Republic of the Philippines ENERGY REGULATORY COMMISSION San Miguel Avenue, Pasig City IN THE MATTER OF THE APPLICATION FOR THE ADOPTION OF THE SAME BILLING METHODOLOGY APPROVED FOR SKK STEEL CORPORATION AND STRONGHOLD STEEL CORPORATION BY THE NATIONAL TRANSMISSION CORPORATION, WITH PRAYER FOR PROVISIONAL AUTHORITY MELTERS STEEL CORPORATION (Msc), Applicant, -versus- ERC CASE NO. 2008-062 MC NATIONAL GRID CORPORATION OF THE PHILIPPINES (NGCP), aad a rane Respondent. by. Meee eee eee ce ene aeeeteaas x DECISION Before the Commission for resolution is the application filed by Melters Steel Corporation (MSC) on June 11, 2008 for the adoption of the same billing methodology approved for SKK Steel Corporation (SKK) and Stronghold Steel Corporation (SSC) by the National Transmission Corporation (TRANSCO), with prayer for provisional authority Statement of Facts MSC is engaged in the business of steel manufacturing that utilizes an Induction Furnace. It is directly sourcing its power through the transmissionERC CASE NO. 2008-062 MC Decision/November 26, 2012 Page 2 of 17 system of the National Transmission Corporation (TRANSCO, now National Grid Corporation of the Philippines [NGCP)). In its Decision dated October 5, 2005 in ERC Case No. 2004-479", the Commission approved the special billing arrangement between SKK and TRANSCO and stated that there should be no discrimination in case TRANSCO's other customers are found deserving of the same privilege granted to SKK. ‘Subsequently, on July 4, 2007, the Commission issued its Decision in ERC Case No. 2005-230 M? approving the Memorandum of Agreement (MOA) entered into by and between SSC and TRANSCO to the effect that the transmission charges shall be calculated based on the actual demand coincident with the Luzon System Peak Demand. While in its initial months of operations, MSC filed the instant application seeking the approval of a similar billing arrangements accorded to SKK and ‘SSC by virtue of the aforesaid Decisions. Having found the said application sufficient in form and in substance, an Order and a Notice of Public Hearing, both dated June 12, 2008, were issued setting the case for hearings on June 23 and 24, 2008. " In the Matter of the Application for Approval of the Preferential Rate of 20% Lower Than the Prevailing Rate of NPC and TRANSCO to Applicant, with Prayer for Provisional Authority ‘SKK Stee! Corporation (SKK), Applicant * Petition for Approval of a Preferential Rate of Twenty Percent (20%) Lower Than the Prevailing Average rate of the National Power Corporation (NPC) and the National ‘Transmission Corporation (TRANSCO), with Prayer for Provisional AuthorityERC CASE NO. 2008-062 MC Decision/November 26, 2012 Page 3 of 17 In the same Order, MSC was directed to cause the publication of the attached Notice of Public Hearing, at its own expense, once (1x) in a newspaper of general circulation in the Philippines, at least five (5) days before the scheduled date of initial hearing, ‘On June 17, 2008, MSC filed its “Pre-Trial Brief’ while TRANSCO filed its “Manifestation and Motion”. During the June 23, 2008 initial hearing, MSC and TRANSCO appeared. MSC presented its proofs of compliance with the Commission's publication of Notice requirements which were duly marked as Exhibits “A” to “E”, inclusive. MSC and TRANSCO agreed to dispense with the conduct of a pre-trial conference considering that the only issue in this case is whether or not MSC is entitled to the same privilege granted to SKK and SSC. At the June 24, 2008 hearing, MSC presented its first witness, Engr. Jimwel C. Capillo, its Technical Consultant, who testified on the material allegations in the instant application. In the course thereof, a document was presented and marked as Exhibit *F”. During the July 3, 2008 hearing, TRANSCO conducted its cross- examination on Engr. Capillo. The cross-examination having been terminated, MSC conducted its re-direct examination. In the course thereof, said witness identified another document which was duly marked as Exhibit “G’.ERC CASE NO. 2008-062 MC Decision/November 26, 2012 Page 4 of 17 On July 24, 2008, TRANSCO filed a “Manifestation and Motion" stating that MSC was granted a six (6)-month non-firm billing arrangement based on its actual consumption to give it sufficient time to make the necessary adjustments on its operations. Several hearings were conducted whereby MSC and TRANSCO discussed the possibility of an amicable settlement. In the meantime, they were given a period of thirty (30) days within which to file their compromise agreement. Thereafter, TRANSCO manifested that it shifted the billing methodology of MSC from non-firm to firm upon the expiration of the six (6)- month billing period. On various dates, TRANSCO and MSC made the following submissions: 1. The “Manifestations and Motion” and “Motion for Extension” filed on July 3, 2008 and July 10, 2008, respectively, by TRANSCO; 2. The “Motion for the Temporary Suspension of the Existing Billing Arrangement with the National Transmission Corporation (TRANSCO) Under the Transmission Service Agreement (TSA) for a Period of Six (6) Months" and the “Motion to Correct the Title of the Previously Filed Motion” filed on December 23, 2008 and January 7, 2009, respectively, by MSC; and 3. The “Manifestation” filed on January 14, 2009 by TRANSCO stating that the concession contract to operate and maintain its transmission business was awarded to NGCP and thus, moved that NGCP be considered as the proper party-respondent to address the relief sought by MSC. On January 15, 2009, NGCP took over the transmission business of TRANSCO pursuant to Republic Act No. 9511 (R.A. 9511). > An Act Granting the National Grid Corporation of the Philippines a Franchise to Engage in the “Business of Conveying or Transmitting Electricity Through the High Voltage Back-Bone ‘System of interconnected Transmission Lines, and for Other PurposesERC CASE NO. 2008-062 MC Decision/November 26, 2012 Page 5 of 17 Accordingly, at the January 26, 2009 hearing, the Commission declared NGCP as the party-respondent in this case. ‘On February 16, 2009, NGCP filed a “Manifestation with Omnibus Motion to Amend the Title and for Time" praying, among others, that the caption, notices and orders in this case be addressed to it as party-respondent. On February 25, 2009, NGCP filed a “Comment and Motion”. At the March 2, 2009 hearing, NGCP manifested that its management denied the request of MSC for an extension of its non-firm billing arrangement. On the other hand, MSC manifested that it filed its proposed “Compromise Agreement’. In connection therewith, NGCP was given a period of ten (10) days within which to file its comment thereon. Several hearings were conducted by the Commission to give MSC and NGCP sufficient time to discuss the possible amicable settlement of this case. The Commission took note of the following submissions: 1. The “Manifestation and Motion’ filed on December 13, 2010 by MSC; 2. The “Comment Ad Cautelam (To MSC’s Manifestation and Motion Dated 6 December 2010)" filed on January 6, 2011 by NGCP; and 3. The letter dated February 8, 2011 filed on February 10, 2011 by Msc. On April 17, 2012, MSC filed a “Motion to Re-open Proceedings for the Purpose of Submitting Additional Evidence in Support of the InstantERC CASE NO. 2008-062 MC Decision/November 26, 2012 Page 6 of 17 Application’. The Commission granted the said motion in its Order dated Apri 25, 2012 and thus, another hearing was set for the reception of MSC's additional evidence. ‘At the July 18, 2012 hearing, MSC presented its witness, Ms. Leticia Garcia, its Power and Energy Consultant, who testified on the load profile of MSC and other matters relative to the instant application. In the course thereof, ‘she identified several documents which were duly marked as Exhibits “B" to “C- 74°, inclusive. The direct examination having been terminated, NGCP conducted its initial cross-examination. It, then, manifested that MSC has to amend its application since it sought additional reliefs in its “Manifestation and Motion” other than the reliefs prayed for in the instant application. Upon close scrutiny of the said manifestation and motion, the Commission has resolved to deny MSC's request to direct NGCP to execute a MOA for a special billing arrangement considering that NGCP interposed its objection to the instant application. However, the Commission maintained the other reliefs being prayed for by MSC since they are consistent with its allegations in the instant application On September 14, 2012, the Commission conducted an ocular inspection on the electrical facilities and electric furnaces of MSC, including the transmission system of NGCP where MSC is connected.ERC CASE NO. 2008-062 MC Decision/November 26, 2012 Page 7 of 17 During the September 17, 2012 hearing, only MSC appeared. NGCP failed to appear despite due notice. Upon motion of MSC, the Commission declared NGCP to have waived its right to cross-examine Ms. Garcia and to Present its witness. MSC moved to correct the markings of the following exhibits, as follows: 1. Exhibits “A” to “A-8" should be marked as Exhibits “H” to “H-8”, inclusive; 2. Exhibits “B” to “B-19" should be marked as Exhibits “J” to “J-19", inclusive; and 3. Exhibits “C” to “C-74” should be marked as Exhibits *K” to "K-74", inclusive. Subsequently, MSC filed its "Formal Offer of Evidence of the Applicant’. On September 18, 2012, NGCP filed a “Motion for Reconsideration” on the ruling made by the Commission during the September 17, 2012 hearing declaring it in default Relative thereto, a hearing was set on September 27, 2012, during which NGCP manifested that it was waiving its right to cross-examine the witness of MSC and to present its own witness if MSC would admit that they have no existing agreement on preferential rate. For its part, MSC admitted and confirmed that it did not execute a MOA with TRANSCO or NGCP for a special billing arrangement. With the admission of MSC, the parties agreed to submit their respective memoranda and moved that this case be submitted for resolution. Said motion was grantedERC CASE NO. 2008-062 MC Decision/November 26, 2012 Page 8 of 17 The Commission admitted the formal offer of evidence of MSC for being material and relevant in the final evaluation of this case. On October 5, 2012 and October 11, 2012, MSC and NGCP filed their respective “Memoranda”. DISCUSSION NGCP claimed that its use of NCPD as the billing determinant in the calculation of MSC’s transmission charges was consistent with the provisions of the Ancillary Services-Cost Recovery Mechanism (AS-CRM), Open Access Transmission Service Rules (OATS Rules) and the Commission's Resolution No. 23, Series of 2007*. NGCP further argued that the grant of a special rate was a valid exercise of management prerogative meant for a legitimate pursuit to protect its transmission business. Verily, it may or may not grant the same privilege when it deems proper and necessary, MSC posits that under the present scheme, it is incurring higher costs in the production of steel. The increase in power costs has, in effect, increased its production costs. Thus, its continued operation under said scheme is threatened considering that the other steel manufacturing companies were able to avail of a preferential rate from NGCP, “A Resolution Adopting the Policy that the Grant of Preferential Rates to Qualified Customers Shall be Considered as Management PrerogativesERC CASE NO. 2008-062 MC Decision/November 26, 2012 Page 9 of 17 According to MSC, the adoption of CPD as billing determinant will result to additional savings and will enable it to reduce its production making it more ‘competitive in the market. ISSUE The only pivotal issue that shall be resolved in this case is whether or not MSC is entitled to the same privilege granted to SKK and SSC. EVALUATION AND FINDINGS “Electricity is a basic necessity whose generation and distribution is imbued with public interest and its provider is a public utility subject to strict regulation by the State in the exercise of police power.”*® “The supply of electricity is public service that affects national security, economic growth and Public interest, To achieve coherent and effective policy, formulation, coordination, implementation and monitoring within energy sector, it became necessary to entrust in one body the regulatory functions covering the sector." Section 7 of RA. 9136 provides that “the transmission of electric power shall be a regulated common electricity carrier business, subject to the rate making powers of the ERC.” Pursuant thereto, the Commission was empowered to establish and enforce a methodology for setting transmission and distribution wheeling rates and to review and approve the changes in the terms and conditions of service of TRANSCO (now NGCCP) or any distribution utility, to wit: { Manila Electric Company vs. Cua, 623 SCRA 81, July 5, 2010 * National Power Corporation vs. PEPOA, G.R. No. 159457, April 7, 2006ERC CASE NO. 2008-062 MC Decision/November 26, 2012 Page 10 of 17 “Sec. 43. Functions of the ERC - xx x *() In the public interest, 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 egulated entities. The rates must be such as to allow the recovery of just and reasonable costs and 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. The rates prescribed shall be non- discriminatory. x x x. (Emphasis supplied) xxx {h) Review and approve any changes on the terms and conditions of service of the TRANSCO or any distribution utility,” In resolving the issues herein, the Commission is guided by the principle enunciated in the various Decisions of the Supreme Court, to wit: “The regulation of rates to be charged by public utilities is founded upon the police powers of the State and statutes Prescribing rules for the control and regulation of public utilities are a valid exercise thereof. When private property is used for a public purpose and is affected with public interest, it ceases to be juris private only and become subject to regulation. The regulation is to promote common good. Submission to regulation may be withdrawn by the owner by discontinuing use; but as ong as use of the property is continued, the same is subject to public regulation In regulating rates charged by public utilities, the State protects the public against arbitrary and excessive rates maintaining the efficiency and quality of service rendered. However, the power to regulate rates does not give the State the right to prescribe rates which are so low as to deprive the public utility of a reasonable return on investment, Thus, the rates prescribed by the State must be one that yields a fair return ‘on the public utility upon the value of property performing the service and one that is reasonable to the public for the services rendered. The fixing of just and reasonable rates involves a balancing of the investor and the consumer interests.ERC CASE NO. 2008-062 MC Decision/November 26, 2012 Page 11 of 17 In his famous dissenting opinion in the 1923 case of Southwestern Bell Tel. Co. v. Public Service Commission, Mr. Justice Brandies wrote’ “The thing devoted by the investor to the public use is not specific property, tangible and intangible, but capital embarked in an enterprise. Upon the capital so invested, the Federal Constitution guarantees to the utility the opportunity to earn a fair return... The Constitution does not guarantee to the utility the opportunity to eam a retum on the value of all items of property used by the utility, or of any of ‘them. The investor agrees, by embarking capital in a utility, that its charges to the public shall be reasonable. His company is the substitute for the State in the performance of the public service, thus becoming a public servant. The compensation which the Constitution guarantees an opportunity to earn is the reasonable cost of conducting the business. (Republic of the Philippines vs. Manila Electric Company, G.R. No. 141314, November 15, 2002) (Emphasis supplied) “Rate regulation calls for a careful consideration of the totality of facts and circumstances material to each application for an upward rate revision. Rate regulators should strain to strike a balance between the clashing interests of the public utlity and the consuming public and the balance must assure a reasonable rate Of return to public utilities without being unreasonable to the consuming public. What is reasonable or unreasonable depends on a calculus of changing circumstances that ebb and flow with time. Yesterday cannot govern today, no more than today can determine tomorrow. (Republic of the Philippines vs. Manila Electric Company, G.R. No. 141341, April 9, 2003) The Commission is cognizant of the major contribution of steel industries in the Philippine economy. The underlying principle for using the CPD as the billing determinant of MSC is to recognize its efforts in shifting its demand for transmission capacity outside the Luzon System Peak, The load profile of MSCERC CASE NO. 2008-062 MC Decision/November 26, 2012 Page 12 of 17 would show that it fully operates its steel production during off-peak hours and less during peak hours in order not to jeopardize the transmission capacities that are critically needed by other transmission customers In the ocular inspection conducted by the Commission on September 14, 2012, it was established that the demand for transmission capacity continuously increases in the area of San Simon, Pampanga, where big industries, majority of which are steel companies, operate 24-hours a day. Their major operations during the Luzon Peak pose risks on transmission. Outages in transmission affect not only MSC but also the bulk of electricity end-users. Evidently, transmission capacity is significantly necessary during peak hours when consumers utilize it the most. The shift of MSC’s demand for transmission capacity outside the Luzon System Peak is imperative to avert possible increases in transmission charges and the occurrence of transmission outages. This scheme will not only allow NGCP to optimize its transmission capacity during peak hours but will also benefit all electricity end-users in terms of a reliable, dependable and secure transmission network. Generally under the OATS Rules, all load customers shall pay a monthly Power Delivery Service (PDS) charge and System Operator Charge using the billing determinant based on the average of the twelve (12) monthly non coincident peak demand in kW. However, the Commission approved a different billing methodology using CPD as the basis in the calculation of SKK and SSC’s transmission charges by irtue of its Decisions dated October 5, 2005 and July 4, 2007 in ERC CaseERC CASE NO. 2008-062 MC Decision/November 26, 2012 Page 13 of 17 Nos. 2004-479 and 2005-230, respectively. In the said Decisions, the Commission approved the special billing arrangements between SKK and TRANSCO and SSC and TRANSCO and stated that no discrimination should be practiced in case other transmission customers are found deserving of the same privilege granted to SKK and SSC. It bears stressing that in the aforesaid Decisions, the Commission did not only establish that SKK and SSC are similarly situated but also determined the appropriate billing determinant that should be used in the calculation of their transmission charges in view of the peculiarity of their operations compared to the other customers of NGCP. Similar with SKK and SSC, MSC also has a unique operation which makes its hourly electricity consumption erratic resulting to an inherently low load factor. It also operates on a 24-hour basis utilizing significant amounts of electricity to melt and manufacture steel, In the exercise of its regulatory powers as enunciated in Section 43 (f) and (h) of R.A. 9136, the Commission finds that CPD reflects a more realistic, reasonable and appropriate billing demand coincident with the Luzon Grid System Peak It is significant to note that in the Decisions issued by the Court of Appeals and affirmed by the Supreme Court’, the Commission's authority to use CPD as billing determinant in the calculation of the transmission charges of ” Resolutions of the Third and First Divisions of the Supreme Court dated April 23, 2012 in G.R. 199074 and July 2, 2012 in G.R. No, 198282, respectivelyERC CASE NO. 2008-062 MC Decision/November 26, 2012 Page 14 of 17 qualified customers of TRANSCO and NGCP has already been established, to A. Special First Division of Court of Appeals CA-G.R. SP No. 113947 Decision dated May 31, 2011 “There is no quibbling that the MOA bestowed upon SKK (now, private respondent) the privilege of being billed under the coincident peak determinant. The MOA was executed so that private respondent may be given a measure of respite in paying its transmission charges. The ERC acknowledged that private respondent operates on a 24-hour basis utilizing a vast amount of electric power to melt and manufacture steel. Its hourly electric consumption is said to be erratic ensuing in an inherently low load ‘compared to other industrial companies. It is precisely for this reason that the ERC approved the MOA authorizing the change in the billing determinant from non- coincident peak to coincident peak demand insofar as private respondent is concerned. This corollary shift in methodology was approved to afford private respondent the flexibility to run its second furnace outside of the system peak To our mind, while the AS-CRM was implemented with the ERC’s authorization, this did not automatically supersede the MOA. The AS-CRM was formulated to apply to petitioner's clients, other than private respondent. Petitioner must bear in mind that its relationship with private respondent is peculiarly governed by the MOA so that any change in its billing methodology may be done after they both agree on such change, and only upon the subsequent approval of the ERC. x x x” B. Former Seventh Division of Court of Appeals CA-G.R. SP No. 113950 Decision dated June 22, 2014 “Furthermore, in approving the AS-CRM, the ERC did not change the billing determinant from coincident peak demand to Non-coincident peak demand as the latter was, in fact, the methodology in force and being adopted during such time by TRANSCO for its general or special customers. Also, consideringERC CASE NO. 2008-062 MC Decision/November 26, 2012 Page 15 of 17 that the special or preferential rate awarded to SKK was granted through the filing of a separate petition, sending the appropriate notices, and conducting public hearings specifically for the said purpose, the revocation of such privilege or modification of the terms of the MOA should likewise be done under the same procedure to provide SKK with due process. To agree with TRANSCO's theory that the filing and approval of the AS-CRM is ‘the approval required under the MOA to change the SKK’s billing determinant would be tantamount to a deprivation of due process and the impairment of obligations and contract clause, and negate the very purpose for which the preferential rate was granted. xxx" The Commission granted SKK and SSC minimum billing determinants to prevent them from intentionally changing their schedules of operation that might lead to the abrupt reductions in their actual demands during system peak, to the Prejudice of NGCP. Applying the same principle, the Commission used MSC’s lowest Load Billing Determinant (MW) for the twelve (12)-month billing period, i.e, 27 MW. Using the 36.8% reduction ratio, MSC’s minimum billing determinant should be 17 MW, computed as follows: Lowest Load Billing Determinant ‘Minimum Customer Demand (MW) ~ 12 Month Period Ratio LBD (MW) MSC. a 36.8% 17.ERC CASE NO. 2008-062 MC Decision/November 26, 2012 Page 16 of 17 In the event that MSC’s actual demand consumption is lower than the minimum billing determinant, it shall pay NGCP a minimum charge on the basis of the minimum demand level of 17 MW. WHEREFORE, the foregoing premises considered, the application filed by Melters Steel Corporation (MSC) for the adoption of the same billing methodology approved for SKK Steel Corporation (SKK) and Stronghold Stee! Corporation (SSC) by the National Transmission Corporation (TRANSCO) is hereby APPROVED. Accordingly, the National Grid Corporation of the Philippines (NGCP) is directed to use MSC’s actual demand coincident with the Luzon System Peak demand as its billing determinant in the calculation of its transmission charges, subject to the approved minimum demand level of 17 MW and submit to the Commission its compliance with the said directive, within ten (10) days from its implementation. SO ORDERED. Pasig City, November 26, 2012. (Gus ZENAIDA G. CRUZ-DUCUT Chairperson i. MARIA TI STANEDA. JO! Ce ALFREDO J, NON GLORIA ViGIORIK G \P-TARUC Commissioner Commission geERC CASE NO. 2008-062 MC Decision/November 26, 2012 Page 17 of 17 Copy furnished: 4. Atty. Reacell D. Baldovino Counsel for NGCP National Grid Corporation of the Philippines Agham Road, Diliman Quezon City 2. Atty. Inocencio R. Vivero, Jr. Counsel for MSC Pangulayan & Associates Unit 1104, Pacific Center, San Miguel Avenue Ortigas Center, Pasig City 3. Commission on Audit Commonwealth Avenue Quezon City 1121 4. Senate Committee on Energy GSIS Building, Roxas Boulevard Pasay City 1307 5. House Committee on Energy Batasan Hills, Quezon City 1126 6. Office of the Solicitor General 134 Amorsolo Street, Legaspi Village Makati City, Metro Manila