fcR PPFCtd for Republic of the Philippines 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, Cavite and Rizal, and certain Cities/Municipalities/Barangays in Batangas, Laguna, Quezon 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