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Republic of the Philippines ENERGY REGULATORY COMMISSION San Miguel Avenue, Pasig City INTHE MATTER OF THE JOINT APPLICATION FOR THE APPROVAL OF THE POWER PURCHASE AND SALE AGREEMENT (PPSA) ENTERED INTO BY AND BETWEEN DAGUPAN ELECTRIC CORPORATION (DECORP) AND GNPOWER LIMITED ~——s COMPANY. (GNPOWER), WITH PRAYER FOR PROVISIONAL AUTHORITY ERC CASE NO. 2007-088 RC DAGUPAN ELECTRIC CORPORATION (DECORP) AND GNPOWER LIMITED COMPANY (GNPOWER), Applicants. =x DECISION Before the Commission for resolution is the joint application filed on March 16, 2007 by the Dagupan Electric Corporation (DECORP) and the GNPOWER Limited Company (GNPOWER) for the approval of their Power Purchase and Sale Agreement (PPSA), with prayer for provisional authority. In the said application, DECORP and GNPOWER alleged, among others, that: 4. GNPOWER will build, own and operate a 2 x 300 MW clean pulverized coabfired electric power generation to be located near Mariveles, Bataan, for the purpose of supplying its customers with environmentally clean electric power commencing in late 2010; 2. In view of the anticipated insufficient supply of power in 2010 as projected by the DOE and the expiration of the Transition Supply Contract (TSC) between the National Power Corporation (NPC) and DECORP, DECORP placed an advertisement to Bid for the Electric Power Purchase Agreement (EPPA) on June 13, 2005 issue of the 7 / ERC CASE NO. 2007-088 RC OrderiSeptember §, 2007 Page 2 of 19 Manila Standard Today. In addition, letters of invitation to bid were sent to the following: . Trans-Asia Power Generation Corporation PPDIC Management Co., Inc. Mirant Philippines Focus Asia Consult Pte. Ltd. Mindanao Energy Systems, Inc. Applied Research Technologies Phil, Inc. GNPower Ltd., Co eronose During the Pre-Bid Conference held on July 7, 2005, only four (4) power suppliers were in attendance, namely: a) PPDIC Management Co., Inc.; b) Mirant Philippines; c) Applied Research Technologies Phil, Inc.; and d) GNPower Ltd., Co. The said power suppliers requested that the scheduled bid submission on July 18, 2005 be cancelled and reset on July 29, 2005; During the bidding date, DECORP did not receive any proposal from the bidders, DECORP's Bidding and Awards Committee (BAC) therefore declared a "Failure of Bidding", Due to the necessily of the EPPA, DECORP’s BAC recommended a second public bidding on September 21, 2005. All intending bidders were furnished with the Bid Bulletin No. 2 dated September 2, 2005 embodying said announcement; Prior to the second public bidding, some intending bidders requested for the extension of the bidding deadline. Accordingly, Bid Bulletin No. 3 dated September 19, 2005 was issued resetting the bidding deadline to October 25, 2005; On October 25, 2005 bidding date, only GNPOWER submitted a bidding proposal to DECORP's BAC. The other intending bidders failed to appear during the bidding deadline. After the Bid Submission closing, DECORP's BAC opened the lone proposal from GNPOWER before the Commission. The BAC proceeded with the evaluation of the two envelopes containing the Technical and Financial proposals of GNPOWER; After careful evaluation of the said proposals, the BAC declared the proposal of GNPOWER acceptable and recommended the awarding of the EPPA to GNPOWER which was embodied in the Notice of Provisional Award dated December 9, 2005; Qn July 7, 2006, DECORP and GNPOWER entered into the subject PPSA; Under the said PPSA, GNPOWER's Purchased Power Rate (Contract Price) is the price in US Dollars to be paid by DECORP for the purchase of the electric capacity. The said Contract Price comprised of relevant Capacity Fee and Energy Fee that may be paid in Philippine Peso (PhP). Any foreign exchange risk is, however, borne by DECORP; dee . ERC CASE NO. 2007-088 RC Crder/September 5, 2007 Page 3 of 19 10. The Capacity Fee is the component of the Contract Price allocated to pay for the cost, including the cost of operations and maintenance, of the power plant and may be adjusted from time to time based on DECORP's Capacity Factor; 11. The Energy Fee is also a component of the Contract Fee allocated to pay for the cost of the coal, including govemment charges, and may be adjusted from time to time due to changes in the delivered price of Coal; 12. Shown below is the calculation of the GNPOWER Contract Price: Contract Price = Capacity Fee + Energy Fee 43. The determination and rate impact of the subject PPSA to DECORP's consumers are as follows: “In order to determine the impact of GNPOWER's and DECORP’s PPSA to DECORP’s over-all generation rate, DECORP's Current load profile was simulated. Shown in Table | is the present allocation of DECORP's energy requirement and the combined generation rate from its current supplier. NPC was grouped into two; so as to proportion what will be reallocated to GNPOWER once the PPSA takes into effect. The projected allocation of DECORP's energy requirement due to GNPOWER's and DECORP's PPSA, as well as the combined generation rate is shown in Table 2. With GNPOWER being another supplier for DECORP, GNPOWER's rate is about PhP1,02/kWh less than the comparable NPC rate of the displaced quantity. The effect would then be a reduction of about PhP0.88 per kWh in DECORP’s over-all generation rate. It has to be noted that at the time when GNPOWER will deliver power to DECORP, its contracted demand will eventually be at a baseload level because of DECORP’s projected growth. Table 1. DECORP’s Present Load Allocation and Combined Generation Rate ‘Average Monthly Percent | ‘Combined | SUPPLIERS Energy Share Rato Rate (kwh)! (2) (Phe/kWh) _|__(PhP/kWh) NPC 1 a 17,007,320 [87.16% | 4.7418 | NPC 27 | ___ 2,504,729 | 12.84% 6.2545 49360 | TOTAL 19,512,305 | 100% on Table 2. DECORP's Projected Load Allocation and Combined Generation Rate | Average Monthly Combined SUPPLIERS Energy tones Rate Rate | | (iewh) nPneWh) | (PRP/Wh)_ | SNPOWER® 17,007,320 | 87.16% 3.7252 | TOTAL 79,512,305 | 100% \& A ERC CASE NO. 2007-088 RC Order/September 5, 2007 Page 4 of 19 Notes: 1. (Peak/Of-peak Quantity) Based on the current annualized (Year 2006, ERC-approved) NPC Time-Of-Use rates for Luzon. Also included in the calculation is the current Deferred Accounting Adjustment (6" GRAM and 5” ICERA) which recovers incremental costs from April to October 2005 only. 2. (Purely Off-peak Quantity) Based on the current annualized (Year 2006, ERC-approved) NPC Time-Of-Use rates for Luzon. Also included in the calculation is the current Deferred Accounting Adjustment (6" GRAM and 5" ICERA) which recovers incremental costs from April to October 2005 only. 3, Based on the current coal price and FOREX at PhP50: USS, Prompt Payment Discount for 15 years not yet included. 4. Analyses and simulations were based on January to December 2006 NPC-TOU data.” 14, The operation by GNPOWER of the proposed 2 x 300 MW clean pulverized coal-fired electric power generation facility is a concrete step in averting a power crisis that could hit the Luzon grid by 2010. In fact, the Honorable Undersecretary Melinda L. Ocampo of the Department of Energy (DOE), speaking at the 32nd Philippine business Conference urged distribution utilities, large industrial and commercial users to help in facilitating investments in new capacity “by firming up and indicating their eneray requirements and by signing up for bilateral contracts with power providers to provide a stable market.” 15. In its officially published Power Development Plant (PDP) for 2008- 2016, the DOE estimated the annual electricity demand to grow by about six percent (6%) in Luzon and requires additional capacity in the Luzon grid as early as 2008. In its latest presentation on the National Competitiveness Summit for Energy Sector held last October 6, 2008, the DOE had pronounced a four percent (4%) annual average growth rate in the electricity demand in Luzon; 16. Even with this conservative estimate used in the aforesaid presentation, given the present capacity and committed projects, power supply will become critical in Luzon by year 2010. In Luzon itself, a minimum of 15 MW capacity is needed by 2010 and another 450 MW by 2011; 17. Out of the 10,596 MW dependable capacity in Luzon, 19.4% comes from oil-based power plants vis-a-vis its generation share of only about 5%. It is important to note that if the increasing demand will not be supported by power supply from baseload and mid-range power plants, it will be forced to fully utilize oil-based power plants which are way too expensive; ( “ f ERC CASE NO. 2007-088 RC Order/September 5, 2007 Page 5 of 19 48. If no power plant will be built, the impact in the Luzon grid would be high generation cost then supply shortage starting 2010; 19. GNPOWER, as it is first in the market, is approaching its target of selling 500 MW of capacity under long-term contracts as a precondition to its financial closing. After financial closing, GNPOWER plans to construct the said power plant in year 2007 to achieve its goal of delivering power by late 2010; 20. The project is bound by milestones, and any delay or barrier will hinder GNPOWER's commencement of commercial operations by late 2010; 21. They prayed that a provisional authority be immediately issued in order for GNPOWER to commence the construction of the coal-fired power plant by 2007 in time to address the expected power short-fall in 2010; 22. The instant application was filed in line with the DOE Circular No. 2003-12-22; and 23. Public welfare, necossity and interest demand, particularly in Luzon- wide, the immediate approval of the instant application as this will help meet the forecasted capacity shortage in the Luzon grid by the year 2010. 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 4, 2007, were issued setting the case for hearing on July 5, 2007 (Thursday), at the DECORP’s Main Office, Veria Il Building, AB Fernandez West, Dagupan City. DECORP and GNPOWER 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 last date of publication to be made not later than ten (10) days before the scheduled date of initial hearing. In compliance therewith, DECORP and GNPOWER published the Notice of Public Hearing in the Manila Times and the Daily Tribune on June 15, and 22, 2007. ERC CASE NO. 2007-088 RC Order/September 5, 2007 Page 6 of 19 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 the Notice of Public Hearing and were requested to have their respective duly authorized representatives present at the aforesaid initial hearing. Likewise, the Offices of the Mayors of the City and Municipalities within the franchise area of DECORP were furnished with copies of the Order and the Notice of Public Hearing for the appropriate posting thereof on their respective bulletin boards. During the July 5, 2007 hearing, the following entered their appearances a) Atty. Lourdy D. Torres, as counsel for GNPOWER; and b) Atty. Marleen Joyce P. Abesamis, as counsel for DECORP. No oppositors appeared nor was there any opposition registered At the said hearing, DECORP and GNPOWER presented proofs of their compliance with the Commission's posting and publication of notice requirements which were duly marked as Exhibits "A" to "E-7”, inclusive. Thereafter, DECORP and GNPOWER made an expository presentation of their application in compliance with the Commission's directive in its Order dated June 4, 2007. Subsequently, DECORP and GNPOWER presented the following witnesses who testified in support of the application: a) Mr. Dave Andrew Opiso, DECORP's Business Manager; b) Mr. John A. Becker, GNPOWER's Senior Vice President; c) Mr. Steve C. Varberg, GNPOWER's Project Manager; and d) Ms. Noelina B, Miran, GNPOWER's Environmental Officer. In the course of their ERC CASE NO. 2007-088 RC Order/September 5, 2007 Page 7 of 19 direct testimonies, additional documents were presented and marked as Exhibits “F" to “CC”, inclusive, The direct examinations of the said witnesses having been terminated, the Commission propounded clarificatory questions. DECORP and GNPOWER were directed to submit their formal offer of evidence and various documents. On August 16, 2007, DECORP and GNPOWER filed their "Formal Offer of Evidence for Joint Applicants” which is hereby admitted for being material and relevant in the final resolution of this case. DISCUSSION DECORP currently sources its electricity requirements from the National Power Corporation (NPC) under the Transition Supply Contract (TSC) with a monthly contracted energy of 14,391,135 kWh for year 2007 and a peak demand of 38,423 kW. The TSC will expire on August 25, 2010. Shown below is the supply-demand scenario of DECORP in years 2010 and 2011 based on its Distribution Development Plan (DDP): ooo 2010 2011 | Particulars ey (ew) (Demand 47,160 49,582 (‘Supply _ Sieg |_NPC, (TSC) 25,314 Expiration - 2070 | WESM 4,716 - (Deficit i7.129 | __ 49,582 Based on the foregoing table, DECORP will experience energy supply shortfall by year 2010 onwards in case no additional capacity is in place by that time. In order to address this and to mitigate the effect of the looming capacity ERC CASE NO. 2007-088 RC Order/September 5, 2007 Page 8 of 19 shortfall in the Luzon grid, DECORP entered into a PPSA with GNPOWER on. July 6, 2008 with an objective to secure a more reliable power supplier at a cheaper cost, PROPOSED GNPOWER 600 MW POWER PLANT GNPOWER undertakes to build, own and operate a 2x300 MW clean pulverized coalfired electric power generation facility located at Mariveles, Bataan. The construction of the said power plant shall commence upon the approval of the instant application. GNPOWER is expected to deliver energy to its buyer by 2011 upon the termination of the contract between NPC and the distribution utilities. in line with the policy of the State to encourage private sector investments in power generation, the DOE issued a Certification dated August 30, 2006 recognizing GNPOWER as a developer of a 600 MW Clean Coal-Fired power generation facility which will utilize a clean coal technology. A. Project Cost Amount Cost Component (USS '000) Engineering, Procurement 466,152 and Construction Value Added Tax 68,780 Financing Fees, IDC, PRI 75,813 Other Cost 61,566 Coal Reserve 9,966 Debt Service Reserve 87,000 Contingency 53,503 TOTAL 822,780 ERC CASE NO. 2007-088 RC Ordet!September 5, 2007 Page 9 of 19 Based on the submitted documents to the Board of investments (BOI), the total project cost is estimated to be at US$822,780,000.00 which will be financed as follows: 68.15% Debt and 31.85% Equity. The altin annual interest rate on the debts is expected to be at 9.5% while the project's cash flows will result in an equity Intemal Rate of Return (IRR) equivalent to 14.2%. PRICING STRUCTURE Under the PPSA, DECORP shall purchase the power supplied by GNPOWER at a Contract Price comprising of the relevant Capacity Fee and Energy Fee. As defined in the PPSA, Capacity Fee is the component of the Contract Price allocated to pay for the cost of the power plant, as well as the operations and maintenance of the power plant computed based on DECORP's Capacity Factor. On the other hand, the Energy Fee is the component of the Contract, Price allocated to pay the cost of coal including government charges at the rate of $0.0250/kWh to be adjusted from time to time due to changes in the delivered price of coal 1. Capacity Fee The Capacity Fee is calculated using the applicable Capacity Factor of DECORP for a certain billing period With respect to the DECORP's purchases from GNPOWER during any billing period, Capacity Factor means the number derived from dividing (i) the actual quantity of the Product made available by the GNPOWER to be purchased ERC CASE NO. 2007-088 RC Order/September 5, 2007 Page 10 of 19 and received by DECORP at the Delivery Point, by (ii) the quantity of the Product (a) that could have been made available by the GNPOWER to be purchased and received by DECORP if the Contracted Capacity was utilized continuously during the Billing Period less (b) the quantity of the Product not available for delivery due to any Scheduled and Unscheduled Outages during the billing period The Capacity Factor is calculated as follows: Capacity Factor (CF) = Q CO* (Hr —EHso-EHuo) Where: Q cc He EHso EHuo = The actual quantity of the kWh made available by the Seller to be purchased by the Buyer at the Delivery Point in any billing period. = Contracted capacity, in kW. = Total number of hours in such billing period. = The sum of the duration, in equivalent hours, of Scheduled Outages, in such billing period. = The sum of the duration, in equivalent hours, of Unscheduled Outages, in such billing period. Shown below are the contracted capacity and the minimum capacity factor provided under the PPSA: Minimum Minimum Contracted | Capacity Fee Month Capacity Factor | Quantity (kWh) | Gapacity (kW) | — ($/kWh) % | | Based on the 180 Months 65.00 158,500,000 30,000 Capacity Factor | Pricing Table On the basis thereof, the Commission takes note of the folowing: a) The plant that DECORP should maintain. As a coal plant, it must have a minimum capacity factor is a monthly floor on utilization of the steady level of projected performance to maintain efficient operations. =, ERC CASE NO. 2007-088 RC Order/September 5, 2007 Page 11 of 19 b) ) a) A coal plant is a baseload plant operated to generate electricity for a continued period; The minimum quantity is an annual quantity of kWh which the customer is required to pay. This provision in the contract is necessary only because of the above discussion on the minimum capacity factor but also to provide financial protection to the Investors in the event that DECORP chooses not to off-take any amount of energy from them; The contracted capacity, which is the upper limit of the amount of MW that DECORP can actually demand for anytime; and The Capacity Fee to be paid by DECORP shall account for the recovery of the cost of investment, the operation and maintenance fee as well as the retum on investment. The Commission also observes that the capacity rate is highly dependent on the uti lization of the total capacity contracted by the distribution utility, which means that the higher the capacity factor the cheaper the electricity price. With this cavacity factor pricing mechanism, the interests of both the generation company a. and the distribution utility are protected: GNPOWER must be compensated with a certain amount on a particular level of utilization for providing or making available at all times the contracted capacity (30 MW) to DECORP. If the 30 MW will be utilized every hour of the month baseload), DECORP shall apply the capacity 100% of time, However, if DECORP shall use 99% of the time, the cost for the 99% is slightly higher considering that ERC CASE NO. 2007-088 RC Order/September 5, 2007 Page 12 of 19 GNPOWER has allocated capacity of 30 MW to DECORP at all times. b. DECORP will have flexibility as to the number of hours each month it wants to buy power from GNPOWER. The extent of the flexibility will depend on whether DECORP wants to use the power generated by GNPOWER or enter into a contract with other suppliers or purchase from the Wholesale Electricity Spot Market (WESM) as prices change in the market, As mentioned earlier, the Capacity Fee is cheaper when the 30 MW is fully utilized (100%). However, there may be situations where using GNPOWER's plant half the time is more reasonable such as when the WESM price is relatively low compared to the cost of GNPOWER on a per unit basis. The prices per kWh on the capacity factor are fixed for fifteen (15) years and shall not be subject to escalation. The price considers not only the capacity but also the investment of the power plant and the cost of operation and maintenance subject to adjustment tied with the movement of the predetermined economic price index. Thus, GNPOWER takes the risk of possible price inflation on the cost of operation and maintenance which is usually passed-on to buyers. Nl, Energy Fee The Energy Fee shall be computed as follows: Energy Fee = Initial Energy Fee x CIF_Cost of Fuel for Billing Period Base CIF Cost of Fuel Where: initial Energy Fee [$0.02500/kWh]* Base CIF Cost of Fuel (87.1073] * indicative. Inclusive of Excise Tax of $0.20 per ton of coal and Import Duty of 7.0% of the CIF price of coal. ERC CASE NO. 2007-088 RC Order!September 5, 2007 Page 13 of 19 The initial Energy Fee of $0.025/kWh is fixed throughout the duration of the PPSA unless the applicable law is amended resulting to changes in the current government charges. The Base CIF cost of fuel is also fixed throughout the duration of the PPSA. The only item that changes in the Energy Fee formula is the CIF Cost for Billing Period which varies according to the provisions of GNPOWER's Coal Supply Agreement with its Coal Suppliers. However, the Total Energy Fee for a billing period varies every time and is dependent on the CIF Cost for the Billing Period. GNPOWER considered two (2) main components in deriving its Initial Energy Fee, namely: a) the cost of coal and; b) the efficiency of the power plant. To obtain competitive costs of coal, GNPOWER conducted a procurement process for its coal supply by sending invitations to prospective coal suppliers from the Philippines and the Republic of Indonesia. All bidders were provided a bid package consisting of, among others, a model or a draft long-term coal supply agreement for low rank coal, which has low calorific value, a similar agreement for middle rank coal and the suggested form of letter for the bid price. Upon thorough evaluation of the bids, GNPOWER entered into a coal ‘supply agreement with three (3) suppliers. It decided to use a low rank coal that has relatively low energy content and cheaper than the high grade coal. The power plant design can use a low grade coal. However, the lower efficiency does not necessarily affect the Energy Fee that will be paid by DECORP because the Initial Energy Fee of US$0.025/kWh was derived using a heat rete which is f ERC CASE NO. 2007-088 RC Order/September 5, 2007 Page 14 of 19 efficient and within the standard that corresponds to the type of coal used. Any slight inefficiency of the coal used is offset by the low price of the low grade coal. Moreover, the cost of inefficiency brought about by the conversion of the coal to energy will be borne by GNPOWER and will not be passed-on to the electricity buyer. RATE IMPACT In order to determine the impact of GNPOWER's rate to DECORP’s over- all generation rate, DECORP’s 2006 load profile was used to simulate the rate impact, ‘Shown below are the present allocation of DECORP's energy requirement and the combined generation rate from its current supplier and GNPOWER. ‘A. DECORP’s 2006 Load Allocation and Combined Generation Rate ‘Average | Percent Combined SUPPLIERS | Monthly Energy | Share Rate NPC 1 ENPC2 2,504,729 12.84% \roraL i 19,512,805 | 100% ae B. DECORP'’s Year 2006 Load Allocation and Combined Generation Rate ~~] “Average Monthly Combined | SUPPLIERS Energy beste Rate | ane (kWh) (PhP/KWh) | _(PhP/kWh) ‘GNPOWER 17,007,320 87.76% |__3.7252__| [NPC 2 2,604,720 12.84% | 6.2545 4.0499 TOTAL 19,512,305 700% See é ERC CASE NO. 2007-088 RC Order/September 5, 2007 Page 15 of 19 Based on the above simulations, GNPOWER's rate is about PhP1.0166/kWh less than the comparable NPC rate of the displaced quantity (PhP4.7418/kWh less PhP3.7252/kwh). ‘The effect on the over-all generation rate of DECORP would be a possible reduction of PhPO.8861/kWh (PhP4.9360/kWh less PhP4.0499/kwh). The GNPOWER's rate of PhP3.7252/kWh was based on 92% Capacity Factor which was derived using @ capacity of 25.5 MW as against the 30 MW contracted capacity under the PPSA. This was done in order to update the equivalent load allocation during the time when NPC's supplied energy was displaced by the operation of GNPOWER in year 2006. By year 2041, considering the DOE's projected energy growth of 6%, the 92% Capacity Factor based on 36 MW will be achieved. It is very apparent that GNPOWER’s baseload rate of PhP3.4850/kWh is cheaper than NPC's baseload rate of PhP4.6810/kWh. However, GNPOWER's baseload rate will be more costly compared to NPC's if DECORP's Capacity Factor falls below 63%. Nevertheless, by year 2011, DECORP’s Capacity Factor is expected to remain at 80% because its baseload is the contracted capacity. This means that DECORP will utilize the 20 MW at all times resulting to its 100% Capacity Factor. The foregoing comparison of rates also considered NPC's approved 6” Generation Rate Adjustment Mechanism (GRAM) rate of PhP0.4170/kWh and 5" Incremental Currency Exchange Rate Adjustment (ICERA) of PhPO.5719/kWh As of June 2007, the 7" GRAM and 6" ICERA rates were PhP0.1221/kWh and PhP0.7425/kWh, respectively. If the GRAM and ICERA are updated to its June ERC CASE NO. 2007-088 RC Order/September 5, 2007 Page 16 of 19 2007 level, the rate impact as presented by DECORP and GNPOWER will be reduced by PhP0.1243/kWh. However, the above computation of NPC rate did not consider the Mandated Rate Reduction (MRR) under Section 72 of Republic Act No. 9136. Considering that only NPC is mandated to extend the MRR to rosidential consumers, the rate impact should be reduced by the percentage of the residential end-users multiplied by the MRR of PhPO.30/kWh. Accordingly, the simulated rate impact of the PPSA between GNPOWER and DECORP reflected a rate reduction from NPC tariff. Further, under the PPSA, DECORP shall be subject to a minimum Capacity Factor of 65%. If it actually utilizes its contracted capacity at a Capacity Factor below 65%, it shall stil pay a rate at 65% level. The subsequent deliveries of undelivered power (.e., the difference between the minimum off-take and the actual quantity delivered below the minimum off-take) should be billed to DECORP at no cost, provided there is no fluctuation on the fuel cost. Applicability of Value Added Tax (VAT) The electricity produced by GNPOWER and delivered to DECORP shall be subject to 12% Reformed Value Added Tax (RVAT). Transmission Service The existing transmission line of the National Power Corporation (TRANSCO) shall be used by GNPOWER to deliver the power generated from its plant at Mariveles, Bataan, ERC CASE NO. 2007-088 RC Order/September 5, 2007 Page 17 of 19 Upon review and evaluation of the PPSA, the Commission finds that its implementation will be beneficial to the customers of DECORP by way of reliable, continuous and sufficient supply of power within its franchise area at reasonable costs, The Commission agrees that there is a need to address the imminent increase in power demand in the Luzon grid by year 2010 to avoid any shortage as predicted by the DOE. In the absence of sufficient capacity as early as 2008, the Luzon grid will be forced to utilize more expensive generation plants. In the meantime, a Certification dated January 25, 2007 was issued by the NPC stating, among others, that it cannot commit the availability of capacity to supply the energy requirements of DECORP from 2011 to 2026 upon expiry of its Contract for the Supply of Electric Energy (CSEE) on July 25, 2010 due to the on-going privatization of its generating assets in the Luzon grid. Hence, DECORP had no other recourse but to enter into a power supply contract with GNPOWER in order to comply with its commitment to its customers to provide reliable and sufficient supply of power. WHEREFORE, the foregoing premises considered, the joint application for the approval of the Power Purchase and Sale Agreement (PPSA) filed by Dagupan Electric Corporation (DECORP) and the GNPOWER Limited Company (GNPOWER) is hereby APPROVED subject to the following conditions: 1. DECORP should observe the terms and conditions of its contract with GNPOWER to achieve a quality and reliable supply of power at a least cost for the benefit of its consumers; ERC CASE NO. 2007-088 RC Order/September 5, 2007 Page 18 of 19 2. The undelivered power representing the difference of the minimum off- take and the quantity below its minimum should be delivered to DECORP at no cost, provided there is no fluctuation on the fuel cost; 3. DECORP and GNPOWER should clarify that the "CIF Cost of Fuel for Billing Period” in the PPSA formula is the CIF invoices of the suppliers of GNPOWER; and 4, GNPOWER should provide a mechanism to address the undelivered ‘energy due to extreme plant damage. SO ORDERED. Pasig City, September 5, 2007. RODOLFO B. ALBANO, JR- Chairman fing fe (On Leave) RAUF A. TAN ALEJANDRO Z. BARIN Commissioner ‘Commissioner 4 j f MARIA TERBSA\A. R, CASTANEDA Josijc. REYES Comntssioner Confimissioner 314 pone DECORP GNPOWER Decision ERC CASE NO. 2007-088 RC Order/September 5, 2007 ‘i Page 19 of 19 Copy furnished: 10. 43. 14, 15. 46. Atty. Erwin A. Gavino Atty. Marleen Joyce P. Abesamis Counsel for Applicants Divino & Gavino Suite 497, One Magnificent Mile Building (OMM-CITRA), San Miguel Avenue Ortigas Center, Pasig City Dagupan Electric Corporation (DECORP) Veria | Building, 62 West Avenue, Quezon City National Power Corporation ‘Quezon Avenue Corner BIR Road Diliman, Quezon City National Transmission Corporation (TRANSCO) Power Genter, Quezon Avenue corner BIR Road: Diliman, Quezon City Office of the Solicitor General 134 Amorsolo Street, Legaspl Village Makati City, Metro Manila ‘Commission on Audit Commonwealth Avenue Quezon City, Metro Manila ‘Senate Committee on Energy GSIS Bidg., Roxas BNd., Pasay City Metro Manita House Committee on Energy Batasan Hills, Quezon City, Metro Manila The City Mayor Dagupan City ‘The Municipal Mayor San Fabian, Pangasinan ‘The Municipal Mayor Calasiao, Pangasinan ‘The Municipal Mayor Sta, Barbara, Pangasinan ‘The Municipal Mayor San Jacinto, Pangasinan ‘The Municipal Mayor and Heads of Barangay Barangays Cruz and Bolingit San Carlos, Pangasinan Lourdy D. Torres and Associates Counsel for Applicant, GNPOWER 1906 The Orient Square Building Don Francisco Ortigas, Jr. Road, Ortigas Center, Pasig City GNPOWER LTD., CO. 1905 The Orient Square Building Don Francisco Ortigas, Jr. Road, Ortigas Center, Pasig