'-~ ~'

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Republic of the Philippines

ENERGY REGULATORY COMMISSION
San Miguel Avenue, Pasig City

IN THE MATTER OF THE

APPLICATION FOR THE
APPROVAL OF THE AMENDED
POWER SUPPLY AGREEMENT
(PSA) BETWEEN STA. CLARA
POWER CORPORATION (SCPC)
AND ORIENTAL MINDORO
ELECTRIC COOPERATIVE, INC.
'(ORMECO), WITH PRAYER FOR
THE ISSUANCE OF PROVISIONAL
AUTHORITY

ERC CASE NO. 2013-164 RC

STA. CLARA POWER

CORPORATION (SCPC) AND
ORIENTAL MINDORO ELECTRIC
COOPERATIVE, INC. (ORMECO), DOCKETElJ
Applicants. Date: .p'Ig~.¥Lf~l~
)(- - - - - - - - - - - - - - - - - - - - -- - - - - )( By:- ~ _._-V£ _,-_~

ORDER

On August 2, 2013, Sta. Clara Power Corporation (SCPC) and

Oriental Mindoro Electric Cooperative, Inc. (ORMECO) filed an
application for the approval of their Amended Power Supply'
Agreement (APSA), with prayer for the issuance of provisional
authority.

Acting on SCPC and ORMECO's prayer for provisional

authority, the Commission initially reviewed the instant application, as
follows:

1. PARTIES TO THE CONTRACT

SCPC is a generation company duly organized and existing

under and by virtue of the laws of the Republic of the Philippines. It
has its principal office at the Highway 54 Building, #986 Stanford
Street corner EDSA, Wack Wack, Mandaluyong City.
 ...'...
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......: ERC CASE NO. 2013-164 RC
ORDER/October 7, 2013
Page 2 of 15

, ORMECO is a non-stock, non-profit, service oriented electric

cooperative organized and existing under and by virtue Presidential
Decree No. 269, as amended, otherwise known as the National
Electrification Administration Act with office address at Bgy. Sta.
Isabel, Calapan City, Oriental Mindoro. It has an exclusive franchise
to distribute electricity in its area of coverage in Oriental Mindoro,
which encompasses Calapan City and the Municipalities of Baco,
Bansud, Bongabong, Bulalacao, Gloria, Mansalay, Naujan,
Pinamalayan, Pola, Puerto Galera, Roxas, San leodoro, Socorro and
Victoria.

2. ORMECO's Need for Additional Capacity

Presently, the energy and capacity demands of Oriental

Mindoro are continuously rising and thus, there is a need for an
additional supply of power. Its Compound Annual Growth Rate
(CAGR) for the last five (5) years was at 6.5%, to wit:

Historical Kwh Energy and Peak Demand

CAGR 2004 to 2012 5.26% - - -
CAGR 2007 to 2012 6.51% - - -
Average Peak
Period kWh Growth
Demand Demand
2004 113,947,687 7.55% 13.0077 -
2005 124,178,399 8.98% 14.1756 -
2006 113,846,430 -8.32% 12.9962 -
2007 125,245,175 10.01% 14.2974 -
2008 128,306,202 2.44% 14.6468 -
2009 138,574,716 8.00% 15.8190 26.085
2010 153,114,691 10.49% 17.4788 27.783
2011 157,191,175 2.66% 17.9442 28.931
2012 171,670,771 9.21% 19.5971 30.33

3. ORMECO'S Power Requirements

As of January 2013, the National Power Corporation (NPC)

remains to be the single largest source of its power supply.
ORMECO's power supply requirements are not sufficient, although
.there is still a considerable un-served energy from other suppliers, to
address the increasing demands from its electricity consumers.
, ,
ERC CASE NO. 2013-164 RC
ORDER/October 7,2013
Page 3 of 15

Shown below is ORMECO's supply scenario:

Total Unserved
To Date
Installed Contracted Generation Energy
IPP's Actual
Capacity Energy/Mo. (2012) (2012)
Capacity
(kWh) (kWh)
NPCI
Cummins
11 MW 8MW 1,500,000.00 6,793,759.30 -
Power One 5.5MW 4.2MW 1,500,000.00 8,920,170.00 9,079,830.00
Ormin 6.4 MW 5.4 MW 3,800,000.00 39,858,798.00 5,471,202.00
Linao
Cawayan 2.1 MW 1.9MW - 7,336,048.00 -
Mini Hydro
Dulangan
Mini Hydro
1.6MW 1.6MW - 9,645,183.80 -
Global 7.5MW 3.0MW 3,600,000.00 37,972,980.00 5,227,020.00
TOTAL 34.1 MW 24.1 MW . 171,670,771.10 (6,416,771.10)

In 2012, ORMECO requested NPC for an increase in contract

energy and equivalent demand as well as an extension of the term of
its CSEE.

Only interim measures were granted by the NPC-SPUG since it

was merely a "transition" electricity supplier in view of the privatization
of its power generation facilities and the privatization of supply and
services of viable SPUG areas.

Notably, ORMECO's peak demand for 2013 is 32.32 MW. It is

expected to rise every year reaching 50.25 MW in 2022 while the
supply is not sufficient to meet its current demand. Thus, the
construction, development and operation of the 8 MW Catuiran
Hydroelectric Power Plant (CHPP) is necessary.

4. ORMECO's Procurement Process

Considering that SCPC's Initial Contract Price (ICP) of PhP6.55

per kWh is lower than both the Subsidized Approved Generation Rate
(SAGR) for Mindoro of PhP6.5896 and its own True Cost of
Generation Rate (TCGR), ORMECO decided to directly negotiate
with SCPC.
, ,
ERC CASE NO. 2013-164 RC
ORDER/October 7,2013
Page 4 of 15

5. Salient Features of the APSA

Project Type Build-Own-and Operate (BOO)

Type of Plant Run-of-River Hydro Power Plant

Type of Operation Baseload, Peaking, Standby and Reserved

Power

Cooperation Period Twenty-five (25) years commencing on

commercial operations of the Hydro Power
Plant. The terms of the APSA shall be
subject to review and negotiations every
five (5) years

Expected Commercial December 2016

Operation

Installed/Dependable 8 MW /4.4 MW
Capacity

Annual Contracted 38,544,000 kWh

Energy

Energy Off-Take ORMECO shall accept all deliveries except

due to force majeure, or for causes beyond
its reasonable control due to the intermittent
nature of hydroelectric power. The quantity
of electricity delivered to ORMECO by the
Catuiran Power Plant shall be monitored,
measured and recorded by both parties in
accordance with metering procedures per
Third Schedule. Power will be delivered to
the nearest ORMECO Substation through
the SCPC Interconnection Line and
monitored by metering points at the delivery
point or ORMECO Substation

Delayed Payment ORMECO shall pay interest on the delayed

payment, calculated at the Treasury Bill
Rate prevailing on the Payment Date plus
two percent (2%) per annum, from the
payment date until the delayed payment is
received by SCPC
ERC CASE NO. 2013-164 RC
ORDER/October 7,2013
Page 5 of 15

6. Generation Fees

The parties agreed that while Oriental Mindoro is not yet

connected to the grid, SCPC shall charge an ICP of PhP6.55/kWh,
subject to the approval of the Commission. However, the moment
that the ORMECO's franchise area becomes part of the grid, the ICP
shall be substituted by the TCGR of SCPC in determining the Total
Generation Fee (TGF) due from ORMECO subject to the approval of
the Commission.

ORMECO has the right to renegotiate the TGF by written notice

within thirty (30) days from connection to the grid. SCPC, however,
has the option to terminate the renegotiation by agreeing to the
application (prior to the connection to the grid) of the original formula
as contained in the instant application and approved by the
Commission.

The Total Generation Fee (TGF) shall be the following:

Total Generation Fee (TGF) Formula:

TGF = ED x [ICP x (CPln/BCPlo )]

Where:
TGF = Total Generation Fee
ED = Energy Delivered during billing period
ICP = Initial Contract Price
SCPlo = Sase CPI: CPI for the period a month
before the contract was signed
CPln = CPI for period a month before the
anniversary date of contract signing of
the current year

7. Force Majeure

Failure on the part of either party in the performance of its

obligations or duties shall be excused to the extent attributable to
force majeure. The party whose ability to perform its obligations so
affected shall notify the other party in writing stating the cause and
such affected party shall do all reasonably within its power to remove
such cause.
ERC CASE NO. 2013-164 RC
ORDER/October 7,2013
Page 6 of 15

DISCUSSION

A. SCPC's Proposed Generation Rate

The Commission considered the following components in

determining the reasonableness of the proposed rates based on the
calculation of the expected cost of generation:

a. Capital Recovery Fee (CRF) - a capital related element

that will allow the SCPC to recover the cost of its
investment over the life of the plant together with a
reasonable rate of return.

b. O&M Fee - a component to recover operating and

maintenance costs. The power plant's O&M cost is
commonly composed of local and foreign components,
where the local O&M cost represents locally denominated
plant operating cost such as salaries, wages, overhead
and technical expenses, while foreign O&M cost
represents maintenance of imported spare parts,
supplies, and all other cost associated with the said parts.

Based on the documents submitted, SCPC derived its TCGR,

as follows:

- . .. - - - -- --
I
.. _."
_.._.fppl_i~~b~e_R.~teJ~t~eginning of ~016 - J

Return on Capital (ex-tunnel), PhP 140,656,759.31

Return on Capital (tunnel), PhP 67,201,253.97
Return on Working Capital, PhP 557,237.74
Depreciation, PhP 56,561,348.00
OPEX, PhP 67,223,469.00
Rate (Revenue Requirements), PhP 332,200,068.00
Billing Determinant, kWh 38,544,000
True Cost of Generation Rate PhP8.6187/kWh

The Commission noted that, although SCPC's TCGR is

equivalent to PhP8.6187/kWh, it offered to ORMECO an ICP of
PhP6.55/kWh based on the result of their negotiation.
 ERC CASE NO. 2013-164 RC
ORDER/October 7,2013
Page 7 of 15

The Commission initially evaluated the proposed rates based

on the documents submitted, as follows:

A.1 Total Project Cost

The proposed total cost of the project is PhP2.089 Billion,

which consists mainly of the acquisition cost of the power plant,
to wit:

... ,~

Capital Cost (ex-tunnel) 1,265,422,178

Capital Cost (tunnel) 604,577,822
Total Capital Cost 1,870,000,000
Add: Interest During Construction 219,613,291
Total Capital Cost wllDC 2,089,613,291.00

The Commission evaluated the project costs and the

details of the breakdown to ensure that costs/expenses were
properly allocated and accounted and to prevent double
inclusion in the costing or redundancy of cost inclusion.

It was observed that SCPC's project cost is significantly

higher than the previously approved run-of-the-river power plant
due to the cost attributed with the construction of tunnel which
covers 32% of the capital expenditure. Thus, the Commission
considers the cost of tunnel as an unusual account since it has
not yet determined the cost of hydro-power plants using tunnel
water ways. Although it may be considered as a legitimate
expense for hydro facilities, the same should be substantiated
in the final determination of its project cost.

Shown below is comparison of the project cost and CRF

computed by SCPC and the Commission:

..
~ ~ijl,itt:m!Jil
~;.j~~_Wrh
v'
iiw i,..{.\!iY.D1rr;Iuf1itU:o-mfl
" , ,;_,' y>t'h" ;'/'N ,<'---', ')!

Capital Cost (ex-tunnel), PhP 1,265,422,178.00 1,265,422,178.00 1,265,422,178.00

Capital Cost (tunnel), PhP 604,577,822.00 604,577,822.00
Interest During Construction, PhP 219,613,291.00 140,652,050.00 124,434,561.88
Total Project Cost, PhP 2,089,613,291.00 2,010,652,050.00 1,360,600,907.12
CRF, PhP/kWh 6.8751 5.7053 3.8640
ERC CASE NO. 2013-164 RC
ORDER/October 7,2013
Page 8 of 15

The Commission noted that the project cost with tunnel

entails a CRF of PhP5.7053/kWh while without tunnel is a CRF
of PhP3.8640/kWh or a difference of PhP1.8414/kWh.

Since SCPC has not yet substantiated the cost allocated

to the tunnel facility, the Commission deems it appropriate to
defer consideration on the costing.

Meantime, the Commission adopted the FIT for run-of-

the-river for purposes a provisional authority.

Shown below is the comparison of SCPC's calculation of

its proposed rate and the Commission's calculation with and
without the tunnel cost:

SCPC The Commission

Cost Proposed (PhP/kWhl
Component Rate FIT Without
With Tunnel
(PhP/kWh) (PhP/kWh) Tunnel
CRF 6.8751 - 5.7053 3.8640
O&M Fee 1.7436 - 1.2169 1.2169
TOTAL Rate 8.6187 5.90 6.9222 5.0809

From the above table, the FIT is lower than the CRF with
tunnel cost by PhP1.0222/kWh and higher than without the
tunnel cost by PhPO.819/kWh

A.2 Weighted Average Cost of Capital (WACC)

SCPC submitted a post-tax WACC of 9.95%> based on a

6.50/0cost of debt and 18% cost of equity computed as follows:

WACC
Debt Element
Cost of Debt Net of tax shield 6.5%
Wei ht of Debt 70%
4.55%

18%
30%
5.40%
WACC 9.95%
" .
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, ERC CASE NO. 2013-164 RC
ORDER/October 7,2013
Page 9 of 15

The project is funded by seventy percent (70%) debt and

thirty percent (30%) equity. The 70% of the project cost shall be
funded through loan from the Metrobank in the amount of
PhP1.5 Billion with an indicative interest rate of seven percent
(7%) per annum.

The Commission used an updated cost of equity of

14.95% derived based on an updated market data for CY 2013.

Shown below is the summary of SCPC's proposed WACC

and the Commission's calculated WACC:

Particulars SCPC The Commission

Debt Element:
Pre-Tax Cost of Debt - 7.00%
Post-Tax Cost of Debt 6.50% 6.30%
Weight of Debt 70% 70%
4.55% 4.41%
Equity Element
Cost of Equity 18.00% 14.95%
Weight of Equity 30% 30%
5.40% 4.49%
Post-tax WACC 9.95% 8.90%
Pre-tax WACC 14.20% 9.88%

A.3 Billing Determinant

The SCPC's Catuiran Hydroelectric Power Plant consists

of a generating unit with an installed capacity of 8 MW and a
net dependable capacity of 4.4 MW.

Shown below is the computation of the annual saleable

generation of the plant (Billing Determinant):

Installed Capacity 8MW

Multiplied by:
Plant Capacity Factor 55%
No. of hours/year 8,760
Billing Determinant (kWh) 38,544,OOOkWh
ERC CASE NO. 2013-164 RC
ORDER/October 7,2013
Page 10 of 15

A.4 Derivation of the CRF

The Commission derived a CRF of PhP5.7053/kWh

based on the following data:

2,010,652,050.00
9.88%
25 Years
219,525,477.97
PhP380,562.26
219,906,040.22
38,544,000
5.7053
Note: Return on Working Capital was computed using the recommended WACC
multiplied to 2 months of Working Capital Requirements for Operation &
Maintenance Expense

A.5 Operations and Maintenance Fee

Operating and Maintenance (O&M) costs are the

recurring expenses which are related to the operation of a
business or to the operation of the power plant facilities.

Based on the proposed tariff structure, ORMECO shall

pay SCPC's O&M Fee of PhP1. 74/kWh based on annual O&M
Expense of PhP67,223,469.00, subject to adjustment
depending on the rise and fall of the economic factors as
indicated in the APSA.

Below is the computation of the proposed SCPC O&M

Fee:

, Operation and Maintenance Fee

AnnualO&M Ex ense PhP67,223,469.00
Contracted Ca acit 38,544,000kWh
FOMF PhP1.74/kWh

The reasonableness of the O&M cost may be best

established and validated by referring to the historical cost of
operations of the power plant as it reflects the power plant's
true cost of generation. In the absence of such historical
information, the Commission used the data submitted by the
applicants.
ERC CASE NO. 2013-164 RC
ORDER/October 7,2013
Page 11 of 15

Shown below is the comparison of SCPC's pr.oposed

.. -O&M and the. Commission's Approved O&M for run-of~river
. 'hydroelectric power plants:

@t!l!iliThlID
~

ROMELCO
~~
~
2010-052 RC
~" ..
CHPC
~
~

Luzon 0.900
~
1.1228
NUVELCO 2010-126 RC Smith Bell Luzon 1.800 1.5200
AURELCO 2011-013 RC San Luis MHEPP Luzon 0.800 1.0079
ORMECO 2013-164 RC Catuiran HEPP Luzon 8.000 1.7441

It can be gleaned from the above, that SCPC's proposed

O&M fee is highest compared to the approved O&M for run-of-
river hydroelectric power plants in the Philippines due to the
nature of the project.

For purposes of a provisional authority, the Commission

adopted an O&M fee of PhP1.2169/kWh computed as the
average O&M Fee among the bench marked power plants in the
meantime that SCPC has not yet substantiated its proposed
cost.

For the indexation formula, SCPC provided a 3.5%

increase in Philippine CPI per annum. The base month used is
May 2013.

In the event that SCPC's TCGR exceeds the SAGR, the

Commission believes that SCPC should be allowed to recover a
rate equal or lower than SAGR.

ORMECO did not undergo the Competitive Selection

Process (CSP) since the agreed ICP rate is lower than the
SAGR.

Shown below is the comparison of SCPC's proposed rate

and the Commission's approved rate.

SCPC's
Commission's
Proposed Rates
Approved Difference
Particulars (PhP/kWh)
Feed-In-Tariff (PhP/kWh)
Per TCGR PerPSA
(PhP/kWh)
Calculation Rate
Capacity Fee 6.8751 - - -
O&M Fee 1.7436 - - -
ICP/TCGR 8.6187 6.55 5.90 (0.65)
, ,
ERC CASE NO. 2013-164 RC
ORDER/October 7,2013
Page 12 of 15

Although SCPC's TCGR is equivalent to PhP8.6187/kWh, it

offered to ORMECO an ICP of PhP6.55/kWh based on the result of
their negotiation.

The Commission, however, bench marked the rate based on the

approved FIT for run-of-the-river hydroelectric power plant.

B. Rate Impact

The Commission initially calculated the estimated rate impact

using the actual kilowatt-hour purchases of ORMECO from its
existing suppliers and their corresponding generation cost for the
June 2013 billing period based on the documents it submitted in
compliance with the Automatic Generation Rate Adjustments (AGRA)
requirements, to wit:

Without SCPC Without SCPC

Supplier Rate Rate Increase
% of Mix % of Mix
(PhP/kWh) (PhP/kWh) (Decrease)
NPC/Cummins 2.29% 10.9932 1.91% 10.9932 -
GBH 18.39% 11.1014 15.40% 11.1014 -
ORMIN Power 25.38% 7.3804 21.25% 7.3804 -
Power One (MIPGC) 11.34% 7.3804 9.50% 7.3804 -
DMHP-ORMECO 4.72% 1.9635 3.95% 1.9635 -
LCMHP - ORMECO 4.53% 5.9000 3.80% 5.9000 -
MGC 33.34% 7.3804 27.92% 7.3804 -
Catuiran Hvdro - - 16.27% 5.9000 -
Blended Rate 100.00% 7.8243 100.00% 7.5113 (0.3130)

The Commission has a mandate to protect the interest of the

electricity consumers insofar as they are affected by the rates, by
ensuring that the tariffs are consistent with the principles of full
recovery of prudent and reasonable costs.

An initial evaluation of the instant application, disclosed that the

APSA entered into by and between ORMECO and SCPC will
redound to the benefit of ORMECO's member-consumers in terms of
continuous, reliable, efficient and affordable power supply as
mandated by Republic Act No. 9136 [Section 2. Declaration of Policy
- (b) "to ensure the quality, reliability, security and affordability of the
supply of electric power'].
ERC CASE NO. 2013-164 RC
ORDER/October 7,2013
Page 13 of 15
WHEREFORE, the foregoing premises considered, the
Commission hereby PROVISIONALLY APPROVES the Amended
Power Supply Agreement (APSA) entered into by and between
Oriental Mindoro Electric Cooperative, Inc. (ORMECO) and Sta.
Clara Power Corporation (SCPC), subject to the following conditions:

1. Applicable Rate shall be the approved Feed-In-Tariff (FIT)

for run-of-the-river hydro power plant amounting to
PhP5.90/kWh;

2. Notwithstanding the adjustment in the O&M

(PhP1.2169/kWh) due to the CPI adjustments, SCPC's
charges to ORMECO shall in no case exceed the
Subsidized Approved Generation Rate (SAGR);

3. SCPC is directed to submit its AFS and final Independent

Engineer's Report, as soon as they become available;
and

4. 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 SCPC
to ORMECO and the latter shall pass it on to its
consumers by crediting the same in their electric bills over
a period to be determined by the Commission. On the
other hand, if the final rates are higher than the
provisionally approved rates, the resulting additional
charges shall be collected by SCPC from ORMECO and
the latter shall pass it on to its consumers over a period to
be determined by the Commission.

SO ORDERED.

Pasig City, October 7,2013.

(On Leave)
ZENAIDA G. CRUZ-DUCUT
Chairperson

~ DO ~
ALFR GL~ICTORIA
,if~
~
tYAP-TARUC
Commissioner Commissioner

JOSEFINA PATRI A. MAGPALE-ASIRIT

Co
 . -.
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ERC CASE NO. 2013-164 RC
ORDER/October 7,2013
Page 14 of 15

Copy furnished:

1. ATTY. CECILIA R. LAYUG

Counsel for SCPC and ORMECO
Unit 2904, One San Miguel Building
San Miguel Avenue corner Shaw Boulevard
Ortigas Center, Pasig City, Metro Manila

2. Sta. Clara Power Corporation

Highway 54 Building, #986 Stanford Street corner EDSA, Wack
Wack, Mandaluyong City.

3. Oriental Mindoro Electric Cooperative, Inc. (ORMECO)

Simaron, Calapan City, Oriental Mindoro

4. Office of the Solicitor General

134 Amorsolo Street, Legaspi Village
Makati City, Metro Manila

5. Commission on Audit
Commonwealth Avenue
Quezon City, Metro Manila

6. Senate Committee on Energy

GSIS Bldg., Roxas Blvd., Pasay City
Metro Manila

7. House Committee on Energy

Batasan Hills, Quezon City, Metro Manila

8. National Electrification Administration

NIA Road, Diliman, Quezon City

9. The City Mayor

Calapan, Oriental Mindoro

10. The Municipal Mayor

Naujan, Oriental Mindoro

11. The Municipal Mayor

Baco, Oriental Mindoro

12. The Municipal Mayor

Puerto Galera, Oriental Mindoro

13. ,The Municipal Mayor

San Teodoro, Oriental Mindoro

14. The Municipal Mayor

Victoria, Oriental Mindoro
ERC CASE NO. 2013-164 RC
ORDER/October 7,2013
Page 15 of 15

15. The Municipal Mayor

Bansud, Oriental Mindoro

16. The Municipal Mayor

Bongabong, Oriental Mindoro

17. The Municipal Mayor

Gloria, Oriental Mindoro

18. The Municipal Mayor

Mansalay, Oriental Mindoro

19. The Municipal Mayor

Pinamalayan, Oriental Mindoro

20. The Municipal Mayor

Pola, Oriental Mindoro

21. The Municipal Mayor

Roxas, Oriental Mindoro

22. The Municipal Mayor

Socoro, Oriental Mindoro

23. The Municipal Mayor

Bulalacao, Oriental Mindoro