SOCOTECO I and SE1 seek approval of 20-year solar power PPA

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IN THE MATTER
OF THE
APPLICATION FOR APPROVAL
OF THE POWER PURCHASE
AGREEMENT
FOR
THE
SUPPLY
OF ,POWER
TO
SOUTH
COTABATO
I
ELECTRIC COOPERATIVE INC.
(SOCOTECO I), WITH PRAYER
FOR
PROVISIONAL
AUTHORITY
ERC CASE NO. 2014-048 RC
SOUTH
COTABATO
I
ELECTRIC COOPERATIVE INC.
(SOCOTECO I) and nv vogt
PHILIPPINES SOLAR ENERGY
ONE, INC. (SE1),
Applicants.
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DECISION
. B fore the Commission for resolution is the application filed on
April
8, 2014, by South Cotabato I Electric Cooperative, Inc.
(SOCOTECO I) and nv vogt Philippines Solar Energy One, Inc.
(SE1), for approval of their Power Purchase Agreement (PPA) for the
supply of power to SOCOTECO I, with prayer for the issuance of a
provisional authority.
In the said application, SOCOTECO I and SE1 alleged, among
others, the following:
1.
',.
,t-
SOCOTECO
I is a non-stock
non-profit
electric
cooperative duly established and existing under and by
virtue of the, Laws of the Republic of the Philippines,
particularly under the provisions of Presidential Decree
No. 269 (PO 269), as amended. It is registered with the
National Electrification Administration (NEA);
"~l
ERC Case No. 2014-048 RC

DECISION/November 17,2014
Page 2 of 41
2.
Its principal office is at Barangay Morales, Koronadal City,

South Cotabato, where it may be served with summons
and other legal processes and represented in this
instance by its General Manager, Santiago C. Tudio, of
legal age, Filipino, and with office address also at
Barangay Morales, Koronadal City, South Cotabato;
3.
It is the exclusive holder of the franchise issued by the

NEA to operate electric light and power services in the
City of Koronadal, Municipalities of Banga, Lake Sebu,
Norala, Sto. Nino, Surallah, T'Boli, Tantangan and
Tampakan, all in the Province of South Cotabato and in
the Municipality of Lutayan in the Province of Sultan
Kudarat;
4.
SE1 is a corporation duly organized under and by virtue

of the laws of the Philippines, with principal office at U2406 The Trade and Financial Tower, ih Avenue cor 32nd
Street, Bonifacio Global City, The Fort, Taguig City 1634,
where it may be served with summons and other legal
processes and represented in this instance by its
President, Reynaldo T. Casas, of legal age, Filipino;
5.
The Mindanao Grid for the past several years has been
experiencing a serious power deficit in its power supply
which has affected the economic development in the
region. The existing generating capacity in the Mindanao
Grid is currently insufficient to meet demand, especially
during the day peak period (e.g. gam to 10pm);
6.
The situation is further worsened during the summer

months of the year since during this time there is a
substantial reduction in the power supply from the hydroelectric power plants that primarily supply the Mindanao
Grid due to the resultant lower water levels. More than
half the power supplied to the Mindanao Grid comes from
hydro-electric power sources. For CY2014, it is expected
that the summer months will be especially dry thus further
exacerbating the deficiency in the power supply;
7.
The Power Sector Assets and Liabilities Management

Corporation (PSALM) supplies the bulk of the power

Page 3 of 41
supply requirements in the Mindanao Grid. It has an
existing Contract for the Supply of Electrical Energy
(CSEE) with SOCOTECO I which is set to expire in
December 2016;
The CSEE already reflects PSALM's reduction of its

committed available power supply to SOCOTECO I by
around
37%
of its current
maximum
demand
requirements
of 34 MW. This reduction has left
SOCOTECO I with a supply deficit of around 12 MW for
CY2014 up to CY2016, when the CSEE is set to expire.
There is also no guarantee that PSALM will not make
further reductions to its commitment to supply power to
SOCOTECO I upon the expiration of the CSEE in 2016
for the following years;
8.
The reduction of the power supplied by PSALM has

resulted in brownouts for the consumers of SOCOTECO I
lasting up to six (6) hours in the past year;
9.
PSALM has already certified to SOCOTECO I that it has

insufficient capacity to supply the same with additional
power beyond the amounts already being supplied under
the current CSEE;
10.
The power supply of SOCOTECO I is currently sourced

from: a) PSALM; b) Therma Marine, Incorporated (TMI);
and c) Mapalad Power Corporation (MPC). TMI and MPC
are diesel type power plants.
Its average generation charge from its current power

suppliers is 4.5295 PhP/kWh. However, the average
generation charge (for CY2014) coming from diesel type
power plants is 9.1216PhP/kWh for TMI and 10.2999
PhP/kWh MPC;
11.
Based on the SOCOTECO I 2013-2023 Forecasted

Demand, its demand requirements are expected to grow
every year, from 36.64 MW in 2013 to 79.66 MW in 2023.
It has also forecasted that its number of customers will
continue to grow from 82,801 in 2013 to around 95,170 in
2017.

Page 4 of 41
Given its constant growth in demand as well as number of
customers, it has endeavored to obtain a secure and
adequate supply of electricity for its consumers in the
coming years. It sought out other generation companies
and sources of electricity in the Mindanao Grid and
solicited offers and/or expressions of interest from these
power
suppliers
to
supply
its growing
power
requirements;
12.
Among the offers to supply SOCOTECO I's power

requirements was one from SE 1. The latter is committed
to construct 5MW AC (6MWp) Solar Plant in the
Barangay Centrala in the Municipality of Surallah, which
is within the franchise area of the former. The power plant
is scheduled to be commissioned in the first half of 2014.
This will help the former's current power requirements,
especially during the peak hours;
13.
Since the power plant will be commissioned within the

first half of 2014, the power it will be supplying to
SOCOTECO I will immediately help reduce and/or
prevent the brownouts currently being experienced by the
same;
14.
SOCOTECO I thoroughly evaluated the offer of SE1 and

determined said to be advantageous to its consumers;
15.
After extensive negotiations with SE1, SOCOTECO I

signed on 26th of June 2013, a Power Purchase
Agreement (PPA) with SE1 for a contracted demand of
5MW AC (6MWp) for 20 years. They also executed an
Amendment Agreement in March 2014 to amend, modify
and supersede particular provisions of the PPA;
16.
Over the period of the PPA, the average generation

charge of SOCOTECO I will be going down which will
translate into significant savings for the same and its
consumers during the term of the PPA;
17.
The salient features

summarized below:
of the
PPA
as amended
are

Page 5 of 41
18.1 Executive Summary
SE1 has entered into a 20 year Power Purchase (PPA)
to provide Solar Power to be generated by its proposed
plant in Barangay Centrala, Municipality of Surallah,
Koronadal, South Cotabato to SOCOTECO I. The plant
will have a capacity of 5 MW AC (6MWp).
The proposed Solar Plant is expected to supply about
8.80 million kWh to SOCOTECO I in the first year of its
operation and a total of 162 million kWh over the 20 year
PPA. This power will be supplied during the day in order
to supplement its peak daytime demand which is currently
being met through Diesel generators. Solar power will
replace a part of this peak daytime diesel consumption.
Since the proposed solar plant will be constructed in 3-6
months, SE1 will be able to immediately address the
growing demand and current power shortage of
SOCOTECO I.
18.2 Amendments
The amendments to the PPA as set forth in the
Amendment Agreement in March 2014 are as follows:
(i)
Determination of the power deemed generated and

supplied
The provision on Deemed Generation in the PPA

originally read as follows:
~x x x To determine the power deemed
generated
and
supplied,
the
average
generation of the 7 (seven) days prior to the
date that the Facility is unable to evacuate the
power shall be utilized. x x x"
This provision was amended

Agreement to read as follows:
In the Amended

Page 6 of 41
"x x x To determine the power deemed
generated and supplied, the average generation of
the 7 (seven) days on which the Facility operated at
its full capacity and supplied power to the Customer
shall be utilized. x x x"
The parties believed that the change was essential

to generate a more equitable formulation of Deemed
Generation.
(ii)
Compensation by Seller (SE1) in relation to the

Seller Generation Guaranty
Article 2.4.2 of the PPA originally read as follows:

"In case the Project energy generation (as
metered) falls below the Minimum Energy Generation
Guaranty, the Seller shall be liable to recompense the
Customer x x x."
This provision was amended

Agreement to read as follows:
in the Amended
"In case the Project energy generation (as

metered) falls below the Minimum Energy Generation
Guaranty, caused by the Seller's gross negligence,
willful misconduct or malicious intent, the Seller shall
be liable to recompense the Customer x x x"
The original wording of the provision seems to imply that

the Seller is and will be penalized even if the falling of the
Project energy generation below the Minimum Energy
Generation Guaranty is not through the fault of the Seller.
To correct this, paragraph 2 of the Amendment
Agreement makes the Seller liable only if there is fault on
its part (i.e. gross negligence, willful misconduct or
malicious intent).
(iii)
Change of degredation rate
Schedule III (Seller Generation Guaranty) of the

PPA sets forth the Performance Ratios and Annual
Decrease from years 1 to 25. The annual decrease was
at 1.000/0for the first 2 years and decreased to 0.5% for

Page 7 of 41
the years thereafter. This was amended by paragraph 3
of the Amendment
Agreement
showing
a fixed
degredation rate of 0.70/0annually beginning year 2. The
parties believed that this would be a more equitable
formula, considering that this conforms to and/or is
consistent
with
the
manufacturer's
performance
guarantees and is in accordance with international
standards for Tier-1 solar panels.
(iv)
Termination
Default
of the PPA for Customer
Event of
Paragraph 4 of the Amendment

Agreement
amended Article 14.1.1 of the PPA by removing the
penalty clause or the right of the Seller to liquidated
damages in case the PPA is terminated on account of a
Customer Event of Default. This amendment was made
in consideration of the fact that SOCOTECO I is rated as
AAA Cooperative and for being listed as among the top
10 electric cooperatives in the country.
18.3 Salient Features
In addition to the above, the PPA as amended
contains the following salient terms and conditions:
"2.2
also
Project Capacity
2.2.1 At the Commercial Operations Date, the Project

Capacity of the Facility shall be 6 MWp +/- 10% which is
expected to generate approximately 8.5 million +/-100/0
KWh per year.
2.3
Deemed Generation
Without prejudice to the Customer's obligation under

Article 2.1.1, if due to unavailability of the Grid
Interconnection
Facilities, the Facility is unable to
evacuate the power generated by the Facility from the
Delivery Point to the Customer, the Facility shall be
deemed to have been operating during the power nonevacuation period and the Seller shall bill the Customer
for the power that would have been supplied during such

Page 8 of 41
period. To determine the power deemed generated and
supplied, the average generation of the last 7 (seven)
days on which the Facility operated at its full capacity and
supplied power to the Customer shall be utilized. This
Article 2.3 shall not be applicable if the reason for the
failure to evacuate power is due to a Force Majeure
Event, or due to scheduled preventive maintenance of up
to a maximum cumulative permitted time of 80 hours per
year during daytime hours of 7am to 7pm of the
Grid Interconnection Facilities.
2.4
Seller Generation Guaranty
2.4.1 The Seller guarantees a minimum average annual

Performance Ratio (UPR") as mentioned in Schedule III.
Performance Ratio would be measured as per the
provisions
of
IEC
61724
(Photovoltaic
system
performance monitoring - guidelines for measurement,
data exchange and analysis).
2.4.2 In case the Project energy generation (as metered)
falls below the Minimum Energy Generation Guaranty,
caused
by the Seller's gross negligence,
willful
misconduct or malicious intent, the Seller shall be liable to
recompense the Customer for the differential between
Contracted Capacity and the volume of power actually
delivered, multiplied by the difference between the Tariff
and the price of the replacement energy.
3.1
Term of Agreement
3.1.1 This Agreement shall commence on the Execution

Date and shall continue for a period of 20 (twenty)
Contract Years from the Commercial Operations Date
unless extended for a 5-year period (as described in
Schedule II), or earlier terminated.
xxx
8.
TARIFF
8.1 The Seller agrees to sell at the Delivery Point and
the Customer agrees to purchase the Contracted
Capacity at the Delivery Point at the Tariff specified in
SCHEDULE II during the Term.

Page 9 of 41
8.2 The Customer shall solely be responsible and shall

bear any and all electricity related costs, expenses and
charges
including
any on account
of wheeling,
transmission,
wheeling
and
transmission
losses,
scheduling, system operating, Grid connectivity or use of
or access to the Grid Interconnection Facilities or any
other charges or costs as may be applicable for
evacuation of the Power Supplied. It is clarified that the
Seller shall be entitled to raise invoices for the Power
Supplied in the manner set out in Article 9 irrespective of
whether or not the Customer is able to evacuate the
Power Supplied from the Delivery Point to its destination
of use. Provided however that, in the event the Customer
is not able to evacuate the Power Supplied from the
Delivery Point to its destination of use for any reason
whatsoever and the Seller is able to supply such
electricity to any third party, the Customer will continue to
be liable to pay the Seller for the electricity supplied by
the Seller at the Delivery Point at the Tariff specified in
SCHEDULE II as adjusted by the amount received by the
Seller from any third party against electricity supplied to
such third party.
8.3 The Customer shall solely be responsible for and
shall bear and promptly pay all statutory taxes, duties,
imposts, levies and cess, including surcharges, penalties
or any other charges, at such rates as are assessed or
levied under Applicable Law as at the Execution Date, on
or in connection with the supply or sale of electricity under
the terms of this Agreement.
For the avoidance of doubt, it is clarified that the
Customer shall be solely responsible for and shall bear all
taxes, duties, imposts, and levies, including surcharges,
penalties or any other charges, assessed or levied under
the Applicable Law at all times, on or in connection with
the evacuation or supply of electricity from the Delivery
Point to its destination of use.

Page 10 of 41
Schedule II
TARIFF
1.
Tariff
1.1 The Tariff shall consist of two components, one that

is fixed in Pesos, and the second that shall be Dollar
indexed.
1.2 The fixed component of the Tariff shall be 15% of
the Nominal Peso Tariff (UNPT"). The Dollar indexed
component shall be 85% of the Nominal Peso Tariff.
1.3 The NPT for the first 15 (fifteen) years shall be as
follows:
PhP/kWh
PhP/kWh
Year 1
9.79
Year 6
9.54
Year 2
9.74
Year 7
9.49
Year 3
9.69
Year 8
9.44
Year 4
9.64
9.39
Year 5
9.59
Year 9
Year
10
9.34
PhP/kWh
Year
11
Year
12
Year
13
Year
14
Year
15
9.29
9.24
9.19
9.14
9.09
1.4 The NPT for years 16 (sixteen) to 20 (twenty) shall

be PHP 7.50/kWh.
1.5 The Tariff in PHP for any given Billing Period shall
be computed as follows, rounded to the nearest centavo:
Tariff
= NPT * 15% + (NPT * 85
* (FXB/FXR)
1.6 In the event that this Agreement is extended for the

Five Year Extension, the NPT applicable for the Five Year
Extension, i.e., years 21 (twenty one) to 25 (twenty five),
shall be PhP 7.50/kWh.

Page 11 of 41
1.7 Invoices raised by the Seller shall be denominated

in PhP.
1.8 Illustrative Example: Assume FXR is 42. For Billing
Period A, assume FXB is 46.
For Billing Period B,
assume FXB is 38. Assume NPT is 10.00 for both Billing
Periods A and B. Then, Tariff shall be computed is as
follows:
Tariff for Billing Period A
(46/42) = PhP 10.81
10.00 * 15% + (10~00* 85%) *
Tariff for Billing Period B = 10.00 * 150/0+ (10.00 * 85%) *

(38/42) = PhP 9.19
18.
SOCOTECO I has forecasted and simulated the effect of

the inclusion of the power supplied by SE1 on its
generation costs upon the commercial operation of the
solar power plant, taking into consideration the reduced
supply from PSALM and the use of the cheaper solar
power during the peak hours.
The simulation will show that the entry of SE1 will provide
cheaper power to SOCOTECO lover the term of the
PPA.
Rate Impact Computation
Year 1
4.5615
4.5295
0.0320
Year 2
4.9921
Year 3
6.1340
Year 4
8.1330

Page 12 of 41
For purposes of illustration, the expanded table for the
Average Impact on Generation Rate for Years 1 to 4 is
provided below:
NVOGT-
85,781,540
8,762,159
PSALM
521,413,035
177,596,380
TMI
124,681,705
12,352,157
Ma alad
188,798,652
3,123,174
Total
920,674,931
201,833,871
Generation Rate Without NVOGT

Increase (Decrease) in Generation
Rate Ph IkWh
4.5295
0.0320
NVOGT
84,481,377
8,673,653
PSALM
487,996,066
166,239,194
TMI
150,310,641
16,135,584
Ma alad
284,782,887
10,785,989
Total
1,007,570,971
201,834,421

Rate PhP IkWh
4.5615
4.9921
5.0127

Page 13 of 41
NVOGT
83,618,879
8,629,399
PSALM
396,064,528
136,399,106
TMI
204,157,195
24,084,588
Ma alad
549,096,191
31,887,204
Total
1,232,936,793
201,000,298

Rate Ph IkWh
6.1803
NVOGT
82,760,807
8,585,146
PSALM
257,333,100
87,600,000
TMI
278,369,154
35,040,000
Ma alad
1,002,586,276
68,091,178
Total
1,621,049,338
199,316,324

Rate Ph IkWh
6.1340
8.1330
8.2099
It will be clearly seen from the foregoing that SE1 will

have a significant effect on the power supplied to
SOCOTECO I during the peak hours when power
demand/consumption is highest through the combination
of providing cheaper rates as compared to the current
diesel power supply and replacing diesel power sources
during the peak hours;

Page 14 of 41
19.
The construction and eventual commissioning of the

power plant depends on several conditions, one of which
is the financial closing with the creditor-bank and other
investors. On the other hand, one of the prerequisites to
the financial closing is a provisional authority from the
Commission to implement the PPA, as amended. In short,
the plant will only be commissioned if a provisional
authority has been secured;
20.
There is already a power shortage being experienced by

SOCOTECO I and that PSALM has stated, through a
letter, that it has insufficient capacity to supply the
former's
additional
power
requirements.
The
commissioning of the solar power plant of SE1 in the first
half of 2014 and the setting of the date of commercial
operations on May 31, 2014 upon agreement by the
parties will immediately alleviate the current state of
affairs of SOCOTECO I's customers as it will help cope
with the worsening power situation in the Mindanao Grid;
21.
In support of the instant Application, the applicants

attached the following supporting documents:
Schedule
A
A.1
Information provided
Power Purchase Agreement between SOCOTECO I and nv
Vogt Philippines Solar Energy One, Inc. (SE1) and the
Amendment Agreement between SOCOTECO I and SE1
Executive Summary/Rate Impact Analysis
Sources of Funds/Financial Plans;
DebUEquity Ratio;
A.2
8
8.1
8.1.a
B.1.b
8.2
8.2.a
Project Cost; and
Computation of Return on InvestmentlWACC
Constitutive Documents
nv voqt PHILIPPINES SOLAR ENERGY ONE, INC. (SE1)
Latest Articles of Incorporation and 8y-Laws
Securities and Exchange Commission (SEC) Certificate of
Registration and latest Certificate of Amendment
SOCOTECO-I
Certificate of Franchise

Page 15 of 41
C.
C.1
Other Information
SOCOTECO-I
Distribution Development Plan (2013-2016)
- Customer Load Profile
-
C.2
C.3
C.4
22.
Demand and Energy Forecast
PSALM Letter to SOCOTECO Idated September 4, 2013

confirmin insufficient ower su I in Mindanao
Rate 1m act
Letter from SE1 to SOCOTECO I dated December 11, 2013
re: adjustment of the milestone schedule of the PPA and the
Secretary's Certificate from SOCOTECO I containing the
Board Resolution approving the extension of the commercial
o eration of the solar ower lant
Thus, the Applicants pray that pending hearing on the

merits, the Commission grant the following:
a) A provisional approval of the PPA between them as

well as a provisional authority authorizing SOCOTECO.
I to pass on the full amount of the fees and charges
under the PPA to its consumers;
b) Permanent approval of the PPA, as amended,

between them which would authorize SOCOTECO I to
charge and collect the fees under the PPA as well as
authorize the same to pass on the full amount to its
consumers; and
c) Other reliefs and equitable under the premises are

likewise prayed for.
Having found said application sufficient in form and in

substance with the required fees having been paid, an Order and a
Notice of Public Hearing, both dated June 9, 2014, were issued
setting the case for jurisdictional hearing, expository presentation,
pre-trial conference, and evidentiary hearing on July 1, 2014.
SOCOTECO I and SE1 were directed to cause the publication
of the 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 were also directed to inform the consumers within

Page 16 of 41
SOCOTECO I's franchise area, by any other means available and
appropriate, of the filing of the instant application, their reasons
therefor and of the scheduled hearing thereon.
The Office of the Solicitor General (OSG), the Commission on
Audit (COA) and the Committees on Energy of both Houses of .
Congress were furnished with copies of the Order and Notice of
Public Hearing and were requested to have their respective duly
authorized representatives present at the initial hearing.
Likewise, the Offices of the Provincial Governors and the
Mayors of the City and Municipalities within SOCOTECO I and SE1's
franchise area were furnished with copies of the Order and Notice of
Public Hearing for the appropriate posting thereof on their respective
bulletin boards.
On June 26, 2014, SOCOTECO
"Pre-Trial Brief'.
I and SE1 submitted their
During the July 1, 2014 initial hearing, SOCOTECO I and SE1,

appeared. No intervenor/oppositor appeared nor was there any
intervention/opposition registered.
SOCOTECO I and SE1 then presented their proofs of
compliance with the Commission's posting and publication of notice
requirements which were duly marked as Exhibits "0" to "l",
inclusive. Instead of the Certifications of Posting from the various
local government units (lGUs) within SOCOTECO I's franchise area
which is required by the rules, they presented duly received
transmittal letters to said lGUs of the Commission's Order and Notice
of Public Hearing. The representatives of the lGUs present
confirmed receipt of said documents.
The Commission then
provisionally accepted such compliance subject to the submission
within five (5) days of the required Certifications. Thereafter,
SOCOTECO I and SE1 conducted an expository presentation of their
application.
At the termination of the expository presentation and upon
motion of the counsel of SOCOTECO I and SE1, the Commission
issued an Order of general default against other interested parties
who failed to appear during the hearing despite sufficient notice.

Page 17 of 41
SOCOTECO
I and SE1, then, presented the following
witnesses:
a) Mr. Vivek Chaudri, SE1 's Director, who testified,
among others, on the terms and conditions of the PPA executed on
June 26, 2013 and the amendment on April 5, 2014, the basis of the
tariff/fees under the PPA and how they were computed, and the
technical specifications of the solar power plant; and b) Mr. Francis
Ian Fedoc, SOCOTECO I's Finance Manager, who testified, among
others, on the power supply situation of SOCOTECO I, how the offer
of SE1 was selected, and the rate impact of the PPA between the two
entities.
In the course of their respective direct examinations, the
witnesses identified various documents which were duly marked as
exhibits.
The direct
examination
having been terminated,
the
Commission
propounded
clarificatory questions
on the said
witnesses. SOCOTECO I and SE1, then, were directed to submit
additional requirements together with their formal offer of evidence
within ten (10) days from the said date of hearing.
On July 7, 2014, SOCOTECO I and SE1 filed their
"Compliance"
and "Motion For Extension of Time To File Formal
Offer of Exhibits".
On July 31, 2014 SOCOTECO I and SE1 filed their "Formal
Offer of Exhibits".
On October 22, 2014 SOCOTECO I and SE1 filed their
"Submission" of additional documents in support of their application.
On November 3, 2014, the Commission issued an Order
admitting SOCOTECO I and SE1's formal offer of exhibits for being
relevant and material in the evaluation of the instant application.
DISCUSSION
1.
Parties to the Contract
SOCOTECO-I is a non-stock, non-profit electric cooperative

duly established and existing under and by virtue of the laws of the
Republic of the Philippines, particularly under the provisions of

Page 18 of 41
Presidential Decree No. 269 (PO 269), as amended. Its principal
office is located at Barangay Morales, Koronadal City, South
Cotabato. It is the exclusive holder of the franchise issued by the
National Electrification Administration (NEA) to operate electric light
and power services in the City of Koronadal, Municipalities of Banga,
Lake Sebu, Norala, Sto. Nino, Surallah, T'Boli, Tantangan and
Tampakan, all in the Province of South Cotabato and in the
Municipality of Lutayan in the Province of Sultan Kudarat.
SE-1 is a corporation duly organized under and by virtue of the
laws of the Philippines, with principal office at U-2406 The Trade and
Financial Tower, 7th Avenue cor 32nd Street, Bonifacio Global City,
The Fort, Taguig City 1634, where it may be served with summons
and other legal processes. It is represented in this instance by its
president, Mr. Reynaldo T. Casas.
2.
Insufficiency
of SOCOTECO I's Power Supply
The Mindanao Grid for the past several years has been
experiencing serious power deficit in its power supply which has
affected the economic development
in the region. The existing
generating capacity in the Mindanao Grid is currently insufficient to
meet demand, especially during the peak period (Le., 9am to
10pm).
The situation is further worsened during summer since there is
a substantial reduction in the supply from the hydro-electric power
plants that primarily supply the Mindanao Grid due to the resultant
lower water levels. Notably, more than half of the power supplied to
the Mindanao Grid comes from hydro-electric power sources.
In fact, for the year 2014, it is expected that the summer
months will be especially dry, thus, further exacerbating the
deficiency in the power supply.
The Power Sector Assets and Liabilities Management
Corporation (PSALM) supply the bulk of the power supply
requirements in the Mindanao Grid. PSALM has an existing Contract
for the Supply of Electrical Energy (CSEE) with SOCOTECO-I which
is set to expire in December 2016. The CSEE already reflects
PSALM's reduction of its committed available power supply to
SOCOTECO-I by around 370/0 of its current maximum demand
requirements of 34 MW. This reduction by PSALM has left

Page 19 of 41
SOCOTECO-I with a supply deficit of around 12 MW for the year
2014 up to 2016, when the CSEE is set to expire.
There is also no guarantee that PSALM will not make further
reductions to its commitment to supply power to SOCOTECO-I upon
the expiration of the CSEE in 2016 for the following years. The
reduction of the power supplied by PSALM has resulted in brownouts
for the consumers of SOCOTECO-I lasting up to six (6) hours in the
past year.
PSALM has already certified to SOCOTECO-I that it has
insufficient capacity to supply SOCOTECO-I with additional power
beyond the capacity already being supplied under the current CSEE.
Meanwhile, based on SOCOTECO-I's 2013-2023 Forecasted
Demand, its demand requirements are expected to grow every year,
from 36.64 MW in 2013 to 79.66 MW in 2023. SOCOTECO-I has also
forecasted that its number of customers will continue to grow from
82,801 in 2013 to around 95,170 in 2017.
Given the constant growth in demand as well as number of
customers, SOCOTECO-I has endeavored to obtain and secure an
adequate supply of electricity for its consumers in the coming years.
Considering the foregoing, there is a need for SOCOTECO-I to
procure sufficient long-term power supply to ensure that the power
requirements of its customers are adequately met.
3.
Procurement
Process Conducted
by SOCOTECO I
SOCOTECO-I submitted the following procurement process it

conducted leading to the acceptance of SE-1 as its supplier:
3.1
SE1 was the first company who gave

SOCOTECO I a comprehensive proposal to
meet its daytime peaking load requirement.
SE 1 made a presentation to the SOCOTECO I Board in

October 2012. The presentation covered solar power advantages,
the experience of the team being represented by Mr. Sinha and their
deep interest to bring this technology to the Philippines.

Page 20 of 41
SE1 requested for load demand and consumption pattern
information to be able to analyze whether a solar power farm would
be a good fit for SOCOTECO I along with the appropriate sizing. On
October 20, 2012, details including load curve, demand forecast,
single line diagram/substation locations were sent to SE1 to enable to
do the appropriate analysis.
This initial meeting was followed by a number of further
meetings with various people in the administrative and technical
departments of SOCOTECO I. Following detailed data analysis,
SOCOTECO I received a proposal for a 10 MW solar power plant in
phase 1 which would be a good fit for both its short term and long
term needs. This is to be followed by additional plants on phases 2
and 3.
3.2
SE1 was the first company with whom

SOCOTECO I signed a Memorandum of
Agreement (MOA)
SOCOTECO I signed a MOA with SE1 on February 8, 2013

which was the basis of the PPA (Power Purchase Agreement). This
MOA envisaged a 69kV substation to be built at SE 1's cost and
proposed an average tariff of PhP9.875/kWh.
3.3
SE1 was the first company to do technical

analysis
which
included
getting
their
engineers from Germany to SOCOTECO I
offices
To enhance SOCOTECO I's understanding of the project and

how and where it would connect to its distribution system, SE1
arranged for 2 senior engineers from its German partner (ib vogt
Germany) to visit the Philippines in the third week of April 2013.
Further, the solar insolation data was taken from different paid
sources and then correlated with ground data available in the country.
This gave SOCOTECO I complete confidence that the projected
production capability was indeed accurate.
Meanwhile,
following:
SOCOTECO
I's criteria for selection
a. Existing experience in this field;
were the

Page 21 of 41
b. Proven ability to have built solar plants in at least three
countries one of which was in Asia;
c. Proven ability to maintain the plants;
d. Technical
analysis
regarding
solar
insolation
data,
interconnection points, load balancing and other Issues
related to transmission;
e. Financial strength to build the plant;
f. Price negotiation;
g. Local presence and partnership; and
h. Land identification and technical vetting of the land as
suitable for the purpose.
SOCOTECO I also received letters from the following solar
power providers, expressing their interest on the project, to wit:
a. Enfinity Philippines Renewable Resources, Inc. (EPRRI);
b. AstroEnergy Development, LLC. (AstroEnergy); and
c. Solarus Partners, Inc. (Solarus).
SOCOTECO I examined how the other solar companies came
up with a price quotation. While some of the rates offered by others
were lower initially, they increased annually and consequently their
total average rate was higher. More importantly they lacked the
experience and financial strength that SE 1 have.
As SOCOTECO I realized, a solar plant embedded in its
distribution network requires much more understanding of the
distribution networks, load capacities and substation transmission
lines coverage. Price was just one factor in the decision making.
SOCOTECO I negotiated with SE 1 and by redesigning and
eliminating the need for a 69kV substation they were able to offer a
reduced average tariff rate of PhP8.96/kWh. To further address some
concerns, SE 1 agreed to reduce the plant size to a 5 MW AC plant
and a second phase shall be executed. Given the extensive
experience of SE 1 and its financial strength and the cheaper rates,
SOCOTECO I negotiated and signed the PPA with the same in June
2013.
The final quote from SE1 has a levelized tariff at PhP8.96/kWh
over 20 years. Coupled with on-time payments, and prompt payment
discount, this is further reduced to PhP8.91/kWh. SE1 's rate structure
is unique in that it has a continuously declining rate per kilowatt hour

Page 22 of 41
on an annual basis. SOCOTECO I and its customers essentially get a
discount for being long term customers of SE1.
The other key reasons for awarding the contract to SE 1 were
due primarily to their strong presence in the Philippines, backed up by
reputable foreign and local financial partners, high quality level of all
hardware and software products to build the solar farm backed up by
a highly rated EPC of choice.
The Provincial Government led by Governor Daisy Avance
Fuentes, has extended its support through speedy approvals in
building the road infrastructure surrounding the solar farm to augment
the potential eco-tourism in the area.
SE1 has secured the title to 8 hectares of land and completed
installing the 7-kilometer transmission line from their solar farm in
Surallah all the way to the substation in Dajay as part of their
investment portfolio to ensure transmission of power while solar
panels are being installed.
4.
Amended Power Purchase Agreement (PPA)

4.1
Salient Features of the Amended PPA
Type of Plant
Solar Power Plant
Installed Capacity
6MW
Contracted Capacity
5MW
Term of PPA
The Agreement shall commence on the

Execution Date and shall continue for a
period of 20 (twenty) Contract Years
Operations Date
the Commercial
from
unless extended for a 5- year period (as
described in Schedule II of the PPA), or
earlier terminated.
Project
Output
Expected
At the Commercial Operations Date, the

generate
expected
to
Facility
IS
%
approximately 8.5 million +/-10
KWh per
year.

Page 23 of 41
4.2
Other Relevant Provisions
Article
2.1.1
Purchase
of
Power.
Commencing
on
Commercial Operations Date, SE1 shall sell and deliver, and
SOCOTECO I shall purchase and receive, the Contracted Capacity at
the Delivery Point at the Tariff, subject to and in accordance with the
terms and conditions set forth in this Agreement. SOCOTECO I shall
be liable to pay Tariff for the Power Supplied irrespective of whether
or not SOCOTECO I is able to evacuate the Power Supplied from the
Delivery Point to its destination of use.
Article 2.3 Deemed Generation. Without prejudice to the
SOCOTECO I's obligation under Article 2.1.1, if due to unavailability
of the Grid Interconnection Facilities, the Facility is unable to
evacuate the power generated by the Facility from the Delivery Point
to SOCOTECO I, the Facility shall be deemed to have been operating
during the power non-evacuation
period and SE1 shall bill
SOCOTECO I for the power that would have been supplied during
such period. To determine the power deemed generated and
supplied, the average generation of the last 7 (seven) days on which
the Facility operated at its full capacity and supplied power to
SOCOTECO I shall be utilized. This Article 2.3 shall not be applicable
if the reason for the failure to evacuate power is due to a Force
Majeure Event, or due to scheduled preventive maintenance of up to
a maximum cumulative permitted time of 80 hours per year during
daytime hours of 7am to 7pm of the Grid Interconnection Facilities.
Article 2.4 Seller Generation Guaranty. The SE1 guarantees
a minimum average annual Performance Ratio (PR) as mentioned in
Schedule III of the PPA. Performance Ratio would be measured as
per the provisions of IEC 61724 (Photovoltaic system performance
monitoring guidelines for measurement, data exchange and analysis).
In case the Project energy generation (as metered) falls below
the Minimum Energy Generation Guaranty, caused by the SE1 's
gross negligence, willful misconduct or malicious intent, SE1 shall be
liable to recompense the SOCOTECO I for the differential between
Contracted
Capacity and the volume of power actually delivered,
multiplied by the difference between the Tariff and the price of the
replacement energy.

Page 24 of 41
Article 9.3 Prompt Payments. In the event SOCOTECO I
makes payment within Ten (10) calendar days of the Monthly Bill
being presented, SOCOTECO I will be entitled to a "Prompt Payment
Discount" of 0.500/0of the Monthly Bill.
4.3
Proposed Tariff
The Tariff shall consist of two components, one that is fixed in

Pesos, and the second that shall be Dollar indexed.
The fixed component of the Tariff shall be 150/0of the Nominal
Peso Tariff (NPT). The Dollar indexed component shall be 85% of the
Nominal Peso Tariff.
The NPT for the first fifteen (15) years shall be as follows:
Year
Year 1
PhP/kWh
PhP/kWh
9.79
Year
Year 6
Year 2
9.74
Year 3
PhP/kWh
9.54
Year
Year 11
Year 7
9.49
Year 12
9.24
9.69
Year 8
9.44
Year 13
9.19
Year 4
9.64
Year 9
9.39
Year 14
9.14
Year 5
9.59
Year 10
9.34
Year 15
9.09
The NPT for years sixteen

Php7.50/kWh.
(16) to twenty
9.29
(20) shall be
The Tariff in PhP for any given Billing Period shall be computed
as follows, rounded to the nearest centavo:
Tariff= NPT * 15% + (NPT * 85%) * (FXB/FXR)
In the event that this Agreement is extended for the Five
Year Extension, the NPT applicable for the Five Year Extension, i.e.,
years
twenty
one (21) to
twenty
five(25),
shall
be
PhP7.50/kWh.

Page 25 of 41
...' ." ..'_._
5.
Evaluation
of the Proposed Rate
The PPA provides a Base Rate of PhP9.79/kWh and 85% of

the rate is subject to a Foreign Currency adjustment and
PhPO.05/kWh annual degression rate from Year 1 to Year 15. Rates
applicable for Year 16 to Year 20 shall be PhP7.50/kWh.
SE 1 provided their explanation on why the trend on the nominal
tariff is decreasing and the indexation of 85% of the nominal tariff to
foreign currency adjustment:
SE1 expect to be able to get debt financing, the tenure of which

is unlikely to exceed 15 year of the PPA. To be able to cover
their debt costs and meet debt covenants like DSCR the initial
tariff is higher and decreases as they go further into the PPA
term;
Post 15th year, the debt would be repaid and the cost savings
will be passed to the customers with a lower tariff;
The lowering trend in the tariff also provides an incentive to

SOCOTECO I and works like a discount for long term
customer;
SE1 estimated that 85% of the total capital cost will be in US$
denomination;
The initial tariff estimation was based on the USD to PhP rate at
the time of the PPA negotiation whereas the actual cost will be
incurred during the construction stage which happens only post
permitting (including ERC approval);
Bridge financing is in US dollars. The replacement bank debt

may also be in US dollars; and
The indexation of the tariff allows SE1 to cover its currency

exposure.
It can be observed that SE 1's proposed rates were not
unbundled
into Capital Recovery Fee and Operations
and
Maintenance Fee. The Commission cannot use the subsequent

Page 26 of 41
simulated unbundled tariff submitted by SE1 as it is not the one being
prayed for in their application.
Nonetheless, the Commission evaluated SE1's proposed tariff
by utilizing the same concept and parameters in approving the Feedin-Tariff (FIT) for Solar Plant as modified in the KSEC case.
It bears stressing that the FIT rate approved by the Commission
particularly for solar power plants has undergone thorough evaluation
and scrutiny of parameters used in the determination of the
applicable FIT rate. The evaluation of parameters conducted by the
Commission is consistent with its evaluation under the FIT for the
solar plant.
Since it is the policy of the Commission to employ a cost-based
methodology of setting the generation rate for bilateral power supply
agreements,
it evaluated the proposed rate based on the
documents/information and justifications submitted by the applicants
and through benchmarking
of the other parameters to the
Commission's approved parameters under the Feed-in-Tariff (FIT) for
Solar Power Plant.
Following sections discussed the Commission's
the parameters proposed by SE 1:
5.1
evaluation of
Project Cost
SE1's project will be funded through loan and equity. The

indicative debt-equity ratio for the project is 70:30. The cost of the
project is estimated at US$ 12.8 million, the main components of
which are as follows:
Cost Component
Materials and Components
Transmission Line
Contingency
Import VAT
Permittinq and Development Cost
Land
IDC, Legal, Bank fee/Others
Total Project Cost
USD
10,375,000
181,818
207,500
996,000
113,636
145,455
786,959
12,806,368
USD/kW
1,660
29
33
159
18
23
126
2,049
% to Total Cost
81.01 %
1.42%
1.62%
7.78%
0.89%
1.14%
6.15%
100.0%

Page 27 of 41
SE1 submitted that the above cost components were based on
the following assumptions:
Cost Component
Materials and Components
Transmission
Line
Explanation/J ustification
Cost refers to the EPC cost which comprises
81.01% of the total project cost. Applicants
alleged that such cost was based on the EPC
contract entered into by and between SE1 and
Juwi Renewable Energies Private Limited.
Cost of 7km transmission line to be installed by
SE1 from Surallah (solar power project site) to
the 13.2kV SOCOTECO I's Dajay Substation.
The 7 km line cost is $25.9k/km; comparable to
the approved FIT for solar plant equivalent to
$23k/km.
Contingency
Referring to unforeseen expenses including

weather related delays, accidents, specification
changes, on the ground issues etc. The cost was
calculated based on 2% of EPC price equivalent
to $1660/kW (or 1.62% of the total project cost);
in line with the approved FIT for solar plant
equivalent to 2%.
Import VAT
12% import VAT based on the assumption that

80% of the cost is imported; in line with the
approved FIT for solar plant.
Permitting and Development

Cost
This refers to the cost of obtaining all the local

and national permits including DOE Service
contract,
Certificate
of commerciality,
LGU
clearances - including Barangay, Municipal and
Provincial clearances, Distribution Impacts study,
Environmental clearance, NCIP clearance, Costs
to provide pre-development
and development
bonds from insurance companies etc. In line with
the approved FIT for solar plant equal to 1% of
EPC as development cost.
Land
Land of 8 Hectares purchased for PhP6.4 Million

and is in the name of the Company
Interest during Construction
Cost of $48/kW based on assumption that 70% of

project is finance through debt; bridge finance
during construction at 10%; construction period 4
months; Lower than FIT Benchmark - 70% debt,
6 month construction period, 8% rate, calculates
to $57/kw IDC.
Documentary Stamp Tax (DST)
Financing costs
Cost based on Philippine law 0.5%

payable on all equity and debt amounts.
DST is
Calculated based on 2% of the 70% Debt; in line

with the approved FIT for solar plant equivalent to
2% of the 70% Debt.

Page 28 of 41
Commitment fee
Calculated as 0.5% of the 70% Debt; in line with

the approved FIT for solar plant equivalent to
0.5% of the 70% Debt.
Legal Fee
Legal fee for all legal work including EPC

contracts, Land, power purchase agreements,
financing agreements, etc.
To verify the
whether the same
solar power plant,
cost to the capital
technology.
reasonableness of the proposed capital cost as to

is within the level of the approved project cost for
the Commission benchmarked the SE1's project
cost it approved under the Feed-in-Tariff for solar
Benchmarking of the
Commission in determining
supply contract involving
valuation is not possible at
constructed.
total project cost has been utilized by the

the reasonability in the approval of power
new power plants. Further, actual cost
this time as the power plant has yet to be
Shown below is the comparison of the project cost proposed by

SE1 with that of Commission's approved FIT for solar project cost:
Particulars
SE1's proposed
ro.ect cost
Commission's approved
for solar lant
12,806.37
24,060.00
6,250
10,000
2,049/kW
2,406/kW
It can be gleaned from the above table that the proposed

project cost of SE 1 is even lower than the approved project cost of
FIT for Solar.
Further, the Commission benchmarked on the prevailing project
cost of a photovoltaic solar plant.
Based on the April 2013 report1 published by U.S. Energy
Information Administration (EIA), a 20 MW utility-scale photovoltaic
solar plant was projected to be at USD4, 183/kW as of October 2012.
EIA estimated that the capital costs for solar photovoltaic
technologies decreased by 22% for 150 MW photovoltaic units from
the costs presented in the 2010 study. Furthermore, EIA found that
I http://www
.eia. goy /forecasts/ capitalcost/pdflupdated
capcost.pdf

Page 29 of 41
there was a significant decline in costs on a $/kW basis from the 7
MW system to the 20 MW system. The overall decrease in costs can
be attributed to a decline in the component costs and construction
cost savings for the balance of plant.
Meanwhile, on July 16, 2013, SunShot of the US Department of
Energy has published a report entitled "Photovoltaic System Pricing
Trends: Historical, Recent, and Near-Term Projections 2013
Edition211 According to the report, PV Distributed Systems are
expected to reach between USD2,OOO/kW-USD4,750/kW while the
PV Utility Scale systems are expected to reach between
USD1 ,500/kW-USD3, 150/kW by year 2014.
Considering the foregoing, the proposed project cost may
already be considered reasonable as it is within the range of the
prevailing project costs for the same solar technology.
The Commission likewise evaluated the components of the
project cost based on the documents submitted by the applicants to
justify their proposed cost and calculation and found that the above
cost components are acceptable for the solar project considering that
the above assumptions are consistent with the approved FIT for the
same technology.
Further, SE1 has substantially provided a supplemental
document to support the other cost components such as Juwi
Renewable Energies Private limited (EPC Contractor) corporate
profile and work plan details for the project, transmission line status
report, certificate of title for land and indicative term sheet from
Development Bank of the Philippines (DBP).
From the foregoing, the Commission believes that it is prudent
to adopt the Project Cost amounting to US$2.049 Million per
megawatt.
5.2
Net Capacity Factor
Under the financial model, SE1 used a Capacity Factor of

16.3% which is lower than the approved net capacity factor of 22%
under FIT.
http://www.nrel.gov/docs/fy130sti/60207.pdf

Page 30 of 41
Accordingly, SE1 has provided a tariff analysis that shows how
the latter found the 16.3% capacity factor reasonable for a solar
technology.
In the said document, SE1 discussed the following key factors
in determining its proposed capacity factor, to wit:
The generation of a solar plant is dependent on the solar
radiation at the location of the project. The solar resource
assessment thus forms a critical part of a project. Given the
criticality SE1 decided not to use free data sources like NASA
or NREL. Based on their experience in other countries in Asia
(India, Thailand) their data can differ by 10-15% from other
more reliable commercial data providers like Meteonorm and
SolarGis. These commercial data providers are widely
accepted by financial institutions as well as solar developers
worldwide.
SE1, during the assessment of the location for the solar plant,
adopted a three-pronged approach.
a. A detailed analysis using internal proprietary methodology
and models;
b. A third party yield analysis done by the Institute for Energy
(IE), Leipzig, Germany; and
c. Assessment from one of the shortlisted EPC providers.
SE1 validated the Capacity Utilization Factor (CUF) by

comparing the same to the Net Generation at the Charanka
Solar Park3 in Gujarat, India. Charanka has multiple solar plants
with a total installed capacity of 221 MW DC. Real time data4 is
also available.
Since the CUF is dependent on the solar radiation - the
validation takes into account the solar radiation estimate from
Meteonorm, a commercial data provider, for both locations.
3
4
www.sldcguLcom/EnergyAccount/energy
sldcguj.comiRealTimeData/GujSolar.asp
account new.asp

Page 31 of 41
In view of the foregoing, the Commission may consider the
proposed capacity factor based on the above discussed SE1 's study.
However, it should be noted that the Commission's calculated FIT
used a twenty-two percent (22%)
capacity factor vis-a-vis SE-1 's
16.3%. In this regard, the Commission finds no reason to deviate
from the load factor it approved under the FIT. As stated, "The
Commission has decided to adopt a 22% capacity factor, which is the
middle range of the capacity factors for PV crystalline technologies
based on NREL's 2011 data. The Commission finds the same
reasonable since, being a tropical country located close to the
equator, the Philippine PV Plants should naturally have a higher
capacity factor due to the more favorable insolation leveF as
compared to Germany6 and various locations in the United States,
which have a winter season. Further, the continued improvements in
the performance of PV technology resulting in better cell efficiencies
and lower electrical conversion losses, will likewise improve the levels
of capacity factors of the new PV installations."
5.3
Operating
Assumptions
SE1 assumed an O&M and G&A cost equivalent to

US$49.55/kW based on estimated current cost. The cost covers
salaries and wages, consumables such as spares and other
materials, repairs and maintenance, taxes, audit, other administrative
expense and insurance.
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 the said actual results of operations would reflect the
power plants true cost of generation. However, such assumed O&M,
to date, was not yet verifiable as the solar plant has yet to commence
its commercial operation.
The Philippines location has a solar irradiation of about 220W/m2, which is above the average
180 W/m2 solar irradiance based on the reported 2010 Mean Annual Solar Irradiance.
www.3tier.com
European countries particularly Germany and Italy has a solar irradiance of about 180 W/m2
based on the reported 2010 Mean Annual Solar Irradiance
www.3tier.com.

DECISION/November 17, 2014
Page 32 of 41
Thus, consistent with the determination of capital cost, the
Commission bench marked the proposed cost to the approved O&M
and G&A cost of FIT for solar plant, as follows:
Particulars
SE.;.1proposed
O&M and G&A
309,699.01*
6,250
Commission's
approved
O&M and G&A
559,708.26**
10,000
O&M and G&A Cost, US$/yr.

Capacity, kW
O&M and G&A Cost, US$/kW/yr.
49.55
55.88
* levelized O&M and G&A over the 20 year PPA term
**adjusted based on the cost approved by the Commission equivalent to
. US$530,000.00 using the CPI adjustment (2009-2013) provided in the
approved FIT for solar plant.
It can be deduced from the above comparison that the O&M

and G&A cost proposed by SE 1 is acceptable considering that the
same is lower than the approved O&M and G&A cost under the FIT
for solar plant. Hence, consistent with the evaluation of the project
cost, the Commission likewise adopted the O&M and G&A cost
proposed by SE 1.
5.4
Weighted Average Cost of Capital (WACC)
The SE1 solar project assumes that 15% of the capital will be
sourced locally and 85% will be sourced outside of the country. This
is based on the currency denomination of the capital cost input.
Furthermore, it is presumed that 70% of the capital needed to put up
the project will come from debt and 30% from equity.
For the local component of the debt, SE1 expected a 7.4%
interest rate based on the indicative offer from the DBP. Said loan is
payable within 14 years from the end of grace period (1 year from
Commercial Operation Date). On the other hand, SE1 entered into a
US Dollar bridge financing which shall cover the financing beyond the
construction period until an appropriate bank financing is secured.
The bridge financing shall be payable at a 10% interest rate in US
Dollars.

Page 33 of 41
As to the equity assumption, SE1 used the Capital Asset
Pricing Model (CAPM) in order to arrive at a reasonable rate of return
on the Equity component which is based on the following
calcu lations:
Re = Rf + Beta * MRP
Re
Rf
=
=
Nominal cost of Equity capital

Risk free rate equivalent to 4.97%, benchmarked on
the 20y treasury rate corresponding to the 20y PPA
duration as obtained from PDEX
Beta =
Equity beta for a benchmark generation company =

1.03, the same value as used by the Commission in its
calculations for the FiT program
MRP
Market risk premium. SE-1 followed the Commission's

methodology in the FIT program and obtained the
January 2014 values from Prof. Damodaran's data on
MRP
which
was
8.300/0
(www.stern.nyu.edu/-adamodar/pc/datasets/ctryprem.xls).
The critical component of the MRP is the default spread based

on the Philippines sovereign risk. SE1, however, was exposed to
SOCOTECO I's default risk which would be higher.
Upon SE1's estimate, it examined SOCOTECO I's borrowing
levels as compared to the treasury rates. Accordingly, SOCOTECOI's finance department expressed that their most recent debt was
obtained at a spread of 3% above the treasury rates. This spread
reflects the additional default risk of SOCOTECO I as compared to
the Philippines sovereign risk.
Using the foregoing data, SE1 derived its Cost of Equity (CoE)
and Weighted Average Cost of Capital (WACC) as follows:
Re 4.97% + 1.03 (8.30% + 3.0%) 16.61 %

WACC = 70% * 7.37% + 30% * 16.61% = 10.14%
It can be observed that the CoE derived by SE 1 using the
above parameters is slightly higher compared with the 16.440/0 CoE
approved under the FIT for the same technology. However, upon the
Commission's evaluation of the financial model submitted by SE 1, the
cost of equity as a result of the discounted cash flow is actually
12.61 %. Nonetheless, the submitted CoE as a result of the CAPM

Page 34 of 41
formula is 16.61 % which is consistent with the formula utilized by the
Commission to arrive in its approved 16.44% CoE.
Thus, the Commission believes that it is appropriate to adopt
the 16.44% cost of equity to be consistent with its approval under the
FIT for solar plants and the PSA case between KSEC and
CEPALCO.
Further, with respect to the cost of debt, the Commission
adopted SE1 's proposal as it was supported by Indicative Term Sheet
from the DBP, the letter covers the terms and conditions including the
foregoing debt assumptions.
The table below summarizes the Commission's computation of
WACC using the parameters discussed above versus SE1 's
computation of WACC:
Commission's
Computation
SE.1's Computation
Debt Element:
Pre-tax Cost of Debt
Post Tax Cost of Debt
Weight of Debt
Equity Element:
Cost of equity
Weight of Equity
Post.tax WACC
Pre.tax WACC
7.37%
70.0%
5.16%
7.37%
6.63%
70.0%
4.64%
16.61%
30.0%
4.98%
10.14%
11.27%
16.44%
30.0%
4.93%
9.57%
10.64%
The Post-tax WACC represents the effective rate of return of

the investment while the Pre-tax WACC represents rate of return
before Income Tax is paid.
5.5
Tax Assumptions
The tax assumptions used by SE1, which the Commission

found acceptable, are uniform for all RE technologies since they are
based on the provisions of R.A. 9136, R.A. 9513, the Local
Government Code, and the National Internal Revenue Code (NIRC).
These assumptions are, as follows:
Income Tax Holiday - 7 years from COD

Page 35 of 41
Income Tax Rate after ITH - 1D%

Property Tax Rate - 1.5%
Local business tax rate - 1%
Government share - 1%
ER 1-94 contribution - 1 centavo per kWh
Gross receipts tax on interest (local currency) - 5%
The above tax assumptions

assumptions used in the FIT.
5.6
Economic
are
consistent
with
the
Assumptions
SE1's applied economic parameters include among others:

a. Current Foreign exchange (US$) rate at PhP44:US$1;
b. Local inflation rate assumed at 4% (from website of the
National Statistics Office);
c. Foreign inflation rate at 2% (from the website of the US
Bureau of Labor Statistics); and
d. Base peso to US$ exchange rate at PhP43.36:US$1. (based
on averaged 3D-day
exchange rate after signing of
agreement).
The Commission likewise adopted these assumptions in order
to provide an adjustment mechanism to account for the fluctuations
(downward/upward movement) in the CPI and exchange rate.
5.7
Tariff Determination
In the determining the nominal tariff, the Commission used the

Financial Model submitted by SE1 which utilized discounted cash
flow analysis. The cost input was changed to conform with its
approved asset base. Thereafter, it set a rate that will yield an Equity
Internal Rate of Return (EIRR) and at the same time satisfy the Debt
Service Payments required by the banks to assure the repayment of
loan.
The Discounted Cash Flow methodology was used to calculate
the appropriate tariff. A stream of cash inflows and outflows (from
operating, investing and financing activities) were incorporated and
the resulting project internal rate of return and equity rate of returns
were arrived at.

Page 36 of 41
As discussed earlier, upon evaluation of the financial model
submitted by SE1, it was disclosed that the rates as well as the other
input parameters proposed by SE1 would actually yield an Equity IRR
equivalent to 12.61 % in the absence of further disallowance or
adjustment on their proposed input parameters.
The following table shows the comparison between the tariff
proposed by SE1 and the Commission's calculated tariff, to wit:
SE1 proposal
Commission's
Calculation
6.25
6.25
Project Cost, USD/kW
2,049
2,049
Capacity Factor
16.3%
22%
20
25
49.55
49.55
DCF =12.61%
CAPM = 16.61%
16.44%
Levelized Tariff
(PhP/kWh)
8.95
7.33
Nominal Tariff _1st Year

(PhP/kWh)
9.79
7.50
Parameters
Installed Capacity, MW
Recovery Period, Years

O&M, USD/kW/yr.
Equity IRR
As can be gleaned from the foregoing simulations, major

adjustments considered by the Commission are the recognition of the
25-year recovery period for the project, the adoption of the 22%
capacity factor, and the 16.440/0 cost of equity consistent with its
approval of the FIT for solar plant.
The Commission utilized a 25-year economic life of the plant as
a recovery period instead of the 20 years PPA term based on the
assumption that the solar plant could still earn revenue until the end
of its useful life. Notably, this is consistent with the its previously
approved PSA cases wherein it used the useful life of the plant as a
recovery period. It bears stressing that under the FIT model, it
likewise used a 25-year recovery period to arrive in its approved FIT
rate for solar technology.

Page 37 of 41
The following table shows the declining nominal
opposed with the calculated levelized rate of PhP7.33/kWh:
Year
Year 1
PhP/kWh
PhP/kWh
7.50
Year
Year 6
Year 2
7.45
Year 3
tariff as
PhP/kWh
7.25
Year
Year 11
Year 7
7.20
Year 12
6.95
7.40
Year 8
7.15
Year 13
6.90
Year 4
7.35
Year 9
7.10
Year 14
6.85
Year 5
7.30
Year 10
7.05
Year 15
6.80
7.00
The NPT for years sixteen (16) to twenty (20) shall be fixed at
PhP6.80/kWh.
The above tariff scheme is consistent with the pricing scheme
as provided in the PPA wherein a PhPO.05/kWh annual decrease in
NPT was recognized. However, if the above scheme was converted
to a levelized tariff, the rate to be charged to SOCOTECO I shall be
at PhP7.33/kWh.
For the 85% foreign currency adjustment on the nominal tariff
proposed by SE1, the Commission modifies the same and instead
adopt the adjustment formula provided under the FIT Rules.
At any rate, the Commission shall require the submission of
actual cost of the power plant including cost of operations and the
rates approved herein shall be adjusted, if warranted.
6.
Rate Impact
SO COTE CO I has forecasted and simulated the effect of the

inclusion of the power supplied by SE1 in its generation costs upon
the commercial operation of the solar power plant, taking into
consideration the reduced supply from PSALM and the use of the
cheaper solar power during the peak hours.

Page 38 of 41
The simulation below shows that the entry of SE1 will provide
cheaper power to SOCOTECO lover the term of the PPA:
Ave Gen Rate with NVOGT (PhP
I kWh)
Ave Gen Rate without
(PhP I kWh)
Rate Impact (PhP/kWh)
NVOGT
Year 1
Year 2
4.5615
Year 3
Year 4
4.9921
6.1340
8.1330
4.5295
5.0127
6.1803
8.2099
0.0320
(0.0206)
(0.0463)
(0.0769)
After a thorough evaluation of the documents submitted and the

testimonies of the witnesses presented, the Commission finds that
the approval and implementation of the PPA will be beneficial to
SOCOTECO I's customers by way of reliable, continuous and
efficient supply of power within its franchise area at reasonable costs
as mandated by the EPIRA [Section 2. Declaration of Policy - (b) "to
ensure the quality, reliability, security and affordability of the supply of
electric power'].
WHEREFORE,
the foregoing
premises considered,
the
application for the approval of the Power Purchase Agreement for
the supply of power to South Cotabato I Electric Cooperative, Inc.
(SOCOTECO I) filed by SOCOTECO I and nv vogt Philippines Solar
Energy
One,
Inc.
(SE1)
is
hereby
APPROVED
WITH
MODIFICATION subject to the following conditions:
a.
The Applicable Tariff shall be PhP7.50/kWh from year 1

subject to annual degression rate of PhPO.05/kWh until
year 15 and a Nominal Peso Tariff of PhP6.80/kWh from
year 16 onwards;
b.
SE 1 is directed to submit, for its first year of commercial

operation, its Audited Financial Statements (AFS), the
final Independent Engineer's Report and actual plant
capacity factor. The actual cost of operation and
construction shall be audited by an Independent Third
Party. The approved rates herein shall be adjusted, if
warranted;
The test reasonability shall not be actual cost incurred but
whether or not such cost is incurred based on a good
utility practice and comparable or within the level of the
power plants similarly situated to that of SE-1. Further the
cost of audit shall be shouldered by SE-1; and

Page 39 of 41
c.
The proposed 85% foreign currency adjustment is denied

and instead adopt the FIT Rules adjustment formula.
SO ORDERED.
Pasig City, November 17, 2014.
(7~
;1, (~
ENAIDA G. CRUZ-DUCUT
Chairperson ,..,v
Ot.
~~<PL-.
L
4toR1A VICTORIA~)(AP-TARUC
A.
ALFREDO~
Commissioner
Commissioner
/ JOSEFINA P~.
MAGPALE-ASIRIT
~61~~~sioner

Page 40 of 41
Copy Furnished:
1.
Quiason Makalintal Sarot Torres Ibarra & Sison

Attn: Atty. Manuel L.M. Torres
Counsel for the Applicants
21 st Floor, Robinsons-Equitable Tower
1605 Ortigas Center, Pasig City
2.
Office of the Solicitor General (OSG)

134 Amorsolo Street, Legaspi Village,
City of Makati 1229
3. Commission on Audit (COA)
Commonwealth Avenue,
Quezon City 1121
4.
Senate Committee on Energy

GSIS Building, Roxas Boulevard,
Pasay City 1300
5.
House of Representatives Committee on Energy

Batasan Hills, Quezon City 1126
6. Philippine Chamber of Commerce and Industry (PCCI)
3rd Floor, ECC Building,

Sen. Gil Puyat Ave., Makati City
7. The Provincial Governor
Province of South Cotabato

8. The Provincial Governor
Province of Sultan Kudarat

9.
The City Mayor

Koronadal City, South Cotabato
10.
The Municipal Mayor

Banga, South Cotabato
11. The Municipal Mayor
Lake Sebu, South Cotabato

Norala, South Cotabato

Page 41 of 41
13.
The Municipal Mayor

Sto. Nino, South Cotabato
14.
The Municipal Mayor

Surallah, South Cotabato
T'boli, South Cotabato

Tantangan, South Cotabato

Tampakan, South Cotabato

18.
The Municipal Mayor

Lutayan, Sultan Kudarat

SOCOTECO I and SE1 seek approval of 20-year solar power PPA

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SOCOTECO I and SE1 seek approval of 20-year solar power PPA

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,

Republic of the Philippinesf~,0r:'(;l,a

ENERGY REGULATORY COMMISSIONJ t".~~"iMO~h;.d

San Miguel Avenue, Pasig City

It,,,,.~.1' '[ . fI"",.

ERC Case No. 2014-048 RC

Its principal office is at Barangay Morales, Koronadal City,

It is the exclusive holder of the franchise issued by the

SE1 is a corporation duly organized under and by virtue

The situation is further worsened during the summer

The Power Sector Assets and Liabilities Management

ERC Case No. 2014-048 RC

The CSEE already reflects PSALM's reduction of its

The reduction of the power supplied by PSALM has

PSALM has already certified to SOCOTECO I that it has

The power supply of SOCOTECO I is currently sourced

Its average generation charge from its current power

Based on the SOCOTECO I 2013-2023 Forecasted

ERC Case No. 2014-048 RC

Among the offers to supply SOCOTECO I's power

Since the power plant will be commissioned within the

SOCOTECO I thoroughly evaluated the offer of SE1 and

After extensive negotiations with SE1, SOCOTECO I

Over the period of the PPA, the average generation

The salient features

ERC Case No. 2014-048 RC

Determination of the power deemed generated and

The provision on Deemed Generation in the PPA

This provision was amended

ERC Case No. 2014-048 RC

The parties believed that the change was essential

Compensation by Seller (SE1) in relation to the

Article 2.4.2 of the PPA originally read as follows:

This provision was amended

"In case the Project energy generation (as

The original wording of the provision seems to imply that

Change of degredation rate

Schedule III (Seller Generation Guaranty) of the

ERC Case No. 2014-048 RC

of the PPA for Customer

Paragraph 4 of the Amendment

2.2.1 At the Commercial Operations Date, the Project

Without prejudice to the Customer's obligation under

ERC Case No. 2014-048 RC

Seller Generation Guaranty

2.4.1 The Seller guarantees a minimum average annual

3.1.1 This Agreement shall commence on the Execution

ERC Case No. 2014-048 RC

8.2 The Customer shall solely be responsible and shall

ERC Case No. 2014-048 RC

1.1 The Tariff shall consist of two components, one that

1.4 The NPT for years 16 (sixteen) to 20 (twenty) shall

= NPT * 15% + (NPT * 85

1.6 In the event that this Agreement is extended for the

ERC Case No. 2014-048 RC

1.7 Invoices raised by the Seller shall be denominated

10.00 * 15% + (10~00* 85%) *

Tariff for Billing Period B = 10.00 * 150/0+ (10.00 * 85%) *

SOCOTECO I has forecasted and simulated the effect of

ERC Case No. 2014-048 RC

Generation Rate Without NVOGT

Generation Rate Without NVOGT

ERC Case No. 2014-048 RC