A COMPREHENSIVE STUDY ON CONVERSION OPTIONS

A Comprehensive Study on Conversion Options for Oriental Mindoro Electric Cooperative, Inc. (ORMECO) Moira Lee Arao-Vilan University of Batangas

A COMPREHENSIVE STUDY ON CONVERSION OPTIONS

INTRODUCTION
RATIONALE The purpose and ideal of Oriental Mindoro Electric Cooperative, Inc. (ORMECO) like all other electric cooperatives throughout the country, is to achieve the total electrification of the Philippines on an area coverage basis as provided for in Republic Act 6038 and Presidential Decree 269 (1973), thus, it has the social obligation to energize the rural countryside, even the remotest and non-viable areas, to realize the national policies of social justice and equal access to basic power infrastructure, economic growth and rural development. With the enactment of Electric Power Industry Reform Act of 2001 (EPIRA) comes the venturing clamor of converting electric cooperatives (EC) in to either stock cooperative under the Cooperatives Development Authority (CDA), stock corporation under the Securities and Exchange Commission (SEC) or remain as it is at present, a non-stock, non-profit and service-oriented cooperative under the National Electrification Administration (NEA). This paper aims to inform the member-consumers, Board of Directors, Management, employees and all the stakeholders of the Oriental Mindoro Electric Cooperative, Inc. (ORMECO) in its quest towards conversion issues.

ORGANIZATION BACKGROUND Oriental Mindoro Electric Cooperative, Inc. (ORMECO) is a non - stock, nonprofit rural electric cooperative duly organized under existing Philippine Laws and

A COMPREHENSIVE STUDY ON CONVERSION OPTIONS

Regulations.

It was registered and incorporated with the National Electrification

Administration (NEA) on February 16, 1973 covering six (6) municipalities in the northern part of Oriental Mindoro. The remaining nine (9) municipalities in the southern part of Oriental Mindoro were covered by the incorporation and registration of ORMECO II on July 15, 1997. On May 20, 1988 the two (2) coops were merged into what is known as ORMECO, Inc. after which fourteen (14) municipalities and one city covered were redistricted into seven (7), District I composed of Baco, San Teodoro and Puerto Galera; District II is Calapan City; District III covers Naujan and Victoria; District IV consists of Socorro and Pola; District V comprises of Pinamalayan and Gloria; District VI for Bansud and Bongabong; District VII covered Roxas, Mansalay and Bulalacao. On June 26, 1988 ORMECO, Inc.s power plant was turned over to National Power Corporation (NPC) in compliance with a Memorandum of Agreement executed by NEA, NAPOCOR and ORMECO, Inc. In its 38 years of existence, ORMECO has become one of the most reliable and trusted institutions in the Province of Oriental Mindoro. Although there were times that it encounters different trials and hardships it was able to surpass them all through the help and support from NEA, LGUs, its member-consumers, BOD, management and staff. As proof to ORMECOs commitment to its member-consumers, the coop has maintained its Category A+ Mega Large EC for 12 consecutive years and was consistent awardee of EC of the Year Award (Mega-Large EC) (2008-2009), Best in Collection Performance Award(1991, 1995-2009), General Manager of the Year Award (20082009), and Special Citation for the Most Complying EC in Audit Evaluation (2007-2009) and was also awarded Special Citation for ECs Attaining 100% Barangay Energization (2009) in NEA Lumens Awards.

A COMPREHENSIVE STUDY ON CONVERSION OPTIONS

With ORMECOs present situation, still there are clamors for conversion into a stock cooperative or stock corporation which arises from some sectors of our society and business-minded individuals with most likely vested interest and others with untold intentions. The basis of their clamors was on the passing of the Republic Act No. 9136 (Electric Power Industry Reform Act of 2001) Chapter VII Section 57 gives the ECs the options to convert to either stock cooperative under the Cooperatives Development Authority (CDA), Stock Corporation under the Securities Exchange Commission (SEC), or remain as non-stock under NEA.

REVIEW OF RELATED LITERATURE It was the desire of the government to effect changes and reforms in the social, economic, and political structure of our society. Studies have shown that electric power, wherever introduced, stimulates the growth of industry and the economy in general. Electric Cooperatives (EC) were organized under PD 269 as non-stock, nonprofit and service-oriented cooperatives. The ECs are developmental institutions pursuing governments social obligation of energizing the rural countryside, even the non-viable areas, to attain the government policies of social justice and equal access to basic power infrastructure, economic growth and rural development. Prior to the organization of non-stock ECs, supply and distribution of electricity was undertaken by private corporations and companies with profit orientation. Some LGUs also operated their own electric systems. However, electrification in the rural areas, perceived to be unviable or unprofitable, was never undertaken.

A COMPREHENSIVE STUDY ON CONVERSION OPTIONS

This was the reason why these corporations registered under the Philippine NonAgricultural Cooperative Act supplying electric energy were converted into non-stock cooperatives under Sec. 32 of Presidential Decree No. 269. electric systems were also taken over by government through NEA. With the organization of non-stock, non-profit ECs, missionary electrification was hereby mandated through the implementation of area coverage basis. Thus, even the unviable or unprofitable areas are now certain to experience the benefits of electricity. Some LGU-operated

LAWS THAT CREATED NEA Republic Act 6038 (1969) - Declaring as national policy the total electrification of the Philippines on an area coverage basis; Creating NEA as primary

agency responsible for executing the rural electrification program through the electric cooperatives (ECs)

Presidential Decree 175 (Apr 14, 1973) - Giving authority to Dept. of Local Government and Community Development through the Cooperatives Development to promote, supervise all types of cooperatives. organize, Bureau register, regulate, of and

Presidential Decree 269 (1974) - Converted NEA into a government owned and controlled corporation with a capitalization of P 1 Billion

(www.nea.gov.ph/index.php/about-us/charter/pd-269)

A COMPREHENSIVE STUDY ON CONVERSION OPTIONS

Presidential Decree 501 (1974) Transferred the supervision of ECs from the Bureau of Cooperatives Development to NEA

Presidential Decree 1645 (1979 )- Broadened NEAs lending and regulatory power over the electric cooperatives with a capitalization of P 5 Billion

Republic Act 9136 (2001) - Provided NEA with additional mandate to prepare ECs to operate & compete in a deregulated environment with a capitalization of P 15 Billion

LAWS THAT CREATED CDA Republic Act 6938 (1990) - an act to ordain a Cooperative Code of the Philippines (http://www.bcphilippineslawyers.com/republic-act-no-6938/)

Republic Act 6939 (1990) - which created the Cooperative Development Authority (CDA), grants the Authority the sole power to register cooperatives. Thus, NEAs power to register ECs had been transferred to the CDA.

A COMPREHENSIVE STUDY ON CONVERSION OPTIONS

Republic Act 9520 (2008) - an act amending the cooperative code of the Philippines to be known as the "Philippine Cooperative Code of 2008" (http://www.lawphil.net/statutes/repacts/ra2009/ra_9520_2009.html)

LAWS THAT CREATED SEC

COMMONWEALTH ACT No. 83 (October 26, 1936) - an act to regulate the sale of securities, to create a Securities and Exchange Commission to enforce the provisions of the same, and to appropriate funds therefore.

Republic Act 8799 (19 July 2000) enacts "The Securities Regulation Code". It contains the declaration of State policy; definitions; authority of the "Securities and Exchange Commission"; registration of securities; regulation of pre-need plans; repertorial requirements; protection of shareholder interests; prohibitions on fraud, manipulation and insider trading; regulation of securities market professionals; exchanges and other securities trading markets; registration, responsibilities and oversight of self-regulatory organizations; acquisition and transfer of securities and settlement of transactions in securities; margin and credit; general provisions. Repeals the Revised Securities Act (Batas Pambansa blg 178), as amended, and sections 2, 4 and 8 of Presidential Decree 902-A, as amended. (78 sections; pp. 182-262)

WHAT IS THE LEGAL BASIS FOR CONVERSION OF ELECTRIC COOPERATIVES?

A COMPREHENSIVE STUDY ON CONVERSION OPTIONS

Republic Act 9136 (Electric Power Industry Reform Act of 2001) - Section 57 of EPIRA gives the ECs the options to convert to either stock cooperative under the Cooperatives Development Authority (CDA), stock corporation under the Securities Exchange Commission (SEC), or remain as non-stock under NEA.

OBJECTIVES
GENERAL To achieve ORMECOs member-consumers, Board of Directors, Management and employees awareness towards the issues of converting ORMECO into a stock cooperative under Cooperative Development Authority (CDA) or a stock corporation under Securities and Exchange Commission (SEC) or to remain as a non-stock, nonprofit service oriented electric cooperative registered under National Electrification Administration (NEA) through the support and cooperation of an active memberconsumers base.

SPECIFIC 1. To generate interest and increase awareness of member-consumers on ORMECOs present status particularly in its nature and accomplishments. 2. To be able to present the commonalities and differences of between a non-profit and service-oriented electric cooperative under the National Electrification

A COMPREHENSIVE STUDY ON CONVERSION OPTIONS

Administration (NEA), or a stock cooperative under Cooperative Development Authority (CDA) or a stock corporation under Securities and Exchange Commission (SEC). 3. To encourage participation and to draw support from member-consumers on ORMECOS conversion issue.

INTERVENSIONS FOR IMPROVEMENTS

A. PROCEDURES/MECHANICS Chapter III of the NEA Guidelines in the Conduct of Referendum enumerates the procedures/mechanics, to wit: Article 10 10.1 In-House Activities Board Resolution scheduling the district(s) date (s), venue (s) and

time of the assembly must be passed by the Board of Directors; 10.2 Board Resolution appropriating the corresponding budget for their

Activities is imperative; 10.3 The concerned departments of the coop shall prepare and

execute the requirements set under the said Board Resolutions; 10.4 The institutional Services Department shall prepare in not less

than twenty (25) days before the General Assembly or District Meetings the

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sanitized masterlist of voters in alphabetical order and classified according to district, municipalities and barangays to facilitate registration and voting; and 10.5 The Board Member of the concerned district shall be responsible

in ensuring the success of the assembly/referendum in that district; and shall likewise preside in the district assembly meeting/s. Article 11 11.1 Major Activities in the Program Determination of attendance from the registration of voters. Only bonafide members shall be allowed to register in the masterlist prepared by the electric cooperative. (a) Where meetings are held simultaneously (meetings held on the same day at various venues/barangays), the total number of votes shall be determined on a cumulative basis; (b) Where meetings are held sequentially (meetings held one after the other in different days in different venues/barangays), the same procedure in (a.1) shall be followed. 11.2 11.3 Introduction by the Presiding officer Presentation of the issues related to conversion (a) Presentation of the historical profile of the cooperative (b) Presentation for the positive side/advantages. (c) Presentation for the negative side/advantages

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(d) Open Forum 11.4 Process of voting (casting of votes through secret balloting and the subsequent canvassing of the ballots) 11.5 11.6 Declaration of the Results by the Presiding Officer Adjournment

Article 12 12.1

Documentation Preparation of the minutes of the meeting indication the highlights, particularly the over-all decision of the bonafide members (whether to convert or not to convert).

12.2

If the vote is for conversion. (a) Certificate of Election to Convert. A Certificate of Election to Convert shall be executed and acknowledged on behalf of the EC by its board president or vice-president under its seal, attested by its secretary, stating: (1) the name of the cooperative; (2) the address of its principal office; and (3) that the members of the cooperative have duly voted that the cooperative converted into a stock corporation or a stock cooperative; (b) The board president or vice-president who executed the said Certificate shall execute an Affidavit which shall state that the statements in the certificate are true.

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B. ACTION PLAN FOR THE REFERENDUM ON CONVERSION Option No. 1 Convince the Board not to pass and approve any resolution to conduct a referendum. After all, based on the guidelines Article 10, the power to schedule a meeting for referendum is vested upon the Board. Convince the Board not to appropriate fund for the referendum. Option No. 2 If there is an overwhelming clamor to conduct a referendum, let the proponents bring the matter to the General Assembly for approval. During the assembly, utilize all the employees to vote against the move. Give quota for every employee to bring at least ten (10) relatives or friends to vote against the move. In ORMECO, there are 289 employees. If these could bring at least ten (10) for every employee, the negative votes will raise 2,890 votes. This is very difficult to outsmart. Other than the employees, transport all the Barangay Power Association (BAPA) Members to vote against the referendum. But before transporting the BAPA members, there must be extensive information campaign to convince them. Option No. 3

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If the Board will pass and approve a resolution to conduct a referendum, let the resolution be approved and confirmed by the General Assembly. When General Assembly comes, use Option No. 2. Option No. 4 If the General Assembly approved the resolution to conduct a referendum, we will face the real battle of information in the coverage area. Pre-Referendum Period a. Consolidate all the pertinent data regarding the advantages and

disadvantages of the three options of electric cooperatives. b. Study the effect of conversion of the electric coops that have

converted into stock cooperative. c. If possible initiate Lakbay-Aral to the converted ECs like SORECO

I, CANORECO, NORECO II, and PANELCO I. d. Get the data from the Cooperative Development Authority the

number of coops registered. How many are operational and nonoperational. If possible research the reasons why there were many coops that gone in their business. (data should per region) e. f. Scout potential employees to be utilized as speakers of the coop. Create a Speakers Bureau coming from the member-consumers

to campaign in favor of the coop. If possible, the member should also be an active officer of coops registered under the CDA. g. Conduct Training and Workshop for the Speakers Bureau. If

possible the seminar shall be conducted regionally so that they can learn other ideas from sister ECs.

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h.

Schedule the Information Drive for the captured supporters such

as BAPA, MSEAC. i. After conducting info drive to the captures supporters, conduct

same activity with the barangays, non-government associations, religious organizations and other associations. j. Initiate interviews with print media, radio hopping and other media

outlets using the speakers bureau. k. Lobby with the local officials in every municipality and city or in the

province. l. Convince the unenergized barangays and the remote barangays

to pass a resolution address to the public officials preserved the missionary program of the coop by retaining as non-stock non-profit.

Referendum Period a. Determine first the following: 1. What is the Name of the Game? Referendum 2. What is the Rule of the Game? Guidelines on Conversion 3. How to Win? Two Kinds of Winning: i. Not to Get the Quorum ii. Get the Quorum and Win the Votes 4. Since it is a Referendum, how many votes we need?

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5. Who will Get that Votes? 6. How to Get that Votes? 7. What we need to Get that Votes? 8. What are our Strengths? Our Weaknesses? 9. What are the Strengths and Weaknesses of our Enemy? Know Your Enemy. b. Sanitize the Master List to institute One member One Vote and

to avoid flying voters. c. Implement the ID System for every member-consumer to ensure

true identity in the voting. d. Identify and assign leader and speaker bureau in every

municipality and city. e. Conduct pulong-pulong, meeting and info drive for the member-

consumers in every barangay of the municipality. f. List the names of the member-consumers who have attended the

information drive. They will be the first priority to be hauled or transport during the actual referendum.

Strategy in Information Battle a. b. c. Speak on peoples language Do not use highly technical language Use character-strategy offense against CDA speakers

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d.

Cite substantial evidence or bad experiences of CDA coops

that failed. Use news reference. e. f. Dictate the tempo of the campaign Use guerilla technique in making leaflets and paraphernalia Non-stock, NON-PROFIT Coop - SERBISYO ang DALA! Stock, Profit Coop Pakay ay GANANSYA! Stock Corporation pang KAPITALISTA! Hwag Kayong Paloko! NON STOCK NON PROFIT COOP Tayo ! Stock at PROFIT Coop tataas ang taripa ng kuryente! Stock Corporation tayong lahat mangangamote! Non-stock, NON-PROFIT Coop dito tayo, para sa mga mahihirap ito! g. h. i. Send letters to all barangay captains and member-consumers Utilize the meter-readers in distributing the leaflets. Use the radio program in propagating the cause of the non-

stock non-profit. Invite credible people (councilor, barangay captain, religious leaders and other key officers in the locality) to speak the missionary spirit of the non-stock non-profit. j. Make comprehensive primer of the three options.

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k.

It has been said that prophets were rejected in their own place.

EC should exchange speakers. l. Get the capital investment of every sitio, purok, barangay,

municipality for figure presentation. m. Highlights the bad effect of the converted coop based on the

experience of the EC converted coops. n. Encourage all EC employee free-lancers columnist to write in

their column the ill effects of the conversion. This will be used as reference of other coops during the campaign period.

District Assembly Prior to Referendum a. Assigned vehicle to transport the member-consumers who will

cast their votes for the referendum. b. Prioritize the transport of the captured supporters like the

BAPA, MCEC, MEC-DEC and other organizations that manifested their support for the non-stock non-profit EC. c. d. Prioritize in giving the ID of these captured supporters. Implement strictly the identification before any person can cast

his/her vote in the referendum.

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e.

During the District Assembly, assign spokesperson who will

ask troubled-questions to the pro-CDA speakers. f. g. Design possible questions that will trap the pro-CDA speakers. Hang streamers manifesting support for the non-stock non-

profit EC. h. Assign people who will distribute leaflets supporting the non-

stock non-profit EC. i. During the presentation campaign, let the Stock Corporation

and Stock Cooperative speak first, so that they could no longer refute the arguments of the Non-stock, non-profit stand.

Post Referendum a. Assign person to monitor, record and document all the activity

of the Referendum. b. If the coop lost in the referendum, try to look for any possible

technicality that can be used for filing of protest against the result. If possible, the person who will lodge the protest is not an employee. c. If the coop won the referendum, call for a press conference to

announce the result.

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d.

Send the result to all public officials of the locality including the

concerned national agencies and officials.

METHODOLOGY

Table 1 - Elements of Commonalities/Differences NON-STOCK Governing Law PD 269 as amended by PD 1645 STOCK STOCK

COOPERATIVE CORPORATION RA 6938 The The Corporation or Batas 68 stock as an

Cooperative Code of Code

governs organization registration

the the Phil. Governs the Pambansa & registration of regulation of & defines the corporation artificial

electric coops which stock cooperatives. are non-stock, nonprofit & service

being

created by law which has capital stock

oriented Policy Declaration cooperatives. PD 269 rationalizes the distribution The

divided into shares Code The code establishes the a new concept of of business

of underscores principle

electricity on an area

coverage basis and subsidiarity the setting up of means that

which corporations so that the they are not merely sector entities established

cooperatives

for cooperative

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power distribution to has primacy over the for private gain but attain electrification. extends technical institutional assistance to ECs. total state in initiating and effective partners of NEA regulating within its the Government government spreading National in the

financial, ranks and The

maintains a policy of non-interference

benefits of capitalism

in for the social and

its management and economic operation. Governing Body NEA is tasked with The organizing, financing regulate and CDA only development of the country. shall The SEC has the the absolute jurisdiction, and all

supervising internal affairs of the supervision converted ECs (Art. control over

electric cooperatives.

Under RA 9136 or 98). EPIRA, NEA is

corporations.

further mandated to act as guarantor of ECs in operating and competing under the deregulated Capital Sources electricity market government loans Subsidies Assistance in all aspects of Share capital of Capital is

members. A member can hold a maximum of 20%

principally

derived

from the contribution of shareholders

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operations. reinvestment fund membership fees

of the share capital. Loans borrowings Revolving capital which consists of deferred payments of patronage and

received

in

consideration for the issuance of stock. from Raise capital loans or by Gets from its

advances creditors. capital

refunds or interest on share capital

profits or earnings which are reinvested

subsidies, donations, grants,

in the business.

aids and assistance from local or foreign Democratic Control The general institutions. The general membership is the supreme authority. Power on is a Stockholder

membership is the supreme authority. The Board of

who owned majority of the shares of the corporation controls the business No control in its

Directors is elected per district. Observes the one-

distributed one-member vote regardless

onepolicy of the

democratic vested

one-member

vote policy. Proxy voting allowed. is NOT

amount of money they invest. Proxy voting

subscribers. Proxy voting

is allowed.

is discouraged.

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Quorum General Assembly Meetings

of

less

Coops having than 1,000

25% of all the

the

Consists

of

members entitled to vote. The by-laws

stockholders a the

members: 5% of all members in person Coops having present

representing majority of

may provide for a quorum with more or less than the 25% of all the

outstanding capital stock. A majority

more than 1,000 members: 5% of

vote is sufficient to decide any question properly presented

all members or 100 whichever is lesser Ownership and Control present in person Owned by the memberwho P5.00

members entitled to vote. Real owners

The

ultimate of the

are those members who capital. Power on is a give share

control

consumers pay

corporation depends upon the vote of the

membership fee. Power on is a

distributed one-member vote regardless

stockholders. The right to

distributed one

onepolicy of the

member-one

vote is an incident of ownership of

vote policy. The directors

amount of money they invest. The directors

stock.

Proxy

are elected by the members district Supervision represent. While in the they

voting is allowed. The Directors

are elected at large by the members. The CDA has no

are elected by the stockholders. The Board of

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and Control

management vested Board, exercises supervision in

is the NEA

quasi-judicial, only conciliatory power under Sec. 8 of RA 6939

Directors formulates and directs of policy the its

conduct business operations.

and

control over ECs. right NEA has the to be and in all

Actual is the are

management delegated officers to who

represented participate

Board meetings Tax Treatment Permanently from income Exempt if:

responsible to the Board. Corporations Transacts subject business with applicable members only If transacts to are all taxes,

exempt paying taxes.

local and national.

For a period 31

ending

December of the 30th full calendar year after the date of the organization of the EC, or until it shall become

business with nonmembers: exempt income from and

sales taxes if it has less

completely free of

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indebtedness exempted from the payment of: A. All national

than

P10M

reserve funds. exempt from all local business taxes, fees

Government, local and charges imposed government municipal and by LGUs including of Real

taxes payment

and fees, and; All duties on imports of foreign goods acquired for Purpose Creation of its operations. Energizes rural areas be it viable or not. Service

Property Tax

Generate for its

Operates

for

profits owners.

business

rather

than for service. Poor folks in

Concentrates

oriented and does not generate profits for their members. folks opportunity meaningfully participate in their own development. Gives rural the to

operation on areas which are less

the countryside will have to pay the costs to enable the corporation recover to the

costly to energize. This stockholders allows to

have more returns on investments. Concentrates their

investments made. If they cannot

pay, there will be no power in their

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This

will

mean

on areas which are viable.

communities. Concentrate

lower rates that would attract big companies to put up or relocate in the thus economic Debts development. Electrification loans incurred by the EC as of June 26, 2001 were by rural areas spurring

on areas which are viable.

Enjoys

full of upon

If conversion

condonation loans

is done within 5 years from the

compliance with EO 119, and if

completed condonation, it shall pay to PSALM the total debts and

assumed PSALM.

conversion will be done after 5 years from date of loan to the condonation. If conversion

Result: Rates

reduction commensurate amount removed amortization cost. New loans of

interests. Conversion

can be done after 5 years so that the corporation will not be required to pay PSALM.

is done within 5 years from the

completed condonation, it shall pay to PSALM the total debts. The

after June 26, 2001 are not included in the loan

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condonation.

repayment

cost

shall be passed on to the consumers in Dividends and Patronage Refund Credit or All membercan their bills Only who have those share Stockholders receive

can

consumers

receive patronage credit/refund if EC has margins Paid in with sufficient

capitals are entitled to receive dividends and refund patronage based on

dividends based on 100% retained

earnings and shall be distributed to

accumulated margin. If patronage

proportionally stocks subscriptions.

accordance

NEA guidelines. Greater to

refund is based on consumption, big

advantage

members in terms of refund. Impact on Rates/Income Tax patronage

loads (commercial, industrial) will

benefit most. Please refer to Table 2

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Table 2 - IMPACT ON RATES/INCOME TAX EFFECT ON RATES (Residential Class) Non-stock EC (NEA) Stock EC (CDA) Stock Corporation (SEC)

Current Billing Rate (P/kwh) Power Cost Distribution/Supply/Metering Universal Charge Local Tax VAT Other Credits P 4.4093 1.4493 0.0398 0.0500 0.2589 (0.4652) P 4.4093 1.6893 0.0398 0.2589 (0.4652) P 4.4093 1.6893 0.0398 0.0500 0.2589 (0.4652)

Total Rate Increase/kwh due to: Local Tax Return on Rate Base (Profit)

P 5.7421

P 5.9321

P 5.9821

P -

0.05

P 0.24

P 0.24

Source: Based on Misamis Oriental Electric Cooperative, Inc.s (MORESCO) Study

RESULTS AND DISCUSSIONS

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INSTITUTIONAL ASPECTS 1. Is conversion of ECs voluntary? Yes. Section 57 of EPIRA states that ECs are given the options to

convert to either stock cooperative under the Cooperative Development Authority (CDA), stock corporation under the Securities and Exchange Commission (SEC). And nothing in this Act shall deprive ECs of any right or privilege granted to them under PD 269, as amended and other existing laws. EC conversion is optional, and needs the approval or consent of the member-consumers. The decision to convert is best left to the judgment of the member-consumers.

2. Why are the ECs given the option? The EPIRA speaks about, among others privatization of the National Power Corporation (NPC), and the National Transmission Corporation (TRANSCO) and the infusion of private capital in the ECs. The EC consumers can now have the choice to fully own their cooperative, thereby relieving the government from putting up more capital to this business.

3. Are there guidelines to follow in the process of conversion?

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Yes, Section 7 (c) (I), Rule 7 of the EPIRA Implementing Rules and Regulations has vested exclusively upon NEA the duty to promulgate the guidelines for the conduct of a referendum by the ECs in order for them to exercise their option to convert. President Gloria Macapagal-Arroyo has also issued Administrative Order No. 112 directing NEA to take full and sole authority and responsibility in the conversion of ECs. On 29 July 2004, the NEA Board of Administrators passed Resolution No. 93 approving the Guidelines in the Conduct of Referendum by Electric Cooperatives (GCREC). The GCREC was published in the Official Gazette on 05 January 2005. The GCREC was further amended on October 5, 2005 to include some relevant provisions. The amended guidelines were published in The Manila Times on October 26, 2005.

4. What are the methods of conducting series of meetings and referendum? For purposes of consulting the member-consumers on the conversion issue, the series of district meetings may be undertaken: SIMULTANEOUSLY wherein meetings are held on the same day at various venues; or SEQUENTIALLY wherein meetings are held one after the other in different days in different venues.

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In these meetings, the member-consumers shall be informed of the positive sides/advantages, and negative sides/disadvantages of conversion so that they could decide intelligently and objectively on the issue. Right after the open forum, a referendum will be held wherein each bonafide member shall cast his/her vote, through secret ballot, whether he/she is in favor or against conversion.

5. What is the Quorum requirement for Conversion? Under the Guidelines, the required quorum and number of votes needed for conversion: The required quorum to conduct a valid referendum shall be at

least a majority (50% plus 1) of all bonafide members of the electric cooperatives. The approval of at least a simple majority (50% plus 1) of the

required quorum shall be considered a valid decision for conversion.

6. Can ECs register with CDA/SEC without conversion? No. It is null and void because it violates Article 14 (5) of RA 6938

(Cooperative Code) which states: No cooperative shall be registered unless the article of cooperation is accompanied with a sworn statement of the treasurer elected by

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the subscribers showing that at least twenty five per centum (25%) of the total subscription has been paid. Further, Rule 7, Section 7 (ii) (Structural & Operational Reforms Between and among Distribution Utilities)of EPIRA Implementing Rules and Regulations (IRR) states that: (ii) ECs converted into Stock Corporation shall be registered with the SEC in accordance with the Corporation Code, while those converted into Stock Cooperative, shall be registered with the CDA: Provided, however, that the ECs which opt to remain as Non-stock Cooperatives shall continue to be registered with the NEA and shall be governed by the provisions of Presidential Decree No. 269, as amended.

7. Is the provisional registration still effect until now as claimed by CDA? No. It had already lapsed on May 4, 2000. There was no other extension granted by CDA and NEA. It is to be that CDA and NEA issued a Joint Memorandum Circular dated October 1997, signed by CDA Chairman Jose C. Medina, Jr. and NEA Chairman Francisco L. Viray and duly approved by Executive Secretary Ruben D. Torres. The Joint Memo Circular had extended the conversion period for a period of three (3) years, from May 4, 1997 to May 4, 2000.

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Since RA 9136 (EPIRA) took effect on June 26, 2001, any move for EC conversion should be governed by the provisions of Section 57 of EPIRA.

8. What is then the legal process of Conversion should the coop decide to convert into stock coop under CDA or stock corporation under SEC? Prior to registration as stock EC, the applicant EC should have already opted first to convert from non-stock, non-profit cooperative to stock cooperative under CDA or stock corporation under SEC. The process for the exercise of the option to convert has been laid down by NEA in its Amended Guidelines in the Conduct of Referendum for Conversion prior to registration with the appropriate government agency. These guidelines were promulgated pursuant to Section 57 of RA 9136 and Subparagraph (i), paragraph , Section 7, Rule 7 of the Implementing Rules and Regulations of RA 9136.

9. What should be followed before registration with CDA or SEC? Chapter VI of the Guidelines provides that: Within 180 days from the date of approval of the conversion to stock corporation with SEC or stock cooperative with CDA, the EC shall file with the SEC or CDA as the case may be the following: Articles of Conversion Amended By-Laws, and

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Treasurers affidavit on the payment of subscriptions of the members or shareholders. The Articles of Conversion shall contain among others, the authorized

capital stock, subscribed capital stock and paid up capital stock of the EC and the respective subscriptions and payments for subscriptions of the members or shareholders listed in alphabetical order. The electric cooperative shall furnish the NEA Certified True Copies of the documents. Such documents are needed before NEA would issue its

favorable endorsement.

10.Does NEAs authority over ECs cease once registered with CDA or SEC? ART. 132. Effects of Registration with the Authority. (1) Upon the effectivity of this Code, electric cooperatives that are duly registered with the Authority, and issued a certificate of registration, shall no longer be covered by Presidential Decree No. 269, as amended by Presidential Decree No. 1645 (2) The electric cooperatives registered with the Authority with existing loans obtained from the NEA after June 26, 2001 shall continue to observe the terms of such loans until full payment or settlement thereof; (3) Except as provided in the immediately preceding paragraph, the NEA shall no longer exercise regulatory or supervisory powers on electric cooperatives duly registered with the Authority.

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11. What are the powers of the General Assembly of a stock coop? Article 34 of RA 6938 provides the following powers which cannot be delegated. To determine and approve amendments to the articles of cooperation and by-laws; To elect or appoint the members of the board of directors, and to remove them for cause; To approve development plans of the cooperative; and Such other matters requiring a two-thirds (2/3) vote of all the members of the general assembly, as provided in this Code.

12. In a stock coop, is there a possibility that a mere resolution of the General Assembly could help destabilized the operations of the EC? Yes. This is what happened to CDA-registered Sorsogon II Electric

Cooperative (SORECO II). During the coops 18th Annual General Membership Assembly (AGMA) on 19 July 1998, a mere motion by a consumer (which was duly seconded) declaring vacant all the positions of the Board of Directors, as well as the position of the General Manager, had destroyed the institutional foundation of the coop. Because the incumbent Board and the incumbent

General Manager did not relinquish their positions even if an Interim Board of

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Directors and an OIC-General Manager had already been appointed, viva voce, by the Assembly. As a result, SORECO II was unfortunately divided into two factions: SORECO II (Incumbents, NEA side) and SORECO II (Interim, CDA side). Not only that the member-consumers, local officials and all sectors were confused, the cooperative that was once very viable had collapsed.

13.What is the method of electing Board of Directors in a stock coop/corporation? While under PD 269, Directors of non-stock EC are elected per district, Directors of a stock EC will be elected at large; hence, is possible that most, if not all, of the Directors will come from the same municipality/city. Some districts will thus have no representations in the Board of Directors to detriment of the member-consumers in the area. In the stock corporation case, Directors are elected by the stockholders.

14. What are the powers of the Board of Directors in a stock coop? Article 39 of RA 6938 provides that the board of directors shall direct and supervise the business, manage the property of the cooperative and may, by resolution, exercise all such powers of the cooperatives as are not reserved for the general assembly. Since the Code promotes the principle of subsidiarity, the Board of Directors of stock EC has complete autonomy and independence from

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government intervention. However, if this principle is not practiced rightly by the Board of Directors who is managing the coop, it will bring about internal squabbles among officials, employees and consumers that may disrupt the delivery of electric service.

15.In case of internal conflict, how would it be settled? There is no immediate availability of government intervention in a stock EC because CDA, having no quasi-judicial powers, can only mediate or conciliate (Sec. 8, RA 6939). The settlement of Disputes on EC registered with CDA shall be in accordance with conciliation/mediation mechanisms embodied in the coops By-Laws and applicable laws. If these fail, the matter shall be settled in a court of competent jurisdiction (Art. 121, Coop Code). While in non-stock ECs, NEA, having quasi-judicial powers under PD 269 as amended, will use its regulatory and supervisory powers over ECs in order to resolve immediately such internal conflict to save the coop from eventual financial and institutional destruction.

16. What is the role of the General Manager in a stock coop? The General Manager of a stock coop is purely a mere implementor of whatever policy or resolution that the Board of Director will pass, even if he/she finds that such policy or resolution is disadvantageous to the coop. If he/she

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disagrees with such policy or resolution and does not implement the same, he/she could be arbitrarily suspended or even without due process. This was what happened to former SORECO II General Manager Joey Cubias. Unlike in a non-tock coop, NEA has promulgated a policy that clearly defines the specific duties and responsibilities of the General Manager and Board of Directors. This is to avoid unnecessary interference of the Board of Directors in the management functions of the General Manager.

FINANCIAL ASPECTS

1. Who are the real owners in a stock coop? To become real owners, members in a stock coop must contribute share capital in order to be entitled to the rights and privileges of a bonafide member. Only those members who infused capital are the real owners who are entitled to receive dividends or patronage refund.

2. What is the maximum amount of share capital a consumer can own? Art. 74 of RA 6938 provides that a member can own 20% of the share capital of the coop. Thus, it is possible that only few rich people can become members.

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It will be unfortunate for the thousands of existing member-consumers of the EC, who cannot afford to put up share capital, because they will be disenfranchised.

3. What is the effect of conversion on loan condonation? Section 60 (Debts of Electric Cooperatives) of EPIRA provides that: Within five (5) years from the condonation of debt, any electric cooperative which shall transfer ownership or control of its assets, franchise or operations shall repay Power Sector Assets and Liabilities Management (PSALM) Corp. the total debts including accrued interest thereon. This is also provided under Article IV of the Memorandum of Agreement (MOA) between NEA and PSALM Corp. signed on October 3, 2003 also provides that: In case of transfer of ownership or control of the EC assets, franchise or operations within five (5) years from the affectivity of the assumption by PSALM Corp. of the Rural Electrification Loan(s), the particular EC shall repay PSALM Corp. the total debts including interest thereon, assumed by PSALM Corp. as prescribed by Section 8 of EO 119 and Section 60 of RA 9136.

4. Is there a possibility that rates will increase?

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Yes. Since the member-consumers are expecting dividends (interest on share capital) and patronage refunds, it is necessary to increase the rates to insure that there is profit or net surplus to distribute annually. In a stock- and profit-oriented coop/corporation, the frequency of rate increase is most probable since conversion will require the EC to have a return on rate base (RORB) or return on investment (ROI), which could be 8% minimum to 12% maximum, which at present is not being considered under the cash-flow method under non-stock EC. Further, if the condoned loans will be revoked by PSALM because of the change of nature of EC (from non-stock to stock EC), rates will increase because the EC shall pay PSALM Corp. the total debts including interest thereon. As a result, the amortization cost of this loan shall be re-imposed on the rates.

5. Is the stock EC exempt from paying local taxes? The stock ECs are tax-exempt if: Article 61: ECs do not transact any business with non-members or the general public. Article 62: Accumulated reserves and undivided net saving are not more than P10M. If more than P10M, EC shall pay full income tax (on amount allocated for interest on capital) and sales tax (on sales to non-members. Exempt from the payment of income and sales taxes for a period of ten (10) years only.

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6. Can ECs avail of the tax exemption privileges if they opt to remain nonstock coop?

Yes.

Pursuant to Sec. 39 of PD 269, the ECs are still permanently

exempt from paying income taxes and, for a period ending on 31 December of the 30th full calendar year after the date of the organization of the EC, or until it shall become completely free of indebtedness, whichever event first occurs, shall be exempt from the payment of: (a) All National Government taxes and fees, and (b) Of all duties or imports on foreign goods acquired for its operations.

7.

Is it better to pay local taxes and remain non-stock than becoming stock EC? Yes. The taxes which the EC pays to the local government can be used for the economic development of the area. Actually, the amount to be

incorporated in the rates for payment of local taxes (franchise, business and real property) is much lower than 8-12% RORB that will be added to the rates if the EC converts to stock coop or stock corporation.

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To illustrate, based on computation, the management of Batangas II Electric Cooperative, Inc. (BATELEC II) will have to increase P0.94/kwh (RORB and interest on Revoked Condoned Loans), as compared to P0.03/kwh increase for payment of Franchise (P0.014/kwh) and Real Property (P0.16/kwh) Taxes, if the EC remains non-stock.

8.

Is the 5% Reinvestment fund part of the built-in contribution of memberconsumers in a non-stock ECs? No. The reinvestment, as part of the rates, is considered as a

contribution-in-aid of construction, and is used to cover the depreciation cost of EC assets. It is part of the operating cost, and not considered as equity of owners.

9. Is the Amortization Cost part of the built-in contribution of memberconsumers in a non-stock ECs? No. It is a embedded in the rate, but it is utilized in the day-to-day

operations of the EC. It cannot be treated as equity of members for distribution.

10.Is there a need to contribute additional paid-up capital to fully comply with the paid-up capital required under the Articles of Cooperation?

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Yes. Because the reinvestment fund and paid amortization are already fixed assets, so the coop has to raise cash to cover increases in operating cost and for the much needed capital investment.

11. Will non-stock ECs still receive subsidies for rural electrification from the government? Under PD 269, NEA is mandated to extend full assistance (Financial, Institutional and Technical) to non-stock, non-profit electric cooperatives.

12. What will happen to the existing loan of ECs with NEA once they convert? As provided in the loan contract, the existing loans will become due and demandable once the ECs convert to stock cooperative or stock corporation.

13.What will happen to the remaining remote unenergized barangays and sitios once the EC becomes stock cooperative? Since it is financially unviable to energize these barangays and sitios, it is possible that the coop will no longer extend the lines to these areas because it will entail millions of investment and is not a profitable undertaking. It is to be noted that an average cost to energize a barangay and sitio is P1.2 million to P2.0 million, and P0.3 million to P0.5 million, respectively.

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It is also possible that stockholders may decide to cut off the services in the existing energized but unprofitable remote areas, especially if these areas are hit by natural calamaties.

TECHNICAL ASPECTS

1.

Can NEA withhold its technical assistance to the ECs once they convert? Yes. Under PD 269, NEA is mandated to extend full assistance

(Financial, Institutional and Technical) to non-stock, non-profit ECs. Thus, NEA can withhold technical assistance to stock ECs, if it needs to prioritize its assistance to non-stock, non-profit ECs.

IMMERSION

ECs Who Conducted Referendum Sultan Kudarat Electric Cooperative (SUKELCO) conducted referendum on July 24,2010. Out of 11,158 (18% of 60,450 total membership) member-

consumers who casted their votes, 6,815 (61%) favors to remain a non-stock EC

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under NEA, while there are only 4,180 (37%) voted for stock cooperative under CDA and 163 (1%) chose to be a stock corporation under SEC.

South Cotabato II Electric Cooperative (SOCOTECO II) referendum on March 2, 2008

conducted

SOCOTECO Final and Official Referendum Result (March 02, 2008) No. of MemberConsumers 30,983 11,117 25,726 15,727 5,635 4,606 3,479 5,228 5,558 10,602 Percentage of Participation 4% 13% 6% 7% 16% 14% 29% 31% 21% 27%

Districts Gen. Santos City 1 Gen. Santos City 21 Gen. Santos City 3 Polomolok Tupi Alabel Malapatan Malungon Glan Phase II Kiamba Maasim Maitum Total

NEA 976 1,342 1,376 947 814 568 919 1,551 859 2,689

SEC 28 48 68 32 20 28 28 20 18 83

CDA 109 98 136 160 94 71 79 45 328 132

TOTAL 1,113 1,488 1,580 1,139 928 667 1,026 1,616 1,205 2,904

Average 12,041 373 1,25 2 13,666 118,661 12%

Source: National Electrification Administration Data

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ECs Who Withdrew Registration with CDA Sorsogon II Electric Coop., Inc. (SORECO II) is a CDA registered EC since 1996 issued Board Resolution No. 320, S-2010 expressing SORECO IIs intention to convert itself from a CDA to a NEA registered coop and Board resolution No. 321, S-2010 which is requesting nea to issue a Php 23 million letter of guarantee to Avoitiz Power for and in behalf of SORECO II.

Peninsula Electric Cooperative (PENELCO) in Bataan issued Resolution No. 592, Series of 2008 Authorizing the withdrawal and cancellation of the Board Resolution No. 533, S. 2007 and to Retain its Registration with the NEA with the following reasons: a. Failure to comply with the requirements as provided under RA 6938 and 6939 b. OGCC Opinion No. 220, Series of 2008, dated 30 Sept. 2008

Zambales II Electric Cooperative (ZAMECO II) issued Resolution No. 36, Series of 2008 requesting for the Immediate Withdrawal and/or Cancellation of ZAMECO IIs Registration with the CDA with the following reasons: a. Registration was hastily initiated, facilitated and implemented by the 7 former BOD members who were removed from office by NEA b. Did not comply with the mandatory requirements of RA 9136 (ex. Referendum)

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c. OGCC Opinion No. 220, Series of 2008

Electric Company Registered under Securities and Exchange Commission (SEC) The Manila Electric Company (formerly known as Manila Electric Railroad And Light COmpany) also known as MERALCO or Meralco, is the Philippines' largest distributor of electrical power. MERALCO is the Metro Manila's only electric power distributor and holds the power distribution franchise for some 22 cities and 89 municipalities, including the whole of Metro Manila and Mega Manila region. (en.wikipedia.org/wiki/Meralco)

Reaction from Stakeholders Zambales Sangguniang Panlalawigan Resolution No. 2008-406 : Vehemently Denouncing the Act of the CDA in Registering ZAMECO II as a Stock Cooperative for Non-Compliance of Legal Requirements in Accordance with the Guidelines Before Its Actual Conversion and Permanent Registration (i.e. No Public Consultation, No Referendum and No NEA Endorsement)

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NEA Position on the Conversion and Registration of ECs as recently approved by the NEA Board of Administrators (NEA-ECs: Firming Up the Road Map for Service Excellence (2008))

ECs which have converted from non-stock to stock for profit can no longer be extended government subsidy funds by virtue of the change of business orientation. Stock cooperatives should raise their own capital. Government cannot provide subsidy funds to private electric distribution utilities organized as stock. The absence of government regulation with the non-application of Sections 3, 5 and 7 of PD 1645 will no longer qualify them to receive subsidy from NEA.

The Commission on Audit (COA) citing the Philippine Constitution dictates that government funds shall be exclusively used for public purpose. NEA is used as the implementing arm of the government, among others, in accounting for utilization of funds, in accordance with Government Rules and Regulations. NEA has the custodial responsibility of ensuring that public assets should not be privately misappropriated.

Without government supervision over the ECs, the attainment of total electrification of the country will be greatly jeopardized. NEA and the ECs are

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the only identified long time partners in charge of the Rural Electrification Program, now entering its 40th year.

Cooperative Development Authority (CDA) reaction on how to deal with converted ECs.

None of our CDA people has come from electric cooperatives, thats why when these cooperatives register with us, we will be confused and lost, CDA Executive Director Niel A. Santillan said. (Reference : CDA at a loss on how to deal with co-ops - Phil. Daily Inquirer, Dec. 2, 2005)

CDA Chairman Ruben Conti said that of the estimated 28,000 cooperatives in the country, half or about 14,000, are on the verge to collapse. (14,000 Coops Collapsing, says official - Phil. Daily Inquirer, August 12, 2005)

Luis Manuel Corral, Secretary General of the party-list group Association of Philippine Electric Cooperatives (APEC) admitted that despite the incentives (i.e. tax exemptions, congressional allocations, grants, subsidies and other financial assistance for rural electrification which can be coursed through the Department of Energy, the Authority or local government units."), only 11 out of the 119 ECs are registered with the CDA.

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Among the ECs that signed up for CDA are Negros Occidental Electric Cooperatives (NOCECO 2); Palawan Electric Cooperative (PALECO);

Pangasinan Electric Cooperative 1 and 2 (PANELCO); Nueva Vizcaya Electric Cooperative (NUVELCO); Negro Oriental Electric Cooperative (NORECO 2); Abra Electric Cooperative (ABRECO), Isabela Electric Cooperative (ISELCO); Sorsogon Electric Cooperative (SORECO) and Quirino Electric Cooperative (QUIRELCO). These ECs have a total of 1.2 million member consumers.

(www.sunstar.com.ph/manila/cda-coops-sell-cheaper-electricity)

2008 Legislative investigation on high power rates of Meralco Meralco is facing a Philippine legislative inquiry/investigation for alleged excessive pricing. The government has considered a plan to take over Meralco, to reduce electricity bills. Meralco and National Transmission Corporation (Transco) blamed each other for the high power rates. Meralco also blames high power generation costs, high transmission costs and government taxes imposed on the electricity sector from power generation to distribution. Government Service Insurance System (Philippines) President Winston Garcia, however, blamed Meralco's inefficiency, its "bloated bureaucracy" and its sourcing of power from independent power producers (IPPs) also owned by the Lopezes, and the need to amend the Electronic Power Industry Reform Act of 2001. Oscar Lopez, said that if GSIS would buy the shares of Meralco, they must buy in whole cash. Many businessmen also say that taking over Meralco is not the way to reduce electrical price. It depends on the government and the

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president. As other people say, this issue is only to hide the ZTE NBN scandal and other more issues. A perceived lack of general understanding regarding the issue of system loss, inherent in the business of utilities prompted Meralco's former holding company First Philippine Holdings to issue advertisements explaining systems loss.

(en.wikipedia.org/wiki/Meralco)

CONCLUSIONS

After studying the facts as well as other information about the conversion of electric cooperatives in the Philippines into a stock cooperative under CDA or stock corporation under SEC or retain its status quo under NEA, I therefore conclude that the outcry of some sectors of our society to change the corner-stone on which it was founded, and convert its very nature of being a non-stock, non-profit and service oriented cooperative to a profit-oriented cooperative or corporation will be a threat on ORMECOs future and stability. Furthermore, the destiny of ORMECO, being one of the most reliable and trusted institutions in the province and the only remaining electric cooperative in Region IV-B under NEA with a categorization of A+ Mega Large EC relies on the responsibility and power of its member-consumers, Board of Directors,

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management and employees to fight and stand for what they think will be the best for our cooperative. If ORMECO will be converted into either stock cooperative or stock corporation, then the sacred goal of total electrification of the Province of Oriental Mindoro will not be realize. It is like taking to the people residing in remote sitios/areas their only hope to improve their lives through the benefits of having an efficient, reliable, and affordable electric service.

RECOMMENDATION

Member-consumers cannot be expected to participate actively in EC activities and affairs, much less cooperate, if they cannot appreciate these because of lack of awareness and knowledge of at least the basic aspects of ORMECO operations. It is important for ORMECO to have an active, supportive and well-informed membership base to serve as the foundation of all its efforts towards conversion issues. Thus, to strengthen ORMECO institution, it will entail an aggressive, sustained and grassroots-based information and educational campaign. This will not only heighten awareness but will ultimately work for a positive attitude and behavior towards ORMECO developing the member-consumers sense of involvement.

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References

2008

Legislative

investigation

on

high

power

rates.

Retrieved

from

en.wikipedia.org/wiki/Meralco Bueno, E. (2010). Message. ORMECO Annual Report 2010, 5 Cario, D., (December 2, 2005). CDA at a loss on how to deal with co-ops, Philippine Daily Inquirer Lotilla, R., Billena, W., Khonghun, J., & Bueno, E. (2005). Amended guidelines in the conduct of referendum,1-7

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MSN/Sunnex (2010). CDA coops sell cheaper electricity. Retrieved from www.sunstar.com.ph/manila/cda-coops-sell-cheaper-electricity NEA Board of Administrators (2008) NEA-ECs: Firming Up the Road Map for Service Excellence, 3-5 NEA Consumer Development & Protection Division (2007). Primer on EC Conversion 1-7 Quiros, J., (August 5, 2005). 14,000 coops collapsing, says official, Philippine Daily Inquirer, A18 Presidential Decree 269 (1974). us/charter/pd-269 Presidential Decree 1645 (1979). us/charter/pd-1645 Republic Act 6938 (1990). Retrieved from http://www.bcphilippineslawyers.com/ Retrieved from www.nea.gov.ph/index.php/aboutRetrieved from www.nea.gov.ph/index.php/about-

republic-act-no-6938 Republic Act 9136 (2001) Retrieved from www.nea.gov.ph/index.php/about-

us/charter/ra-9136 Republic Act 9520 (2008).Retrieved from http://www.lawphil.net/statutes/repacts/ra2009/ ra_9520_2009.html

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