Erc2004 05a

Management Services
Report No. 2004 -05A

Government-wide Performance Audit
Regulatory Functions
Energy Regulatory Commission

Republic of the Philippines
Commission on Audit
MANAGEMENT SERVICES
Commonwealth Avenue, Quezon City, Philippines
Telephone Nos.: 931-9235, 931-7455
October 28, 2005
ATTY. RODOLFO B. ALBANO, JR.

Chairman
Energy Regulatory Commission
Pacific Center
Sn. Miguel Ave., Pasig City
Sir:
We are pleased to transmit the report on the government-wide

performance audit of the regulatory functions of the Energy Regulatory
Commission (ERC). The audit was conducted from October 20, 2004 to April
1, 2005 in compliance with COA MS and TS Office Order Nos. 2004-033 and
2004-033A dated July 7, and September 16, 2004, respectively. The results of
the audit were transmitted for comments to that Office on May 31, 2005 and
discussed in an exit conference held on July 5, 2005. The comments were
incorporated in the reports where appropriate.
The audit was conducted to assess the effectiveness of carrying out the
regulatory functions of ERC in ensuring the viability of regulated entities and
protecting public interest giving considerations to the development of standards,
rules and regulations and enforcement and monitoring of compliance thereof.
We look forward to the proper implementation of the audit

recommendations and we would appreciate being informed of the actions taken
thereon within one month from receipt hereof.
We acknowledge the cooperation and assistance extended to the audit

team by the officials and staff of that Office.
Very truly yours,
By Authority of the Chairman:
Management Services
Contents Page
Part I Executive Summary 1
Introduction 2
Audit Objective 3
Audit Scope and Methodology 3
Audit Conclusion 3
Management’s Reaction to Audit Observations 4
Part II The Regulatory Functions 5
The Electric Power Industry 6

- Before the Passage of Republic Act 9136
- After the Passage of Republic Act 9136
Other Implementing Agencies 8
Requirements for a Fully Restructured Industry 8
The Powers and Functions of ERC 9
The ERC Organization 10
The ERC Regulatory Framework 13
Permits and Licenses Issued by ERC 16
Rate-Setting Methodology 17
Part III Audit Observations 22
Chapter 1 Development of Appropriate Standards 23
Introduction 24
Observation 24
Chapter 2 Timely Compliance With Laws, Rules

and Regulations 32
Introduction 33
Observation 33, 40
Chapter 3 Sound Monitoring System 45
Introduction 46
Observations 47
Part IV Recommendations 50
Part I
Executive Summary
1
EXECUTIVE SUMMARY
INTRODUCTION
The term “regulatory” comes from the word “regulate” which, as defined in the
Webster dictionary, means “to bring under the control of law or constituted
authority.” In the Philippines, just like in any other country, public utilities are
regulated by the government by requiring them to secure permits and licenses
before they can operate business, submit relevant reports or documents, and by
approving the rates to be imposed to the public, where appropriate. Government
regulatory intervention is employed to attain social goals such as safety of
workers, environmental and consumer protection, and protection of public
interest.
Under the Public Service Law, “public utilities” are described as business
organizations which regularly supply the public some commodity or services,
such as electricity, gas, water, transportation, or telephone and telegraph
services. These services are part of every household’s budget and affect almost
everybody. Thus, rate hikes, contaminated water, sea mishaps and
unsatisfactory performance of utilities delivering these services have been
everybody’s concern and the subject of numerous rallies, commentaries and
inquiries.
These services are being regulated by the following agencies:
Government Agency Regulated Entities
Energy Regulatory Commission (ERC) Electric Power Operators

Local Water Utilities Administration (LWUA) Water Districts
Maritime Industry Authority (MARINA) Shipping Operators
National Telecommunications Commission (NTC) Telecommunication Operators
Metropolitan Waterworks and Sewerage System Water Concessionaires within Metro Manila
(MWSS)
Air Transportation Office (ATO) Public Air Utility Facilities and Services
Operators
Land Transportation Franchising and Regulatory Public Land Transportation Operators
Board
In line with these issues, this audit was conducted to determine the effectiveness
of regulatory functions of the concerned government agencies with due
consideration to protection of public interest.
2
EXECUTIVE SUMMARY
AUDIT OBJECTIVE
The audit was conducted to assess the effectiveness of the regulatory functions
of four regulatory offices in ensuring the viability of public utilities and
protection of public interest taking into consideration the development of
standards, rules and regulations, and enforcement and monitoring of the same.
AUDIT SCOPE AND METHODOLOGY
The audit covered the regulatory functions of the ERC, NTC, LWUA and
MARINA. The team considered the following audit criteria in the assessment:
• Development of appropriate standards;
• Effective enforcement of standards, rules and regulations;
• Timely compliance with the law, rules and regulations; and
• Sound monitoring system.
To achieve the audit objective, the team performed the following audit
procedures:
• Reviewed existing regulatory framework of the agencies

covered in the audit including the guidelines, rules,
regulations, standards set and rate-setting methodology,
where appropriate;
• Evaluated the status of implementation of the Electric
Power Industry Reform Act (EPIRA) insofar as ERC is
concerned;
• Evaluated relevant reports prepared by the ERC; and
• Interviewed officers and key staff.
The audit was conducted from October 20, 2004 to April 1, 2005 in compliance
with COA MS and TS Office Order Nos. 2004-033 and 2004-033A dated July 7
and September 16, 2004, respectively.
AUDIT CONCLUSION
The effectiveness of the ERC in the discharge of its regulatory function was
adversely affected by its failure to develop standards to measure performance
and financial capability of regulated utilities, to meet deadlines set under the
EPIRA and monitor the effect of approved rates on the rate of return of the
regulated entities.
3
EXECUTIVE SUMMARY
While the ERC has already developed and promulgated the Philippine Grid and
Distribution Codes as required under the Electric Power Industry Reform Act,
these contain mere performance indicators and financial ratios without
indicating the acceptable levels of performance. The implementing guidelines
to come up with performance and financial standards are still either in the
process of finalization or for public consultation. In addition, the promulgation
and implementation of some requirements under existing regulations and
guidelines were beyond the prescribed period.
The ERC’s failure to approve compliance plans of 127 Distribution

Utilities/Electric Cooperatives (DUs/ECs) on time will further delay
compliance by the DUs/ECs with the requirements under the National Grid and
Distribution Codes. These codes prescribed, among others, technical standards
to be observed by the regulated entities. The delayed compliance by these
entities will expose the public to risks, added cost and inconveniences.
Finally, while the ERC is developing and adopting rate setting methodologies to
allow entities to recover total allowable costs plus a reasonable return on
investment, the implementation of the approved rates was not monitored to
assess its effect on the entities’ rate of return. There was, therefore, no
assurance that the rates so approved did not result in excessive rate of return.
As effective performance of regulatory functions is crucial in ensuring the

viability of electric utilities and in protecting public interest, the team
recommended measures under Part IV of the report to address these concerns.
MANAGEMENT’S REACTION TO AUDIT OBSERVATIONS
The results of the audit were transmitted to ERC on May 31, 2005 and
discussed in an exit conference held on July 5, 2005. Generally, the
management recognized the existence of the problems uncovered during the
audit and has initiated appropriate steps to address these concerns. They
submitted explanations and justifications which were incorporated in the report
together with the team’s rejoinder.
4
Part II
The Regulatory Functions
5
THE REGULATORY FUNCTIONS
THE ELECTRIC POWER INDUSTRY
BEFORE THE PASSAGE OF REPUBLIC ACT 9136
The Philippine power industry, prior to the passage of Republic Act 9136
otherwise known as the Electric Power Industry Reform Act (EPIRA or the
Act) of 2001 on June 8, 2001, was divided into three major sectors, namely:
generation, transmission, and distribution.
The National Power Corp. (NPC) used to monopolize the generation of energy
until the issuance of Executive Order (EO) No. 215 dated July 10, 1987,
opening the generation function to private investors. The EO paved the way to
the existence of Independent Power Producers (IPPs) which generate and sell
electricity to NPC and other users.
NPC is responsible for the transmission of electricity to distributors and large

industrial users through its high-voltage wires comprising the transmission grid
highway interconnecting the main islands nationwide.
The distribution of electricity to end-users is done by private utilities such as

the Manila Electric Company (MERALCO), and local government-owned
utilities and electric cooperatives within their franchise areas at retail rates
regulated by the then Energy Regulatory Board.
The policy direction for the energy industry was set by the Department of
Energy (DOE), while the financial and technical assistance to electric
cooperatives were provided by the National Electrification Administration
(NEA). (Source: DOE.gov.ph)
AFTER THE PASSAGE OF REPUBLIC ACT 9136
REFORMS
The passage of the Act brought about two major reforms, namely, the
restructuring of the electricity supply industry and the privatization of the NPC.
The reforms were aimed to encourage greater competition and to attract private
investors in the industry. It is believed that a more competitive power industry
will result in competitive/lower power rates and more efficient services to end-
users.
6
An integral part of the restructuring program of the electric power industry is

the separation of the different components of the power sector, namely:
generation, transmission, distribution and supply. The generation sector shall
be competitive and open while the transmission and distribution sectors shall be
regulated and subject to the ratemaking power of Energy Regulatory
Commission (ERC). The supply sector catering to contestable market shall
require a license from the ERC. Contestable market refers to an area where end-
users have a choice of Supplier of electricity.
The four sectors are depicted below in a context diagram:
Conveyance of electric power from transmission

Production of electricity by a Generation facilities or Embedded Generators to End-users
Company or a co-generation facility by Distribution Utility
TRANSMISSION
D E
G I
S N
E S
O D
N T
U -
E R U
R
R I
C S
A B
E E
T U R
S
I T
U
O I
P
N O
P
N
L
Y
Sale of electricity by a party other than a

Conveyance of electricity through the Generation Company or a Distribution
high voltage backbone system Utility in the Franchise Area of a
Distribution Utility using the wires of such
Distribution Utility
Another reform in the energy sector is the privatization of the NPC through the
sale of the firm’s generation and transmission assets to private investors. This
is being carried out by the Power Sector Assets and Liabilities Management
(PSALM) Corporation and the National Transmission Corp. (TRANSCO)
which were created under this Act.
PSALM is tasked to take ownership of the existing generation assets, liabilities,

Independent Power Producers’ (IPP) contracts, real estates and all other
disposable assets of the NPC, including the assumption of all its outstanding
obligations. On the other hand, the TRANSCO assumed the authority and
responsibility of NPC for planning, construction and centralized operation and
maintenance of its high voltage transmission facilities, including grid
interconnection and ancillary services. TRANSCO is wholly owned by
PSALM.
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OTHER IMPLEMENTING AGENCIES
In addition to the above-mentioned agencies, the following are mandated under

the Act to:
Agencies Mandated Function
DOE Supervise the restructuring of the electric

industry
NEA Develop and implement programs to prepare
electric cooperatives in operating and
competing under the deregulated electricity
market within five (5) years from effectivity
of the Act, specifically in an environment of
open access and retail wheeling
ERC Perform the combined quasi-judicial, quasi-
legislative and administrative functions in the
electric industry
REQUIREMENTS FOR A FULLY RESTRUCTURED INDUSTRY
The electric industry can be considered fully restructured once there is an open
access to transmission lines and retail competition. This can be realized under
existence of certain conditions:
Wholesale electricity spot Unbundled transmission and

market distribution wheeling charges
Restructured Power Industry
Transfer of the management

Privatization of at least and control of at least seventy
Initial implementation of seventy percent (70%) of percent (70%) of the total
the cross subsidy removal the total capacity of energy output of power plants
scheme generating assets of NPC in under contract with NPC to
Luzon and Visayas the IPP Administrators
8
THE NEW STRUCTURE OF THE ELECTRIC POWER INDUSTRY
THE POWERS AND FUNCTIONS OF ERC
The ERC was created under RA 9136 upon the abolition of the Energy
Regulatory Board (ERB). It is a regulatory body mandated to perform the
combined quasi-judicial, quasi-legislative and administrative functions in the
electric power industry.
9
In line with this mandate, the ERC was vested with the following powers and
functions:
Penalize abuse of market

power in the electricity
industry
Promulgate rules & Fix and approve Transmission and
regulations to promote Distribution wheeling charges,
competition, encourage market and retail rates using ERC
development, ensures established and enforced rate
customer choice setting methodology
Grant, revoke, review and

modify the certificates of
Determine the electricity
compliance issued to
End-users comprising the
generation companies and
Contestable and Captive
licenses issued to suppliers
Markets
ERC
Enforce national Grid & Promulgate rules and
Distribution Codes Powers and regulations prescribing
function the qualifications of
Suppliers
Enforce rules and

regulations governing the Set a Lifeline Rate for
operations of Wholesale the Marginalized End-
Electricity Spot Market Users
Determine the levels of

Unbundle business cross subsidies in the
activities and rates existing retail rates until
the same is removed
Some of these functions were required under the Act to be completed within six
months to three years from its effectivity on June 26, 2001.
THE ERC ORGANIZATION
The ERC is operating with a total personnel complement of 249, of which 14

remained unfilled as of October 31, 2004. It is under the supervision of a
Commission composed of four Commissioners and a Chairman. The
Commission is assisted by seven major organizational units with defined
responsibilities as follows:
Organizational Units Responsibilities
Office of the General Counsel and Provides legal advice or assistance to

Secretariat to the Commission the Commission and acts as secretariat
to the Commission.
10
Organizational Units Responsibilities
Regulatory Operations Service Recommends and enforces the rules,

regulations, standards and
methodologies adopted by the
Commission. It studies and
recommends changes in electric rates
and tariffs, conducts investigations and
takes actions on any violations by the
electric participants, and recommends
revisions on various standards
promulgated and enforced by ERC.
Market Operations Service Recommends to the Commission
appropriate action on such cases as
issuance of certificates of compliance
to generators, operators, and licenses
to electricity suppliers, and
determination of contestable markets,
wholesale spot market, anti-
competitive behavior and other
matters as directed by the CEO.
Planning and Information Service Provides the Commission with
relevant, timely and accurate reports,
data/information, and takes the lead
role in information dissemination.
Consumer Affairs Service Handles consumers’ complaints and
ensures adequate promotion of
consumer interests.
Legal Service Provides legal assistance and
representation to all line departments
in proceedings before the Commission
and assistance in external legal matters
as requested by the General Counsel.
Financial and Administrative Provides financial, administrative, and
Service human resources service to the
Commission and its operating units.
The organizational structure of the ERC is presented on the succeeding page:
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12
THE ERC REGULATORY FRAMEWORK
The regulatory framework defines the scope of authority and mandate of the
Regulator. The main activities of the regulator are presented in this context
diagram.
Governing Rule – EPIRA and its IRR
Generating
companies
S E M
E N O TRANSCO
T F N
T O I
Distribution
I R T
Utilities
N C O
G E R
M I
Suppliers
Regulatory E N
Rules N G
and T IPP
Standards Administrator
End-users
ERC is guided by the EPIRA Law and its Implementing Rules and Regulations.
Under the law, the ERC was mandated to develop performance standards to be
observed by all participants in the electric power industry to ensure satisfactory
performance. As of audit date, the ERC has formulated the Distribution and the
Philippine Grid Codes.
The governing rules, procedures, requirements, and performance and financial

indicators in the operation, maintenance, and development of the electric
Distribution System and the high-voltage backbone Transmission System were
defined under these codes.
The indicators include, among others, the following:
Category Indicators
Performance Power quality
¾ Frequency variations
¾ Voltage variations
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Category Indicators
¾ Harmonics
¾ Flicker severity
Reliability
¾ System Average Interruption Frequency Index
¾ System Average Interruption Duration Index
¾ Momentary Average Interruption Frequency
Index
System efficiency
¾ System loss – Technical
¾ System loss – Non-technical
¾ System loss – Administrative
Customer service
¾ Time to process an application
¾ Time to connect premises to the distribution
system
¾ Time to restore service after a loss of
service
¾ Time to respond to emergency calls
¾ Time to respond to billing queries and
complaints
Financial Leverage ratios
Liquidity ratios
Efficiency ratios
Profitability ratios
On the other hand, the Department of Energy promulgated the market rules of
the Wholesale Electricity Spot Market (WESM) and the governing rules,
requirements and procedures in the operation of the Philippine electricity
market. WESM is a centralized venue for sellers and buyers to trade electricity
as a commodity. The WESM Rules identifies, recognizes and sets the
responsibilities of the market operator, the System Operator, the WESM
participants, and the Philippine Electricity Market Board. The electricity
market participants as defined in the WESM Rules follow:
Electricity Market
Participant Definition
Market operator The entity responsible for the operation of the spot market governed by
the PEM Board in accordance with clause 1.4 which is the Autonomous
Group Market Operator (AGMO) for a period of twelve months from
the spot market commencement date and thereafter the entity to which
the functions, assets and liabilities of the AGMO are transferred in
accordance with Section 30 of the Act.
System Operator The party responsible for generation dispatch, the provision of ancillary
services, operation and control to ensure safety, power quality, stability,
reliability and security of the grid.
14
Electricity Market
Participant Definition
WESM participants Refer to all Generation Companies, Distribution Utilities, Suppliers,
Aggregators, End-users, the TRANSCO or its Buyer or Concessionaire,
IPP Administrators, and other entities authorized by the ERC to
participate in the WESM in accordance with the Act.
Philippine The group of Directors serving from time to time on the Board
Electricity Market that is responsible for governing the WESM.
Board (PEM Board)
The salient provisions in the Grid and Distribution Codes (PGDC) for strict
compliance by the electric market participants follow:
Provision
Distribution Code Establishment of a Distribution Management Committee
which shall carry out, among others, the following functions:
¾ Monitor the implementation of the Distribution Code;
¾ Review and recommend standards, procedures, and
requirements for Distribution System connection,
operation, maintenance and development;
¾ Initiate the Distribution Code enforcement process and
make recommendations to the ERC
Performance standards for distribution and supply
Financial capability standards for distribution and supply
Distribution connection requirements
Grid Code Establishment of a Distribution Management Committee
which shall carry out, among others, the following functions:
¾ Monitor the implementation of the Grid Code;
¾ Review and recommend standards, procedures, and
requirements for Grid connection, operation,
maintenance and development;
¾ Initiate the Grid Code enforcement process and make
recommendations to the ERC
Performance standards for transmission
Financial standards for generation and transmission
Grid connection requirements
15
PERMITS AND LICENSES ISSUED BY ERC
As part of its regulatory function, ERC issues the following permits and
licenses either to the distribution utilities or the generation operators:
Permit/License & Services Legal Basis
Certificates of Public Convenience and/or Necessity Section 40(a), 16(a) Public Service Act (C.A. No.
(CPC/CPCN) 146 as amended); Section 43(p), R.A. 9136 or the
(for not more than 50 years) Act
Certificate of Compliance (for 5 years) Section 6 of the Act
Licenses or permits of franchised electric utilities Section 43(p) of the Act
Modification of license of suppliers of electricity to Section 29 of the Act
the contestable market
Authority to recover stranded costs by Distribution Section 33 of the Act
Utility
Authority to recover cost and return on demand side Section 43(q) of the Act
management projects
Approval of any changes on the terms and conditions Section 43(h) of the Act
of service of the:
¾ TRANSCO or
¾ any distribution utility
Approval of reappraisal of the eligible assets by an Section 43f(i) of the Act; Section 17c of C.A. No.
independent appraisal company of: 146
¾ TRANSCO or
¾ Any distribution utility
Authority to improve or expand TRANSCO’s Section 9(d) of the Act; Section 20d of C.A. No.
transmission facilities consistent with the Grid Code 146
and the Transmission Development Plan (TDP)
Authority for the increase of equipment, construction, Section 40(g) of C.A. No. 146
operation and installation of new units, increase of
capacity or the extension of means or general
extensions in the service
Authority to revise schedule of transmission charges, Sections 19, 24, 25, 36 & 43(u) of the Act;
distribution wheeling rates/retail rate for captive Section 16c & 20(a) of C.A. No. 146
market and unbundling of rates and function
Authority to sell, alienate, mortgage, encumber, or Section 20(g), C.A. No. 146 as amended; Section
lease its property, franchise, certificate, privileges or 43(p) of the Act
rights or any part thereof, merge or consolidate its
property, franchise, certificate, privileges or rights or
any part thereof, together with CPC/CPCN with any
other utility/public service
Authority to issue or increase capital stock Section 20(e), 40(f) of C.A. No. 146
16
RATE-SETTING METHODOLOGY
Part III, Rule 15 of the Rules and Regulations Implementing RA No. 9136
provided for the determination of electricity rates and charges which includes
the unbundling of rates, removal of cross subsidies, stranded debts and contract
costs recovery, the universal charge, the mandated residential rebate and the
lifeline rate. The rates must be such as to allow the recovery of just and
reasonable costs plus a reasonable return to enable the entity to operate viably.
The ERC may adopt alternative forms of internationally accepted rate setting
methodology as it may deem appropriate. The rate setting methodology so
adopted and applied must ensure a reasonable price of electricity and the rates
prescribed shall be non-discriminatory which shall take into consideration,
among others, the franchise tax.
As of audit date, the ERC has so far developed the following rate-setting
methodologies for each type of service:
Electric
Service/Power Newly-developed Rate-Setting Methodology
Agencies
NPC Generation Rate Adjustment Mechanism (GRAM)
GRAM is an adjustment recovery mechanism, which replaces the automatic

adjustment mechanisms of NPC which is the Fuel and Purchased Power Cost
Adjustment (FPCA) and distribution utilities’ Purchased Power Adjustment (PPA).
It will allow a periodic (quarterly) adjustment to the Generation Rate to reflect
changes in fuel and IPP Costs after a review by the ERC before costs are passed on
to customers.
GRAM is applicable to NPC and distribution utilities which source their power not
only from NPC but also from IPPs. It is also applicable to distribution utilities that
generate its own power. This recovery mechanism will be implemented after the
unbundling of the utility’s rates and shall continue indefinitely, until orders to the
contrary.
Generally, the Generation Charge will change quarterly as NPC files its GRAM
application. Distribution utilities sourcing its entire power from NPC will
automatically adjust its Generation Charge (whether upward or downward) based
on the rates approved by the ERC relative to NPC’s GRAM. Distribution utility
sourcing its power other than NPC (e.g. IPP) and/or utility which generates its own
power will apply with ERC its own GRAM before it can change its Generation
Charge (whether upward or downward).
The generation rates must be established in an application for deferred generation

cost accounting relief and must be based on the following formula:
FC period i + PP period i
GR = BR + ------------------------------------ + DAA
kWh sales period i
Where:
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Electric
Agencies
GR - Generation Rate for test period i
BR - Base Rate per Grid based on CY 2000 costs
FC - Fuel costs (if applicable) as approved by the ERC subject

to heat rate cap
PP - Purchased power costs as approved by the ERC
DAA - Deferred accounting adjustment
The Deferred Accounting Adjustment (DAA) must be established in an application

for deferred generation cost accounting relief and must be based on the following
formula:
DB
_______
DAA =
T
Where:
DAA - The deferred accounting adjustment
DB - The balance in the deferred generation cost account as of
the end of the test period
T - The total estimated sales for the Recovery Period
TRANSCO Transmission Wheeling Rates (TWR)
Maximum Annual Revenue Cap (MAR)
The TWR is used to set the maximum transmission wheeling rates that may be
charged for regulated transmission services by TRANSCO. The MAR Methodology
requires the setting-up of a regulatory period consisting of five years. The
Methodology ensures that the total revenue that is derived from the provision of
transmission services during a regulatory year that occurs in the first regulatory
period does not exceed the MAR Cap for the regulatory year.
The TWR considers the following elements for each regulatory year:
• Maximum Annual Revenue Cap (MARt)

• Change in Weighted/Consumer Price Index
• Change in the PhP/$US exchange rate
• Correction Factor for Regulatory Year
• Differential Amount
• The Regulatory Asset Base
• Estimated Corporate Income Tax Payable by the Regulated Entity
• Taxable Income
• Smoothed Maximum Annual Revenue Requirements
• Maximum Annual Revenue
• Income Tax Adjustment
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Electric
Agencies
Open Access Transmission Service (OATS)
The services to be provided by category of Transmission Customers under

OATS follow:
Transmission Description of
Applicable Charges
Customers Customers
Generation and Generation Power Delivery Service

Load Customers Load Connection
Customers System Operator
Metering Service
Provider
Any technical services
Ancillary Services
Embedded A person or entity System Operator
Generators that generates Any technical services
electricity using an Ancillary Services
embedded
Generating Plant.
Other Customers Other persons or Charges corresponding to
entities purchasing OATS services
services from
Transmission
Provider/System
Operator
Designated Entities performing Designated Agents of the
Agents functions under Transmission Customer,
OATS Rules on Generation Customer,
behalf of Load Customer, and
Transmission Embedded Generators.
Provider/ Customer.
Distribution Distribution Wheeling Rates (DWR)
A performance based rate-setting approach that employs incentives to induce

cost-cutting that is expected to result in lower electricity rates in the long-term.
Supply - Still to be determined pending the implementation of the retail competition.
The existing unbundled electric power rate was, however, set using the return
on rate base (RORB) methodology. The unbundled rate is composed of the
following:
RATE – Residential
Generation charge
Transmission charge
System loss charge
Distribution charge
Metering charge
¾ Retail customer charge
¾ Metering system charge
Supply charge
19
Lifeline rate subsidy

Interclass subsidy
Power Act reduction
CERA
Franchise Tax
¾ National
Universal charge
¾ Missionary
¾ Environmental Fund
Other charges
¾ Electrification charge
SOURCE: ERC PUBLICATIONS – Knowing More My Unbundled Electric Bill
A comparison of the bundled residential bill to unbundled residential bill is

presented below:
The components of the unbundled electric bill are briefly explained as follows:
Bill Components Description
Generation Charge - refers to the cost of power generated and sold to the
distribution utility by the National Power Corporation
(NPC) as well as the Independent Power Producers
(IPPs).
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Bill Components Description
Transmission Charge - refers to the regulated cost or charges for the use of a
transmission system, which may include the availment
of Ancillary Service.
System Loss Charge - represents recovery of the cost of power lost due to
technical and non-technical loses currently pegged at
9.5% for private distribution utilities and 14% for
electric cooperatives, including company used power.
Distribution Charge - is the regulated cost of building, operating and
maintaining the distribution system, which brings
power from high-voltage transmission grids, to
commercial/ industrial establishments and to residential
end-users.
Metering Charge - is the cost of metering, its reading, operation and
maintenance of power metering facilities.
Supply Charge - includes the cost of rendering service to customers,
such as, billing, collection, customer assistance and
related services.
Lifeline Rate Subsidy - refers to the subsidized rate given to marginalized/low-
income captive market end-users who cannot afford to
pay full cost. For MERALCO, the subsidy extends to
residential customers consuming 100 kWh or less per
month.
Interclass Subsidy - is the reduction in the bill of subsidized customer
classes, specifically residential, small industrial,
government hospitals and streetlight services, and an
upward adjustment in the bill of subsidizing customer
class.
Power Act Reduction - Is a PhP 0.30/kWh reduction in the electric bill of
residential customers as mandated under R.A. No.
9136.
Currency Exchange - covers adjustments due to fluctuations in the Philippine
Rate Adjustment peso-US dollar exchange rate.
Franchise Tax - refers to the national and local franchise taxes which
must be paid by private utility companies. 2% of gross
revenues goes to the national government as national
franchise tax, while a range of .05% up to .75% of
gross revenues goes to local government units in the
form of local franchise tax.
Universal Charge - refers to the charge, if any, imposed for the recovery of
stranded debts, stranded contract costs of NPC, and
distribution utilities.and other mandated purposes. It is
a non-bypassable charge, which shall be passed on and
collected from all end-users on a monthly basis by the
distribution utilities. At present, this consists of
Missionary Electrification and Environmental Charges.
Missionary - Refers to the cost associated with the provision of basic
Electrification Charge electricity service in unviable areas with the ultimate
aim of bringing the operations in these areas to viability
levels.
Environmental Charge - is a charge to be used for the rehabilitation and
of P0.0025/kWh management of watershed areas.
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Part III
Audit Observations
22
Chapter 1
Development of Appropriate Standards
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DEVELOPMENT OF APPROPRIATE STANDARDS
INTRODUCTION
Standards refer to the minimum acceptable norms set forth to ensure that any
service required to be rendered could be delivered effectively and efficiently
without unnecessary interruption. These standards are set to protect public
interest and ensure the viability of any public utility.
At the least, these standards should cover financial and technical capabilities,
required minimum facilities, manpower requirements and performance
measurements. These requirements would more or less ensure continuous
operation or service.
In the case of electric industry, the standard requirements are clearly established
under RA 9136, promulgated on June 26, 2001 and its implementing rules and
regulations. It was also mandated therein that ERC should promulgate rules,
regulations and implementing guidelines to carry out the provisions of the Act,
most of which are required within three years after its effectivity. However,
while it is true that a number of guidelines have to be completed in three (3)
years time, some of them are subject to certain conditions such as the
establishment of the Wholesale Electricity Spot Market (WESM) and the
privatization of the National Power Corporation, to name a few.
The audit disclosed that the ERC has yet to promulgate and establish
appropriate standards to assess the financial capabilities and performance of the
electric power participants, and the adequacy of facilities and manpower to
effectively render the required services.
OBSERVATION
1. The ERC has yet to promulgate performance and financial

standards and manning requirements to be observed by electric
power utilities to ensure continuous satisfactory service and
protection of public interest. It has so far developed only
performance indicators and financial ratios without establishing
the acceptable levels or standards. The inadequacy of standards
exposes the public to unnecessary risks, costs, inconveniences and
unsatisfactory service.
24
The implementation of RA 9136 is a responsibility of a number of

government agencies defined under the Act. One of the implementing
agencies is the ERC which is responsible, as regulatory office, for the
promotion of competition, encouragement of market development, ensuring
customer choice and penalizing abuse of market power in the electric power
industry. It was also provided therein and in its Implementing Rules and
Regulations (IRR) that for the ERC to accomplish this mission, it has to
promulgate and enforce necessary rules, regulations, guidelines and
standards which shall serve as its regulatory tools.
In line with this mandate, the ERC promulgated the national Grid and
Distribution Codes. The team, however, noted that the standards mentioned
in the Codes are mere performance indicators. It did not in any way set the
acceptable level or standards to be observed by public utilities. Inadequacy
of standards exposes the public to unnecessary cost, inconveniences and
unsatisfactory services. Sample of financial and performance indicators
developed by the ERC follow:
Category Indicators
Performance Power quality

¾ Frequency variations
¾ Voltage variations
¾ Harmonics
¾ Flicker severity
Reliability
¾ System Average Interruption Frequency
Index
¾ System Average Interruption Duration Index
¾ Momentary Average Interruption Frequency
Index
System efficiency
¾ System loss – Technical
¾ System loss – Non-technical
¾ System loss – Administrative
Customer service
¾ Time to process an application
¾ Time to connect premises to the
distribution system
¾ Time to restore service after a loss of
service
¾ Time to respond to emergency calls
Time to respond to billing queries and complaints
Financial Leverage ratios
¾ Debt ratio
¾ Debt-equity ratio
¾ Interest cover
25
Category Indicators
Liquidity ratios
¾ Financial current ratio
¾ Quick ratio
Efficiency ratios
¾ Sales-to-assets ratio
¾ Average collection period
Profitability ratios
¾ Net profit margin
¾ Return on assets
As embodied in the Codes, the performance of the DUs and grid operators
are to be measured in terms of the following:
Category Description
Power quality A power quality problem exists when at least one of the
following conditions is present and significantly affect
the normal operation of the system:
The system frequency has deviated from the

nominal value of 60 Hz;
Voltage magnitudes are outside their allowable
range of variation;
Harmonic frequencies are present in the
system;
There is imbalance in the magnitude of the
phase voltages;
The phase displacement between the voltages
is not equal to 120 degrees;
Voltage fluctuations cause flicker that is
outside the allowable flicker severity limits; or
High-frequency overages are present in the
distribution system.
It can be noted that the above-mentioned conditions are

just indicators of a power quality problem. The
acceptable power quality level is not defined.
Reliability The following indices are the indicators without
established benchmark:
System Average Interruption Frequency

Index
26
Category Description
System Average Interruption Duration

Index
Momentary Average Interruption
Frequency Index
The transmission reliability performance indices were not

defined in the Grid Code. It merely requires ERC to
prescribe reliability index that will measure the total
number and total duration of sustained power
interruption in the Grid.
System loss System loss is classified into technical, non-technical and
administrative. The allowance for losses or cap on the
loss that the Distributor can pass on to its end-users or by
the Grid Owner to the Grid Users shall be approved/
prescribed by ERC after due notice and hearing.
Safety ERC adopts the Philippine Electrical Code (PEC) Parts 1
and 2 set by the Professional Regulation Commission and
the Occupational Safety and Health Standards set by the
Bureau of Working Conditions of the Department of
Labor and Employment.
Customer service Various performance indicators were enumerated in the
code.
The absence of the above-mentioned performance standards will not ensure

the quality of electric power and services rendered to customers.
Interview with the Chief, Standards and Monitoring Division, ROS,

revealed that the ERC is still in the process of setting appropriate
benchmarks as standards to assess performance and financial capabilities of
the electric power industry participants.
In the absence of financial standards, the ERC issues Certificates of

Compliance (COCs) to generation companies without evaluation of their
financial capability. It maybe mentioned that prior to the issuance of a
COC, the ERC requires the submission of financial statements supposedly
to determine the companies’ financial capability.
The distribution utilities (DUs), on the other hand, were required to make
and submit self-assessment of their compliance with the Grid and
Distribution Codes. They are likewise required to compute financial ratios
using the formula provided for in the codes.
However, the ERC could not conduct a reasonable financial evaluation due
to absence of financial standards. Hence, irrespective of the derived
27
financial ratios, the ERC could not take any further action. Shown below
are sample financial ratios submitted by selected distribution utilities:
Financial Ratios
Leverage Ratio Financial Efficiency
Liquidity Ratio Ratio Profitability Ratio
Sales Ave. Net Profit Return on
Debt Debt Interest Curre Quick to Collect. Margin Asset
Distribution Year Ratio Equity Cover nt Ratio Asset Ratio Ratio
Utility Ratio Ratio Ratio (days)
MERALCO 2001 1.39 0.39 1.54 0.95 1.00 23 2.92% 2.91%

2000 1.42 0.42 0.94 1.12 0.91 23 3.84% 3.50%
NORECO 2 2001 0.30 3.86 3..15 1.08 0..91 1.63 48.83 2.20% 3.49%
2000 N o d a t a a v a i l a b l e
CASURECO IV 2001 1.34 (4.96) 0.29 2.02 1.94 0.95 54 (12%) 2.0%
2000 1.42 (4.07) 0.29 1.73 1.72 0.83 55 (14%) (.70%)
ISECO 2001 0.50 0.34 1.34 1.41 1.23 1.56 39.36 (0.04%) (.07%)
2000 0.50 0.34 1.53 1.33 1.14 1.41 41.94 (0.63%) (.89%)
DASURECO 2001 0.48 0.31 - 1.8 1.48 1.15 40 2% 4.43%
2000 0.51 0.37 - 1.68 1.29 1.07 40 0.4% 3.07%
The absence of a standard for this criterion will pose a problem in ensuring
utilities’ ability to render continuous service. Moreover, the need to
establish financial capability of public utilities particularly, the electric
cooperatives is important as NEA acts as guarantor of electric cooperatives
and small Distribution Utilities.
The team also observed that the ERC has not formulated standards on
manning requirements for each category of service provider. In the case of
the Local Water Utilities Administration, the required number of personnel
is one (1) for every 120 water connections.
The inadequacy of standards or delay in its formulation exposes the public

to added risks, costs, inconveniences and will adversely affect the expected
benefits of the restructured power industry.
Management’s Comment Team’s Rejoinder
“The ERC promulgated the Philippine The team agrees that the regulators
Grid and Distribution Codes (PGDC). should, to some extent, exercise
The Technical and Performance discretion. However, even the exercise
Standards are found on these codes. of discretion should be based on solid
While the ERC agrees that the grounds which should be properly
standards mentioned in the Codes are defined. In this case, without any
mere performance indicators, it standards or acceptable levels, all
nevertheless disagrees with the decisions would be rendered on a case
assertion that there is a need to set the to case basis which could be to some
acceptable levels as standard. extent, be abused and discriminatory.
Acceptable levels vary with the Besides, the absence of standards
surrounding circumstances. The ERC, would not provide an accurate and
as the Regulator, must be given ample objective basis for evaluating the
28
opportunity and leeway in exercising performance of distribution utilities.

its discretion.
The ERC, notwithstanding, is in the

process of developing the guidelines to
monitor compliance with these
specified Technical and Financial
Performance Standards. These
guidelines, principally for the ERC’s
use but to be made known to the
concerned entities (just as the internal
rules of the Bureau of Internal Revenue
as accessible to all taxpayers), include
rules and regulations to how to assess
the level of performance of
Distribution Utilities through
performance indicators and the
establishment of reportorial
requirements.
Once a Distribution Utility shifts from

Return on Rate Base (RORB) to
Performance-Based Rate-Setting, the
data generated from the reports will be
used in setting benchmarks for
technical performance indicators. A
system of rewards and penalties will be
established for the purpose of
motivating the Distribution Utility to
improve its technical performance.
Financial Standards:
The guidelines defining the financial The financial guidelines is applicable

and performance standards or only to generation companies. There is
benchmarks to be used in measuring no guideline yet issued for distribution
the financial capability and quality of utilities and Transco which is required
service of regulated entities in the under the Grid and Distribution Codes.
generation sector was already
promulgated on April 21, 2005 entitled
“Guidelines for the Financial Standards
of Generation.
Prior to the promulgation of the

Financial Standards of Generation,
however, the ERC required, in lieu of
the evaluation of the companies’
financial capabilities, sworn statements
29
from the applicants of Certificates of

Compliance as regards their financial
capacity.
The Financial Guidelines for the

Distribution Sector is currently being
drafted. It should be noted that the
establishment of these standards had to
go through due process. Individual
submission of comments will be
required from the Distribution Utilities
and public consultations will be
conducted before competent,
reasonable and fair standards can be
set.
The tone of the last sentence is The last sentence was intended to
negative. It is suggested that the focus emphasize the risks the public have to
should be on the positive aspect. Thus, face under this condition. Besides, the
the sentence should be paraphrased as paraphrased is more of a
follows: recommendation than an observation.
“It is necessary to establish

immediately the guidelines for
monitoring technical
performance of the Distribution
Utilities in order to motivate
them to provide superior
performance and to prepare them
for competition. A Distribution
Utility, whose performance is
being monitored, will look for
new ways to improve its service
to its customers because superior
technical performance means
customer satisfaction. A
Distribution Utility that can
guarantee its own superior
technical performance could
gain big savings for itself and for
the benefit of its customers.”
As explained above, the establishment The team acknowledged that

of these standards had to go through establishment and promulgation of
due process which included the standards involved tedious process.
submission of comments and conduct However, its absence would expose the
of public consultations to be able to public to added risks, costs,
finalize a fair set of standards. inconveniences and unsatisfactory
30
service. Nonetheless, the team took

The ERC has drafts of the following note of the actions being undertaken by
Guidelines: the ERC to address this concern.
1. Guidelines for the Monitoring

of Power Quality Standards
for Distribution Utilities
2. Guidelines for the Monitoring
of Reliability Standards for
Distribution Utilities
3. Guidelines for the Application
and Approval of Caps on the
Recoverable Rate of
Distribution System Loss
In 2004, these three (3) Guidelines

underwent public consultations. The
first two (2) Guidelines will still be
presented to the Distribution
Management Committee (DMC) on
July 18, 2005 for their comments. On
the other hand, the Distribution
Utilities are required to submit in
November, 2005 their applications for
approval of caps on the recoverable
rate of distribution system losses in
which ERC will set new system loss
caps based on load density, sales mix,
cost of service, delivery voltage and
other technical consideration it may
promulgate.
Moreover, please be informed that the

ERC has already drafted the
“Guidelines for the Capability
Standards for Distribution Utilities”.
These Guidelines will be subjected to
public consultations.”
31
Chapter 2
Timely Compliance With Law, Rules and

Regulations
32
TIMELY COMPLIANCE WITH LAW, RULES AND REGULATIONS
INTRODUCTION
Laws are promulgated and rules and regulations are prescribed to establish
order in the performance of certain function or activity and ensure the
attainment of an objective or target. A timely action is recognized as an
important element in ensuring the effective discharge of any function. To
further ensure the achievement of the intention of the law, these laws and
regulations should provide parameters and deadlines for their implementation.
Thus, RA 9136 prescribed the time lines to be observed by the ERC in the
implementation of specific rules, regulations and formulation of standards.
The audit, however, disclosed that the ERC failed to approve the Compliance
Plans (CPs) submitted by 127 Distribution Utilities (DUs)/Electric Cooperatives
(ECs) within the mandated 60 day period. This resulted in further delay by the
distribution utilities to comply with the requirements under the National Grid
and Distribution Codes. Moreover, no actions were taken on the failure of 14
others to comply with the requirements under the National Grid and
Distribution Codes.
The ERC likewise failed to complete all other requirements under the Act
within the prescribed timeline contributing in the delayed implementation of the
restructuring of the electric power supply industry.
OBSERVATIONS
1. The ERC was not able to comply with the scheduled time line of
sixty days for approving compliance plans submitted by the
distribution utilities. As of October 29, 2004, the 127 compliance
plans submitted were not yet approved. The evaluation procedures
did not also include on-site validation to confirm the Statement of
Compliance submitted by the DUs/ECs. Further, there were no
actions taken on 14 others that failed to submit their CPs. This
resulted in delayed compliance by DUs/ECs with the requirements
set under the National Grid and Distribution Codes.
The performance of ERC is principally guided by RA 9136. In compliance

with the requirement of the Act, the ERC and the DOE promulgated the
Distribution Code, the Philippine Grid Code and the WESM. These
33
documents establish the governing rules, procedures, requirements, and

standards in the operation, maintenance, and development of the electric
Distribution Systems, the high-voltage backbone Transmission System, and
the Philippine electricity market, respectively.
Under Section 23 of the Act, the distribution utilities are required to submit
to the ERC a Statement of Compliance (SOC) with the technical
specifications and performance standards prescribed in the Distribution
Code and IRR of the Act, respectively. The SOC represents the utilities’
self-assessment of the extent of their compliance with the requirements and
the standards in the Code and the IRR. These SOCs were mandated to be
evaluated by the ERC within 60 days from receipt thereof. The evaluation
would cover the extent of compliance by the distribution utilities on the
prescribed technical specifications, requirements and standards in the Grid
and Distribution Codes and the IRR.
Distribution utilities that are not yet compliant with these requirements shall
submit to the ERC for approval, Compliance Plan specifying the activities
to be undertaken to ensure compliance with all requirements within a period
of three years. This plan will be the basis of ERC in monitoring
performance by the distribution utilities.
The mechanics for submission of the above requirements are contained in

two separate Guidelines both dated January 29, 2003 issued by the ERC for
this purpose. The distribution utility shall submit the SOC using the
templates provided for in the Guidelines which are divided into two parts:
Part 1 of the Template specified the following:

o Brief description of the Standard;
o The Standard or the prescribed technical specifications, performance
standards, financial standards, or other requirements (PGC or the
PDC) under the codes.
o Other references or provisions of the codes that are related to the
Standard that shall also be complied with by the Reporting Entity;
and
o The Measurements by which compliance by the Reporting Entity
with the Standard will be assessed.
Part II of the Template specifies the required self-assessment and

Certification by the Reporting Entity concerning its degree or level of
compliance or non-compliance with the Standard.
The Distribution Utility shall first assess the applicability of the Standard to
its Distribution System(s). If the Standard is applicable, it has to assess the
degree or level of compliance or non-compliance with such standards.
34
The degree of compliance can be measured in any of the following:
(a) Full Compliance – the Reporting Entity complies with all the
requirements of the Standard;
(b) Non-Compliance (Level 1) – the Reporting Entity is not in
compliance with one or more of the requirements of this Standard but
has definite plan and schedule to correct all violations or complete all
requirements.
(c) Non-Compliance (Level 2) – the Reporting Entity is not in
compliance with one or more of the requirements but has definite plan
or schedule to correct some of the violations or complete some of the
requirements.
(d) Non-Compliance (Level 3) – the Reporting Entity is not in
compliance with one or more of the requirements but has no definite
plan yet to correct the violations or complete the requirements.
(e) Compliance Not Ascertained – the Reporting Entity is unable to
ascertain its compliance to one or more of the requirements of this
Standard.
The Standards for compliance are contained in 75 different Templates

briefly discussed below:
Brief Description
Code
of the Standard
PHILIPPINE GRID CODE:

DSC-PGC-01 Total Harmonic Distortion (THD) and Total Demand Distortion (TDD) at the
Connection Points of the Grid
DSC-PGC-02 Required Transient Overvoltage Suppression in the Grid
DSC-PGC-03 Standards for Equipment at the Connection Points of the Grid
DSC-PGC-04 Maintenance logbook for the Equipment at the Connection Points of the Grid
DSC-PGC-05 Control of Connection Point of the Grid by a circuit breaker
DSC-PGC-06 Isolation of circuit breaker at the Connection Point of the Grid by disconnect
switches
DSC-PGC-07 Protection of Distributor’s Equipment at the Connection Point of the Grid
DSC-PGC-08 Circuit breaker fail protection for the Distributor’s Equipment connected to the
Grid at 500 kV, 230 kV, or 138 kV,
DSC-PGC-09 Reliability of protection system
DSC-PGC-10 Connection of transformer that are connected to the Grid at 115kV and above
DSC-PGC-11 Fixed Asset Boundary Document for Equipment at the Connection Point of the
Grid
DSC-PGC-12 Electrical Diagrams for the Equipment at the Connection Point of the Grid
DSC-PGC-13 Connection Point Drawing at the Connection Point of the Grid
DSC-PGC-14 Submission to the Grid Owner of planning data
DSC-PGC-15 Correction of Power Quality problems at the Distribution System
DSC-PGC-16 Ensuring that the Distribution System will not cause Degradation of the Grid and
remedying any degradation that it has caused
DSC-PGC-17 Provision and maintenance of voltage-control Equipment to support Connection
Point voltage
DSC-PGC-18 Automatic Local Dropping Program
DSC-PGC-19 Distribution Maintenance Program
DSC-PGC-20 Manual Load Dropping Program
DSC-PGC-21 Demand Control through Disconnection of the Distribution System at the
Connection Point of the Grid
35
Brief Description
Code
of the Standard
DSC-PGC-22 Demand Control through Customer Demand Management program at the

Distribution System
DSC-PGC-23 Demand Control through Voluntary Load Curtailment program at the Distribution
System
DSC-PGC-24 Safety coordination procedures for Safety Precautions
DSC-PGC-25 Provisions and installation of Site and Equipment Identification
PHILIPPINE DISTRIBUTION CODE:
DSC-PDC-01 Long Duration Voltage Variations at the Connection Points of the Distribution
System
DSC-PDC-02 Voltage Sags at the Connection Points of the Distribution System
DSC-PDC-03 Total Harmonic Distortion at the Connection Points of the Distribution System
DSC-PDC-04 Total Demand Distortion at the Connection Points of the Distribution System
DSC-PDC-05 Voltage Unbalance at the Connection Points of the Distribution System
DSC-PDC-06 Flicker Severity at the Connection Points of the Distribution System
DSC-PDC-07 Short Duration Peaks at the Connection Points of the Distribution System
DSC-PDC-08 Submission of Distribution Interruption reports to ERC
DSC-PDC-09 Identification, quantification, segregation, and submission of Distribution System
Losses reports to the ERC
DSC-PDC-10 Application for approval of allowance for Administrative Loss in the Distribution
System
DSC-PDC-11 Reduction of Technical Loss through Reactive Power competition
DSC-PDC-12 Application for approval of Customer Service Program
DSC-PDC-13 Development, operation and maintenance of Distribution in accordance with PEC
Part 1 and 2 and the OSHS
DSC-PDC-14 Submission of personnel safety records and reports to the ERC
DSC-PDC-15 Financial Ratios for evaluating the Financial Capability of Distributor
DSC-PDC-16 Submission of audited balance sheet and financial statement
DSC-PDC-17 Submission of customer profile
DSC-PDC-18 Selection of voltage ratings of Distribution Equipment
DSC-PDC-19 Required transient Overvoltage suppression devices in the Distribution System
DSC-PDC-20 Protection of the Distribution System
DSC-PDC-21 Information about the fault levels at the connection points in the distribution
system
DSC-PDC-22 Information about the Grounding method used in the distribution system
DSC-PDC-23 Monitoring and control equipment for the user system
DSC-PDC-24 Standards for equipment at the connection points of the distribution system
DSC-PDC-25 Maintenance logbook for the equipment at the connection points of the distribution
system
DSC-PDC-26 Application for new connection or modification of existing connections to the
distribution system
DSC-PDC-27 Fixed asset boundary document for equipment at the connection point of the
distribution system
DSC-PDC-28 Electrical diagrams for the equipment at the connection point of the distribution
System
DSC-PDC-29 Connection point drawing at the connection point of the distribution system
DSC-PDC-30 Registration of user data relating to the connection point
DSC-PDC-31 Maintenance of distribution planning data bank
DSC-PDC-32 Submission to DOE of a distribution development plan
DSC-PDC-33 Distribution planning studies
DSC-PDC-34 Distribution operating procedures
DSC-PDC-35 Submission of monthly reports to the DMC
DSC-PDC-36 Submission of Significant Incident Report to the DMC
DSC-PDC-37 Submission of Annual Operations Report to the DMC
DSC-PDC-38 Distribution Maintenance Program
DSC-PDC-39 Distribution Demand and Voltage Control Program
DSC-PDC-40 Distribution emergency procedures
36
Brief Description
Code
of the Standard
DSC-PDC-41 Distribution emergency drills

DSC-PDC-42 Safety coordination procedures for safety precautions
DSC-PDC-43 Testing and monitoring of power quality at the connection point of the distribution
system
DSC-PDC-44 Monitoring of the effect of user system on the distribution system
DSC-PDC-45 System tests on the distribution system or the user system to be conducted which
may have impact to the distribution system or the user system
DSC-PDC-46 Capability tests procedures for embedded generating units
DSC-PDC-47 Standard system for site and equipment identification
DSC-PDC-48 Standard labeling system for site and equipment identification
DSC-PDC-49 Provision and installation of site and equipment identification
DSC-PDC-50 Submission to the ERC of distribution reliability performance targets and historical
reliability data and performance
Review of documents show that 127 Compliance Plans (CPs) have been
submitted to the ERC as of October 29, 2004 for review and approval.
Unfortunately, however, as of audit date, there were no CP yet approved.
The team was informed that 4 were already ready for presentation to the
Commission while the 123 others were under various stages of evaluation.
Moreover, the ERC was only conducting table evaluation without on-site
validation. This procedure would not provide accurate information on the
extent of compliance by the distribution utilities on the standard
requirements.
The failure of the ERC to approve the CPs on time will further delay the
actions to be taken by the distribution utilities to comply with the standard
requirements. Meantime, the public are not fully protected from risks,
added cost and inconveniences and had to be content with the services
being provided by the distribution utilities which are oftentimes
unsatisfactory and costly.
Furthermore, there were still 14 EC’s/PU’s that failed to submit CPs and
yet no actions were taken by the ERC to enforce compliance:
Region Name of ECs/PUs
Region III Nueva Ecija II Electric Cooperative

Pampange Electric Cooperative
San Jose City Electric Cooperative
Tarlac I Electric Cooperative
Region IV Busuanga Island Electric Cooperative, Inc.
Romblon Electric Cooperative
Region V Camarines Sur III Electric Cooperative
37
Region Name of ECs/PUs
Masbate Electric Cooperative

Region VIII Eastern Samar Electric Cooperative
Region IX Cagayan de Sulu Electric Cooperative
Siasi Electic Cooperative
Tawi-Tawi Electric Cooperative
LUZON Bauan Electric Light System
MANSONS Corporation, Floridablanca, Pampanga
“138 out of 141 Distribution Utilities The Order referred to which was
have already submitted their docketed on July 4, 2005 required
Statements of Compliance to the submission of Statement of
technical specifications, performance Compliance and not Compliance Plan
standards, and financial capability which is the subject of this observation.
standards prescribed in the Philippine
Grid Code and the Philippine
Distribution Code. The three (3)
Distribution Utilities which have not
yet submitted their Statements of
Compliance were directed by the Legal
Service to prepare and submit the
same.
All the Statements of Compliance The team’s observation is centered on

submitted by the 138 Distribution the ERC’s failure to approve the
Utilities have already been evaluated required Compliance Plan and not on
and these were used by the Distribution the evaluation of Statement of
Utilities concerned as basis in the Compliance. The Compliance Plan is a
preparation and submission of their plan of action to comply with the
Compliance Plans. requirements of the Grid and
Distribution Codes.
132 out of 141 Distribution Utilities While it maybe true that reckoning
have already submitted their date would start on the submission of
Compliance Plans which were initially the formal offer, the EPIRA law
evaluated to determine their mandates the distribution utilities to
completeness and conformity with the comply with all requirements under the
prescribed format. The initial Grid and Distribution Codes within 3
evaluation showed that Compliance years. These Codes were promulgated
Plans were incomplete and so were in December 2001. As discussed, in the
returned together with an Order to report, there was no compliance plan
complete the submittals. The same yet approved by the ERC. In effect, as
evaluation procedure will be used in of this date, there is no assurance that
the submitted revised Compliance the Distribution Utilities are already
38
Plans. If the submission is found compliant with these Codes.

substantially complete, a hearing is set.
It is only after the applicant has
submitted its Formal Offer of Evidence
that a full evaluation is conducted.
Hence, the reckoning period for an
application to be decided starts after
the applicant has submitted said Formal
Offer and not at the time when the
Compliance Plan was filed.
Not all documents submitted during the
As regards the table evaluation without hearing could be relied upon without
on-site validation, please take note that on-site validations. The absence of on
all Compliance Plan applications site validation would not provide ERC
undergo a formal hearing, either opportunity to refute the applicant’s
scheduled at the franchise area of the representations.
applicant or at the ERC Hearing Room.
All concerned parties are given the
chance to participate during the
hearings. All the documents presented
and the testimonies of the witnesses
during the hearings are required to be
under oath. Administrative and/or
criminal sanctions are also imposed on
any person who has found to have
violated the ERC’s Laws, Rules, and
Regulations.
Considering that there is no approved
Further, the ERC monitors the Compliance Plan yet, there is no basis
compliance of the Distribution Utilities to monitor the actions of Distribution
based on the approved Compliance Utilities.
Plans.
Moreover, it must be emphasized that

the 141 Distribution Utilities referred
to above do not yet include those
within the economic zones. The sheer
bulk of the work proves too taxing for
only nine (9) personnel assigned with
these tasks.
39
2. The ERC was not able to comply with the requirements of RA 9136
within the timeline specified therein. This contributed in the
delayed restructuring of the electricity supply industry which was
scheduled to be implemented not later than three years from the
effectivity of the Act but re-scheduled to commence not earlier than
July 1, 2006.
In order to ensure the effective implementation of RA 9136, the specific

roles and responsibilities of the concerned agencies are clearly defined in its
IRR with the prescribed timelines for each critical activity. The team,
however, noted that the ERC was not able to comply with its obligations
under the law within the prescribed timeline.
The status of implementation of the requirements of the ERC under the Act
follows:
Requirements Deadline Status/Comments
1. Promulgation & December The Codes were adopted under ERC Resolution No. 115
enforcement of a National 26, 2001 series of 2002 which took effect on March 2, 2002. The
Grid Code and a Code merely define the performance indicators and
Distribution Code financial ratios to be used in assessing financial capability
(Section 43b) of utilities but failed to establish the acceptable level or
standards.
2. Setting a lifeline rate for Within 6 The lifeline rate structures were embodied/incorporated in
the marginalized end- months from the ERC Decisions approving the unbundled rates. There
users (Section 43) submission were four distribution utilities whose rates are not yet
of revised unbundled as of February 28, 2005.
rates by
distribution
utilities.
3. Implementation of retail June 26, The ERC prescribed the timeline and policy directions for
competition and open 2004 the implementation of retail competition and open access
access on distribution under Resolution No. 02 series of 2004 dated September
wires, subject to the 21, 2004 to commence on July 1, 2006 in the Luzon Grid.
following conditions: The timetable for implementation in the Visayas and
Mindanao Grid is still to be determined.
a. Establishment of the June 26, The Philippine Electricity Market Corporation
wholesale electricity 2002 (PEMC)under the DOE has declared that WESM shall be
spot market established and will be commercially operational by
December 31, 2005 in Luzon, and by June 30, 2006 in the
Visayas.
A study prepared by the PA Consulting Group, through

the Academy for Educational Development, disclosed that
there is a need to harmonize the WESM Rules with that of
the National Grid and Distribution Codes due to
conflicting procedures and inconsistencies in the terms
used.
40
Requirements Deadline Status/Comments
b. Approval of unbundled June 26, The ERC has unbundled transmission charges of the NPC
transmission and 2002 and TRANSCO distribution charges of 112 electric
distribution wheeling cooperatives and 15 privately-owned distribution utilities
charges as of October 31, 2004 with 12 others for decision and/or
evaluation.
c. Initial implementation June 26, ERC ordered the full removal of the Inter-Regional Grid
of the cross-subsidy 2004 Cross Subsidy starting September 2002 and started the
removal scheme three-year phase-out program of the Intra-Regional Grid
Cross-Subsidies on June 2003, with planned total phase
out by June 30, 2006.
4. Promulgation of rules and June 26, The Competition Rules and Complaint Procedures have
regulations to protect 2002 yet to be finalized.
public interest. (Section
45(c), EPIRA)
5. Other Requirements
a. Distribution
Evaluate the Statement of 60 days from As of October 29, 2004, out of 127 SC/CP received, only
Compliance (SC) / receipt 4 or 3% is ready for presentation to the Commission while
Compliance Plan (CP) of 123 or 97% are in different stages of evaluation.
distribution utilities
Promulgate the rules and February The rules and regulations to implement and effect the
regulations to implement 2002 demonopolization and shareholding dispersal has already
and effect the de- been promulgated in 2002.
monopolization and
shareholding dispersal of
public utilities except for
electric cooperatives.
The delayed implementation of the requirements prescribed under the Act

may contribute to the possible delay on restructuring the electricity supply
industry. Fully restructured electricity industry means open access of
transmission lines and retail competition. Section 31 of the EPIRA Law
mandates the implementation of retail competition and open access not later
than three years upon the effectivity of the law.
General Comment:
“While there is no objection to the Assuming that the timeline prescribed

comparison between the performance under the EPIRA Law are tight, unless
of the ERC and the requirements of its these are revised, the ERC’s
enabling statute, the EPIRA, it must be performance would be continuously
noted that most of our legislators and measured on the basis of these
electricity industry experts concede that timelines.
the EPIRA is an ambitious piece of
legislation. Its prescribed timelines
required too much early. Take for
instance the case of unbundling rates.
41
The EPIRA mandates that the

unbundling of rates cases of 139
Distribution Utilities and the National
Power Corporation (NPC) must be
decided in six (6) months. Not only
were there numerous applicants but
each and every application must
undergo due process. Notices need to
be published and a series of hearings
need to be conducted before the ERC
can decide the merits of the case.
Likewise, since the unbundling activity
partakes of the nature of a rate case,
thorough computation, evaluation, and
verification of the figures and financial
statements of the applicants are
required since these will form part of
the decision. Another consideration is
the fact that while parties are entitled to
the speedy disposition of cases, the
same must be tempered with
considerations of equity in order not to
deprive the parties the opportunity to
defend their positions in the most
appropriate manner. Thus, motions for
resetting hearings are granted but only
upon justifiable cause.
Now, three (3) years after the task

should have been finished, the ERC
still has four (4) remaining Distribution
Utilities to unbundled. From the
perspective of compliance with the
requirement of law, the ERC fared
poorly. From the standpoint of actual
experience across different
jurisdictions around the world,
however, what ERC achieved as far as
unbundling of 134 Distribution Utilities
and the NPC is concerned amounts to
nothing less than unprecedented.
It should be made clear that the EPIRA Assuming that the EPIRA Law is at par
is a progressive law. It serves as an or of the same league as that of U.K.
economic blueprint for the attainment and Australia, the intended effect of its
of a restructured, open and competitive implementation is yet to be felt despite
electricity industry. Aptly so, the law being in operation for about four years.
42
effectively puts us in the same league

as the United Kingdom (UK) and
Australia which already restructured
their respective electricity markets with
remarkable success. It goes without
saying that the Philippines, if the
industry develops as contemplated by
the EPIRA, being the first in Asia, will
serve as a model in this part of the
globe.
What is emphasized, however, is the

fact that the EPIRA expressly provides
for specific deadlines for certain
programs, activities and projects that
are very difficult to comply with.
Admittedly, the restructuring of the
electricity industry proved harder than
everyone thought. Given ERC’s
currently limited institutional,
budgetary and manpower support, the
EPIRA-prescribed time frame become
directory, not mandatory.”
Specific Comments:
Setting a lifeline rate for the

marginalized end-users:
As of April 30, 2005, there are 133 There are still four DUs whose rates are
Distribution Utilities with unbundled not yet unbundled as of February 2005.
rates. This means that there are 133 Unbundling of rates is required to be
lifeline rates set since each and every undertaken within six months from
unbundling of rates cases decided submission by the distribution utilities
include a determination of the lifeline of the revised rates.
rates.
Approval of undundled transmission

and distribution wheeling charges:
To be consistent with Requirement No.

3, this should reflect the same number
(133) of Distribution Utilities with
unbundled rates. The ERC has
approved all the respective rate
components of each of the Distribution
Utilities in the resolution of their
43
respective unbundling of rate

applications.
Establishment of the Wholesale

Electricity Spot Market:
The harmonization process is currently We commend the efforts being done to

being undertaken in order to correct the correct the conflicts and inconsistencies
conflicts and inconsistencies in the on the WESM Rules to meet the target
terms used. establishment and commercial
operation by the end of the year for
Luzon and middle of next year for
Visayas.
Promulgation of rules and regulations

to protect public interest:
The Competition Rules and Complaint Rules that are not yet approved and
Procedures is already approved in promulgated cannot be enforced.
principle. Approval in principle would not
command compliance.
44
Chapter 3
Sound Monitoring System
45
SOUND MONITORING SYSTEM
INTRODUCTION
RA 9136 envisioned a transformation of the electric power industry from

comprehensive regulation to greater reliance on competition in setting prices
under the concept of Open Access to Transmission Lines and Retail
Competition. This concept would result in customer’s having choices of
suppliers of electricity.
Part III, Rule 15 of the IRR of RA No. 9136 requires among others, the
development of rates and charges including unbundling of rates; removal of
cross subsidies, provision for stranded debts and contract costs recovery; and
universal charge; and mandated the implementation of residential rebate and the
establishment of a lifeline rate.
The rates must allow the recovery of just and reasonable costs plus a reasonable
return to enable the entity to operate viably. The ERC may adopt alternative
forms of internationally accepted rate-setting methodology at it may deem
appropriate. The rate-setting methodology so adopted and applied must ensure a
reasonable price of electricity and the rates prescribed shall be non-
discriminatory which shall take into consideration, among others, the franchise
tax.
To ensure attainment of these objectives, the regulatory office needs to establish

a monitoring mechanism. Monitoring is the process of keeping track of an
activity for the purpose of determining whether things are working as planned.
It is also done to check whether regulations set and prescribed are being
complied with and standards are properly adhered to.
Monitoring should be done on a regular basis so that corrective actions could be

taken on any deviation from plans or intended outcome. This may be achieved
through reportorial requirements and supervisory activities which should
include conduct of on-site inspection.
The audit disclosed that while the ERC approves the rates based on appropriate
setting methodologies, their implementation were not properly monitored to
ensure that the rates so set are reasonable.
46
OBSERVATION
While the ERC is developing and adopting rate-setting methodologies

devised to ensure reasonable rate of return to the regulated entities and
reasonable price to the public, the implementation of the approved
rates was not properly monitored to ensure that the same did not result
in a return in excess of the authorized rate.
Section 43 (g) of the Act provides that the ERC shall establish and enforce a
methodology for setting transmission and distribution wheeling rates and retail
rates for the captive market of a distribution utility, taking into account all
relevant considerations, including the efficiency or inefficiency of the regulated
entities. The rates must be such as to allow the recovery of just and reasonable
costs and a reasonable return on rate base (RORB) to enable the entity to
operate viably.
The rate-setting methodology so adopted and applied must ensure a reasonable

price of electricity and shall be non-discriminatory. It further provides that the
ERC shall determine such form of rate-setting methodology, which shall
promote efficiency.
It authorizes the ERC then to adopt any internationally-accepted rate-setting

methodology deemed appropriate other than RORB which was historically
used in rate-setting.
Prior to the implementation of the Act, the basic charge imposed to end-users is
composed of the generation, transmission and distribution cost. In addition,
end-users are charged for purchase power adjustment (PPA), currency exchange
rate adjustment (CERA) and power cost reduction. Under Section 36 of the
Act, the rates shall be unbundled to reflect the respective costs of providing
each service. The unbundled rates were computed using the RORB
methodology. The team, however, noted that while the ERC as a matter of
policy, prescribed the rate taking into consideration the return on rate base,
there was no validation conducted after implementation to ensure that the rates
so prescribed upon application, did not exceed the authorized rate of return. In
the absence of any validation, there is no assurance that the approved rate is
reasonable.
The team was informed that the Investigation and Enforcement Division of the
ERC evaluates the implementation of the approved rate based only on the
submitted reports together with a copy of sample billing without the benefit of a
47
rate audit or actual validation/verification. This validation procedure is not

adequate to ensure that the approved rate is reasonable and does not result in a
return in excess of the authorized rate.
It is true that the monitoring of the Before the implementation of EPIRA

approved rates based merely on reports Law, the then Energy Regulatory Board
together with copies of sample billings (ERB) managed to perform rate audits to
without the benefit of a rate audit or validate the reasonableness of rates. This
actual validation/verification is function of then ERB was absorbed by
inadequate. A procedure must be ERC. The team noticed that the ERB’s
established in undertaking rate audits in budget for salary then was only P35
order to validate that “the approved rates Million in contrast to the ERC’s budget
are non-discriminatory and comply with for salaries which tremendously increased
the prescribed limitations”. Moreover, in a span of five years to reach P100
regulatory visits to the distribution Million in 2005 as illustrated below:
utilities must also be initiated to
effectively monitor the implementation of Fiscal Appropriations for
approved rates as well as the adequacy or Years Personal Services
inadequacy of revenues being generated 2000 P 35.283 Million
from the same. The ERC, however, is 2001 35.283 Million
seriously constrained by its budget and 2002 76.192 Million
manpower complement. In 2004, by way 2003 Not indicated in the GAA
of example, the IED targeted 72 2004 Not indicated in the GAA
2005 100.657 Million
supervisory visits of 72 Distribution
Utilities scattered all over the archipelago
but managed to visit only eight (8)
because of lack of funds. As to manpower
complement, IED only started its
operations in the middle of 2004. Prior to
this, its staff were tapped to assist in the
evaluation of the unbundling of rate cases
and confirmation of the PPA. This
arrangement came about because the pool
of staff in charge of evaluation the PPA
confirmation and the unbundling
applications are seriously burdened with
their workload. Since it is the ERC’s
priority to finish these two (2) activities,
IED staff were borrowed, after all, even if
ERC wants to, it cannot conduct
supervisory visits because it is beyond its
capacity to finance.
48
A further consideration is the fact that

part of the documentary requirements of a
rate application is Audited Financial
Statement. The audit being performed by
the Commission on Audit may differ
from a rate audit being done by the ERC
as an economic regulator. The ERC, on
its part, allows recovery of prudent costs
incurred by the Distribution Utilities and
ensures rates are reasonable. Ideally, an
on-site audit is conducted as part of the
process of evaluating rate cases.
However, the enormous demands of the
EPIRA, specifically the simultaneous
unbundling of 141 entities prevented the
conduct of on-site inspections. Add the
fact that these 141 entities are scattered
and located all over the country. The
requisite resources involved in
conducting an on-site audit made
individual audits not feasible. ERC, as a
result had to content itself with the
evaluation of verified documentary
submissions from the Distribution
Utilities.
Another concern was the fact that even Other activities being undertaken by IED
when the ROS-IED provided COA a were not incorporated in the report as this
number of documents, COA, in its report, observation refers only to the absence of
that the “regulatory office need to validation on the effect of the approved
establish a monitoring mechanism.” It did rates on the rate of return of Distribution
not discuss the existing procedures Utilities which is not being done at
conducted by the IED in monitoring present.
compliance with ERC orders, decisions,
rules, and regulations.
49
Part IV
Recommendations
50
RECOMMENDATIONS
RECOMMENDATIONS
In order to address the noted observations in the discharge of its

regulatory functions and ensure the protection of the public and viability
of regulated entities, the team recommends the following courses of
action:
1). Expedite the issuance of guidelines defining the financial and

performance standards or benchmarks to be used in measuring the
financial capability and quality of service of regulated entities;
2). Facilitate the processing and approval of Compliance Plans for

immediate implementation by the regulated utilities considering the
three-year grace period for compliance. The approved Compliance
Plans should be used as bases for monitoring and evaluating
regulated entities’ performance;
3). Take note of all requirements of the EPIRA Law not yet complied
with by the ERC and take appropriate action; and
4). Conduct post-evaluation of approved rates to ensure that the same

did not result in excessive rate of return.
51
Submitted in compliance with COA MS and TS Office Order Nos. 2004-033 and
2004-033A dated July 7, and September 16, 2004, respectively.
52

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Management Services

Report No. 2004 -05A

Energy Regulatory Commission

October 28, 2005

ATTY. RODOLFO B. ALBANO, JR.

We are pleased to transmit the report on the government-wide

We look forward to the proper implementation of the audit

We acknowledge the cooperation and assistance extended to the audit

Very truly yours,

By Authority of the Chairman:

Part I Executive Summary 1

Part II The Regulatory Functions 5

The Electric Power Industry 6

Part III Audit Observations 22

Chapter 1 Development of Appropriate Standards 23

Chapter 2 Timely Compliance With Laws, Rules

Chapter 3 Sound Monitoring System 45

These services are being regulated by the following agencies:

Government Agency Regulated Entities

Energy Regulatory Commission (ERC) Electric Power Operators

AUDIT SCOPE AND METHODOLOGY

• Reviewed existing regulatory framework of the agencies

The ERC’s failure to approve compliance plans of 127 Distribution

As effective performance of regulatory functions is crucial in ensuring the

MANAGEMENT’S REACTION TO AUDIT OBSERVATIONS

The Regulatory Functions

THE ELECTRIC POWER INDUSTRY

BEFORE THE PASSAGE OF REPUBLIC ACT 9136

NPC is responsible for the transmission of electricity to distributors and large

The distribution of electricity to end-users is done by private utilities such as

AFTER THE PASSAGE OF REPUBLIC ACT 9136

An integral part of the restructuring program of the electric power industry is

The four sectors are depicted below in a context diagram:

Conveyance of electric power from transmission

Sale of electricity by a party other than a

PSALM is tasked to take ownership of the existing generation assets, liabilities,

OTHER IMPLEMENTING AGENCIES

In addition to the above-mentioned agencies, the following are mandated under

Agencies Mandated Function

DOE Supervise the restructuring of the electric

REQUIREMENTS FOR A FULLY RESTRUCTURED INDUSTRY

Wholesale electricity spot Unbundled transmission and

Restructured Power Industry

Transfer of the management

THE NEW STRUCTURE OF THE ELECTRIC POWER INDUSTRY

THE POWERS AND FUNCTIONS OF ERC

Penalize abuse of market

Grant, revoke, review and

Enforce rules and

Determine the levels of

THE ERC ORGANIZATION

The ERC is operating with a total personnel complement of 249, of which 14

Organizational Units Responsibilities

Office of the General Counsel and Provides legal advice or assistance to

Organizational Units Responsibilities

Regulatory Operations Service Recommends and enforces the rules,

The organizational structure of the ERC is presented on the succeeding page:

THE ERC REGULATORY FRAMEWORK

Governing Rule – EPIRA and its IRR

The governing rules, procedures, requirements, and performance and financial

The indicators include, among others, the following:

Performance  Power quality

Performance Power quality

Generation and Generation Power Delivery Service

Lifeline rate subsidy

Performance Power quality

The system frequency has deviated from the

System Average Interruption Frequency

System Average Interruption Duration

Part 1 of the Template specified the following:

Part II of the Template specifies the required self-assessment and