Guidelines for the Classification of ECs and Provision for NEA Intervention

November 6, 2013


I. Rationale

Specifically, Rule IV, Section 19 (b) of the

Likewise, Rule IV, Section 20 of the DIHETS

II. Background

NEA assessment shows that some ECs are confronted with a range of challenges such as mounting liabilities arising from poor governance, low collection efficiency, high system loss, and/or unresponsive rate methodology. Early detection of these problems is necessary to ensure continuous delivery of efficient and reliable service to member-consumers without threat of power supply disconnection. Pursuant to

III. Objectives

1. To formulate and prescribe standards for the classification of ECs according to financial, technical and institutional performance.

2. To ensure early detection of adverse financial condition and to serve as triggers for NEA intervention in the EC operation.

3. To institute preventive, remedial and mitigating measures prior to being categorized as ailing EC.

4. To implement alternative options for the ailing ECs.

IV. Policy Statement

It shall be the policy of NEA to prescribe a mechanism for the assessment of the performance of ECs, to provide financial, institutional and technical assistance if necessary, to institute preventive and remedial measures, and to exercise step-in rights when circumstances warrant.

V. Parameters

The parameters and standards to be used in the assessment of the EC financial condition and operational performance are as follows:

Parameters Standards
1. Cash General Fund At least one (1) month power cost and
non-power cost
2. Collection Efficiency 95%
3. Accounts Payable-Power Current/Restructured-Current
4. Profitability Positive
5. Networth Positive
6. System Loss 13%

VI. Classification of ECs

1. Green ECs which meet and comply with all the standards set forth in the preceding table, thus needing less NEA intervention. TEHIaA

2. Yellow ECs which do not comply with any of the above parameters and shall fall under the "watchlist" group.

An EC which falls under the parameters enumerated under any of the circumstances as provided in Section 20 of the

a. Has negative networth for the last three (3) years. For this purpose, "Negative Net Worth" shall mean as the financial condition of an EC in which its liabilities are greater than its assets;

b. Has accumulated ninety (90) days arrearages in power supply purchases from generating companies and power suppliers/sources of electricity, and the transmission charges by the TransCo or its Concessionaire;

c. Unable to provide electric service due to technical and/or financial inefficiencies including, but not limited to, high systems loss, low collection efficiency, below standard current ratio, operating loss, huge liabilities and/or institutional problems such as governance, and non-adherence to NEA and EC policies;

d. Unable to efficiently perform its electric distribution utility obligations or continue in business due to organizational, external and internal factors;

e. When an EC has failed to meet other operational standards established by NEA; and

f. Unable to set up or continuously support its Wholesale Electricity Spot Market prudential requirements.

3. Red ECs which have been declared and classified by the NEA as "Ailing ECs" after observance of due process under the policy to be issued for the purpose. TcHCIS

VII. NEA Interventions

A. Green ECs

1. Monitor and assess the EC operation based on quarterly reports and historical and projected cash flow template.

B. Yellow ECs NEA, upon its determination, shall exercise any or a combination of the following actions:

1. Monitor and assess the EC operation based on quarterly reports and historical and projected cash flow template

2. Provide financial, institutional and technical (FIT) assistance

3. Conduct roundtable assessment

4. Conduct special audit/examination on EC operation

5. Monitor the implementation of the EC Operation Improvement Plan (OIP) as supported with Performance Commitment Contract

6. May designate an AGM and/or PS when the interest of the EC so requires pursuant to

C. Red ECs NEA, upon its determination, shall exercise any or a combination of the following actions:

1. Strictly monitor the EC operation based on monthly reports and historical and projected cash flow template.

2. Appoint or assign a PS or AGM or assign third persons to the Board until the NEA decides that the election of a new Board of Directors to lead or manage the EC is necessary. The NEA may also create a management team for the purpose. DACTSa

3. May enter into partnership with a qualified private sector investor, under any of the following frameworks:

a. Joint Venture;

b. Investment Management Contract;

c. Management Contract;

d. Operations and Maintenance Contract;

e. Special Equipment and Materials Lease Agreement;

f. Concession;

g. Merger;

h. Consolidation; and

i. Other variants deemed applicable to the EC.

4. If within a reasonable period, not exceeding 180 days from its takeover, the NEA determines that such EC is unable to continue its operation in the ordinary course of business, it may:

a. Institute structural reforms such as conversion of the ailing EC to either a Stock Cooperative registered with the CDA or a Stock Corporation registered with the SEC; or

b. Institute appropriate legal actions such as Extrajudicial Foreclosure and Insolvency (Voluntary/Involuntary) and Bankruptcy proceedings, without prejudice to the right of the creditors. cEAHSC

VIII. Guidelines

1. The ECs are responsible for the submission of Monthly Financial and Statistical Report (MFSR), Monthly Engineering Report (MER), and other relevant reports within the prescribed period.

2. The NEA shall create a composite group which shall undertake review, assessment and validation of the ECs' operating performance based on established parameters and using the 5-year historical performance as well as the 10-year monthly projections using the cash flow template. The appropriate intervention/s shall be recommended according to EC classification.

3. The result of assessment shall be forwarded to the Administrator for approval of the recommended intervention/s in order to avert threat of power supply disconnection.

4. If the operational and financial conditions of the EC further deteriorate in such a way that the EC falls under the circumstances set forth in Section 20 of the

5. The OIP shall include any one (1) or more of the following:

a. Debt Repayment Plan

b. Capital Expenditures Plan

c. Operating Expenditures Plan

d. System Loss Reduction Program aACHDS

e. Collection Efficiency Improvement Program

f. Manpower Reorganization Plan

6. If within a reasonable period, not exceeding one hundred eighty (180) days from the implementation of the OIP, there is no concrete or significant improvement in the EC's operational and/or financial conditions, the OIP shall be set aside and become wholly inoperative thus, the NEA shall thereupon declare the EC as an "Ailing EC".

7. Any or all of the interventions enumerated for Red ECs under these Guidelines may be taken for those ECs previously and currently identified as "Ailing" and which the NEA had already taken early interventions.

8. The NEA may designate an AGM and/or PS when the interest of the EC and the program so requires pursuant to

9. In cases of fortuitous events, force majeure, and/or natural or man-made calamities, the NEA may implement any of the abovementioned interventions.

10. The NEA shall enforce performance standards and submit quarterly compliance report to the Department of Energy (DOE) and Joint Congressional Power Commission (JCPC) which shall include summary of compliance to the established parameters and recommendation for rehabilitation or takeover.

IX. Responsibility

The NEA shall be responsible in the implementation of this policy and submission of required reports to the DOE and JCPC.

X. Effectivity

These implementing guidelines shall immediately take effect fifteen (15) days following the publication in a newspaper of general circulation. Let three (3) copies hereof be filed with the University of the Philippines (UP) Law Center pursuant to President ECDaAc

National Electrification Administration

> Approved by the NEA Board of Administrators on November 6, 2013.

> Approved by the Department of Energy (DOE) per transmittal dated December 12, 2013.