19. Office of the Municipal Mayor Monkayo, Davao del Norte

20. Office of the Municipal Mayor Mawab, Davao del Norte

21. Office of the Municipal Mayor Nabunturan, Davao del Norte

22. Office of the Municipal Mayor New Bataan, Davao del Norte

23. Office of the Municipal Mayor Pantukan, Davao del Norte

24. Office of the Municipal Mayor Maragusan, Davao del Norte