Title
NEA Guidelines for EC Classification and Intervention
Law
Nea
Decision Date
Nov 6, 2013
A Philippine law establishes guidelines for the classification of electric cooperatives (ECs) based on financial and operational performance, allowing the National Electrification Administration (NEA) to intervene and provide assistance to ECs facing challenges to ensure efficient and reliable service to member-consumers.
electric cooperatives
financial performance
operational performance

Legal basis and policy aims

  • Republic Act No. 10531 requires the NEA to strengthen electric cooperatives (ECs), help make them economically viable, and prepare them for retail competition and open access.
  • The implementing rules for RA 10531 provide that the NEA shall develop financial and operational parameters that serve as triggers for NEA intervention at least one (1) year prior to categorizing an EC as an ailing EC.
  • The NEA must submit within sixty (60) days from the effectivity of the IRR of RA 10531 a set of standards to classify ECs guided by those parameters.
  • The Guidelines declare NEA’s policy to prescribe a mechanism for assessing EC performance, provide assistance when necessary, institute preventive and remedial measures, and exercise step-in rights when warranted.
  • The Guidelines aim to: (a) formulate and prescribe standards for EC classification based on financial, technical, and institutional performance; and (b) ensure early detection of adverse condition so preventive measures can be instituted before an EC is declared ailing.

Coverage: parameters and classification standard

  • The Guidelines apply to electric cooperatives (ECs) for the purpose of assessing financial condition and operational performance.
  • The Guidelines use a set of performance parameters and standards as the classification basis.
  • The assessment and classification create a baseline/benchmark for each EC’s performance.
  • The classification categories are Green, Yellow, and Red.
  • The Guidelines use quarterly and historical/projection templates for monitoring and assessment, and they use specified cash flow projections for validation of operating performance.

Performance parameters and thresholds

  • The Cash General Fund standard requires at least one (1) month power cost and non-power cost.
  • The Collection Efficiency standard requires 95%.
  • The Accounts Payable–Power standard requires Current/Restructured–Current.
  • The Profitability standard requires Positive profitability.
  • The Networth standard requires Positive net worth.
  • The System Loss standard requires 13% system loss.

EC classification rules

  • Green classification applies to ECs that meet and comply with all standards listed in the performance table, requiring less NEA intervention.
  • Yellow classification applies to ECs that do not comply with any parameter and are placed under a “watchlist” group.
  • An EC that falls under the Yellow classification also includes an EC that meets any circumstance under Section 20 of the IRR of RA 10531 but has not yet been declared an ailing EC by the NEA.
  • Yellow classification includes the following circumstances:
    • The EC has negative networth for the last three (3) years.
    • Negative Net Worth means the financial condition where liabilities are greater than assets.
    • The EC has accumulated ninety (90) days arrearages in power supply purchases from generating companies and power suppliers/sources of electricity, and in transmission charges by TransCo or its Concessionaire.
    • The EC is 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.
    • The EC is unable to efficiently perform electric distribution utility obligations or continue in business due to organizational, external, and internal factors.
    • The EC has failed to meet other operational standards established by the NEA.
    • The EC is unable to set up or continuously support the Wholesale Electricity Spot Market prudential requirements.
  • Red classification applies to ECs that have been declared and classified by the NEA as ailing ECs after observance of due process under the policy to be issued for that purpose.

NEA interventions by classification

  • For Green ECs, the NEA monitors and assesses EC operations based on quarterly reports and historical and projected cash flow templates.
  • For Yellow ECs, the NEA may exercise any or a combination of these actions:
    • Monitor and assess operations using quarterly reports and historical and projected cash flow templates.
    • Provide financial, institutional and technical (FIT) assistance.
    • Conduct a roundtable assessment.
    • Conduct a special audit/examination on EC operations.
    • Monitor implementation of the EC Operation Improvement Plan (OIP) supported with a Performance Commitment Contract.
    • Designate an AGM and/or PS when the interest of the EC requires, pursuant to PD 269, as amended by PD 1645 and RA 10531.
  • For Red ECs, the NEA may exercise any or a combination of these actions:
    • Strictly monitor operations based on monthly reports and historical and projected cash flow templates.
    • 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.
    • Enter partnership with a qualified private sector investor under any of the following frameworks: Joint Venture; Investment Management Contract; Management Contract; Operations and Maintenance Contract; Special Equipment and Materials Lease Agreement; Concession; Merger; Consolidation; and other variants deemed applicable.
    • If, within a reasonable period not exceeding 180 days from takeover, the NEA determines the EC cannot continue ordinary operations, the NEA may:
      • Institute structural reforms such as conversion of the ailing EC into either a Stock Cooperative registered with the CDA or a Stock Corporation registered with the SEC; and/or
      • Institute appropriate legal actions such as Extrajudicial Foreclosure and Insolvency (Voluntary/Involuntary) and Bankruptcy proceedings, without prejudice to creditors’ rights.

Reporting, assessment process, OIP recovery, and consequences

  • ECs must submit Monthly Financial and Statistical Report (MFSR), Monthly Engineering Report (MER), and other relevant reports within the prescribed period.
  • The NEA creates a composite group to review, assess, and validate EC operating performance using established parameters, including 5-year historical performance and 10-year monthly projections using the cash flow template.
  • Based on assessment results, the composite group recommends the appropriate intervention(s), and the result is forwarded to the NEA Administrator for approval to avert threats of power supply disconnection.
  • If an EC deteriorates such that it falls under the circumstances in Section 20 of the IRR of RA 10531 but is not yet declared ailing, the EC is granted a recovery period of not more than one (1) year to undertake remedial or mitigating measures through an OIP submitted to the NEA for approval.
  • The OIP must include any one (1) or more of the following:
    • Debt Repayment Plan
    • Capital Expenditures Plan
    • Operating Expenditures Plan
    • System Loss Reduction Program
    • Collection Efficiency Improvement Program
    • Manpower Reorganization Plan
  • If, within a reasonable period not exceeding 180 days from implementation of the OIP, there is no concrete or significant improvement in operational and/or financial conditions, the OIP is set aside and becomes wholly inoperative, and the NEA declares the EC as an ailing EC.
  • Any or all Red EC interventions may be taken for ECs previously and currently identified as ailing and where the NEA already exercised early interventions.
  • The NEA may designate an AGM and/or PS when interest of the EC and the program so requires, pursuant to PD 269, as amended by PD 1645 and RA 10531.
  • In cases of fortuitous events, force majeure, and/or natural or man-made calamities, the NEA may implement any of the above interventions.
  • The NEA must enforce performance standards and submit quarterly compliance reports to the Department of Energy (DOE) and the Joint Congressional Power Commission (JCPC), including summary of compliance to established parameters and recommendation for rehabilitation or takeover.
  • The NEA is responsible for implementing this policy and submitting required reports to the DOE and JCPC.

Amendments, step-in authority, and administrative effect

  • The classification and intervention system is designed to support early detection and preventive/remedial action before an EC is declared ailing.
  • Interventions are structured to align with NEA’s exercise of step-in rights when circumstances warrant and after due process for Red classification.
  • The NEA Board of Administrators approved the Guidelines on November 6, 2013, and the DOE approved per transmittal dated December 12, 2013.

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