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ENERGY REGULATORY COMMISSION! ~,prO\fe'jfor~San Miguel Avenue, Pasig City \ f.t<;tir:g

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IN THE MATTER OF THEAPPLICATION FOR APPROVALOF THE AMENDMENT ANDSUPPLEMENT TO THE ENERGYSUPPLY AGREEMENT (ESA)BETWEEN SURIGAO DEL SURII ELECTRIC COOPERATIVE,INC. (SURSECO II) ANDTHERMA MARINE,INCORPORATED (TMI), WITHPRAYER FOR PROVISIONAL

. AUTHORITY

ERC CASE NO. 2014-142 RC

SURIGAO DEL SUR IIELECTRIC COOPERATIVE, INC.(SURSECO II) AND THERMAMARINE, INCORPORATED(TMI),

Applicants.)(- - - - - - - - - - - - - - - - - - - - - - -)(

ORDER

On September 23, 2014, Surigao .. Del Sur II ElectricCooperative, Inc. (SURSECO II) and Therma 'Marine, Inc. (TMI) fileda joint application for the approval of their Amendment andSupplement to the Energy Supply Agreement (ESA), with prayer forprovisional authority.

In support of their prayer for the issuance of a provisionalauthority, SURSECO II and TMI alleged the following:

1. They move for the issuance of a provisional approval ofthe ESA, as amended by the Amendment to the ESA andSupplement Agreement, pending trial on the meritsthereof, upon the following reasons:

ERC CASE NO. 2014-142 RCORDER/November 24, 2014Page 2 of 28

a. Mindanao Power Crisis. The power shortage inMindanao has remained a critical problem forSURSECO II which continues to suffer rotatingbrownouts in the grid. A bilateral agreement, suchas the Amendment to the ESA and SupplementAgreement, will significantly aid SURSECO II inminimizing or even eliminating the rotatingbrownouts in its franchise area which has had adebilitating impact upon the local economy;

b. Insufficiency of National PowerCorporation/Power Sector Assets and LiabilitiesManagement Corporation (NPC/PSALM) Supply.The reduction of the NPC/PSALM Contract for theSupply of Electric Energy (CSEE) capacity fromSURSECO II's portfolio renders imperative abilateral supply contract to answer for the equivalentcapacity, lest SURSECO II be compelled to resort tothe unpredictable and expectedly higher prices inthe IMEM or worse, be curtailed for insufficientcontracted capacity; and

c. Continuing Demand Growth. As illustrated in itsDistribution Development Plan (DDP), SURSECO IIis expecting a growth in the total demand of its end-users so that, coupled with reduction of theNPC/PSALM capacity, there is a wide supply gapthat urgently needs to be filled. Without theSupplement Agreement, SURSECO II will beincapable of satisfying the electricity requirementsof its end-users who must be forced to sufferbrownouts resulting from its curtailment;

2. Considering the foregoing, they request the Commissionfor the provisional approval of the ESA, as amended bythe Amendment to the ESA and the SupplementAgreement to enable SURSECO II to draw under the saidagreement. This will avoid the power interruptions whichhave caused irreversible losses upon economicproductivity within its franchise area;

3. Under Section 13 of the ESA, each Party undertook tokeep in strict confidence and not to disclose to any thirdparty any and all Confidential Information of the otherParty;


4. Under Rule 4 of the ERC Rules, the Commission may,upon request of a party and determination of theexistence of conditions which would warrant suchremedy, treat certain information submitted to it asconfidential. Pursuant to its undertaking, SURSECO IIand TMI move that Annexes "0" "M" "N" "0" "P" and, , , ,"a" not be disclosed and be treated as confidentialdocuments in accordance with Rule 4 of the ERC Rulesand accordingly, not be disclosed to persons other thanthe officers and staff of the Commission, as necessary.These documents contain certain non-public information,data and calculations involving business operations andfinancial trade secrets reflecting TMl's investment andbusiness calculations;

5. They submitted one (1) copy of Annexes "0", "M", "N","0", "P" and "a" in a sealed envelope, with the envelopeand each page of the document stamped with the word"Confidential". and,

6. They prayed that the Commission:

a.

b.

c.

Issue an Order treating Annexes "0" "M" "N" "0", , , ,"P" and "a" and the information contained therein asconfidential, directing their non-disclosure to. persons other than the officers and staff of theCommission, pursuant to Rule 4 of the ERC Rules,and prescribing the guidelines for the protectionthereof;

Pending trial on the merits, provisionally approvethe ESA, as amended by the Amendment to theESA and the Supplement Agreement, effectiveSeptember 26, 2013; and

After trial on the merits, approve with finality theESA, as amended by the Amendment to the ESAand Supplement Agreement, including the rates,Security Deposit and Application Costs which shallbe for the account of SURSECO II.

\," '",


Relative to the prayer for a provisional authority, theCommission initially reviewed the instant application, as follows:

1. Parties to the Contract

SURSECO II is a non-stock, non-profit electric cooperativeorganized and existing under and by virtue of Presidential Decree No.269, as amended, otherwise known as the National ElectrificationAdministration Decree, with principal office address at Balilahan,Mabua, Tandag City, Surigao Del Sur. It holds an exclusive franchiseissued by the National Electrification Commission (NEC) to operatean electric light and power distribution service in Tandag City and theMunicipalities of Bayabas, Cagwait, Cantilan, Carmen, Carrascal,Cortes, Lanuza, Lianga, Madrid, Marihatag, San Agustin, San Migueland Tago, all in the Province of Surigao Del Sur (Franchise Area).

TMI is a generation company duly organized and existing underthe laws of the Republic of the Philippines with principal officeaddress at Aboitiz Corporate Center, Gov. Manuel A. CuencoAvenue, Kasambagan, Cebu City. It owns and operates the 100 MWPower Barge No. 117 (PB 117) in Nasipit, Agusan del Norte and the100 MW Power Barge No. 118 (PB 118) in Maco, Compostela Valley,upon their privatization by the PSALM under Republic Act No. 9136,otherwise known as the "Electric Power Industry Reform Act of 2001"(EPIRA).

2. The Mindanao Grid and SURSECO II's Supply-DemandScenario

The power shortage in Mindanao has remained to be a criticalproblem for SURSECO II as it continues to experience rotatingbrownouts.

The table below shows the Mindanao Grid Supply-DemandOutlook (2014-2020), as published by the Department of Energy(DOE):

• ,0-

"'.'"\


2016 2017Mar: 25 MW lake Mainit HEP . Jan: 9 MW limbatangon HEPsep: 405 MW FOG Coal

2015Mar: 150 Mill' Therma South 2Jun: 131 Sabangan HEPJul:30 MW P\lYO HEPSep: 200 MW Sarangani CoalDec: 40 MW BiOmass

2000 ••

. ,1000 .;" ,- t--. ;--- I---~--: . -,-j-- .---. -~--'7--r -j----',----,--I--, ---;--t' -,--i.--,- ,,- e----.--.-,- \ -,---- --.------;---~---------; ---:;---1-'-'--'---' ------i----T--:.--+--,--.~-:-rl~______;;-~TTi-. I-t-~-- 1

~ ~ = ~ ~ ~ ~ ~ ~ = = M = ~ = = ~ ~ ~ ~ ~ = ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ g 2 ~, 2 ~ 28 S 0 S 8 0 ~ S 0 0 0 S ~ 0 0 0 S 0 0 0 S 0 8 0 000 0 S 0 S 0 S 0 S 0 0 000 0 0N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N Nc" >-.0.:> s: ,•• >'"' ,0.:> C" ;>-0. :> c .•. "..'"' Co:> c •. ,>'"' Co:> c ,•. >- 0.:> c •. >- ll.:>'" 1" ,l'l .:; 'Ill 0 r:= :!". '" ~ tlO", "'", ~'" 0 I'll ,S' tv :: tI 0 '" ~. '" .=! <!I ,0 '" Ii! '" ~101 0 '" g'" ~ QI 0~ ~ ~ M Z ~ ~ ~ M Z ~ ~ ~ M Z ~ ~ ~ M Z ~ ~ ~ M Z ~ ~ ~ M Z ~ ~ ~ M Z

[=::J Committed _ AvallableCapacitV -Peak'Demand - - -Required IReserve

20143000 ~ Apr: 13.6 MWTudaya

I 15MWMapalad Diesel2800 ., sep: 26.1 MW Peak Power

. Nov: 150 MW Themla South 1

2600 .•

I2200 of

2400 -

" .."" •..,..,...',.'

1600 1 ,

,""1400 oj

I

1200 ~

1800..,

Shown below IS SURSECO II's forecasted annual demandrequirement:

Year Annual Demand (kW)2014 13,1182015 13,9992016 14,9462017 15,9632018 17,056

Shown below are the current Power Supply Agreements(PSAs) entered into by SURSECO II with corresponding contractedcapacities:

Available Supply (kW)Supplier 2014 2015 2016 2017 2018

KEGI - 5,000 5,000 5,000 5,000TMI* 3,000 3,000 3,000 - -NPC/PSALM** 4,339 4,339 4,339 - -GNPower - - - 13,000 13,000IMEM - - - - -

* Contract may be terminated upon commercial operations of TSI** Until 2016 only

','\


The extension of the contract term under the Amendment andSupplement Agreement and the implementation thereof will redoundto the benefit of SURSECO II's consumers which may otherwise beforced to bear the cost of 3 MW purchased from the IMEM or to sufferrotating brownouts.

3. Salient Features of the Amendment and Supplement to theESA

Type of Plant

Installed Capacity

Additional Term

Contract Energy

Electricity Fees

Non-propelled type barges (diesel engine)

. Two (2) plants (PBs 117 and 118) with anaggregate capacity of 200 MW

The Amendment to the ESA provides thatthe ESA shall remain in force for anadditional period of three (3) years from theexpiration of the Renewal Term. It furtherprovides that it may be terminated effectiveon the date of commercial operation of thecoal-fired power plant of Therma South, Inc.(TSI) or if commercial operation of thepower plant of TSI has not yet occurred bythe end of the Additional Term, the ESAshall be automatically renewed on a year-to-year basis, unless earlier terminated inaccordance with the provisions of the ESA.

Upon expiration of the Additional Term, andany extension thereof, the parties mayagree to further extend the term of theagreement and/or revise the billing capacityand/or make such other modifications onthe terms and conditions of the agreementas may be agreed upon by the parties.

TMI shall make available, on a monthlybasis, the capacity of 3 MW, to be deliveredin accordance with the Schedule of ContractEnergy of the ESA.

Beginning on the expiration of the RenewalTerm, the Electricity Fees shall becomputed based on the following values:

""

ERC CASE NO. 2014-142 RCORDER/November 24,2014Page 7 of 28

Particular Unit 2013 2014. 2015 2016 2017 2018CF PhP/kW/mo. 296 323 305 287 268 250FOM PhP/kW/mo. 239 314 314 314 314 314EF PhP/kWh 0.14864 0.15245 0.15245 0.15245 0.15245 0.15245HFCR li./kWh 0.23580 0.23580 0.23580 0.23580 0.23580 0.23580LOCR li./kWh 0.00240 0.00240 0.00240 0.00240 0.00240 0.00240

Furthermore, the formula for FC in item 2(Contract Energy Fee per month) ofSchedule III (Contract Energy Fee) of theESA shall be deemed amended to read asfollows:

INS = INSy - INS1

Where:

INSy = actual insurance cost for the two (2) bargesfor the current year

INS1 = PhP43,035,782.00 for the two (2) barges,representing insurance cost included in theFOM

Hence, the formula for Contract Energy Fee per Monthshall be:

Contract Energy Fee per Month

CEF =FC+VC

VC = [(EF)(IFv)+ FLR]EDm

..'\


For calendar month m = 1,2, ... , 12

Where:

CEF = Contract Energy Fee in PhP

EF = Energy Fee (before adding the applicableVAT) for the Billing Period in PhP/kWh

FC = Fixed charge per month in Pesos

VC = Variable charge per month in Pesos

CF = the Capacity fee in PhP/kW/month for thecurrent Contract Year

FOM = Fixed O&M fee in PhP/kW/month

IFf = Inflation factor for fixed O&M fee

BC = Billing Capacity in Kw

INS = INSy -INS1

Where:

INSy = actual insurance cost for the two(2) barges for the current year

INS1 = PhP43,035,782.00 for the two (2)barges, representing insurancecost included in the FOM

IFv = Inflation factor for Energy Fee

Total BC= Total Billing Capacity for all Energy SupplyAgreements entered into by Supplier whichhave achieved effectivity date and for the

I,

".',


duration of such effectivity, as such terms andconditions are defined under the respectiveEnergy Supply Agreements

FLR = Fuel Oil, Lube Oil and Related Fuel Rate inPhP/kWh

EDm = The Sum of the hourly volumes of ContractEnergy as found in the Schedule of ContractEnergy (or as revised by the Parties or byMSO/MSO RCC) for the Billing Periodprimarily associated with calendar month m(for example December 26-January 25 isassociated with January) (and adjusted fortransmission losses, if any, imputed by thetransmission service provider if measured at ameter other than the Generator MeteringPoint), in kWh

The Fixed Charge (FC) shall be proportionately adjustedif:

a. The Contract Energy Delivery days in a BillingPeriod are less the total number of days in theBilling Period (to adjust to first and last BillingPeriods of the ESA); and

b. The non-delivery days (or fraction thereof) in anyBilling Period caused by Allowed Downtimedescribed under Section 8 of the ESA;

Finally, the base indices in item 3 (Inflation Factor) ofSchedule III (Contract Energy Fee) of the ESA shall bedeemed to read as follows:

PCPlb = Philippine CPI of 126.4 as of June 2011

UCPlb = US CPI of 225.722 as of June 2011

ECPlb = EURO CPI of 113.10 as of June 2011

JCPlb = Japan CPI of 99.9 as of June 2011


Security Deposit

Billing Capacity

Additional Energy

Section 6.1.2 of the ESA shall be deemedamended to read as follows:

"No later than thirty (30) days beforecommencement of the 2nd Contact Year andeach Contract Year thereafter, SURSECO /Ishall post and provide TMI a RenewalSecurity Deposit in an amount equivalent tothe estimated average one month Invoiceprojected for the next twelve (12) months asagreed by SURSECO /I and TMI.

If the parties cannot agree on theestimate average one month Invoice atleast thirty (30) days before the saidRenewal Term, the Renewal SecurityDeposit shall be in an amount equal to thehighest Invoice issued by TMI to SURSECO/I in the twelve (12) months immediatelypreceding such Renewal Term.

The Renewal Security Deposit(s) shallbe effective on or before thecommencement of the relevant ContractYear and shall be in the form of a StandbyLetter of Credit containing the languageprovided in Schedule IV of the ESA or suchother security acceptable to TMI, and in allcases in the form and substance issued byan entity acceptable to TMI."

In the event that TMI is required to reduceits installed capacity in order to remaincompliant with Section 45 of the EPIRA, itshall have the right to reduce the BillingCapacity of SURSECO II to the extent ofthe reduction required pursuant thereto,provided that, the reduction in the BillingCapacity of SURSECO II shall not exceedits pro rata share in the total Billing Capacityof TMI in relation to the other off-takers

TMI may, at its option, make available toSURSECO II such energy in excess of the

.'.',',. "'.


contracted energy for which the latter shallbe liable to pay the Additional Energy Feeconsisting of variable and fixed charges pro-rated for the hours of delivery of theadditional energy, subject to annualadjustments. The same formula for theAdditional Energy Fee Rate under the ESAshall continue to be in effect

Replacement Power TMI has the option but not the obligation tosource replacement or alternative supplyfrom its own back-up facility and/or any thirdparty to supply all or part of the contractenergy. The replacement supply shall besubject to payment at the same ContractEnergy Fee, provided that such supply ofreplacement energy does not reduce thetotal Contract Energy

4. TMI's Power Barges (PBs) 117 and 118

TMI currently owns and operates the 100 MW PB 117 inNasipit, Agusan del Norte and the 100 MW PB 118 in Maco,Compostela Valley. Each of the PBs has two (2) separate 50 MWpower generating trains, which are designed to meet intermediate,peaking and voltage regulation requirements and allow extendedoperation at partial loads as well as frequent startup, shutdown andload changes.

5. Certificate of Compliance (COC) and Other Permits

5.1.1 COC

The Commission issued COCs to PBs 117 and 118 onApril 6 and 19, 2006, respectively.

On April 4, 2011, the Commission renewed the COCs ofthe PBs until April 4, 2016.

I ••,ERC CASE NO. 2014-142 RCORDER/November 24, 2014Page 12 of 28

5.1.2 Department of Environment and Natural Resources'(DENR) Environmental Compliance Certificate (ECC)

The Environmental Management Bureau of the DENRgranted the ECCs to the then Mindanao Diesel Power Barges,(now PBs 117 and 118), of NPC on June 29, 1992.

On October 4, 2010, the DENR granted the request forthe transfer of the ECCs from the name of NPC to TMI.

6. Background of the Original ESA

On November 19, 2012, the Commission issued a Decisionapproving with modification ERC Case No. 2011-076 RC1

, thedispositive portion of which reads:

"WHEREFORE, the foregoing premises considered,the application filed by Surigao Del Sur II ElectricCooperative, Inc. (SURSECO II) for approval of its EnergySupply Agreement (ESA) with Therma Marine,Incorporated (TMI) is hereby APPROVED withMODIFICA TION, subject to the following conditions:

1. Applicable Rates:

2390.1486

Pass-through cost based on fuelconsumption rates of 0.2210liter/kWh or actual, whichever islower, for Heavy Fuel Oil (HFO) and0.00313 liter/kWh or actual,whichever is lower, for Lube Oil La

Cost Com onent

Fuel and Lube Oil Rate

A201120122013

roved Rates344278296

1 In the Matter of the Application for Approval of the Energy Supply Agreement(ESA) Between Surigao Del Sur II Electric Cooperative, Inc. (SURSECO II) andTherma Marine, Incorporated (TMI), With Prayer for Provisional Authority,SURSECO II - Applicant

..,',',


a. The Capacity Fee shall not be subject toindexation. but subject to the true-upmechanism at the beginning of the followingyear.

.b. The Fixed and Energy Fees shall be subjectto their respective indexation factors.

The determination of the CRF shall be based onthe actual contracted capacity provided that in nocase shall it be lower than 70% of the plantdependable capacity. Relative thereto, TMI andSURSECO " are hereby directed to submit theactual contracted capacity every end of the yearfor purposes of monitoring compliance with thesaid condition and recalculating the CRF, ifnecessary.

2. The Insurance Cost under the Fixed ChargeFormula shall be the difference between theactual Insurance Cost per year and theInsurance Cost included in the FOM. It shall beallocated accordingly to both the ESA and ASPAcases.

3. The Start-Up Fee shall not be allowed to berecovered as the cost applicable thereto isrecoverable through the Fuel Cost Fee and O&MFee.

4. TMI is hereby directed to show as a separateitem in its bill to SURSECO " the Marketing Fee,penalty on late payment, posting of securitydeposit and the costs, fees and other charges formonitoring purposes.

5. TMI and SURSECO " are hereby directed to file,within fifteen (15) days from receipt hereof, ascheme for the refund of the difference betweenthe final and the provisionally approved ratesstarting from the implementation of the


provisional authority until the effectivity of thefinal rates approved herein. "

7. Evaluation of the Proposed Rate

TMl's approved total project cost is PhP1,833,440,OOO.002

(PhP962,556,000.00 for PB 117 and PhP870,884,OOO.00 for PB 118).

Under the Supplement to the ESA, SURSECO \I and TMIagreed on the following rates:

Ca acit201320142015201620172018

PhP/kW/mo.296323305287268250

SURSECO \I and TMI alleged that the proposed rates underthe Supplement to the ESA were derived and consistent with theCommission's previous approval.

7.1 CRF Derivation

Shown below are the approved CRF based on theCommission's Decision on the Original ESA entered into by TMIand several distribution utilities:

PhP/kW/mo.344278296

2 Page 3 of the Orders both dated July 9,2012 in ERC Case Nos. 2010-011 RCand 2010-014 RC resolving the motions for reconsideration filed by CagayanElectric Power and Light Company (CEPALCO)

, ",


The foregoing CRF were computed based on the annualrevenue requirements provided in the Orders both dated July 9,2012 in ERC Case Nos. 2010-011 RC and 2010-014 RC[Ancillary Services Procurement Agreement (ASPA) betweenthe National Grid Corporation (NGCP) and TMI]. Thismethodology has been consistently used by the Commission inapproving the ESAs of TMI with several distribution utilities.Said annual revenue requirements and their correspondingCRF were derived based on the following factors:

a. The acquisition cost of PBs 117 and 118 in the amountof PhP739,467,200.00 and PhP651 ,233,800.00,respectively, plus the cost of procurement of theexcluded equipment and replenishment of spare parts- In the aforementioned Orders, the Commissionresolved that the Asset Base to be used in determiningthe CRF shall be the acquisition cost instead of theappraised value; .

b. The life of the asset which is ten (10) years;

c. The rate should be unlevelized as the contract term isfor a short-term period only;

d. The billing determinant for the first two (2) years (2010and 2011) should be based on the actual capacityavailable and scheduled; and

e. The billing determinant for succeeding years should bebased on the actual contracted quantity recognizingthat TMI has already contracted most of its capacityunder a bilateral supply contract or seventy percent(700/0)capacity factor.

Thus, the Commission set TMI's CRF using a billingdeterminant of seventy percent (700/0)capacity factor or actualoutput, whichever is higher, to wit:

""

,',


Revenue BillingYear Requirement Determinant CRF

(PhP) . (kW)* (PhP/kW/month)2011 562,687,547.2850 1,633,474.79 3442012 535,185,947.2850 1,924,585.80 2782013 507,684,347.2850 1,714,000.00 2962014 480,182,747.2850 1,485,124.59 3232015 452,681,147.2850 1,485,124.59 305

* based on 70% capacity factor or actual I projected capacity, whichever is higher

The Commission already approved the declining annualrevenue requirements for TM!. However, the rates should besubjected to recalculation depending on the updated actualcontracted capacity.

Upon perusal of the Amendment and Supplement to theESA, the Commission verified that the rate provided therein isthe same CRF it approved in several ESAs involving TMI's powerplants.

However, to determine the updated actual contractedcapacity, the Commission subjected it once more to the billingdeterminant test, where the billing determinant should be theactual contracted capacity or seventy percent (70%

) capacityfactor, whichever is higher. Thereafter, the Commission testedthe CRF for 2014-2016 using the following values:

ContractedCapacity

kW2,280,0001,022,000

90,000

YearRevenue 70% Plant

Requirement Capacity FactorPhP kW

2014 480,182,747.2850 1,485,124.592015 452,681,147.2850 1,485,124.592016 425,179,547.2850 1,485,124.59Note: 2014 -Actual; 2015 to 2016 - Based on projection

In this regard, the Commission believes that the CRF for2014 should be adjusted by using the actual billing determinantinstead of seventy percent (70%) capacity factor to reflect theresulting rate, consistent with its previous approvals of TMI'sESAs with various distribution utilities.

...•!

..'ERC CASE NO. 2014-142 RCORDER/November 24,2014Page 17 of 28

Shown below is a comparison between CRFs (inPhP/kW/mo.) based on a seventy percent (70%) capacityfactor, as approved under the Original ESAs, and theCommission's recalculation using TMl's actual data:

At 70% Plant Approved ProvisionallyYear Capacity Factor CRF Revised Approved CRFs(a) (b) (c)2014 323 323 211 2112015 305 305 443 3052016 286 - 4,724 286

Note:

a. CRF based on seventy percent (70%) plant capacityfactor

b. Calculated CRF during the approval of the original ESAs

c. Calculated CRF based on actual contracted capacity for2014, projected capacity factor of forty-five percent (45%)(1,022,000 kW) for 2015, and four percent (4%) capacityfactor (90,000 kW) for 2016. This will be subject toannual true-up determination

For the year 2014, the approved CRF isPhP323.00/kW/mo. where the billing determinant used thereinis the seventy percent (700/0) capacity factor. However, theCommission noted that the actual contracted capacity washigher than the seventy percent (70%) billing determinant.Thus, the resulting CRF was accordingly reduced.

On the other hand, for years 2015-2016, the CRFs werecalculated based on the seventy percent (700/0)capacity factorsince the projected quantity is below the same.

The Commission is cognizant that TM I may not fullyrecover its Capacity Fee in the event that it would not be able tocontract at least seventy percent (70%) of its plant capacity.On this note, the risk for not being able to sell the plant capacityshould be borne by TMI and not its current customers.

ERC CASE NO. 2014-142RCORDER/November 24,2014Page 18 of 28

Shown below is a comparison between TMl's proposedand the Commission's provisionally approved CRFs:

Year TMI's Proposed CRF Provisionally Approved CRF(PhP/kW/mo.) (PhP/kW/mo.)

2014 323 2112015 305 3052016 286 286

7.2 Operations and Maintenance Fee

The FOM under the ESA is based on an annual fixedoperating and maintenance cost of PhP466,648,382.00 for thePower Barges, as approved by the Commission in its Decisionsinvolving TMl's ESAs. Hence, SURSECO II and TMI agreedthat the Fixed O&M Fee is PhP314.00/kW/mo. based on theapproved annual O&M fee and seventy percent (700/0)capacityfactor.

Pursuant to its Decisions, the Commission calculated thefollowing annual Fixed O&M Fee and their equivalent rate:

Revenue BillingYear Requirement Determinant Fixed O&M Fee

(PhP) (kW) (PhP/kW/month)2011 466,648,382.00 1,633,474.79 285.682012 466,648,382.00 1,924,585.80 242.472013 466,648,382.00 1,714,000.00 272.262014 466,648,382.00 1,485,124.59 314.212015 466,648,382.00 1,485,124.59 314.21

Similar with the CRF, the Commission recalculated theapplicable Fixed O&M Fee (in PhP/kW/mo.) based on theupdated actual contracted capacity. This is to compare thebilling determinant used based on updated actual contractedcapacity and the seventy percent (70%) plant capacity factor, towit:

""


Year

201420152016

At 70% PlantCapacity Factor(PhP/kW/mo.)

a314314314

Note:

OriginallyApproved

FOM(PhP/kW/mo.)

b314314

Revised FOM(PhP/kW/mo.)

c205457

5,185

ProvisionallyApproved

FOMPhP/kW/mo.

205314314

a. FOM based on seventy percent (70%) plant capacityfactor

b. Calculated FOM during the approval of the Original ESAs

c. Calculated FOM based on actual contracted capacity for2014, projected capacity factor of forty-five percent (45%)(1,022,000 kW) for 2015, and four percent (4%) capacityfactor (90,000 kW) for 2016. This will be subject toannual true-up determination

Thus, the revised Fixed O&M are as follows:

Year

201420152016

TMI's ProposedPhP/kW/mo.

314314314

Provisionally ApprovedPhP/kW/mo.

205314314

It is worth mentioning that in the instant joint application,TMI's proposed FOM of PhP314.00/kW/mo. is consistent withthe Commission's previous calculations.

The projected Variable Operating and Maintenance Fee(VOM) under the Original ESA is based on the total estimatedVOM of PhP115,406,480.00, broken down as follows:

ExpenseDiesel Generator UnitsAuxiliar S stemsDOE ER 1-94Pa ments

, .."...

"


Total Variable 0 & M 112,516,536.00Approved Variable 0 & M 112,311,596.00Additional: Lubricants 3,094,884.00Revised Total Variable O&M 115,406,480.00

On the other hand, the VOM under the ESA is based onthe annual variable operating and maintenance costs ofPhP115,406,480.00 for the Power Barges and based on theCommission's approved Variable O&M of PhP112,311,596.00plus the additional costs of the lubricants of PhP3,094,884.00,derived as follows:

Annual VOM PhP 115,406,480.00Billing Determinant kWh/year 755,580,000VOM Rate PhP/kWh 0.1527

It should be noted that the rate of PhPO.1527/kWh is theupdated estimate of the annual VOM.

On another note, TMI derived its Energy Fee ofPhPO.14891/kWh by dividing the Annual Variable O&M Cost ofPhP112,516,536.00 over the net annual energy production of755,580,000 kWh.

Although the Commission approved the same VOM Costof PhP112,516,536.00 in the Ancillary Services ProcurementAgreement (ASPA) cases of the National Grid Corporation ofthe Philippines (NGCP) and TMI, the Commission deemed itnecessary to adjust the DOE E.R. 1-94 for each plant, fromPhP3,880,370.00 to PhP3,777,900.00 since the said E.R. 1-94states that the Generation Company and/or energy resourcedeveloper shall set aside PhPO.01/kWh of the total electricitysales as financial benefit for the host communities of suchGeneration Facility. Accordingly, the Commission arrived at anEnergy Fee of PhPO.14864/kWh.

In the present application, TMI proposed a VOM ofPhPO.15245/kWh which considers the additional cost forsystem lubricant.

For purposes of issuing a provisional authority, theCommission deems it prudent to adopt a Variable O&M Fee of

I' .,'

'r.'


PhPO.14864/kWh. However, the same will still be subject to re-evaluation.

7.3 Fuel Cost

In the Original ESA, TMI proposed fixed fuel consumptionrates of 0.2210 liter/kWh for Heavy Fuel Oil (HFO) and0.00313 liter/kWh for Lube Oil.

Subsequently, TMI submitted a Plant Performance TestReport made by the NPC on the test conducted on PBs 117and 118 from January 24 to 27, 2011. Said report is incompliance with the Commission's directive to conduct a fuelheat rate testing.

The result of the heat rate testing3, which is also the

proposed fuel consumption rates in the instant joint application,showed that the consumption rates for HFO and Lube Oil are0.2358 liter/kWh and 0.0024 liter/kWh, respectively.

Shown below is a comparison between the proposed andthe actual heat rate test results:

Fuel

HFOLube Oil

In the Decision approving the Original ESA, theCommission adopted TMI's proposed fuel consumption ratessubject to the condition that it shall be the actual or proposed,whichever is lower.

It bears stressing that in most recent ESAs of TMI andseveral distribution utilities, the Commission ruled that the fuelrate shall be a pass-through cost based on fuel consumptionrate of 0.2358 liter/kWh or actual, whichever is lower, for

3 "Plant Performance Test Report of Therma Marine Mobile 1 and ThermaMarine Mobile 2", as attached on Annex E of TMI and Several DUs'Manifestation with Motion for Non-Disclosure of Confidential Information datedAugust 19, 2011

I'"

,,"


Heavy Fuel Oil (HFO) and 0.0024 liter/kWh or actual,whichever is lower, for Lube Oil (LO)4.

Further, considering that TMI's diesel power plants will bedispatched for peaking load, the Commission compared theproposed fuel heat rate with power plants involving the sametechnology and it was disclosed that the said proposed fuelconsumption rate is lower than the previous approvals of otherdiesel plants. In this regard, the Commission deems it prudentto adopt the proposed fuel heat rate, subject to adjustment ifthe actual consumption rates are lower.

The Commission recognizes that the fuel cost utilized ingenerating electricity may be passed-on to the customers,however, the same should be within the efficiency levels set byit. Further, the fuel cost shall be subject to adjustment toaccount for its upward/downward changes as well as thetransportation cost.

The Commission believes that an efficient fuel cost will bea passed-on cost to the end-users and the power producershould not make revenue from it.

Any inefficiency should not be passed on to the end-usersbut should be absorbed by TMI. In case there is an increase infuel consumption due to fuel quality, deterioration of theequipment or other reasons, it will be the responsibility of TMIto shoulder the cost for the increase in fuel consumption andthe additional cost of improving efficiency.

On the other hand, if TMI saves on fuel consumption dueto its efficient operations and maintenance of the plant, then thesavings in fuel will be passed-on to SURSECO II's customers.

4 Approved Fuel Consumption Rates in most recent cases of TMI withZamboanga Del Norte Electric Cooperative, Incorporated (ZSURSECO II),Zamboanga Del Sur I Electric Cooperative, Incorporated (ZAMSURECO I),Zamboanga Del Sur II Electric Cooperative, Incorporated (ZAMSURECO II),Zamboanga City Electric Cooperative, Incorporated (ZAMCELCO), MisamisOccidental I Electric Cooperative, Incorporated (MOELCI I), Misamis OccidentalII Electric Cooperative, Incorporated (MOELCI II), Cotabato ElectricCooperative, Incorporated (COTELCO), Sultan Kudarat Electric Cooperative,Incorporated (SUKELCO), Bukidnon Second Electric Cooperative, Incorporated(BUSECO), and Camiguin Electric Cooperative, Incorporated (CAMELCO)


Further, considering that the fuel cost is a pass-on costand there is no long-term fuel supply contract for TMI, theCommission believes that the fuel procurement process shouldbe monitored with the objective of obtaining the fuel supplierwith the least cost possible.

7.4 Replacement Power

As regards the replacement power, SURSECO II and TMIalleged that:

"TMI has the option but not the obligation tosource replacement or alternative supply from itsown back-up facility and/or any third party to supplyall or part of the contract energy."

The Commission notes, however, that the said agreementon replacement power is unclear as to whether or not TMI hasthe obligation to source replacement power beyond the alloweddowntime (scheduled and unscheduled outages) of up to amaximum of 876 hours for each power barge per contract year.

Hence, the Commission deems it appropriate that TMIshall have the obligation, not merely an option, to sourcereplacement power for SURSECO II, beyond the alloweddowntime (scheduled and unscheduled outages), to fulfill thecontracted energy of SURSECO II and shall shoulder anyincremental cost in providing the same. In the event that TMIfails to source replacement power, SURSECO II shall beallowed to find replacement power, the incremental cost ofwhich shall be for the sole account of TMI.

It must be noted that in the event TMI fails to supplypower to SURSECO II beyond the allowed downtime, itshould be incumbent upon TMI to source replacement powerfor SURSECO II since the failure to supply power is due to. TMl's fault, except in case of Force Majeure. Moreover, it is itsobligation under the ESA to supply power to SURSECO II forthe entire duration or term of the contract (less the alloweddowntime per year). The failure to supply power, beyond theallowed downtime due to the fault of the supplier, is consideredas an inefficiency of the supplier. Thus, such supplier shouldbear the consequence of its inefficiency by sourcingreplacement power at its expense. It should not merely be an


option on the part of the supplier but should be an obligationsince the supplier undertook to supply the contracted energy ofthe distribution utility for the entire duration or term of thecontract, except during allowed downtime.

8. Rate Comparison

Summarized below is the difference between TMI's proposedrates vis-a-vis the Commission's provisionally approved rates:

Cost TMI's Proposed Commission's Provisionally DifferenceComponent Rates Approved Rates

Capacity Fee, 2014 - 323 2014 - 211 1122015 - 305 2015 - 305 --(PhP/kW/month) 2016 - 287 2016 - 287 --

Fixed O&M, 2014 - 205 109

(PhP/kW/month) 314 2015-314 --2016 - 314 --

Energy Fee 0.15245 0.14864 0.00381(PhP/kWh)Fixed Consumption Pass-through cost based on consumption

Fuel and Lube rates of 0.23581i/kWh rates of 0.23581i/kWh for HFO or actualOil Rate for HFO and whichever is lower and 0.00241i/kWhfor LO

0.00241i/kWhfor LO or actual whichever is lower

9. Rate Impact

SURSECO II and TMI simulated the rate impact of theAmendment and Supplement to the ESA, as follows:

Scenario ScenarioYear Without TMI* With TMI

PhP/kWh PhP/kWh2014 15.2883 4.8362015 11.0579 5.1812016 11.0579 5.175

* Assumes that, without TMI, SURSECO II may purchase the 3MW deficit from IMEM.

The Commission has a mandate to protect the interest of theelectricity consumers insofar as they are affected by the rates, byensuring that the tariffs imposed are consistent with the principle offull recovery of prudent and reasonable costs.


An initial evaluation of the instant application disclosed that theAmendment and Supplement Agreement entered into by andbetween SURSECO II and TMI will redound to the benefit ofSURSECO II's customers in terms of reliable, continuous, andefficient supply of power within its franchise area at reasonable costsas mandated by the EPIRA [Section 2. Declaration of Policy - (b) "toensure the quality, reliability, security and affordability of the supply ofelectric power'1.

WHEREFORE, the foregoing premises considered, theCommission hereby PROVISIONALLY APPROVES the Amendmentand Supplement to the Energy Supply Agreement (ESA) betweenSurigao Del Sur II Electric Cooperative, Inc. (SURSECO II) andTherma Marine, Incorporated (TMI), subject to the followingconditions:

a. The applicable rate shall be as follows:

Particulars Rates2014 - 211

Capital Recovery Fee, PhP/kW/month 2015 - 3052016 - 2862014 - 205

Fixed O&M, PhP/kW/month 2015 - 3142016 - 314

Energy Fee, PhP/kWh 0.14864Fixed Consumption rates

Fuel and Lube Oil Rate of 0.2358 ii/kWh for HFOand 0.0024 Ii/kWh for LO

b. The final generation cost that can be recovered shall bedetermined by the Commission in its Decision in the instantjoint application; and

c. In the event that the final rates are higher than thatprovisionally granted, the resulting additional charges shallbe collected by TMI from SURSECO II. On the other hand, ifthe final rates are lower than that provisionally granted, theamount corresponding to the reduction shall be refunded byTMI to SURSECO II.

...'ERC CASE NO. 2014-142 RCORDER/November 24,2014Page 26 of 28

Accordingly, SURSECO II is hereby directed to ATTACH in itsAutomatic Generation Rate Adjustment (AGRA) submission thecomputation of the monthly fuel cost, including the following details:gross kWh generation, total kWh sales, the corresponding quantity offuel consumed, and any other documents necessary for theCommission to verify the amount of fuel cost passed-through.

SO ORDERED.

Pasig City, November 24,2014.

1'r ~t C~ENAIDA G. CRUZ-DUCUT

Chairperson ~

(} ~~ l...~~G~~VICTORIA e:t((AP-TARUC

Commissioner

(On Leave)JOSEFINA PATRICIA A. MAGPALE-ASIRIT

Commissioner


Copy Furnished:

1. Atty. Ditas A. Lerios-AmboyLERIOS-AMBOY PINGOL & GONZALES LAW OFFICESCounsel for SURSECO IIUnits 1609-1610, Tycoon Centre,Pearl Drive, Ortigas Center, Pasig City

2. Atty. Rowena Fatima M. SalongaPUYAT, JACINTO & SANTOSCounsel for TMI5th & 1ih Floors, VGP Center,6772 Ayala Avenue, Makati City

3. Office of the Solicitor General134 Amorsolo Street, Legaspi VillageMakati City, Metro Manila

4. Commission on AuditCommonwealth AvenueQuezon City, Metro Manila

5. Senate Committee on EnergyGSIS Bldg. Roxas Blvd., Pasay CityMetro Manila

6. House Committee on EnergyBatasan Hills, Quezon City, Metro Manila

7. Office of the Provincial GovernorProvince of Surigao Del Sur

8. Office of the City MayorTandag City, Surigao Del Sur

9. Office of the Municipal MayorBayabas, Surigao Del Sur

10. Office of the City MayorCagwait, Surigao Del Sur

11. Office of the Municipal MayorCantilan, Surigao Del Sur

12. Office of the Municipal MayorCarmen, Surigao Del Sur

.. ~.-'~


13. Office of the Municipal MayorCarrascal, Surigao Del Sur

14. Office of the Municipal MayorCortes, Surigao Del Sur

15. Office of the Municipal MayorLanuza, Surigao Del Sur

16. Office of the Municipal MayorLianga, Surigao Del Sur

17. Office of the Municipal MayorMadrid, Surigao Del Sur

18. Office of the Municipal MayorMarihatag, Surigao Del Sur

19. Office of the Municipal MayorSan Agustin, Surigao Del Sur

20. Office of the Municipal MayorSan Miguel, Surigao Del Sur

21. Office of the Municipal MayorTago, Surigao Del Sur

22. PresidentPhilippine Chamber of Commerce and Industry (PCCI)3rd Floor, ECC Building, Sen. Gil Puyat AvenueMakati City

Documents

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