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LACHICA & ASSOCIATES RECEIVED BY: Are ff Republic of the Philippines DATE: ENERGY REGULATORY COMMISSION San Miguel Avenue, Pasig City IN| THE MATTER OF THE APPLICATION FOR THE APPROVAL OF THE POWER SALES AGREEMENT, AS AMENDED, AMONG SOUTH COTABATO i ELECTRIC COOPERATIVE, INC. (SOCOTECO 11), CONAL HOLDINGS CORPORATION AND SARANGANI ENERGY CORPORATION ERC CASE NO, 2011-138 RC SOUTH COTABATO fl ELECTRIC COOPERATIVE, INC. (SOCOTECO II) AND SARANGANI ENERGY CORPORATION (SEC), Applicants. DECISION Before the Commission for resolution is the joint application filed on October 7, 2011 by South Cotabato II Electric Cooperative, inc. (GOCOTECO II) and Sarangani Energy Corporation (SEC) for the approval of their Power Sales Agreement (PSA). In the said joint application, SOCOTECO II and SEC alleged, among others, the following 1, SOCOTECO I is a non-stock, non-profit electric cooperative organized and existing under and by virtue of Presidential Decree No. 269, as amencled, with office address at J. Catolico Avenue, Lagao, General Santos City. It has a franchise to distribute electricity in the City of General Santos, in the Municipalities of Alabel, Glan, Kiamba, Maasim, Maitum, Malapatan and Malungon, all in the Province of Sarangani, and in the Municipalities of Polomolok and Tupi, both in the Province of South Cotabato (Franchise Area) ERC CASE NO, 2011-138 RC DECISION/July 30, 2012 Page 2 of 75 i 2, SEC is a generation company duly authorized and existing under and by virtue of the laws of the Republic of the Philippines, with principal address at 3 Floor, Solid House, 2285 Chino Roces Avenue Extension, Makati City, It is the project company of Conal Holdings Corporation (CHC) for the construction and operation of the power generation facilities subject of the instant joint application. Copies of SEC's Certificate of Registration issued by the Securities and Exchange Commission, Articles of Incorporation and By-Laws and latest General Information Sheet are attached to the joint application as Annexes “A’, “A” and "A-2,” respectively Copies of CHC's Certificate of Filing of Amended Articles of Incorporation issued by the Securities and Exchange Commission (SEG), Amended Articles of Incorporation and By-Laws, latest General Information Sheet and latest Audited Financial Statements (AFS) are attached to the joint application as Annexes "B", "B-1," *B-2" and "B-3," respectively. NATURE OF THE APPLICATION 3, Pursuant to Rule 20 (B) of the Commission's Rules of Practice and Procedure, the instant joint application is submitted for its review ancl approval of the PSA, as amended by the Supplement to the PSA among SOCOTECO II, SEC and CHC (Amended PSA), Copies of the PSA and the Amended PSA are attached to the joint application as Annexes “C” and "C-1" COMPLIANCE WITH PRE-FILING REQUIREMENTS 4. In compliance with Rule 6 of the Commission's Rules of Practice and Procedure, they have furnished the legislative bodies of each of the local government units where they principally operate copies of the instant joint application with all its annexes and accompanying documents Proofs of receipt by the legistative bodies of the said local government units, including the Provinces of Sarangani and South Cotabato, are attached to the joint application as Annexes “D" to “D-11". Proof of receipt by the Sangguniang Panlungsod of Makati City, where the principal office of SEC is located, is attached to the joint application as Annex “D-12" 5. They have caused the publication of the instant joint application in its entirety in a newspaper of general circulation within the franchise area Copies of the newspaper and the corresponding Affidavit of Publication are attached to the joint application as Annexes “E” and “E-1", respectively. 7 ERC CASE NO, 2011-138 RC DECISION/July 30, 2012 Page 3 of 75 STATEMENT OF FACTS o Shortage of Power Supply in the Mindanao Grid. The Mindanao Grid is currently facing a deficit in its power supply which is certain to worsen over time. 7. According to the Department of Energy's (DOE) Power Development Plan (PPD, 2009-2030)", the generating capacity in the Mindanao Grid is no longer sufficient to meet the required capacity which is the peak demand plus the reserve margin mandated by the Commission, By 2015, the generating capacity will no longer be able to meet the grid peak demand despite the cominissioning of generating capacities already committed by private investors 8. As a result, Mindanao, including the SOCOTECO Ii franchise area, has experienced and at risk of suffering power outages adversely affecting local businesses and the daily lives of all electricity consumers, The lack of sufficient and reliable power supply has long been a barrier to much needed capital investment that would spur the local economy not only in the SOCOTECO Il franchise area but in greater Mindanao as well 9. The Mindanao Grid is heavily dependent on hydroelectric power. In fact, according to the DOE, fifty-three percent (53%) of the total dependable capacity in the Mindanao Grid as of 2009 consists of hydroelectric generating capacity. As a consequence, available power supply in the Grid is drastically reduced in the summer months. 10.In recent times, the adverse consequences of such dependence and the corresponding need for additional and inore reliable generation capacity were highlighted when the EI Nifio phenomenon aggravated the seasonal drop in available supply resulting into extended periods of power outages throughout the Grid, 11.Insufficiency of SOCOTECO II's power supply. SOCOTECO II's power requirements are currently being supplied solely by the National Power Corporation (NPC). However, Republic Act No. 9136 (R.A. 9136) mandates the privatization of its generation assels and prohibits it from investing in new generation capacity. a. The Power Sector Assets and Liabilities Management Corporation (PSALM) has sold Power Barges 117 and 118 to Therma Marine, Inc (TMI) and turned over the lligan Diesel Power Plant to the lligan City Government. As a result, NPC is na longer able to supply the full requirements of SOCOTECO II's customers. In fact, NPC has reduced its firm supply to SOCOTECO Il by thirty percent (30%) and its supply commitment to SOCOTECO II has effectively been reduced to 70 MW, which is expected to be reduced further by at least another seven percent (7%) by 2016 when its Energy Conversion Agreements (ECAs) with Wester Mindanao Power Corporation and Souther Philippines Power Corporation expire. ‘http dwww.doe. gov.phiep/Devp. htm I ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 4 of 75 b. The insufficiency of supply is expected to worsen due to the increase in demand for electricity which the DOE estimates to grow at about four percent (4%) annually. c. NPC Certification. In a Certification dated August 10, 2011, NPC confirmed that it cannot commit to supply the levels of capacity thal il has contracted to provide SOCOTECO 1! in their Contract for the Supply of Electric Energy (CSEE) A copy of the said Certification is attached to the joint application as Annex “F” 12.Consequently, SOCOTECO II will experience outages due to shortage of supply to the detriment of its customers and local businesses. 13.Procurement of Power Supply by SOCOTECO Hl. As mandated under DOE Circular No. 2003-12-01, it is the obligation of a distribution utility to forecast, assure and contract for the supply of power for its franchise area. In addition, under R.A. 9136, a distribution utility shall supply electricity to its customers in a least cost manner, 14.To address the need for adequate and reliable supply, SOCOTECO I conducted a competitive bid selection process to meet its long-term power requirements by way of a bilateral supply agreement. a. Consequently, in May 2008, SOCOTECO I! published an Invitation to Apply for Eligibility and to Bid inviting interested and potential bidders to participate in its Selection and Pre-Bid Conference. Copies of the newspapers containing such publication are attached to the joint application as Annexes “G* lo "G-1", A copy of the corresponding Affidavit of Publication is attached to the joint application as Annex “H” b, Only CHC and Agus 3 Hydro Inc. submitted letters of intent and application for eligibility in response to the said invitation. Only CHC qualified upon the opening of the bids for eligibility requirements. SOCOTECO Il, in the exercise of its right to accept any bid and to annul the bidding process, declared the failure of the said bidding. Copies of the Resolution of SOCOTECO I's Bids and Awards Commitiee declaring the failure of bidding and its letter informing CHC of the said fallure are attached to the joint application as Annexes *I" and “J” respectively. ©. Pursuant to a Memorandum of Agreement (MOA) with CHC to enter into a power supply agreement and in accordance with the procurement undertaken by SOCOTECO II, SOCOTECO Ii and CHC conducted a series of negotiations on the proposed terms and conditions for the said power supply d. As no other qualified independent power producer (IPP) submitted a letter of intent, CHC was, at that time, the only power supplier willing and capable to supply SOCOTECO I's power requirements. Presently, CHC, with SEC as-its project company, is the only power supplier with the ERC CASE NO, 2011-138 RC DECISION/July 30, 2012 Page 5 of 75 necessary permits to commence the construction of a baseload power plant in Mindanao. Hence, CHC is still the only one capable of supplying SOCOTECO I's power requirements in a timely manner. - After conducting the said negotiations and evaluating CHC’s proposal and given its urgent need for power supply, on June 3, 2011, SOCOTECO Il executed the PSA with CHC subject of the instant joint application On September 1, 2011, SOCOTECO ||, CHC and SEC executed an Amended PSA whereby the parties agreed to the assignment of CHC's fights and obligations under the PSA to SEC as well as to amend certain provisions of the PSA, With the Amended PSA, SEC shall provide SOCOTECO II 70 MW of adequate, reliable, and economic baseload power supply over the long term. Having a baseload plant connected directly to its system will vastly improve the quality and reliability of SOCOTECO {I's power supply. This will make SOCOTECO I less vulnerable to outages in the transmission line connecting it to the Grid which, in numerous times in the past, has experienced power outages due to natural and manmade causes. Furthermore, the presence of a baseload plant will also reduce, if nol eliminate, voltage fluctuations, thereby, improving power quality and helping reduce systems losses in the franchise area. With the 70 MW embedded baseload supply, SOCOTECO 1 will no longer rely foo much on the Grid for its electricity requirements. From 2044 until 2023, the Amended PSA will provide its baseload needs while the Grid will be for its intermediate and peaking requirements. Minimal use of diesel generation will only be from 2024 onwards. This maximizes utilization of the most economic sources of generation resulting to an over-all lower procurement cost of electricity, ABSTRACT OF THE PSA AND RELATED INFORMATION The Generation Facilities. To supply power under the Amended PSA, SEC shall construct, own, operate, manage and maintain a 120 MW Circulating Fluidized Bed Combustor Boiler Coal-Fired power plant in the Municipality. of Maasim, Sarangani (SEC Power Plant). The SEC Power Plant consists of one (1) generating unit with an installed capacity of 120 MW and a net dependable capacity of 105 MW. A copy of the Certification on the Plant's heat rate is attached to the joint application as Annex “Kk”, a. Expected Commercial Operations, The SEC Power Plant shall commence commercial operations within thirty-six (36) months from the effectivity of the Amended PSA, as discussed below, b. Embedded Generation. The SEC Power Plant will be located within SOCOTECO II's franchise area and will be connected directly to its distribution facilities. Said location will have significant adclitional benefits for SOCOTECO II ERC CASE NO, 2011-138 RC DECISION/July 30, 2012 Page 6 of 75 16. 47, 18, ©. Firslly, the SEC Power Plant's operations will greatly improve the power quality in SOCOTECO I's franchise area, thereby, reducing if hot! eliminating voltage problems. They will greatly enhance SOCOTECO II's operational efficiency and its service to its customers. d. Secondly, the direct connection between the SEC Power Plant and SOCOTECO I's facilities obviates the need to transmit power through the high-voltage transmission lines of the National Grid Corporation of the Philippines (NGCP). For power transmitted by NGCP from sources outside of SOCOTECO II's franchise area, the customers currently pay Power Delivery Service (PDS) charge of PhP376.33/Wimonth. The customers need not pay said amount to the extent of the power supplied from the SEG Power Plant Salient Features of the Amended PSA. a. Baseload. Under the Amended PSA, SEC shall supply or cause to supply to SOCOTECO I its baseload electric power requirements up to the Contracted Capacity of seventy (70) MWW and the Dispatchable Energy as indicated in and subject to the terms and conditions of the Amended PSA b, Term. The term of supply and purchase under the Amended PSA shall be twenty-five (25) years from the date the SEC Power Plant is ready to commence commercial operations, as designated by the Parties, c. Effectivity. The Amended PSA shall become effective upon the occurrence of the following conditions: (a) its final approval by the Commission; (b) effectivity of SEC’s equipment, procurement ancl construction (EPC) contract; and (¢) attainment or waiver of the olosing of SEC's finaneing for the project. Stages of Supply. SEC shall supply power to SOCOTECO Il during the commigsioning of the SEC Power Plant and thereafter, during its full commercial operations. As discussed below, SOCOTECO Il shall pay a lower rate during commissioning, Purchased Power Rate. The rate: to be paid by SOCOTECO II to SEC depends on whether the power is delivered during commissioning ot during commercial operations of the SEC Power Plant. a. For electricity delivered during commissioning, SOCOTECO 1! shall pay the adjusted fuel cost and the portion of Basic Capacity and Energy Charges and Adjustments that cover Fixed and Variable Operation and Maintenance cosis plus any Value-Added Tax (VAT) and any other applicable taxes, fees and charges. b. For electricity delivered during commercial operations, SOCOTECO HI shall pay the Basic Capacity and Energy Charges and Adjustments. plus VAT and any other applicable taxes, fees and charges. The said chatges and adjustments shall be computed based on the following formulae: ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 7 of 75 4. Monthly Payments 1.1, The Monthly Payments shall be paid to the Seller on a monthiy basis in accordance with the following formula: Where: CRE = Capital Recovery Fee FOMF = Fixed Operation and Maintenance Fee VOME = Variable Operation and Maintenance Fee AFC = Actual Fuel Cost sc = Start-up Cost RCEC = Replacement Capacity and Energy Costs BCEC = Backup Capacity and Energy Costs Taxes = Value-Added Tax and other applicable taxes, if any CRF stiall be computed as follows: 4.1.1 During the First Contract Year: CRF, Where: CRF, = Capital Recovery Fee for the First Contract Year FCRF, = $22.05 per kW per month which shall be converted to Philippine Peso on the Commercial Operation Date at the weighted average US Dollar to Philippine Peso exchange rate provided in Schedule J (Power Plant Foreign Capital Recovery Fee Conversion) DCRF, = PhP457.35 per KW per month cc = Contracted Capacity (70 MW) ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 8 of 75 Where: ED = Electricity Delivered during the billing period in kWh TMED " Theoretical Maximum Energy Delivered being the Contiacted Capacity multiplied by the hours in the relevant month, less any adjustments made for Allowed Outage, limitation due to dispatch order, Force Majeure of SEC Power Plant and allowable start-up time due to period of non-generation due to a Buyer Dispatch Order or an Allowed Outage and any other hours as a consequence of the Buyer's failure to perform any of its obligations F = 1 if the foregoing formula results in F being greater than 1 4.1.2 During the Second Contract Year cr x CCK E Where: CRF2 = Capital Recovery Fee for the Second Contract Year FCRF2) = $25.31 per KW per month which shall be converted to Philippine Peso on the Commercial Operation Date al the weighted average US Dollar to Philippine Peso exchange rate provided in Schedule J (Power Plant Foreign Capital Recovery Fee Conversion) DCRF2) = ~—_- PhP 525.04 per kW per month ce = Contracted Capacity (70MW) F 7 Where ED =‘ Electricity Delivered during the billing period in kWh TMED = Theoretical Maximum Energy Delivered being the Contracted Capacity multiplied by the hours in the relevant month, less any adjustments made for Allowed Outage, limitation due to dispatch order, Force Majeure of SEC Power Plant and allowable start-up time due to period of non-generation due to a Buyer Dispatch Order or an Allowed Outage and any other hours as a consequence of the Buyer's failure to perform any of its obligations ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 9 of 75 F = 1 ifthe foregoing formula results in F being greater than 1 1.4.3. During the Third Contract Year Where RFs = Capital Recovery Fee for the Third Contract Yeat FCRFs = $30.51 per KW per month which shall be converted to Philippine Peso on the Commercial Operation Date at the weighted average US Dollar to Philippine Peso exchange rate provided in Schedule (Power Plant Foreign Capital Recovery Fee Conversion) DCRFs) = ~—_-PhP525.04 per kW per month cc = Contracted Capacity (70 MW) F 7 Where: ED = Electricity Delivered during the billing period in kWh TMED = Theoretical Maximum Energy Delivered being the Contracted Capacity multiplied by the hours in the relevant month, less any adjustments made for Allowed Outage, limitation due to dispatch order, Force Majeure of SEC Power Plant and allowable start-up time due to period of nan-generation due to a Buyer Dispatch Order or an Allowed Outage and any other hours as a consequence of the Buyer's failure to perform any of its obligations F = 1 if the foregoing formula results in F being greater than 1 1.1.4 From the Fourth Contract Year up to the end of the Term 5 LA P= DORE) «CC x F ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 10 of 75 Where: CRF = Capital Recovery Fee for the Fourth Contract Year up to the end of the Term FCRF = $30.51 per kW per month which shall be converted to Philippine Peso on Commercial Operation Date at the weighted average US Dollar to Philippine Peso exchange rate provided in Schedule J (Power Plant Foreign Capital Recovery Fee Conversion) DCRF = PhP632.83 per KW per month cc = Contracted Capacity (7OMW) F = Where: ED = Electricity Delivered during the billing period in kWh TMED = Theoretical Maximum Energy Delivered being the Contracted Capacity multiplied by the hours in the relevant month, less any adjustments made for Allowed Outage, limitation due to dispatch order, Force Majeure of SEC Power Plant and allowable start-up time due (o period of non-generation due to a Buyer Dispatch Order or an Allowed Outage and any other hours as a consequence of the Buyer's failure to perform any of its obligations F = 1 if the foregoing formula results in F being greater than 1 1.2 Fixed Operation and Maintenance Fee The Fixed Operation and Maintenance Fee covers the operating and maintenance costs of the SEC Power Plant. It shall be compuled according to the following formula wl [f FOMPF ond [025 Fer.) os ic 8x FCPo)” Fv Where: FOMF = Fixed Operation & Maintenance Fee in Philippine : Pesos OMR = PhP333.23 per KW per month ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 11 of 75 cc = Where: ED = TMED = FCP, = FCPy = LP, = LeP, = Contracted Capacity (70 MW) Electricity Delivered during the billing period in kWh Theoretical Maximum Energy Delivered being the Contracted Capacity multiplied by the hours in the relevant month, less any adjustments made for Allowed Outage, limitation due to dispatch order, Force Majeure of SEC Power Plant and allowable start-up time due to period of non-generation due to a Buyer Dispatch Order or an Allowed Outage and any other hours as a consequence of the Buyer's failure to perform any of its abligations 1 if the foregoing formula results in F being greater than 1 The arithmetic average of the values of the United States Consumer Price Index for all Items, as last Published on or before the last day of such billing month by the International Monetary Fund; Provided that if the Intemational Monetary Fund ceases to publish such indices, the relevant indices as published by the U.S. Department of Labor Bureau of Labor Statistics shall apply The arithmetic average of the values as of the date of this Agreement of the United States Consumer Price Index for all Items as published by the International Monetary Fund; Provided that if the Intemational Monetary Fund ceases to publish such indices, the relevant indices as published by the U.S. Department of Labor Bureau of Labor Statistics shall apply The arithmetic average of the values of the Consumer Price Index in the Philippines for all items and General Wholesale Price Index in Metro Manila for mineral fuels, lubricants and related materials, both as last published on or before the last day of such Billing Month by the National Statistics Office The arithmetic average of the values as of the date of this Agreement of the Consumer Price Index in the Philippines for all Items and General Wholesale Price Index in Metro Manila for mineral fuels, lubricants and related materials, both as published by the National Statistics Office ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 12 of 75 Fx, = Actual Philippine Peso to US Dollar exchange rate on the meter reading date as published by the Bangko Sentral ng Pilipinas, www.bsp.gov.ph Fxo Actual Philippine Peso to US Dollar exchange rate on the date of this Agreement as published by the Bangko Sentral ng Pilipinas, www.bsp_gov.ph. 1.3. Variable Operation and Maintenance Fee The Variable Operation and Maintenance Fee covers the cost of the use of, among other items, chemicals, lubricants and spare parts, that are directly related to the generation of the SEC Power Plant. It shall be computed according to the following formula VOME =VOMRx (ust? ct PPPs flo 65x sche) xED Feo LCPo Where VOMF = Variable Operation & Maintenance Fee in Pesos VOMR PhP0.3170 per kWh ED = Electricity detivered during the billing period in kWh PPP,= The arithmetic average of the values of the United States Producers’ Price Index for Industrial Goods as last published on or before the last day of such billing month by the International Monetary Fund; Provided that if the International Monetary Fund ceases to publish such indices, the relevant indices as published by the U.S. Department of Labor Bureau of Labor Statistics shall apply PPP, The arithmetic average of the values as of the date of this Agreement of the United States Producers’ Price Index for Industrial Goods as published by the International Monetary Fund; Provided that if the Intemational Monetary Fund ceases fo publish such indices, the relevant indices as published by the U.S. Department of Labor Bureau of Labor Statistics shall apply LCP, The arithmetic average of the values of the Consumer Price Index in the Philippines for all Items and General Wholesale Price Index in Metro Manila for mineral fuels, lubricants and related materials, both as last published on or before the last day of such Billing Month by the National Statistics Office ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 13 of 75 LCPo = The arithmetic average of the values as of the date of this Agreement of the Consumer Price Index in the Philippines for all Items and General Wholesale Price Index in Metro Manila for mineral fuels, lubricants and related materials, both as published by the National Statistics Office Fx = Actual Philippine Peso to US Dollar exchange rate on the meter reading date as published by the Bangko Sentral ng Pilipinas, www_bsp. gov ph Fxq Actual Philippine Peso to US Dollar exchange rate on the date of this Agreement as published by the Bangko Sentral ng Pilipinas, www.bsp.gov_ph 1.4 Actual Fuel Cost The Actual Fuel Cost is the fee paid to the Seller as payment for the procurement and delivery of the coal used in the operation of the SEC Power Plant. The Actual Fuel Cost shall be computed as fallows: Where: FOB Coal Price = FOB Base Price x —CHletifc Values np GEN Calorie Vale Where FOB Base Price = The price expressed in US Dollars applicable for all Shipments for which the Bill of Lading Date falls within the period from and including the date of this Agreement until and including the last day of the Quarter in which the date of this Agreement occurs (the "FOB Base Price"), shall be equal to the globalCOAL Newcastle ‘Index (which is the coal price per ton, FOB Newcastle, stated in USD, as published by globalcOAL, on wwwgiobalcoal.com under the heading “Weekly Index; NEWC Index” for under such other replacement heading under which such prices are published by globalCOAL] with calorific value basis of 6,000 kcal/kg net as received) for the week immediately preceding the week in which the date of signing of this Agreement occurs. The FOB Base Price shall be reset every Quarter following the Quarter in which the date of this Agreement occurs arid ERC CASE NO, 2011-138 RC DECISION/July 30, 2012 Page 14 of 75 Calorific Value, Discount Factor Tc Other Charges Consumption Rate Forex ED such FOB Base Price applicable for all Shipments for which the B/L Date falls within and including the first day and the last day of such Quarter shall be equal to the arithmetic average of the globalCOAL Newoastle index for the immediately preceding Quarter Average Calorific Value of the coal used in the billing period Discount Factor applied to the coal used during the billing period Actual Transport Cost, including transshipment cost of the coal used during the billing petiod in USD per metric ton Actual insurance cost and port charges (all charges incurred by a vessel at a loading port and discharge port including towage, pilotage, light dues, moor or unmoor, berthing and deberthing, assist tugs, wharfage, tonnage dues and sundries, including agent's fees communications ‘charges and other miscellaneous expenses customarily regarded as port charges) and applicable customs dulies and import taxes of the coal used during the billing period 0.7kg/kWh, escalated at 0.5% annually Actual Philippine Peso to US Dollar exchange rate on the date the Seller makes payment to the fuel supplier Electricity delivered during the billing period in kWh Note: In the event that the Seller procures coal from muttiple suppliers, the weighted average of the relevant values above shall be used. 4.5 Start-Up Costs The Buyer shall pay the Seller Start-Up Costs for the cost of starting up the SEC Power Plant after a period of shutdown due to any reason attributable to the Buyer. The Stari-Up Costs shall be paid in accordance with the following schedule: ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 15 of 75 Type of Synchronization Cost per Event (PhP) | Cold Start-up to Synchronization | ___ 5,203,269 Warm Start-up to Synchronization 3,278,841 Hot Start-up to Synchronization 2,426,907 1.6 Replacement Capacity and Energy Cost; Backup Capacity and Energy Cost The Buyer shall pay the Seller Replacement Capacity and Energy Cost in accordance with the invoice provided by the supplier of Replacement Capacity and Energy. The Buyer shall pay the Seller Backup Capacity and Energy Cost equivalent to the Monthly Payment had there been no Forced Outage. 2. Gommissioning Output Charge The Buyer shall pay the Seller the Commissioning Output Charge for electricily supplied prior to the Commercial Operation Date. The Commissioning Output Charge shall be computed as follows. Where, coc = Commissioning Output Charge FOMF = Fixed Operation and Maintenance Fee computed in accordance with Item 1.2 of Schedule 8 of the PSA VoMF = Variable Operation and Maintenance Fee computed in accordance with Item 1.3 of Schedule B of the PSA ACE = Actual Cost of Fuel computed in accordance with lem 14 of Schedule B of the PSA 3. Interconnection Capital Revovery Fee The Buyer shall pay the Seller the Interconnection Capital Recovery Fee as payment for the Interconnection Facilities in accordance with the following formula: ICRF =| (RIFCRF+ DIFCRF)xCC]4 Taxes t ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 16 of 75 Where: FIFCR == Foreign Interconnection Capital Recovery Fee of $2.85 per kW per month which shall be converted to Philippine Peso on the Commercial Operation Date at the weighted average US Dollar to Philippine Peso exchange rate provided in Schedule K (Foreign Interconnection Capital Recovery Fee Conversion) DIFCRF = = —__ Domestic Interconnection Capital Recovery Fee of PhP122,55/Wimonth cc = Contracted Capacity (70 MW) Taxes = Value-Added Tax and other applicable taxes, if any ¢. Price Components and Breakdowns. The components of the Basic Capacity and Energy Charges aie 1. The CRF which represents SEC's recovery of its capital at a reasonable rate of return; 2, The Fixed Operation and Maintenance Fee which covers the operating and maintenance costs of the power structures and ‘equipment and plant management and supervision costs; 3. The Variable Operation and Maintenance Fee which covers the use of chemicals, lubricants, spare parts and other materials that are directly related to the generation of electricity; and 4. The Actual Fuel Cost which represents a pass-on of the actual cost incurred by SEC for fuel. Relevant computations supporting the above formulae are contained in Annex "L" of the joint application. A sample computation of the rate is attached fo the joint application as Annex "M" d. Basis for Indexation. As indicated in the formulae above, the monthly fees to be paid by SOCOTECO 1 are subject to adjustments based on various indices or factors in order to properly reflect the fluctuation of SEC's costs in producing electricity. €. The Foreign CRF component is fixed and is subject only to a one-time conversion to Philippine Peso on Commercial Operation Date at the weighted average exchange rate as computed in accordance with the Amended PSA. This will ensure that SOCOTECO II does not carry a long-term foreign exchange exposure on the Capital Recovery Fee component. ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 17 of 75 f. The components of the Operation and Maintenance Fees representing dollar-denominated costs are adjusted based on the foreign exchange rate and the US Consumer Price and Praducer Price Indices; those representing local costs are adjusted based on the Local Consumer Price Index. The Actual Fuel Custs vary based on actual costs as well as the foreign exchange rate and on the Global Coal Newcastle Index. 19.Sources of Funds/Financial Plans. The project will be funded through loans and equity. The indicative debl-equity ratio for the project is 70:30 a, Project Gost. The cost of the project is estimated at US$280.197 Million, the main components of which are as follows: USD ('000) 207,781 Plant EPC Non-EP uction Period Insurances perating Expenses Development Fe | Social and Environmental Land | Capitalised O&M Comm 9 Contingency Value Added Tax (VAT) _ Other Taxes Financing Costs | 32,148 |__ Fihancing Costs = 32,148 PH TOTAL 280,197 A breakdown of the components of the project cost is attached to the joint application as Annex “N’ b. Annual Interest. SEC is currently discussing with prospective lenciers the terms and conditions of the project financing. It underlakes to provide a certification from the said lenders on the relevant loan details as soon as the same is finalized ©. For purposes of determining the Basic Capacity and Energy Charges, SEC applied an estimated interest rate of 9.5% per annum as indicated by the prospective lenders ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 18 of 75 4. Computation of Project Internal Rate of ReturnWeighted Average Cost of Capital (PIRRMWACC). The PIRR and nominal pre-tax WACC are 13.7% and 15.03%, respectively. Computations of the PIRR and WACC are shown in Annexes “P" of the joint application, respectively and 20.Cash Flow. a. Breakdown of Operating and Maintenance Expenses. A detailed breakdown of the projected operating expenses, including expenses for the power plant and general and administrative expenses, is attached to the joint application as Annex "a" b. Offtake Arrangement. Under the Amended PSA, SEC shall make available, reserve, guarantee and deliver to SOCOTECO Il the Contracted Capacity and SOCOTECO II shall pay for such quantity of electric power SEC shall utilize such Contracted Capacity to generate energy for SOCOTECO II. c. There ig no minimum energy offtake under the Amended PSA. As SEC will dedicate 70 MW of capacity to SOCOTECO II, the CRF and the Fixed Operations and Maintenance Fee ate computed based on the proportion of actual energy delivered to the energy that could have been delivered 21.Fuel procurement. For the fuel for the SEC Power Plant, CHC issued an international public tender for the supply of coal. The conduct of the tender and the fuel procurement process is summarized in Annex “R" of the joint application 22. The conduct of international public tender assures SOCOTECO | of the best available cost of fuel supply. It must be stressed that SEC derives no revenue whatsoever from the fuel supply. 23. Environmental Compliance Certificate. On April 20, 2009, the Department of Environment and Natural Resources (DENR) issued Environmental Compliance Certificate (ECC) Ref. No. 0901-001-4021 for the SEC Power Plant. A copy of the ECC is attached to the jaint application as Annex “S". 24.DOE Certification. On July 27, 2007, the DOE issued Certificate of Endorsement No. 2007-07-01 certifying that the SEC Power Plant is consistent with the Philippine Developnient Plan (PDP). A copy of the said Certificate is attached to the joint application as Annex ‘T" 25.Certificate| of Compliance. As the SEC Power Plant is still to be constructed, it is not yet covered by a Certificate of Compliance (COC). In accordance with ERC Resolution No. 9, Series of 2010, SEC shalt file the necessary application for a GOC no later than three (3) months before the commencement of commercial operations, ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 19 of 75 26. SOCOTECO II's Load Forecast Projections. A copy of SOCOTECO I's Distribution Development Plan (DDP), showing its load forecast projections, is attached {9 the joint application as Annex “U" RATE IMPLICATIONS 0} HE PSA 27.In order to determine the impact of the implementation of the Amended PSA on SOCOTECO II's generation costs, an analysis was conducted taking into consideration the reduction of NPC’s firm supply commitments fo it and the available alternative sources of power in Mindanao. A copy of the said analysis is attached to the joint application as Annex 28.As NPC will no longer be able to supply the full extent of its power requirements, SOCOTECO II's only other options for supply are: (a) alternative | sources available in Mindanao, which consist of expensive diesel/bunker C-fueled power plants; and (b) the SEC Power Plant. 29. The following table shows the expected rate impact should SOCOTECO II procure power from such alternative sources or from the SEC Power Plant { (ee jee [201% to | 2017 to Scenario | 2011 | 2012 | 2013 | 2014| 2015/2016} 2016 2027 i i i (average) | (average) - He PikWh Without SEC 4.65 | 4.82 [4.97] 5.15] 5.35] 5.60] 5.09 8.24 Supply _ Ee eee cu Supplier NPC and Diesel Pants zi With SEC Supply | 4.65 [482 [4.97 [4.95 [524530] 4,09 _[ 631 NPC and Diesel | Supplier Plants_____|_NPC and SEC z - Difference 0 Jo] 0 [0207011] 030 | o70 4.93 a. In ordet to properly reflect SOCOTECO II's cost of procurement, the analysis considers the delivered cost of electricity, that is, the cost of generation and cost of power delivery service. In addition, the analysis assumes no increase in the cost of fuel as it is not possible to predict future fuel costs, 30.As shown above, if SOCOTECO II procures its power requirements from the available diesel/bunker C plants, the blended delivered cost of electricity will increase from PhP4.65/kWh to an average of PhPS.OQ/kWh from 2011 to 2016. The blended cost will increase to an average of PhP8.24/KWh from 2017 to 2027, U ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 20 of 75 31. However, if SOCOTECO 1 procures its power requirements from the SEC Power Plant under the Amended PSA, the cost impact will not be as significant. The average blended costs will be PhP4.99/KWh from 2011 to 2016 and RhP6.31/kWh from 2017 to 2027, 32. Thus, SOCOTECO II's procurement of power under the Amended PSA, instead of from the more expensive diesel/bunker C power plants, results in very significant long term savings over the contract term, 35.After due hearing, judgment be rendered approving their PSA dated June 3, 2011, as atnended by the Supplement to the PSA dated September 1, 2011 as well as the generation rate and adjustment mechanisms indicated therein 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 November 2, 2011, were issued setting the case for jurisdictional hearing, expository presentation, pre-trial conference and evidentiary hearing on December 7, 2011 in the same Order, SOCOTECO II and SEC 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, the date of the tast publication to be made not later than ten (10) days before the scheduled date of the initial hearing. They were also directed to inform the consumers within SOCOTECO I's franchise area, by any other means available and appropriate, of the filing of the instant application, its 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 ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 21 of 78 Likewise, the Offices of the Governors of the Provinces of South Cotabato and Saranggani and the |Mayors of the City and Municipalities within the franchise area of SOCOTECO II were furnished with copies of the Order and Notice of Public Hearing for the appropriate posting thereof on their respective bulletin boards On November 14, 2011, the City Council of General Santos endorsed to the Commission its Resolution No. 541, Series of 2014, entitled “Resolution Urging the Energy Regulatory Commission (ERC) to Hold in Abeyance the Consideration of the Power Supply Agreement Entered into by South Cotabato Il Electric Cooperative, inc. (SOCOTECO It) with Conal Holdings Corporation and Sarangani Energy Corporation Pending the Report of the Study Being Conducted by the Power Consumers Group of General Santos City” On December 1, 2011, the Freedom from Debt Coalition (FDC) - SOCSARGEN Chapter filed its “Petition for Intervention’, On December 2, 2011, SOCOTECO Il and SEC filed their respective “Pre-ttial Briefs”. On December 5, 2011, SEC filed a “Submission with Motion to Treat Information Confidential’ praying that its Engineering, Procurement and Construction (EPC) contract be treated as confidential information. During the December 7, 2011 initial heating, SOCOTECO II, SEC, the City of General Santos and Atty. Dominador Lagare, Sr., for and on behalf of FDC and himself as a member-consumer of SOCOTECO Il, appeared. ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 22 of 75 At the said hearing, SOCOTECO Il and SEC presented their proofs of compliance with the Commission's publication and posting of notice requirements, which were marked as Exhibits “A” to “P-1°, inclusive, They, then, conducted an expository presentation of their joint application. The Mayor of the City of General Santos propounded tlarificatory questions, particularly on the authority of Mr. Elenito Senit to execute the PSA on behalf of SOCOTECO II. The Commission directed SOCOTECO Ii to file its comments thereon, to conduct a public consultation on the PSA subject of the instant application not later than January 15, 2012 and to submit a written report Thereafter, FDC moved that further hearings be deferred since the City of General Santos would constitute a Technical Working Group (TWG) to assess the feasibility of the construction of the SEC Power Plant. On the other hand, SEC moved for the issuance of an Order of General Default. Said motions were granted. The Commission, then, directed the City of General Santos, FDC and Atty Lagare to file, within ten (10) days from said date of hearing, their respective pre-trial briefs, On the same date, Atty. Lagare. filed his "Intervention and/or Opposition and/or Comment” while the City of General Santos filed its “Opposition/Comment” On December 15, 2041, the National Grid Corporation of the Philippines (NGCP) filed its “Petition for Intervention’, On December) 16, 2011, SOCOTECO II filed a “Manifestation” that it would be conducting public consultations on various dates and venues. / ERC CASE NO, 2011-138 RC DECISION/July 30, 2012 Page 23 of 75 On December 20, 2011, FDC filed its “Pre trial Brief” On December 22, 2011, SEC filed a “Motion to Admit Attached Comment’. On December 26, 2011, the City of General Santos filed its “Pre-trial Brief (for Oppositor City of General Santos)” On January 2, 2012, the Commission issued an Order denying NGCP’s “Petition for Intervention”. On January 12, 2012, Mr. Miguelito 1. Balicaco, a member-consumer of SOCOTECO Il, filed his comments on the public consultations conducted by SOCOTECO II and SEC. On January 24, 2012, Mr. Eduardo C. Alegre, et al, member-consumers of SOCOTECO Il, filed a “Petition to Declare Null and Void the Application for Approval of the Power Sales Agreement, as Amended” On January 25, 2012, NGCP filed a “Motion for Reconsideration (of the Order Dated January 2, 2042)". On January 30, 2012, the Commission issued an Order directing SOCOTECO It and SEC to file their comments on Mr. Alegre, et al's petition. On the same date, SOCOTECO II and SEC filed a “Compliance (Re: Report on the Public Consultations)’, On February 7, 2012, NGCP filed its “Comment (to the Joint Application)". ERC CASE NO, 2011-138 RC DECISION/July 30, 2012 Page 24 of 75 On February 15, 2012, Atty. Lagare filed a ‘Manifestation that SOCOTECO 1 Entered into an Agreement with Sarangani Energy Corporation with Capitalization Only of Five Million Pesos, Among Others’, On February 16, 2012, SOCOTECO II and SEC filed their “Joint Comment (Re: Petition to Declare the PSA, Supplemental Agreement to PSA and PSA Application Null and Void”, On February 23, 2012, SOCOTECO I filed an “Opposition to NGCP’s Motion for Reconsideration’. On February 28, 2012, SEC filed its “Comment (Re: Manifestation Dated February 3, 2012 Filed by Atty, Dominador A. Lagare)" On March 1, 2012, SEC filed a "Manifestation (Re: Adopting SOCOTECO II's Opposition to NGCP’s Motion for Reconsideration)". On March 8, 2012, SOCOTECO II filed its "Comment on the Manifestation (That SOCOTECO I Entered into an Agreement with SEC with Capitalization Only of Five Million Pesos, Among Others)", On March 8, 2012, the Commission issued an Order denying Mr. Alegre, et al’s “Petition to Declare Null and Void the Application for Approval of the Power Sales Agreement, as Amended” y ERC CASE NO. 2014-138 RC DECISION/July 30, 2012 Page 25 of 75 On March 19,/2042, the Commission issued an Order granting NGCP's “Motion for Reconsideration" and allowing it to intervene in the instant joint application ‘On March 20, 2012, the City of General Santos furnished the Commission a copy Of its Resolution No. 133, Series of 2012, entitled "Resolution Endorsing the Report of the Technical Working Group to the Energy Regulatory Commission (ERC) on its Study of the Power Sales Agreement Entered into by the South Cotabato Il Electric Cooperative, Inc. (SOCOTECO |), Conal Holdings Corporation and Sarangani Energy Corporation and Urging the Same to Deny its Application for Approval of the said Power Sales Agreement’ At the continuation of the hearing on March 22, 2012, SOCOTECO II, SEC and NGCP appeared. The City of General Santos, FDC and Alty. Lagare failed to appear. Al the said hearing, the Commission deferred the conduct of the pre-trial conference and evidentiary hearing in the interest of fairness and equity. Instead, all the parties were directed to be ready to present their respective witnesses at the next hearing. Relative thereto, the judicial affidavits of the said witnesses should be submitted to the Commission, copy furnished the other parties, at least three (3) days prior to their presentation. Further, Atty. Lagare was directed to submit his pre-trial brief al least three (3) days prior to the next hearing On the same date, NGCP filed its “Pre-trial Brief’ On March 26, 2012, Atty. Lagare filed “Intervenor/Oppositor Atty. Dominador A. Lagare, Sr. Manifesting to Adopt the Pre-tvial Brief of Intervenor Freedom from Debt Coalition - SOCSARGEN Chapter” ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 26 of 75 During the March 29, 2012 hearing, SOCOTECO II, SEC, the City of General Santos and NGCP appeared. FDC and Atty. Lagare failed to appear despite due notice In the said hearing, the Commission took note of the following: 1) the “intervenor/Oppositor Atty. Dominador A. Lagare, Sr. Manifesting to Adopt the Pre-trial Briof of Intervenor Freedom from Debt Coalition - SOCSARGEN Chapter” fled on March 26, 2012 by Atty. Lagare; and 2) the “Manifestation” filed on March 28, 2012 by FDC. Upon the Commission's inquiry, the City of General Santos manifested that it intended to participate in the proceedings as an Intervenor. In connection therewith, SEC inquired whether or not the City of General Santos has already filed its petition for intervention. The City ef General Santos manifested that it did not file a petition for intervention but moved that its “Opposition/Comment" filed on December 7, 2011 be treated as its petition for intervention. SOCOTECO II and SEC interposed no objection thereto, Thus, said motion was granted The Commission conducted the pre-trial conference among the parties present, subject to the comments of FDC and Alty. Lagare at the next hearing. SEC interposed its objection to the issues proposed by NGCP for being irrelevant to the instant application. The Commission has resolved to defer its ruling on the said matter Uy ERG CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 27 of 75 The Commission inquired from NGCP and the City of General Santos whether or not they have already filed the Judicial Affidavits of their respective witnesses as directed in the Order dated March 22, 2012. NGCP and the City of General Santos separately manifested that they have not complied with the said directive. Thus, the Commission directed them anew to file the said affidavits on or before April 4, 2012. Thereafter, the City of General Santos manifested that SOCOTECO II denied its request for documents on the ground that the same were confidential in nature SOCOTECO II manifested that it already furnished the City of General Santos with the Tequested documents, except for the engagement letter of its counsel, The City of General Santos marifested that it was not furnished with the Minutes of the Meetings pertaining to the negotiations among SOCOTECO Il, CHC and SEC relative to the execution of the subject PSA and its Supplement. SOCOTECO Il manifested that it could not provide the City of General Santos a copy of the said minutes as they do not exist. The FDC commented that it was unusual for the General Manager of SOCOTECO II, Engr, Rodolfo Ocat, to serve copies of the Order dated March 22, 2012 to the Interveners in General Santos City. The Commission informed the parties present that during the March 22, 2012 hearing, il directed Engr. Ocat to serve copies of the Order to the other parties to ensure their receipt thereof, Subsequently, SOCOTECO Il presented its General Manager, Engr. Ocat, as its lone witness, who testified, among others, on the following: a) the:salient features of the PSA, including the rates therein; b) the load requirements of SOCOTECO Il; ¢) the insufficiency of SOCOTECO It's supply of power to ils franchise area after the expiration of its CSEE with NPC; d) SOCOTECO II's compliance with the Commission's ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 28 of 75 publication and posting of notice requirements; e) the Contract Energy Fees and other charges under the PSA meet the standards imposed by RA. 9136; and f) the commercial terms of the PSA are advantageous lo SOCOTECO II's consumers. NGCP and the City of General Santos cross-examined the said witness. NGCP, then, moved that it be allowed to continue its cross-examination of the said witness at the next hearing since it needed to confer with its technical staff as regards the load forecast and rate simulation, Said motion was granted. The Commission propounded clarificatory questions On the other hand, SEC presented its Vice President for Business Development, Mr. Joseph Nocos, as its lone witness, who testified, among others, on the following: a) the negotiations between SOCOTECO I and CHC for the execution of the PSA; b) CHC's participation in the competitive selection process conducted by SOCOTECO II; ©) the technical aspects of the SEC Power Plant; and d) the salient features of the PSA, particularly the components of the rate, duration, stages of the power supply, minimum energy offtake, start-up costs, amounts of debt and equity, total project cost and source of fuel, Due to lack of material time, the cross-examination of the said witness was deferred until the next hearing At the continuation of the hearing on Apiil 11, 2012, SOCOTECO II, SEC, the Cily of General Santos, FDC and NGCP appeared. Atty. Lagare failed to appear despite due notice In the said hearing, SOCOTECO II, SEC and NGCP were given until Apri! 18, 2012 within which to submit a single line diagram of the proposed connection of SEC power plant to SOCOTECO II's distribution system. Relative thereto, NGCP manifested ERC CASE NO. 2014-138 RC DECISION/July 30, 2012 Page 29 of 75 that it already attached said diagram to its “Comment (To The Joint Application)” filed on February 7, 2012 Upon the Commission's inquiry, FDC manifested that it has yet to file the Judicial Affidavits of its witnesses since it would like to avail of the modes of discovery under the Commission's Rules of Practice and Procedure, namely: data request and written interrogatories. It also moved that the succeeding hearings be set in General Santos City or in Davao City to afford SOCOTECO II's member-consumers the opportunity to attend The Commission denied FDC’s request to avail of the modes of discovery since its request was couched in general terms, as can be gleaned from its “Pre-trial Brief", and the same was belatedly filed. The Commission, likewise, denied FDC’s motion to conduct the succeeding hearings in South Cotabato City or in Davao City since the initial hearing on December 7, 2011 was already held in South Cotabato Cily. Under Section 4 (e), Rule 3 of the Implementing Rules and Regulations (IRR) of RA, 9136, the Commission is only required to conduct at least one public hearing in the affected locality, In the meantime, record disclosed that despite the Commission's Order dated November 22, 2011 directing interested parties to file their respective Pre-trial Briefs and the Judicial Affidavits of their witnesses not later than December 2, 2014, FDC only filed its "Pre-trial Brief" on December 20, 2011 and has not yet filed the required Judicial A¥fidavits as of date. NGCP, for its part, only submitted the Judicial Affidavit of one (1) of its three (3) witnesses. On the other hand, the City of General Santos manifested that it would adopt the witnesses to be presented by FDC. ERC CASE NO. 2011-138 RC DECISION/July 30, 2012 Page 30 of 75 In the interest of substantial justice, FDC and NGCP were given until April 18, 2012 within which to submit the respective Judicial Affidavits of their witnesses. Their failure to submit the required Judicial Affidavits shall be deemed as a waiver of their right to present their evidence. ‘The Commission conducted a pre-trial conference to discuss the stipulations of facts and issues of FDC in its “Pre-trial Brief" Thereafter, SOCOTECO II recalled ils witness, Engr. Ocat, for cross. examination. FOC reserved its right to cross-examine the said witness at the next hearing relative to the expository presentation made during the December 7, 2011 initial hearing SEC recalled its witness, Mr. Nocos, who was cross-examined by the City of General Santos, NGCP and FDC. Subsequently, SEC moved that Atty. Lagare be deemed to have waiyed his right to cross-examine Engr. Ocat and Mr. Nocos in view of his absence at the said hearing without any justifiable reason. The Commission denied the said motion. However, Atty. Lagare was ditected to attend the next hearing for his cross-examination of the said witnesses, otherwise, he would be deemed to have waived his right to da so. On April 12, 2012, the Commission issued an Order setting an ocular inspection ‘on the proposed cannection of the SEC Power Plant to the distribution system of SOCOTECO II

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