r Aprovcd for Republic of the Philippines ENERGY REGULATORY COMMIS f144L .J San Miguel Avenue, Pasig City IN THE MATTER OF THE APPLICATION FOR THE APPROVAL OF THE BUSINESS SEPARATION AND UNBUNDLING PLAN (BSUP), PURSUANT TO THE PROVISION OF SECTION:36 OF R.A. 9136, AND RULE 10 OF ITS IMPLEMENTING RULES AND REGULATIONS ERC CASE NO. 201 2-047 MC ILOCOS NORTE ELECTRIC COOPERATIVE, INC. (INEC), D 0 i3 1' E I) Applicant. CLTJ x----------------------- x m- V DECISION Before this Commission for resolution is the application filed on July 31, 2012 by Ilocos Node Electrib Cooperative, Inc. (INEC) for approval of it& 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, INEC alleged, among others, that: 1. It is a non-stock, non-profit Electric Cooperative (EC) duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal office at Brgy. Suyo, Dingras, Ilocos Node. 2. It holds an excIu(C franchise issued by the National Electrification ComrjiiAsion (NEC), to operate an electric light 0/ and power distribççtiy 1,service in the two (2) Cities of Batac -t ERC Case No. 2012-047 MC DECISION/May 14, 2013 Paae 2 of 17 and Laoag, and the twenty one (21) Municipalities of the Province of Ilocos Norte namely: AdE ims, Bacarra, Badoc, Bangui, Banna, Burgos, Carasi, Currimao, Dingras, Dumalneg, Marcos, Nueva Era, Pagudpud, Paoay, Pasuquin, Piddig, Pinili, San Nicolas, Sarrat, Solsona and Vintar. 3. Section 36 of Republic Act No. 9136 (R.A. 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 ERC shall ensure full compliance with this pro vision '1 4. Pursuant to the said mandate of the EPIRA as well as Rule 10 of its Implementing Rules and Regulations (IRR), the Commission promulgated Resolution No. 49, Series of 2006, otherwise known as the "Business Separation Guidelines, as Amended' as well as Resolution No. 07, Series of 2012, adopting the Accounting and Cost Allocation Manual (ACAM) for EC. 5. 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 together with its BSUP, its Accounting Separation Statements for Year 2011 based on its 2011 Audited Financial Statements (AFS). 7. It prays that after due notice and hearing, its BSUP be approved accordingly. ERC Case No. 20 12-047 MC DECISION/May 14, 2013 Paae 3 of 17 On September 3, 2012, the Commission issued an Order directing INEC to submit the following: a) Confidentiality Policies and Guidelines; and b) Board Resolution/s on the Statement of Compliance with the applicable provisions of Article 5 of the BSG. On September 20, 2012, INEC filed its "Compliance". 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 November 12, 2012, were issued setting the case for jurisdictional hearing, expository presentation, pre-trial conference and evidentiary hearing on November 28, 2012. In the same Order, INEC was directed to caUse the publication of the Notice of Public Hearing, at its own expense, once (lx) in a newspaper of general circulation in the Philippines, at least ten (10) days before the scheduled date of initial hearing. 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 November 19, 2012, INEC filed an "Urgent Motion to Reset Hearing" praying for the resetting of the hearing and citing that the members of the Technical Working Group (TWG) are scheduled to attend the convention for the Philippine Institute of Certified Public Accountants (PICPA) on the same date of hearing. Said urgent motion was granted. Thus, the Commission issued another Order dated January 28, 2013 resetting the hearing to March 1, 2013. On February 21, 2013, INEC filed its "Pm-Trial Brief'. During the March 1, 2013 initial hearing, only INEC appeared. No intervenor/oppositor appeared nor was there any intervention/opposition registered. ERC Case No. 20 12-047 MC DECISION/May 14, 2013 Pacje 4 of 17 At the said hearing, INEC presented its proofs of compliance with the Commission's posting and publication of notice requirements which were duly marked as Exhibits "B" to "E-2", inclusive. Thereafter, it conducted an expository presentation of its application and presented Ms. Rosita A. Bumanglag, its Finance Manager 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 clarificatory questions on the said witness. On March 26, 2013, INEC filed its "Compliance with Directive" and "Formal Offer of Evidence". On May 7, 2013, the Commission issued an Order admitting INEC's "Formal Offer of Evidence" and declaring the case submitted for resolution. DISCUSSION INEC's BSUP consists of six (6) sections as prescribed in the BSUP Filing Package, as follows: 1) Details of Current Structure INEC 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 or juridical entities, as well as the description of the current process enumerated as follows: 1.1 Meter Reading/Billing and Collection 1.2 Issuance of Notice of Disconnection "Abiso" and Collection 1.3 Disconnection, Reconnection, Collection-Remittance- Deposit 1.4 Bank Collection, Check Voucher Preparation, Cahs Advance, Payroll, Journal Voucher Preparation, Petty Cash Fund 1.5 AccourPq for Construction Costs, Preparation of FinancfialReporting, Bank Reconciliation ERC Case No. 20 12-047 MC DECISION/May 14, 2013 Paae 5 of 17 1.6 Processing and Remittance of Social Security System (SSS), Philippine Health Insurance Corporation (PHIC) and Home Development and Mutual Fund (HDMF) Premiums and Loan Payment 1.7 Budget Rate Computation 1.8 Technical Services-Planning, Planning and Engineering Design 1.9 Transmission and Distribution Pilferage Apprehension 1.10 Big Loads Consumer Tapping and Maintenance 1.11 Kilowatthour (kWh) Meter and Sealing 1.12 Substation Maintenance, Repairs and Maintenance of Equipment, Transformers 1.13 Pole and Transformer Rental 1.14 Employment, Disciplinary Action, Audit 1.15 II System Development and Deployment 1.16 Infrastructure Project Management, Total Work Management System (TWMS) 1.17 Total Customer and Management System (TCMS) 1.18 Meter Testing, Sealing and Rehabilitation Process 1.19 Energy Trading and Construction 1.20 Operations and Maintenance Process 2) Details of Business Segments In compliance with the BSUP Filing Package, I NEC 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 Generation Business Segments It adopted the Generation of Electricity and Provision of Ancillary Service Business Segment. This segment comprises the generation facility of electricity (i.e., the production of electricity including the use of a co- generation facility and embedded generators) and the provision of Ancillary Services (using generation assets). 2.2 Distribution and Related Activities Business Segments Its businfrSs segments are classified and defined according' t the BSG. These are grouped into six (6) busines&gme,nts, namely: a) Distribution Services ERC Case No. 20 12-047 MC DECISION/May 14, 2013 Paqe 6 of 17 (DS); b) Distribution Connection Services (DCS); c) Non- Regulated Retail Services (NRRS); d) Regulated Retail Services (RRS); e) Related Businesses (RB); and f) Supplier of Last Resort (SOLR). a. Distribution Services (DS) - This segment includes the following: 1) 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); 2) Provision for Ancillary Services (if any) that are provided using assets which form part of a Distribution System; 3) Planning, maintenance, augmentation and operation of the Distribution System; 4) Provision, installation, commission, testing, repair, maintenance and reading of the Wholesale Electricity Spot Market (WESM) related meters that are not also used to measure the delivery of electricity to end-users or other customers; and 5) Billing, collection and the provision of customer