REGULATORY FRAMEWORK

AND POLICIES GOVERNING

PSA APPLICATIONS
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Points of Discussion
GENERAL REGULATORY PRINCIPLE
GENERATION CHARGE AS COMPONENT
OF DUS RETAIL RATE
REVIEW AND
APPROVAL
OF
RECOVERABLE GENERATION COST
DRAFT PSA RULES
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GENERAL REGULATORY PRINCIPLE

3

Guiding Principles

Regulatory Principle
Section 6, Chapter 2 of the Republic Act No. 9136 or the
Electric Power Industry Reform Act of 2001 (EPIRA)

GENERATION

SECTOR.

Generation of electric power, a

business affected with public interest,
shall be competitive and open.
Upon implementation of retail
competition and open access, the
prices charged by a generation
company for the supply of
electricity shall not be subject to
regulation by the ERC except as
otherwise provided in this Act.

Regulatory Principle
Section 4 (e), Rule 5 of the Implementing
Rules and Regulations of the EPIRA

xxx
Prior
to
the
implementation of OARC, the
prices
charged
by
a
Generation Company for the
Supply of Electricity shall be
subject to ERC regulation on
the Retail Rates charged by
Distribution Utilities xxx
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Regulatory Principle
Section 25, Chapter 2 of Republic Act No. 9136 or the
Electric Power Industry Reform Act of 2001 (EPIRA)

RETAIL

RATE. The retail rates

charged by distribution utilities for the

supply of electricity in their captive
market shall be subject to regulation by
the ERC based on the principle of full
recovery of prudent and reasonable
economic costs incurred, or such
other principles that will promote
efficiency as may be determined by the
ERC.
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Regulatory Principle
Section 23, Chapter 2 of the Republic Act No. 9136
Functions of Distribution Utilities.

A distribution utility shall have

the
obligation
to
supply
electricity in the least cost
manner to its captive market,
subject to the collection of retail
rate duly approved by the ERC.

Regulatory Principle
Section 45 (b) of Republic Act No. 9136 or the Electric
Power Industry Reform Act of 2001 (EPIRA)
Cross Ownership, Market Power Abuse And Anti-Competitive Behavior.
xxx
To promote true market competition and prevent harmful monopoly and market
power abuse, the ERC shall enforce the following safeguards:
xxx
(b) Distribution utilities may enter into bilateral power supply contracts
subject to review by ERC.
x x x.

Regulatory Principle
Section 41.
Interests

Promotion

of

Consumer

xxx The ERC shall handle

consumer complaints and
ensure
the
adequate
promotion of consumer
interests. xxx

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Generation Charge as Component

of DUs Retail Rate
Biggest component of
the retail rate (around
50% to 60%)
Through the generation
charge,
the
DUs
recover the generation
costs associated with
their energy purchases

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Section 25, EPIRA

Regulation of
Generation
Component of
DUs Retail
Rates
Rate Application
of NPC/DUs
Published and served on
LGU Sanggunian
Notice
of
Hearing
published
Hearing conducted

Retail rates to DUs captive market, subject to ERC regulation

Full recovery of prudent and reasonable economic costs

Section 67

Section 45 (b)

Section 30

PSA rates capped at

TSC rate, if NPC still
has excess capacity
PSA rates to be
determined by ERC if
NPC no longer has
excess capacity

Review of DU
bilateral contracts

WESM Price
Determination
Methodology

NPC
Transition Supply
Contract
ERC set NPC-TOU
rates as the TSC rate

Translation into the

current billing months
Generation Charge

For determination of
DUs
recoverable
generation costs

Power Supply
Agreement
ERC approves bilateral
contracts between DU
and GenCo

Automatic Generation Rate

Adjustment (AGRA)
Mechanism

Embodies pricing principles

under the WESM Rules:
Locational pricing
Gross pool concept
Full nodal pricing regime

WESM
Price Determination
Methodology

Subject to ERC postverification of any

over/under recovery

REVIEW AND APPROVAL

OF RECOVERABLE
GENERATION RATE

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Generation Rate Structure

Review

What does the ERC

look into in its review
and evaluation?

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Generation Rate Components

A
B
C

Capacity Fee/Capital Recovery

Fee
Operations &
Maintenance
Fee

Fixed O&M
Variable
O&M

Fuel Recovery Fee/Energy Fee

Fixed
Cost

Variable
Cost

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Generation Rate Components

Capital Recovery Fee

a capital-related component to recover the cost of
investment (historical cost) over the economic life
of the plant together with a reasonable rate of
return
Fixed for the duration of the project life/plant
economic life
Derived using Discounted Cash Flow (DCF) Model
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Capital Recovery Fee

Required Supporting Documents/

Input Parameters
PROJECT COST (EPC/VERIFIED
ESTIMATES)
PLANT TECHNICAL SPECIFICATIONS
(ECONOMIC LIFE/RECOVERY PERIOD)

RATE OF RETURN (WACC/COST OF

EQUITY)
PLANT DEPENDABLE CAPACITY
(BILLING DETERMINANT)
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Generation Rate Components

Operations & Maintenance Fee

Fixed O&M
Variable O&M

Refers the recurring expenses related to the operations and

maintenance of the power plant facilities
Fixed O&M an element to recover fixed operating and
maintenance (O&M) costs. This cost is determined by the
capacity of the plant, not the level of utilization.
Variable O&M - an element to recover variable O&M costs and
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which varies with the amount of electricity generated.

Operations and Maintenance Fee

Required Supporting Documents/

Input Parameters
GENERAL
EXPENSES

AND

ADMINISTRATIVE

MAINTENANCE AND INSURANCE

SUPPLIES AND SPARE PARTS

GOVT TAXES AND LICENSES

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Generation Rate Components

Operations & Maintenance Fee

Regulatory Authority over Expenses

Management exercises
incurring expenses

its

prerogative

in

The Commission reviews the expenses incurred

by management and decides whether or not to
allow recovery of these cost from consumers

Prudency and reasonableness of the proposed

expenses, and relationship to the provision of
service
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Generation Rate Components

Operations & Maintenance Fee
Formula:
O&M Fee = Total Annual Expenses Billing Determinant
PhP/kWh =
PhP
kWh

Indexation of O&M Fee

A. PhP-Based O&M
Fixed
Variable
B. USD-Based O&M
Variable

Philippine Consumer Price Index

(PH CPI)
United States Consumer Price
Index (US CPI)

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Generation Rate Components

Fuel Recovery Fee/Energy Fee

Variable
Cost

Pass-through cost to allow recovery

of fuel consumed to generate power

Cost also depends on the plant heat rate
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Fuel Recovery Fee /Energy Fee

Required Supporting Documents/

Input Parameters
FUEL SUPPLY CONTRACT/S

FUEL PROCUREMENT PROCESS

FUEL COST COMPUTATION (BASIS OF ASSUMED
BASE COST/PRICES AND INDEXATION)

CONSUMPTION RATE/HEAT RATE

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Determination of Reasonable
Fuel Efficiency level
Guaranteed Heat rate or consumption
rate under IPP Contracts
Generator Manufacturers Specifications
or Contractor guaranteed efficiency
level
Benchmark to Heat rate of comparable
power plants
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Procedure for the Application

of the PSA
Receipt of
LGU
Legislative
Body of the
Application/
Publication
of the
Application

Filing of the
Application

Earliest Day for

the issuance of
Provisional
Authority (P.A.)

Commission
issues Order &
Notice of Public
Hearing

Last Day for

the Issuance
of Provisional
Authority
Earliest Date
for the Initial
Hearing

Issuance
of Final
Authority

Day 34
Day 1

Day 10

Day 75
After 30 days from the (a)
receipt of a copy of the
application by the LGU
Legislative Body or (b)
publication of the application,
whichever comes later

Within 1
year from
the
issuance of
P.A.

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ERC CASE NO. 2013-005RM

In the Matter of the Promulgation of the Rules
Governing the Execution, Review and Evaluation of
Power Supply Agreements Entered into by Distribution
Utilities for the Supply of Electricity to their Captive
Market
Article I: Objectives

Article II: Definition of Terms

Article III: Procurement Process
Article IV: Requirements and Review Procedures
Article V: Final Provisions

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Draft Rules Governing Execution, Review

and Evaluation of PSA Applications

Key Provisions
of the Draft
Rules

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Highlights/Key Provisions
ARTICLE III
Section 1. Award of PSA to Generation Company
PSA shall be awarded to the winning Generation Company following a
successful transparent and Competitive Selection Process or by Direct
Negotiation as provided in Section 3 below. A CSP is successful if the
DU receives at least two (2) qualified bids from entities with which
the DU is not prohibited from entering into a contract for power
supply in accordance with Rule 11, Section 5 (b) of the EPIRA IRR.

Section 2. Competitive Selection Process

A DU shall undertake a transparent and competitive selection process
before contracting for the supply of electricity to its captive market in
accordance with Appendix A of this Rules.
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Highlights/Key Provisions
ARTICLE III
Section 4. Benchmark Rate

The ERC shall in the future endeavor to establish a

benchmark rate that shall serve as reference price that
may be used to assess the price that a Generation
Company may offer. Such benchmark rate shall consider
the type of generating plant, type of operation, installed
capacity, and location, among others.

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Highlights/Key Provisions
ARTICLE IV
Section 1. Filing of the PSA

The PSA shall be a joint responsibility by the generation

company and the DU. Following the execution of the PSA,
the parties thereto shall file with the ERC, within thirty
(30) days therefrom, a joint application for the approval of
said PSA and for the determination of the reasonable
generation costs that the DU can recover from its captive
market as part of its retail rate.

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Highlights/Key Provisions
ARTICLE IV

Section 2. Review of the ERC

ERCs evaluation of the PSA and the generation rate will be based on its
satisfaction of the following:
a. That the PSA was awarded in accordance with the prescribed procurement
process prescribed under Appendix A of the rules, as applicable;
b. That the PSA guarantees suppliers compliance with the required technical,
environmental and financial standards set out in the bid documents; and
c. That the PSA have substantially complied with the PSA Template under
Appendix C that accords the parties with equitable rights and that the risks
associated with the supply of electricity such as those pertaining to the tariff
structure, economic indices, foreign exchange fluctuations, volatility of fuel
prices and the like are efficiently allocated between the parties.

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Highlights/Key Provisions
ARTICLE IV

Section 3. PSA Pricing Structure.

The ERC shall determine the reasonable generation cost under the
said PSA, taking into account the following fees:
Capital Recovery Fee
Operating and Maintenance Fee
Fuel Fee

In support of the prosed pricing under the PSA, the Following shall be
required:
a. Executive Summary
b. Sources of Funds / Financial Plans
c. Details of the Purchase Power Rate
d. Details of Cash flow
e. Details on the procurement of fuel
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Highlights/Key Provisions
ARTICLE IV
Section 6. ERC Action on the Application
Any PSA submitted to the ERC shall be reviewed and approved as to its
reasonableness in terms of costs, risk allocation, and other contractual
terms.
In the exercise of its discretion and on the basis of all the submissions made,
the ERC shall determine whether or not to approve the full pass through or
prohibit some or all energy costs from being passed on to the DUs captive
market and whether or not to disapprove or modify certain contractual
stipulations of the parties.
The ERCs decision and judgment shall bind both parties and shall not be
rendered ineffective or nugatory by any termination or walk-away clause
incorporated in the PSA.

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NEXT Discussion of Major

Issues/Comments
Competitive Selection Process
Benchmark Rate
Joint Application
Walk-away Clause