~~ Republic of the Philippines ENERGY REGULATORY COMMISSION San Miguel Avenue, Pasig City IN| THE MATTER) OF THE APPLICATION FOR APPROVAL OF THE CONTRACT FOR THE SUPPLY OF ELECTRIC ENERGY BETWEEN SAN JOSE CITY —_ ELECTRIC COOPERATIVE, INCORPORATED AND MASINLOC POWER PARTNERS. COMPANY, LIMITED, WITH PRAYER FOR PROVISIONAL AUTHORITY ERC CASE NO. 2009-053 RC SAN JOSE CITY __ELECTRIC COOPERATIVE, INCORPORATED (SAJELCO) AND MASINLOC POWER PARTNERS COMPANY, LIMITED (MPPCL), Applicants. Xe ww ence eee ee eee eee eee eee x ORDER On July 16, 2009, San Jose City Electric Cooperative, Incorporated (SAJELCO) and Masintoc Power Partners Company, Incorporated (MPPCL) filed a Joint application for approval of their Contract for the Supply of Electric Energy (CSE), with prayer for provisional authority. In the said application, SAJELCO and MPPCL alleged, among others, that: The Applicants 1 SAJELCO is a stock electric cooperative registered under the Cooperative Development Authority (CDA), with office address at Barangay Rafael Rueda, Maharlika Road, San Jose City, Nueva JERC Case No. 2009-053 RC ORDER/August 17, 2009 Page 2 of 19 Ecija. It has been granted a franchise to distribute electric service in San Jose City, Nueva Ecija (Franchise Area). 2. MPPCL is a limited partnership established in the Philippines to invest in, acquire, finance, complete, construct, develop, improve, operate, maintain and hold power production and electric generating facilities in the country, with principal office address at Barangay Bani, Masinloc, Zambales. It is a subsidiary of AES Corporation, a global power generation and power distribution company with assets in twenty-eight (28) countries in Asia, North America, South America, Europe and Africa. it recently acquired and took over the operations of the Masinioc Coal-Fired Thermal Power Plant (Masinloc Power Plant), a six hundred megawatt (600 MW) power plant located in Masinloc, Zambales, through a competitive bidding process managed by the Power Sector Assets and Liabilities Management Corporation (PSALM). Nature of the Application 3, Pursuant to Rule 20 (B) of the ERC Rules of Practice and Procedure, approved on June 22, 2006 in Resolution No. 38, Series of 2006, and Resolution No. 16, Series of 2008, entitled “A Resolution Adopting Policies to Govern the Transition Supply Contracts Which Have Been Assigned and Transferred to National Power Corporation Successor Generating Companies”, this application is submitted to the Commission for its review and approval of the CSEE dated January 21, 2009 executed by and between SAJELCO and MPPCL. Compliance with Pre-Filing Requirements 4. In compliance with Rule 6 of the said ERC Rules of Practice and Procedure, they have furnished the Sangguniang Panlungsod of San Jose City and the Sangguniang Panlalawigan of Nueva Ecija, with copies of the instant application and accompanying documents. 5. Furthermore, they have caused the publication of the present application in its entirety in a newspaper of general circulation in SAJELCO's franchise area. ‘Statement of Facts 6. The provisions of Republic Act No. 9136, otherwise known as the Electric Power Industry Reform Act of 2001 (EPIRA), called for the privatization of the power generation assets of the National Power Corporation (NPC) in order to promote competition in the power sector and to reduce the price of electricity in the Philippines. The wes WtERC Case No. 2009-053 RC ORDER/August 17, 2009 Page 3 of 19 SS 10. 1 Masinloc Power Plant was one of the power generation assets of the NPC that was already privatized. MPPCL acquired the Masinloc Power Plant as it was the winning bidder in the competitive bidding process managed by PSALM. The acquisition was perfected through an Asset Purchase Agreement (APA) dated July 26, 2007 In connection with the bidding of the Pantabangan Hydro Electric Power Plant, the Contract for the Supply of Electric Energy or Transition Supply Contract (TSC) between NPC and SAJELCO was assigned to First Gen Hydro Power Corporation (FGHPC), the winning bidder. The original term of the TSC between NPC and SAJELCO that was assigned to FGHPC expired on February 25, 2009. Prior to the expiry of the TSC on February 25, 2009, and as SAJELCO and FGHPC no longer intended to extend their TSC, SAJELCO has undertaken a competitive selection process by inviting interested entities to supply its power requirements in its Franchise Area to ensure the quality, reliability, security and affordability of supply of electric power for its consumers. The said competitive selection was conducted as follows: 9.1. SAJELCO published the Invitation to Submit Bid Proposal for its power requirements on January 7, 2009 in Balita, a newspaper of general and national circulation in the Philippines. 9.2. On January 12, 2009, MPPCL submitted its letter of intent to participate in the competitive selection process. 9.3. On the deadline set for the submission of Letter of Intent on January 19, 2009 and bid proposals on January 27, 2009, only MPPCL_ has submitted the requisite documents. Considering SAJELCO's urgent need for a new power supplier as the TSC assigned to FGHPC was then about to expire on February 25, 2009 and in accordance with its bidding rules, SAJELCO decided to proceed with the evaluation of MPPCL’s proposal. As such, they proceeded with the negotiation of the terms of their new bilateral power supply contract. Pending the execution, processing, filing an application and approval of their bilateral power supply contract by the Commission, the parties entered into an Interim Contract for the Supply of Electric Energy (ICSEE), where they agreed to extend the TSC for another six (6) billing periods starting from February 26, 2009 or until August 25, 2009. ‘They sought the approval of the ICSE with the Commission The Commission, in its letter dated February 25, 2009, however, considered the ICSEE as a new bilateral power supply contract yiERC Case No. 2009-053 RC ORDER/Aug! Page 4 of 19 just 17, 2009 between the parties, the approval of which must be in accordance with the "Guidelines for the Recovery of Costs for the Generation Component of the Distribution Utilities Rates.” 11.1. The Commission further clarified that in the absence of any approval, the transaction between the parties shall be govemed by the policy of the Commission that the concemed distribution utility shall only be allowed a pass through of its generation rates equivalent to the approved NPC Time-of-Use (TOU) rate or the actual cost of energy supplied, whichever is lower. 11.2. The Commission further directed the parties to seek the approval of the ICSEE or their new bilateral contract in accordance with the ERC Rules of Practice and Procedure. Commercial Advantage of MPPCL’s Generation Rate 12. SAJELCO concluded, after being satisfied with MPPCL’s compliance and performance of its obligations under the assigned TSC, that it would be in the best interest of its consumers if it enters into a new bilateral power supply contract with MPPCL rather than seek out for other power suppliers, as its bilateral contract with MPPCL will not impose additional burden on its customers, provide certainty of supply and assure it of a long-term competitive pricing 12.1. Moreover, SAJELCO concluded that the commercial terms of the CSE, particularly the generation rate being offered by MPPCL, is advantageous to it. MPPCL’s generation rate is more reasonable compared to other generating companies such as NPC in the near term, and other generation companies utilizing coal as fuel in the long run. In fact, it will generate savings for SAJELCO and its customers. Thus, notwithstanding that a direct negotiation was undertaken by the parties, MPPCL's generation rate offers a competitive and advantageous rate for SAJELCO and its customers. ‘A summary analysis of the power generation rate from MPPCL compared with the power rate by other generating facilities utilizing coal as fuel is presented in tabular form below: \ERC Case No. 2009-053 RC ORDER/August 17, 2009 Page 5 of 19 12.2. SAJELCO did not, likewise, consider NPC as a potential supplier, as the latter may no longer be in the position to supply its required capacity at rates lower than MPPCL considering that the power plants remaining with NPC, after the privatization of its assets, are plants which are less efficient and thus, more expensive to run. 12.3. Notably, on February 16, 2009, the Commission provisionally authorized NPC to increase its basic rates by an average of PhP0.4682/kWh for Luzon in ERC Case No. 2009-004. With the adjustment, NPC's new average basic rate is PhP4.3648/kWh for Luzon, commencing on the February 26, 2009 to March 25, 2009 billing period. The provisionally approved rate is even higher than the basic generation rate charged by MPPCL under the CSEE, even after the same is restated. 12.4. NPC confirmed by way of a Certification dated June 10, 2009 that it cannot commit to supply the electric power requirements of SAJELCO for the whole term of the CSEE between SAJELCO and MPPCL, as it would not be economical for it to serve this customer given the privatization schedule of PSALM. 12.5. In the same Certification, NPC, likewise, expressed that when it assigned the TSC of SAJELCO to MPPCL, it intended that the TSC and the power requirements’ of SAJELCO will be served by MPPCL or other NPC successor generating companies upon expiry of the original term of the TSC. , AYERC Case No. 2009-053 RC ORDER/August 17, 2009 Page 6 of 19 oo customers: MPPCL FSP Base Charge 211,526,420 38107 Performance Discount (9,991,540) (0.1800) Security Discount (6,550,856) (0.1000) Prompt Payment Discount (6,879,521) (0.1059) VAT 22,812,540 0.4110 Net Charges 212,917,044 3.8368 NPG-TOU NPC-TOU 222,964,760 40168 FBHC 1,359,960 0.0245, MRR (10,324,591) (0.1860) PPD (6,420,004) (0.1157) VAT 21,795,913 0.3927 Net Charges 229,376,037 4.1323 Savings 16,458,994 0.2965 13. Considering the urgency of the situation, as SAJELCO’s TSC assigned to FGHPC was then about to expire on February 25, 2009, further aggravated by the lack of interested parties Participating in the competitive selection process for its power supply requirements, it decided to enter into the CSEE with MPPCL, rather than risk not having any power supplier at all considering that there are only a few days left from the bid submission date until the expiration of its TSC. 14. The foregoing commercial advantages and factual circumstances considered, on February 19, 2009, they entered into the CSEE, which is the subject of the instant application. Abstract of the CSEE and Related Information 15. The following are the salient features of the CSEE: 12.6. A summary of MPPCL's base offer generation rate with the NPC-TOU rate is shown in the table below. As earlier mentioned, by sourcing its power supply requirements from MPPCL, SAJELCO would be able to generate savings for its 15.1. Term. The CSEE shall have a term of thirty-six (36) billing periods counted from the Operations Effectivity Date automatically renewed for another twenty-four (24) billing Periods for a total of sixty (60) billing periods, unless earlier terminated in accordance with the CSEE, Under the CSEE, the Operations Effectivity Date occurs on the next immediate twenty-sixth (26) day of the month after the following conditions have been satisfied: a. Approval by the Commission of the CSEE, provided that a provisional authority granted by the ptERC Case No. 2009-053 RC ORDER/August 17, 2009 Page 7 of 19 15.2. 15.3. Commission shall be considered as a satisfaction of this condition; b. Receipt of and written approval by MPPCL of the Security Deposit required to be provided by SAJELCO; and ¢. Written confirmation from the Escrow Account Bank that SAJELCO has established and funded an escrow account. Volume. Under the CSEE, MPPCL shall supply SAJELCO a minimum 56,526,870 kWh of Contract Energy per year for the whole term of the CSE. a. MPPCL shall commence with its obligation to supply power to SAJELCO starting on the Operations Effectivity Date. b. An Allowable Maximum Demand (AMD) is made available which when dispatched is expected to meet SAJELCO's peak power requirements, The AMD will be dispatched to satisfy the Bilateral Contract Quantities (BCQ) of SAJELCO in a manner that would allow it to comply with the requirements of Section 45 (©) of EPIRA, ie, securing ninety percent (90%) Power supply from bilateral supply contracts and ten percent (10%) from the Wholesale Electricity Spot Market (WESM). Any amounts in excess of the AMD or the BCQ nominated for the load of SAJELCO shall be deemed to have been sourced and purchased by MPPCL from the WESM. c. The Contract Energy shall be used to determine the amount that SAJELCO shall pay as minimum charges, d. The latest energy and demand forecast of SAJELCO, as embodied in its latest Distribution Development Plan and the variability of the forecast over the Proposed contractual period, including the estimation Of the potential for a reduction in load, is attached to the application. Total Energy Charge Rate. For electricity supplied by MPPCL, SAJELCO shall pay a Monthly Power Bill which is composed of the Total Energy Charge, National Transmission Corporation (TRANSCO) Service Charge, Generation Service Charges and Value Added Tax applicable to the transaction, and calculated according to the methodology set out in Annex Il of the CSEE. The Total Energy Charge is composed of a Basic or Bilateral Energy AERC Case No. 2009-053 RC ORDER/August 17, 2009 Page 8 of 19 Rate (BER), which is initially set at PhP3.7000 per kWh, and may be adjusted from time to time in accordance with Section 3, Annex II! of the CSEE, multiplied by the Actual Energy or Net Expected Energy Delivery, whichever is higher, and by a Rate Adjustment Index, plus the Imbalance Energy Charge. a. Basic or Bilateral Energy Rate. The BER may be adjusted in accordance with Section 3, Annex Ill of the CSEE, as follows: @ Gi) (iy ) wy) Should the Commission approve an increase in NPC's Basic Generation Rate, MPPCL shall be allowed to adjust the BER in the same amount as NPC's rate increase. Only positive adjustments shall apply, except when the NPC. Test Period(s) used by the Commission in the determination of a negative basic generation rate adjustment cover periods after the date hereof. By June 25, 2009, if the cumulative increases in NPC Basic Generation Rate have not reached a total of PhP0.3315/kWh, the BER shall be restated to PhP4.0315/kWh; By December 25, 2009, if the cumulative increases in NPC. Basic Generation Rate have not reached a total of PhP0.5100/kWh, the BER shall be restated to PhP4.2100/kWh; By June 25, 2010, if the cumulative increases in NPC Basic Generation Rate have not reached a total of PhP0.6205/kWh, the BER shall be restated to PhP4.3205/kWh; and By December 25, 2010, if the cumulative increases in NPC Basic Generation Rate have not reached a total of PhP0.6800/kWh, the BER shall be restated to PhP4.3800/kWh. The BER shall continue at the rate of PhP4.3800/kWh_ thereafter and beyond December 26, 2010. b. Rate Adjustment Index. The Total Energy Charge shall be subject to adjustments in the Rate Adjustment Index (RAI) to reflect changes in foreign exchange, consumer price, and fuel cost, calculated using the formula below as further defined in Section 1, Annex Ill of the CSEE: RAI = {(A/ALF + B) x (FCPIn/FCPlo) + C x (FCIn/FClo) } x (FXRn/FXRo) a jERC Case No. 2009-053 RC ORDER/August 17, 2009 Page 9 of 19 Where A = 5.00%; B = 47.93%; and C = 47.07% FCPIn FCPlo FXRn FXRo FCIn FClo ALF Ave AE AMD The average of the U.S. Consumer Price Index for Capital Equipment (line 63, International Financial Statistics) for the period of the calendar quarter immediately prior to the billing month U.S. Consumer Price Index for Capital Equipment, line 63, International Financial Statistics as of June 2008 The average of the exchange rate of the Philippine Peso to the US Dollar as published by the Bangko Sentral ng Pilipinas for the period of the calendar quarter immediately prior to the billing month PhP 48.00; provided, that when FXRn / FXRo < 1, it shall be deemed to be 1.0000 Fuel Cost Index stated in $/Million Kcal as determined using Argus/McCloskey Coal Price Index Report for “fob Newcastle” for the period of the calendar quarter immediately prior to the billing month US$13.45 per Million kcal Actual Load Factor stated in % of the Customer's Allowable Maximum Demand for the billing period, calculated as follows: ALF = Ave AE / AMD The average of the actual coincident hourly energy demand registered in all Points of Delivery of the Customer in the billing period excluding the interval where the Force Majeure transpired Allowable Maximum Demand The coefficients A, B and C of the RAI formula shall be changed and restated starting on the earlier of designated billing periods identified in Section 4, Annex Ill of the CSE, as follows: () Starting on June 26, 2009: A = 13.62%; B = 43.18%; and C= 43.20%. (i) Starting on December 26, 2009: A = 22.23%; B = 36.40%; and C = 41.37%, (ii) Starting on June 26, 2010: A = 30.85%; B = 28.84%; and C = 40.31%.ERC Case No. 2009-053 RC ORDER/August 17, 2009 Page 10 of 19 (iv) Starting on December 26, 2010: A = 39.47%; B = 20.77%; and C = 39.76%. c. Imbalance Energy Charge. This component of the Total Energy Charge shall be paid to MPPCL in accordance with Section 1, Annex ill of the CSEE. This amount pays for the cost of the customer's imbalance (ie., the quantity of electric energy in ‘excess of the AMD in a WESM trading interval) at a rate which is the positive difference between the WESM ex-post nodal price and the rate MPPCL would have charged under the CSEE (ie., BER X RA\ plus a surcharge of ten percent (10%) d. Discounts. Provided that SAJELCO has no overdue obligation with MPPCL, MPPCL shall grant it with the following discounts: (i) Prompt Payment Discount, (ii) Performance Discount, and (iii) Payment Security Discount, all in accordance with Section 2, Annex Iil of the CSEE €. Generation Rate for the Delivered Power. A summary analysis of the rate impact of the power delivered from MPPCL to SAJELCO is presented in tabular form below. It also shows the step increases and its impact on the rate of SAJELCO: Base | June 26, Particulars Offer | 2009 December 26, 2009 June 26, 2010 December 26, 2010 BER, PhP/kWh 3.7000 | 3.7000 3.7000 3.7000 3.7000 Milestone Adjustment 0.3315 0.5100 0.6205 0.6800 Applicable BER for the period 3.7000 |” 4.0315 4.2100 [4.3205 4.3800 Net Generation Rate After Discounts | 3.4228 |_ 3.9517 4.3454 — 4.6787 “4.9619 TRANSCO Charges 1.4318 | 1.1318 4.1318 4.1318 4.1318 Generation Service Charge (WESM Charges) 0.0100 { 0.0100 0.0100 0.0100 0.0100 [Total Charges 4.5646 | 6.0935 5.4872 5.8205 _| [6.1037 15.4. Energy Purchase from the WESM. For the purpose of Gy sourcing at least ten percent (10%) of its energy requirements from the WESM, SAJELCO shall transact with the WESM through MPPCL. MPPCL shall purchase SAJELCO's energy requirements from the WESM at the applicable WESM rates. However, MPPCL shall charge SAJELCO based on the stipulated energy charge determined under Section 6 of the CSEE, thereby absorbing any fluctuation in electricity price in the WESM. During the Term of the CSEE, SAJELCO agrees to transact with the WESM exclusively through MPPCL to allow the latter to monitor SAJELCO’s compliance with Section 45(c) of the EPIRA. To implement this arrangement, MPPCL shall ApERC Case No. 2009-053 RC ORDER/August 17, 2009 Page 11 of 19 nominate the BCQs of SAJELCO at each WESM trading interval such that in a year's period it would have nominated as its BCQs the equivalent to ninety percent (90%) of ‘SAJELCO's energy supply. The demand of SAJELCO in a WESM trading interval for which no BCQ is declared is an Imbalance - a delivery from WESM that satisfies Section 45, (0) of the EPIRA. In this manner arise the purchase of ten percent (10%) of SAJELCO’s energy from the WESM 16. Characteristics of the Power Capability and Connection Facility. The Masinloc Power Plant is rated at 600 MW Gross and Installed (as opposed to Rated) capacity. ‘As the Masinloc Power Plant is already an existing facility, it was no longer provided a Certification from the Department of Energy (DOE) that the generating capacity is consistent with DOE's Philippine Development Plan (PDP). Said DOE Certification is required in cases of new and proposed generation capacities, 17. Details of the Transmission/Connection Facilities. MPPCL is connected to the Luzon grid via a double circuit 230 kV line to the Kadampat EHV Substation of TRANSCO. SAJELCO is likewise connected to the Luzon grid ‘As such, they will not incur costs in developing or constructing anew a transmission or grid connection project to complement Masinloc Power Plant's capacity, as it is already connected to the grid. It should also be noted that MPPCL is currently not paying costs of ancillary services based on the Open Access and Transmission (OATS) Rules. If it were made to pay ancillary services, MPPCL will charge SAJELCO its ancillary services costs on a pass-through basis. 18. Details of the Procurement Process of Fuel. As earlier stated, MPPCL's Power Plant primarily runs on coal. ‘Treatment of Discounts 19. Pursuant to the policy of the Commission allowing the distribution utilities to pass on to their customers fifty percent (50%) of the prompt payment discount received from NPC in ERC Resolution No. 12, series of 2005', they request for approval of a similar treatment for all discounts available to SAJELCO under the CSEE. As earlier mentioned, these discounts include the Prompt Payment Discount, Performance Discount, and Payment Security Discount. 20. _ In the event that SAJELCO meets the criteria set forth in Section 2, Annex II! of the CSEE which entitles it to these discounts, it should be allowed to reflect at least one-half of the discounts as rate "A Resolution Approving a New Policy on the Treatment of the Prompt Payment Discount A httERC Case No. 2009-053 RC ORDER/August 17, 2009 Page 12 of 19 24 22. 23, 24. feduction to its end-users and that it may use the balance for operating and capital expenditure purposes. The discounts which SAJELCO would be allowed to keep constitute ‘a substantial capital inflow for its operations. Its assured source of capital to finance the expansion, rehabilitation, and upgrading of its power distribution system is the five percent (5%) Reinvestment Fund allowed by the Honorable Commission to be allocated from its gross revenues. It cannot be denied however that the Reinvestment Fund is not enough to sustain the repairs, upgrades, and expansion of its electric power system. If it is not allowed to retain fifty percent (50%) of the discounts granted by MPPCL, it will have substantial difficulty to raise capital either from additional contributions from its members or from debt financing. Thus, by this arrangement, SAJELCO will have access to an assured capital source to enable it to maintain a sustainable operation by ensuring low systems loss and high productivity. Additionally, in using the balance of the discount for operating purpose, SAJELCO may acquire maintenance and repair tools and equipment, as well as software, to further improve its efficiency, productivity and reliability. It will have funds for the remuneration of its officers and employees that is contingent upon and rewards them for their achievement of efficiency and productivity Issuance of a Provisional Authority Provisional Authority Under the Rules. Under Rule 14 of the ERC Rules of Practice and Procedures, the Commission is authorized to issue a provisional authority or interim relief prior to a final Decision in the instant application, provided that the facts and circumstances alleged warrant such remedy. Factual Grounds for Issuance of Provisional Authority. They submit that the following facts and circumstances clearly warrant the issuance by the Commission of provisional authority or interim relief in the instant application 24.1. Pursuant to the letter of the Commission dated February 25, 2009, the transaction between the parties are currently governed by the policy of the Commission that SAJELCO shall only be allowed a pass through of its generation rate equivalent to the approved NPC-TOU rate or the actual cost for the energy supplied by MPPCL, whichever is lower. 24.2, Pending final resolution of the instant application and without @ provisional authority granted, SAJELCO will be unable to avail of the commercial advantages granted to it under its CSEE with MPPCL, such as:ERC Case No. 2009-053 RC ORDER/August 17, 2009 Page 13 of 19 25, 24.3. 24.4, a. Savings for SAJELCO and its customers, as MPPCL's base offer generation rate under the CSEE compares favorably vis-a-vis the NPC-TOU rate; b. Unique discounts offered by MPPCL under the CSEE, which further makes its offer under the CSEE more competitive and advantageous for SAJELCO and its customers; and ©. Purchase in the WESM of ten percent (10%) of ‘SAJELCO’s power supply requirements in order for it to comply with the EPIRA requirement. In the event that SAJELCO sources its power supply or additional requirements from NPC, it may be required to pay it at the Default Wholesale Supplier rate which is ten percent (10%) higher than the NPC basic rate for Luzon or WESM Ex-Post Nodal Energy Price, whichever is higher. In the alternative, should it resort to directly buy from the WESM or purchase power through a direct member, SAJELCO and its customers will be exposed to the volatility of the rates in the WESM, to the detriment and prejudice of its consumers. Likewise, noteworthy is the Certification issued by NPC dated June 10, 2009 that due to the ongoing privatization of its generating assets in the Luzon Grid, it cannot commit to supply the electric power requirements of SAJELCO for the Term of the CSEE as it would not be economical for it to serve said customer from its remaining generation assets. Legal Basis for the Grant of Provisional Authority, They, likewise, submit that Section 3, Rule 14 of the ERC Rules of Practice and Procedure clearly provides legal basis for the grant of provisional authority, as it expressly states that ‘motions for provisional authority or interim relief may be acted upon with or without hearing.” 25.1. 25.2. The aforesaid Rule further provides that the Commission shall act on the motion on the basis of the allegations of the application or petition and other evidences that they have ‘submitted and the comments filed by any interested person, if there be any. The authority of the Commission to grant a provisional authority has been clearly affirmed by the Supreme Court in the case of Freedom from Debt Coalition vs. Energy Regulatory Commission (432 SCRA 157) where the Supreme Court has stressed that the Commission is endowed with the statutory authority to approve provisional rate adjustments under the aegis of Sections 44 and 80 of the EPIRA, in relation to Section 16 (c) of the Public Service Act and Section 8 of Executive Order. No. 172. feERC Case No. 2009-053 RC ORDER/August 17, 2009 Page 14 of 19 26. 27. 25.3, 25.4. 25.5, Verily, in the Freedom from Debt Coalition case, when confronted with the issue of whether the Commission exercised grave abuse of discretion in granting provisional rate adjustment, the Supreme Court emphasized that “like Section 16 (c), C.A. No. 146 and Section 8, E.O. No. 172, Section 4 (e), Rule 3 of the IRR does not require the conduct of a hearing prior to the issuance of a provisional order.” The Supreme Court only emphasized that, as a prerequisite to such issuance, the Commission should consider also the ‘comments of the consumers and the local government units concemed on the application which were filed within thirty (30) days from their receipt of a copy of the application or the Publication thereof. In other words, the Commission must wait for thirty (30) days from service of copies of the application on the interested parties or from the publication ‘of such application before it can issue a provisional order Considering the foregoing, there is clear and sufficient basis that the issuance of a provisional authority or interim relief pending the issuance of a final order or decision in the instant application is imperative, In view of all the foregoing, they submit the instant application for approval of the CSEE for the Commission's urgent and utmost consideration. Prayer They prayed that: 27.4. 27.2. 27.3, 274. Annex “U" of the instant application (Derivations of Basic Energy Rate and Total Energy Charge) be treated as confidential information pursuant to Rule 4, Section 1 of the ERC Rules of Practice and Procedure and prescribing the guidelines for the protection thereof; ‘An Order be issued granting provisional approval/authority for them to implement the provisions of the CSEE pending the issuance of a final resolution in the instant application; SAJELCO be allowed to reflect as rate reduction to its end- users at least one-half of the discounts it will receive from MPPCL and to keep the balance of the discounts for operating and capital expenditure purposes; and The CSEE dated February 19, 2009 be approvedERC Case No. 2009-053 RC ORDER/August 17, 2009 Page 15 of 19 Finding the said application to be sufficient in form and substance with the required fees having been paid, the same is hereby set for initial hearing, expository presentation, pre-trial conference and evidentiary hearings on the following dates and venue: DATE TIME VENUE PARTICULARS Nine o'clock Jurisdictional Hearing, in the morning Expository Presentation and October 22, 2009 | _(9:00A.M.) | SAJELCO’s Board Room, Pre-Trial Conference (Thursday) | Twoo’clock in| Barangay Rafael Rueda, Evidentiary the afternoon Maharlika Road, (Reception of evi = (2:00 P.M.) _| San Jose City, Nueva Ecija | _ presentation of witnesses) Nine o'clock Evidentiary Hearing eee ae the morning (Continuation of presentation ¥ 00 A.M.) of witnesses, if necessary) SAJELCO and MPPCL are hereby directed to cause the publication of the attached Notice of Public Hearing, at their own expense, twice (2x) for two (2) successive weeks in two (2) newspapers of general circulation in the Philippines, with the date of the last publication to be made not later than ten (10) days before the scheduled date of initial hearing. They are also directed to inform SAJELCO’s consumers, by any other means available and appropriate, of the filing of the instant application, their reasons therefor, and of the scheduled hearings thereon Let copies of the application, this Order and the attached Notice of Public Hearing be furnished the Office of the Solicitor General (OSG), the Commission ‘on Audit (COA), and the Committees on Energy of both Houses of Congress. They are hereby requested, if they so desire, to send their duly authorized representatives at the scheduled hearings. feERC Case No. 2009-053 RC ORDER/August 17, 2009 Page 16 of 19, Likewise, let copies of this Order and the attached Notice of Public Hearing be furnished the Offices of the Mayor of San Jose City and the Provincial Governor of Nueva Ecija for the appropriate posting thereof on their respective bulletin boards. SAJELCO and MPPCL are hereby directed to furnish all those making requests therefor with copies of the application and its attachments, subject to reimbursement of reasonable photocopying costs On the date of the initial hearing and pre-trial conference, SAJELCO and MPPCL must submit to the Commission their written Compliance with the jurisdictional requirements attaching therewith, methodically arranged and duly marked, the evidences on the actual posting and publication of the Notice of Public Hearing consisting of certifications issued to that effect, signed by the aforementioned Mayors and Governor or their duly authorized representatives, bearing the seals of their offices, and the affidavits of the Editors or Business Managers of the newspapers where the said Notice of Public Hearing were Published together with the complete issues of the said newspapers, and such other proofs of compliance with the requirements of the Commission. SAJELCO and MPPCL and all interested parties are directed to submit, at least five (5) days before the date of initial hearing and pre-trial conference, their fespective Pre-trial Briefs containing, among others: @. a summary of admitted facts and proposed stipulation of facts; b. the issues to be tried or resolved;ERC Case No. 2009-053 RC ORDER/August 17, 2009 Page 17 of 19 ¢. the documents or exhibits to be presented, stating the purposes and Proposed markings thereof; and d. the number and names of the witnesses, with their written testimonies in an individual affidavit form, to be attached to the Pre-trial Brief. Failure of SAJELCO and MPPCL to submit the required Pre-trial Brief and Judicial Affidavits of their witnesses within the prescribed period shall be a ground for cancellation of the scheduled hearing, and the resetting of which shall be six (6) months from said date of cancellation. As part of the pre-trial conference, SAJELCO and MPPCL must also be Prepared to make an expository presentation on their application, aided by whatever communication medium that they may deem appropriate for the Purpose, in order to put in plain words and explain, for the benefit of the consumers and other concerned parties, what the application is all about and the reasons and justifications being cited in support of the rate adjustments prayed for. The Commission has a mandate to protect the interest of the consumers insofar as they are affected by the rates, particularly, in the light of the pervading global financial crises. An initial evaluation of the instant application discloses that the CSEE entered into by and between SAJELCO and MPPCL will redound to the benefit of SAJELCO’s consumers in terms of continuous, reliable and efficient power ‘supply as mandated by the EPIRA [Section 2. Declaration of Policy — (b) “to 2ERC Case No. 2009-053 RC ORDER/August 17, 2009 Page 18 of 19 ensure the quality, reliability, security and affordability of the supply of electric power’). WHEREFORE, the foregoing premises considered, the Commission hereby PROVISIONALLY APPROVES the application filed by San Jose City Electric Cooperative, Incorporated (SAJELCO) and Masinloc Power Partners Company, Limited (MPPCL), with prayer for provisional authority, subject to the following conditions: a. The final generation cost that can be recovered shall be determined by the Commission in its Decision in the instant application; and b. In the event that the rates provisionally approved are found to be higher than the final rates, the amount corresponding to the excess shall be refunded by SAJELCO to its customers by crediting the same in their electric bills over a period to be determined by the Commission SO ORDERED. Pasig City, August 17, 2009. eee 6 [dees NAIDA G. CRUZ-DUCUT { Chairperson ~~ Ke / RAUF A. TAN EJANDRO ZC Commissioner Commissioner MARIA TERI Re CASTANEDA, Comnjissioner Promumscneneron one CorjmissionerERC Case No. 2009-053 RC ORDER/August 17, 2009 Page 19 of 19 Copy Fumished: 1. 10. 1 Soriano and Pobre Law Office Counsel for SAJELCO A.O. Pascual St., San Jose City, Nueva Ecija Puyat Jacinto & Santos Law Counsel for MPPCL 12" Floor, VGP Center, 6772 Ayala Avenue, Makati City San Jose City Electric Cooperative, Incorporated (SAJELCO) Barangay Rafael Rueda, Maharlika Road, San Jose City, Nueva Ecija Masinloc Power Partners Company, Limited (MPPCL) Barangay Bani, Masinloc, Zambales Office of the Solicitor General (OSG) 34 Amorsolo Street, Legaspi Village, Makati City, Metro Manila Commission on Audit (COA) Commonwealth Avenue, Quezon City, Metro Manila Senate Committee on Energy GSIS Bldg., Roxas Blvd., Pasay City, Metro Manila House Committee on Energy Batasan Hills, Quezon City, Metro Manila Office of the City Mayor San Jose City, Nueva Ecija Office of the Provincial Governor Province of Nueva Ecija Mr. Edgardo G. Lacson President Philippine Chamber of Commerce and Industry (PCC!) 3" floor, ECC Building, Se. Gil Puyat Avenue, Makati CityRepublic of the Philippines ENERGY REGULATORY COMMISSION San Miguel Avenue, Pasig City IN THE MATTER OF THE APPLICATION FOR APPROVAL OF THE CONTRACT FOR THE SUPPLY OF ELECTRIC ENERGY BETWEEN SAN JOSE CITY __ELECTRIC COOPERATIVE, INCORPORATED AND MASINLOC POWER _ PARTNERS COMPANY, LIMITED, WITH PRAYER FOR PROVISIONAL AUTHORITY SAN JOSE CITY _ ELECTRIC. COOPERATIVE, INCORPORATED (SAJELCO) AND MASINLOC POWER PARTNERS COMPANY, LIMITED (MPPCL), Applicants. ERC CASE NO. 2009-053 RC DOCKETED NOTICE OF PUBLIC HEARING TO ALL INTERESTED PARTIES: Notice is hereby given that on July 16, 2009, San Jose City Electric Cooperative, Incorporated (SAJELCO) and Masinloc Power Partners Company, Incorporated (MPPCL) filed a joint application for approval of their Contract for the Supply of Electric Energy (CSE), with prayer for provisional authority. In the said application, SAJELCO and MPPCL alleged, among others, that The Applicants 1. SAJELCO is a stock electric cooperative registered under the Cooperative Development Authority (CDA), with office address at Barangay Rafael Rueda, Maharlika Road, San Jose City, NuevaERC Case No. 2009-053 RC NOTICE OF PUBLIC HEARING/August 17, 2009 Page 2 of 16 Ecija. It has been granted a franchise to distribute electric service in San Jose City, Nueva Ecija (Franchise Area). MPPCL is a limited partnership established in the Philippines to invest in, acquire, finance, complete, construct, develop, improve, operate, maintain and hold power production and electric generating facilities in the country, with principal office address at Barangay Bani, Masinloc, Zambales. It is a subsidiary of AES Corporation, a global power generation and power distribution company with assets in twenty-eight (28) countries in Asia, North America, South America, Europe and Africa, It recently acquired and took over the operations of the Masinloc Coal-Fired Thermal Power Plant (Masinloc Power Plant), a six hundred megawatt (600 MW) power plant located in Masinloc, Zambales, through a competitive bidding process managed by the Power Sector Assets and Liabilities Management Corporation (PSALM) Nature of the Application Pursuant to Rule 20 (8) of the ERC Rules of Practice and Procedure, approved on June 22, 2008 in Resolution No. 38, Series of 2006, and Resolution No. 16, Series of 2008, entitled "A Resolution Adopting Policies to Govern the Transition Supply Contracts Which Have Been Assigned and Transferred to National Power Corporation Successor Generating Companies”, this application is submitted to the Commission for its review and approval of the CSEE dated January 21, 2009 executed by and between SAJELCO and MPPCL. ents In compliance with Rule 6 of the said ERC Rules of Practice and Procedure, they have furnished the Sangguniang Panlungsod of San Jose City and the Sangguniang Panlalawigan of Nueva Ecija, with copies of the instant application and accompanying documents. Furthermore, they have caused the publication of the present application in its entirety in a newspaper of general circulation in SAJELCO's franchise area. Statement of Facts The provisions of Republic Act No. 9136, otherwise known as the Electric Power Industry Reform Act of 2001 (EPIRA), called for the privatization of the power generation assets of the National Power Corporation (NPC) in order to promote competition in the power sector and to reduce the price of electricity in the Philippines. TheERC Case No. 2009-053 RC NOTICE OF PUBLIC HEARING/August 17, 2009 Page 3 of 16 10, 11. Masinloc Power Plant was one of the power generation assets of the NPC that was already privatized. MPPCL acquired the Masinloc Power Plant as it was the winning bidder in the competitive bidding process managed by PSALM. The acquisition was perfected through an Asset Purchase Agreement (APA) dated July 26, 2007. In connection with the bidding of the Pantabangan Hydro Electric Power Plant, the Contract for the Supply of Electric Energy or Transition Supply Contract (TSC) between NPC and SAJELCO was assigned to First Gen Hydro Power Corporation (FGHPC), the winning bidder. The original term of the TSC between NPC and SAJELCO that was assigned to FGHPC expired on February 25, 2009. Prior to the expiry of the TSC on February 25, 2009, and as SAJELCO and FGHPC no longer intended to extend their TSC, SAJELCO has undertaken a competitive selection process by inviting interested entities to supply its power requirements in its Franchise Area to ensure the quality, reliability, security and affordability of supply of electric power for its consumers. The said competitive selection was conducted as follows: 9.1. SAJELCO published the Invitation to Submit Bid Proposal for its power requirements on January 7, 2009 in Balita, a newspaper of general and national circulation in the Philippines. 9.2. On January 12, 2009, MPPCL submitted its letter of intent to Participate in the competitive selection process 9.3. On the deadline set for the submission of Letter of Intent on January 19, 2009 and bid proposals on January 27, 2009, ‘only MPPCL_ has submitted the requisite documents. Considering SAJELCO's urgent need for a new power supplier as the TSC assigned to FGHPC was then about to expire on February 25, 2009 and in accordance with its bidding rules, SAJELCO decided to proceed with the evaluation of MPPCL’s proposal. As such, they proceeded with the negotiation of the terms of their new bilateral power supply contract. Pending the execution, Processing, filing an application and approval of their bilateral power supply contract by the Commission, the parties entered into an Interim Contract for the Supply of Electric Energy (ICSEE), where they agreed to extend the TSC for another six (6) billing Periods starting from February 26, 2009 or until August 25, 2009. They sought the approval of the ICSEE with the Commission The Commission, in its letter dated February 25, 2009, however, considered the ICSEE as a new bilateral power supply contractERC Case No. 2009-053 RC NOTICE OF PUBLIC HEARING/August 17, 2009 Page 4 of 16 Commercial between the parties, the approval of which must be in accordance with the “Guidelines for the Recovery of Costs for the Generation Component of the Distribution Utilities Rates.” 11.1. The Commission further clarified that in the absence of any approval, the transaction between the parties shall be governed by the policy of the Commission that the concerned distribution utility shall only be allowed a pass through of its generation rates equivalent to the approved NPC Time-of-Use (TOU) rate or the actual cost of energy supplied, whichever is lower. 11.2. The Commission further directed the parties to seek the approval of the ICSEE or their new bilateral contract in accordance with the ERC Rules of Practice and Procedure. Advantage of MPPCL’s Generation Rate 12. SAJELCO concluded, after being satisfied with MPPCL’s compliance and performance of its obligations under the assigned TSC, that it would be in the best interest of its consumers if it enters into a new bilateral power supply contract with MPPCL rather than seek out for other power suppliers, as its bilateral contract with MPPCL will not impose additional burden on its customers, provide certainty of supply and assure it of a long-term competitive pricing. 12.1. Moreover, SAJELCO concluded that the commercial terms of the CSEE, particularly the generation rate being offered by MPPCL, is advantageous to it. MPPCLs generation rate is more reasonable compared to other generating companies such as NPC in the near term, and other generation companies utilizing coal as fuel in the long run. In fact, it will generate savings for SAJELCO and its customers. Thus, notwithstanding that a direct negotiation was undertaken by the parties, MPPCL’s generation rate offers a competitive and advantageous rate for SAJELCO and its customers. A summary analysis of the power generation rate from MPPCL compared with the power rate by other generating facilities utilizing coal as fuel is presented in tabular form below:ERC Case No. 2009-053 RC NOTICE OF PUBLIC HEARING/August 17, 2009 Page 5 of 16 2280 [seq oie |_| som eae ae aes 12.2. SAJELCO did not, likewise, consider NPC as a potential supplier, as the latter may no longer be in the position to supply its required capacity at rates lower than MPPCL considering that the power plants remaining with NPC, after the privatization of its assets, are plants which are less efficient and thus, more expensive to run 12.3. Notably, on February 16, 2009, the Commission provisionally authorized NPC to increase its basic rates by an average of PhP0.4682/kWh for Luzon in ERC Case No. 2009-004. With the adjustment, NPC’s new average basic rate is PhP4.3648/kWh for Luzon, commencing on the February 26, 2009 to March 25, 2009 billing period. The provisionally approved rate is even higher than the basic generation rate charged by MPPCL under the CSEE, even after the same is restated. 12.4. NPC confirmed by way of a Certification dated June 10, 2009 that it cannot commit to supply the electric power requirements of SAJELCO for the whole term of the CSEE between SAJELCO and MPPCL, as it would not be economical for it to serve this customer given the privatization schedule of PSALM. 12.5. In the same Certification, NPC, likewise, expressed that when it assigned the TSC of SAJELCO to MPPCL, it intended that the TSC and the power requirements’ of SAJELCO will be served by MPPCL or other NPC successor generating companies upon expiry of the original term of the TSC.