Republic of the Philippines ENERGY REGULATORY COMMISSION

Republic of the Philippines ENERGY REGULATORY COMMISSION

San Miguel Avenue, Pasig City

IN THE MATTER OF THE APPLICATION FOR APPROVAL OF THE POWER SUPPLY AGREEMENT BETWEEN VISAYAN ELECTRIC COMPANY, INCORPORATED AND GREEN CORE GEOTHERMAL, INCORPORATED, WITH PRAYER FOR THE ISSUANCE OF PROVISIONAL AUTHORITY

VJSAYAN ELECTRIC COMPANY, INCORPORATED (VECO),

Applicant. x- - - - - - - - - - - - - - - - - - - - - - - - - - -x

ORDER

•. t::::;- '

ERC CASE Nb. 2011-047 RC

DOC,\\liTE]'}

Date: .. ~~8---~!!t!_ ~: _____ /.: ........... -

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On March 28, 2011, Visayan Electric Company, Incorporated (VECO) filed

an application for approval of its Power Supply Agreement {PSA) with Green

Core Geothermal, Incorporated (GCGI), with prayer for the issuance of

provisional authority.

In support of its prayer for the issuance of a provisional authority, VECO

alleged the following:

1. Considering that supply of energy by GCGI makes up twenty-one percent (21%) of its energy demand, pending hearing of the instant application and in the absence of a provisional authority, VECO and its consumers will be at a very vulnerable state as they cannot be assured of continuous supply of energy absent an authority to implement an agreement where the obligation to supply and purchase energy may be enforced.

ERC Case No. 2011-047 RC ORDER/May 16, 2011 Page 2 of29

2. More so, pending approval of the instant application, and without a provisional authority granted, it will be unable to avail of the commercial advantages granted to it under the PSA, to the detriment and prejudice of its consumers.

3. Furthermore, it is necessary for it to avail of the much needed electric power from GCGI, without any delay, and help alleviate the current power shortage in its franchise area.

4. Rule 14, Section 3 of the Commission's Rules of Practice and Procedure, clearly mandates the issuance of provisional authority pending approval of the application, thus:

Section 3. Action on the Motion. - Motions for provisional authority or interim relief may be acted upon with or without hearing. The Commission shall act on the motion on the basis of the allegations of the application or petition and supporting documents and other evidences that applicant or petitioner has submitted and the comments or opposition filed by any interested person, if there be any. (Emphasis supplied)

5. In view of the foregoing, there is a sufficient basis for the issuance of the provisional authority pending final approval of the instant application, and thus the issuance of provisional authority is clearly imperative.

VECO prays, that:

1. Prior and/or pending hearing, a provisional authority be issued authorizing it to immediately implement the PSA with GCGI, including the rate structure therein as applied and that said rate structure be allowed retroactive implementation starting December 26, 2010 until final approval; and

2. After due notice and hearing, a final authority be issued implementing the PSA with GCGI including its rate structure and finally approving the retroactive implementation of the rate structure starting December 26, 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 April 4, 2011, were issued setting the case for initial hearing, expository

presentation, pre-trial conference and evidentiary hearing on May 4, 2011.

ERC Case No. 2011-047 RC ORDER/May 16,2011 Page 3 of 29

VECO was directed to cause the publication of the Notice of Public

Hearing, at its own expense, twice (2x) for two (2) successive weeks in two (2)

newspapers of general circulation in the Philippines, with the date of the last

publication to be made not later than ten (10) days before the scheduled date of

initial hearing. It was also directed to inform its customers, 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.

Likewise, the Offices of the Mayors of the Cities and Municipalities within

VECO's franchise area and the Provincial Governor of Cebu were furnished with

copies of the Order and Notice of Public Hearing for the appropriate posting

thereof on their respective bulletin boards.

On May 2, 2011, VECO submitted its "Pre-trial Brief'.

During the May 4, 2011 initial hearing of this case, only VECO and GCGI

appeared. Engr. Robert F. Mallillin, Consultant of San Miguel Corporation and

Mr. Jason Aguirre, Representative of Apo Cement Corporation (APOCEMCO)

ERC Case No. 2011-047 RC ORDER/May 16,2011 Page 4 of29

both entered their appearances as oppositors. No other intervenor/oppositor

appeared nor was there any other intervention/opposition registered.

At the said hearing, VECO presented its proofs of compliance with the

Commission's posting and publication of notice requirements which were duly

marked as Exhibits "D" to "Q-2", inclusive. Thereafter, VECO and GCGI made

an expository presentation of their application.

At the termination of the expository presentation, VECO and GCGI

presented the following witnesses: a) Mr. Lyndon C. Jayme, Assistant Vice- .

President for Utility Economics Group of VECO, who testified, among others, on

the due execution of the PSA and the net rate impact of the electricity rate to its

mix generation rate; and b) Mr. Carlos Lorenzo L. Vega, Senior Manager for

Marketing of First Gen Corporation, who testified, among others, on the salient

features of the PSA and the electricity rate therein as a fixed market-based

charge.

In the course of their respective direct examinations, the witnesses

identified various documents in support of the application. Said documents were

duly marked as exhibits.

The said witnesses were, likewise, required to address the clarificatory

questions propounded by the Commission.

Thereafter, VECO and GCGI were directed to submit various documents

to facilitate the evaluation of the instant application.


Relative to the prayer for a provisional authority, the Commission initially

reviewed the instant application, as follows:

1. Parties to the Contract

VECO is a domestic corporation duly organized and existing under and by

virtue of the laws of the Republic of the Philippines, with principal office at J.

Panis Street, Banilad, Cebu City where it may be served with summons and

other legal processes. It is a duly authorized distribution utility of the electric

light, heat and power systems in the Municipalities of San Fernando, Minglanilla,

Consolacion and Lilo-an and the Cities of Naga, Talisay, Cebu and Mandaue, all

in the Province of Cebu.

On the other hand, GCGI is a corporation duly organized and existing

under Philippine laws to engage in the general business of generating electric

power, with principal office address at the Energy Center, Merritt Road, Global

City, Taguig City. It is the NPC Successor Generating Company for the

Palinpinon Geothermal Power Plant (PGPP) and Tongonan Geothermal Power

Plant (TGPP).

2. Salient Features of the PSA

Type of Plant Geothermal Power Plant

Type of Operation

Cooperation Period

it/

Base load

The PSA shall be in force for a period of five (5) years commencing on the effectivity date of December 26, 2010 until December 25, 2015, unless earlier terminated in accordance with the provisions of the PSA

ERC Case No. 2011-047 RC ORDER/May 16, 2011 Page 6 of 29

Schedule of Contracted Capacity

Schedule of Contracted Energy

Supply of Contracted Energy

In any hour, GCGI has no obligation to supply energy to VECO over and above the equivalent energy of the applicable Contracted Capacity

In the event that VECO's actual consumption of electric energy in any one (1) hour period exceeds the equivalent energy of the Contracted Capacity, such excess electric energy shall be paid by VECO at: a) higher of the Basic Energy Charge for such hour or the WESM price at VECO's node for such hour, that is, if GCGI provides such excess electric energy; or b) actual cost of such excess electric energy (including any other charges or penalties that GCGI may incur due to such excess electric energy consumption of VECO), that is , if GCGI procured such excess electric energy from other Suppliers or the WESM

Billing December 26, 2010 to December 25, 2015 Month (_in kWhj_

January_ 44,640,000 February 44,640,000 March 40,320,000* April 44,640,000 May 43,200,000 June 44,640,000 July 43,200,000 August 44,640,000 September 44,640,000 October 43,200,000 November 44,640,000 December 43,200,000

Note: * 41,760,000 kWh if contract month falls in a leap year

GCGI and VECO shall, upon execution of the PSA, promptly establish and maintain a procedure for the delivery and receipt of the Contracted Energy by the hour, which procedure shall be deemed an integral part of the PSA. The procedure requires that VECO shall provide GCGI with nominations of its forecasted weekly demand at the start of the week and nominations of projected daily demand one (1) day ahead of dispatch. It shall inform GCGI of any expected or actual deviation from the forecasted demand to the extent of plus or minus one and a half percent (+/- 1.5%) within one (1) hour of the occurrence of such deviation. Should it fail to give such information within the prescribed time, it shall be responsible for any additional charges that the System Operator, Market Operator, the National Transmission


Increase in Contracted Energy

Transmission Service I Nodal Pricing

Availability of Energy

Points of Delivery

Maintenance Allowance

Corporation (TRANSCO) or its concessionaire, as the case may be, may impose upon GCGI in connection with the deviation

VECO may be allowed to increase the Contracted Energy, subject to: a) the technical limits, constraints relating to the transmission lines, substations and other facilities; b) the respective capacity constraints of the Plants; c) the availability of energy and/or capacity from other suppliers that may be utilized to serve the increase in the Contracted Energy; and d) such rates and other terms and conditions as they may agree upon

VECO shall be responsible for arranging with the System Operator or TRANSCO or its successor concessionaire for the wheeling of the Plants' output from the said Plants through the Grid to the Point of Delivery. Any and all line rental charges, transmission fees, line losses, imbalance charges, ancillary services fees and other similar charges and expenses shall be for the sole account of and paid by VECO except generation imbalances. For avoidance of doubt, in the event that the Wholesale Electricity Spot Market (WESM) is implemented in the Visayas Grid, all load imbalances shall be for the account of VECO

GCGI shall supply the Contracted Energy from any of PGPP and TGPP and, subject to the terms of the PSA, from the WESM or Suppliers, in accordance with good utility practice and in compliance with applicable law, rules and regulations

Supply of Contracted Energy shall be available except for interruption and/or reduction due to: a) any force majeure event; b) planned outages; c) forced outages; or d) safety or other causes as may be provided by law, rule, regulation or order of a competent authority

The agreed delivery point shall be at VECO's substations, to wit

Location Delivery Voltage

Cabancalan Substation (Lines 1 and 2) 138 kV/69 kV Mandaue GIS Feeders 2, 5, 4 138 kV/69 kV

GCGI shall have the right to suspend or reduce the level of operation of any or both of the plants for planned outages and forced outages for each of the plants in each calendar year for such period not to exceed the number in gross kilowatt-hours calculated in accordance with the formula below:


Service Interruption Adjustment

Approval by the Commission and Effectivity

Planned Outage = Contracted Capacity x Nominated Number of

Days for Planned Outage x 24 hours

Forced Outage = Contracted Capacity x (60 days - Nominated

Number of Days for Planned Outage) x 24 hours

GCGI shall be entitled to a total of number of more than sixty (60) days of planned and forced outages per calendar year for both Plants and a maximum of twenty (20) days of forced Outages per calendar year. Unutilized planned outage days may not be credited in favor of forced outage. Unutilized planned or forced outage days for any given calendar year may not be cumulated for use during the succeeding calendar years of the PSA

GCGI is allowed forced outages for such number of days that remain after deducting from the maintenance allowance the aggregate number of actual hours of planned outages in accordance with Section 5.4 of the said PSA

In the event that the allowed planned and forced outages are exceeded, GCGI shall be obliged, at its sole option, to source replacement power to comply with its obligation to deliver the Contracted Energy at the Basic Energy Charge regardless of the nodal clearing price of the WESM or the price of the relevant Supplier, as the case may be

In the event that the supply of electricity is interrupted or curtailed to a level below the Contracted Energy due to the fault of GCGI (excluding, for the avoidance of doubt, those causes specified in Section 5.2 of the PSA), the Contracted Energy shall be adjusted (referred to as a "Service Interruption Adjustment") to actual off-take below the level of Contracted Energy for all hours when service was curtailed or interrupted

On the other hand, in the event that Contracted Energy is not taken due to VECO's fault or negligence or other causes affecting its ability to take or consume electricity, it shall not be entitled to any Service Interruption Adjustment and shall pay the Minimum Charge

Should the Commission or any other relevant governmental instrumentality order or decide that any provision relating to generation costs, charges,


Termination by GCGI

adjustments or energy off-take under the PSA is disapproved or is approved subject to modifications (Conditional Approval), VECO and GCGI agree to negotiate in good faith with a view of amending the PSA in order to comply with the terms of such order or decision. Until such amendments have been agreed upon and approved, they shall continue to strictly perform their respective obligations under the terms and conditions of the said PSA, except that the Contracted Energy shall be charged at the higher of: a) the rate approved by the Commission; and (b) the prevailing Time-of-Use (TOU) generation rates

In the event that they fail to reach any agreement on such amendments, GCGI shall have the right (but not the obligation) to terminate the PSA, provided that there shall be a thirty (30)-day prior notice and the provisions of the second (2"d) paragraph of Section 13.2 of the said PSA shall apply. In case of Conditional Approval, GCGI and VECO may continue implementing the PSA with the modified provisions

In any event, VECO shall not be entitled to a return nor refusal of payment for such generation costs, charges, adjustments or energy off-take under the disallowed or conditionally approved prov1s1ons already billed by or paid to GCGI. Any consequent refund to VECO's customers, as may be directed by the Commission, shall be for the sole account of VECO

In the event that no Conditional Approval is issued by the Commission on or before the Effectivity Date, GCGI shall have the right (but not the obligation) to supply the Contracted Energy commencing on the Effective Date at the Time-of-Use (TOU) rates, subject to other charges, bonuses, interest or penalties as may be imposed or granted pursuant to the provisions of the PSA

Subject to the Commission's approval, VECO agrees that the electricity rate under the Conditional Approval or Final Approval, as the case may be, shall be made retroactive to the Effectivity Date, and GCGI shall be entitled to adjust the billings to VECO for the period commencing on the said Effectivity Date to reflect such electricity rate, as approved by the Commission


3. Charges and Adjustments

3.1 Basic Energy Rate (BER)

Particulars

Basic Energy Charge

December 26, 2010 to December 25, 2015

PhP5.0336/kWh Base Philip!Jine Consumer Price Index (CPI) December 2009 Point of Delivery VECO's Substations

The foregoing Basic Energy Charge is inclusive of the 3.67%

systems loss factor approved by the Commission for the Visayas Grid and

shall be adjusted in the event that a new systems loss factor will be issued

by the Commission for the said Grid.

Shown below are sample computations of the Basic Energy Charge

using different Visayas Grid systems Losses:

Basic Energy Charge at 3.67% Visayas Grid Systems Loss

Basic Energy Charge = PhP5.0336/kWh

Existing Visayas Grid Systems Loss = 3.67%

Basic Energy Charge Less 3.67% Grid Loss = Basic Energy Charge x (1 -Existing Visayas Systems Grid Loss)

= 5.0336 X (1 - 3.67%)

Basic Energy Charge Less 3.67% Visayas Grid = PhP4.8489/kWh Systems Loss

Basic Energy Charge at 3% Visayas Grid Systems Loss

Basic Energy Charge at 3% Visayas = Grid Systems Loss

=

Basic Energy Charge Less 3.67% Visayas Grid Systems Loss (1 - Existing Visayas Systems Grid Loss)

4.8489 (1 - 3%)

= PhP4.9988/kWh

/


Basic Energy Charge at 4% Visayas Grid Systems Loss

Basic Energy Charge at 4% Visayas = Basic Energy Charge Less 3.67% Visayas Grid Systems Loss Grid Systems Loss (1 -Existing Visayas Systems Grid Loss)

= 4.8489 (1 - 4%)

= PhP5.0509/kWh

On December 26, 2010, the WESM commenced operations in the

Visayas Grid. On even date GCGI commenced delivery of electricity to

VECO. It has delivered ex-plant to VECO in compliance with the WESM

Rules. Accordingly, the Basic Energy Charge will be lower since the

3.67% transmission loss will be excluded as the same will be charged by

the Market Operator as "line rental" pursuant to the said WESM Rules.

The proposed Basic Energy Charge of PhP4.8554/kWh is a fixed

market-based rate, thus, the cost assumptions and computational

methodologies relative to debt-equity ratio, project cost and computation

of return on investment, which are benchmarks in determining actual or

true cost of generation, were not applied.

In lieu thereof and to substantiate its proposed rate, VECO resorted

to comparison of rates between and among its existing power suppliers, to

wit: a) KEPCO-Salcon Power Corporation's (KSPC) 2 x 100 MW power

plant in Naga City, Cebu; b) Panay Energy Development Corporation's

(PEDC) 2 x 82 MW power plant in La Paz, Iloilo City; and c) Cebu Energy

Development Corporation's (CEDC) 3 x 82 MW power plant in Toledo

City, Cebu.


•

The table below shows that GCGI's Basic Energy Charge of

PhP4.8554/kWh is the lowest compared to other base load power plants

in the Visayas Grid:

Derived figure based on Capacity Fee @ 100% Load Factor: PhP3.4740 x 75% = PhP2.6055/kWh

The base prices of KSPC, PEDC and CEDC as approved by the

Commission have been updated using the latest available indices as of

July 2010.

In adopting a market-based approach, even without looking into the

actual cost of generation, VECO is still assured that it will be purchasing

electricity at a lower rate while eradicating its low voltage problems.

The concept of a competitive electricity market comes into play

where a distribution utility selects a power supplier with clearly-defined

benefits and distinct commercial advantages over competitors in terms of

price and quality of service and, therefore, its consumers are already


assured of getting the best price and quality of service and most efficient

power supply in the market.

3.2 Escalation and De-escalation Formula

The Basic Energy Charge shall be escalated or de-escalated

annually using the Philippine Consumer Price Index (CPI) as published by

the National Statistical Coordination Board (NSCB), provided that no

escalation or de-escalation shall be made within one (1) year from the

Effective Date of the PSA. The base Philippine CPI shall be December

2009. Since GCGI will be fully absorbing the risk of any upward

movement of the geothermal steam cost (indexed to global coal prices

and foreign exchange rates) and foreign exchange (forex) risk related to

spare parts and equipment, the full Basic Energy Charge shall be subject

to the adjustment formula (based on Philippine CPI only) to help it for the

risk of potential increases of the geothermal steam cost and forex-

denominated spare parts and equipment.

Shown below is the formula used by VECO and GCGI in

determining the Adjusted Basic Energy Charge:

Adjusted BECn = Previous Year BEC x CPin-1

CPin-2

Thus:

Yearn 2011 2012 Previous Year BEC, PhP/kWh 5.0336 5.1351 CPI n-1 166.9000 170.2000 CPI n-2 163.6000 166.9000 Adjusted BEC , PhP/kWh 5.1351 5.2367

• Applicable to January to December billing periods


Basic Energy Charge for 2011

Previous Year BEC (PhP/kWh) = 5.0336

Adjusted BEC2o11 C CPI n-1 = B E 20 1 0 X ---=-::-:--c"-'--CPI n-2

= 5.0336 X 166.9 163.6

Adjusted BEC2o11 (PhP/kWh) = 5.1351

Basic Energy Charge for 2012

Previous Year BEC (PhP/kWh) = 5.1351

Adjusted BEC2o12 BEe CPI n-1 = 2011 X

CPI n-2

= 5.1351 X 170.2 166.9

Adjusted BEC2o11 (PhP!kWh) = 5.2367

3.3 Minimum Charge

In the event that VECO has not fully taken the Contracted Energy in

a Billing Period, it shall pay GCGI a minimum charge, subject to

deductions and adjustments. Shown below are the formula and sample

computations for said deductions and adjustments:

Particulars Amount (PhP) Variable Formula Contract Energy_(_kWh/mo.) 44,640,000.00 CE Service Interruption Adjustment - SIA Adjustment Contracted Energy (kWh/mo.) 44,640,000.00 ACE CE - SIA Actual Consumption ( kWh/mo.) 44,600,000.00 ACT Shortfall (kWh/mo.) 40,000.00 SH ACE- ACT Applicable BEC for the Year (kWh/mo.) 5.1351 BEC Contract Energy Revenue (PhP/mo.) 229,230,864.00 CER CE x BEC Service Interruption Adjustment Revenue - SIAR SIA x BEC Actual Energy_ Revenue (PhP/mo.) 229,025,460.00 AER ACT x BEC Minimum Charge (PhP/mo.) 229,230,864.00 MC CER- SIAR


3.4 Prompt Payment Discount (PPD)

VECO is entitled to a prompt payment discount (PPD) equivalent to

the following:

If Invoiced Amount is Paid Within the Period Set Applicable Below from Receipt of the Invoice PPD

Within five (5) day_s from recei(lt of the invoice 3.2% After five (5) days but within seven (7) days from receipt

3.0% of the invoice After seven (7) days but within ten (1 0) days from receipt

2.8% of the invoice

3.5 Overdue Account

In the event that any invoice from GCGI remains unpaid within the

grace period [five (5) days from the last day on which VECO is required to

pay an invoice without the necessity of demand], it has the right to: a)

require VECO to post a Security Deposit if it had been previously waived

by GCGI pursuant to Section 8.6 of the PSA and notwithstanding that

VECO meets the financial indicators; or b) draw against the Security

Deposit if the same has been posted.

If any invoice from GCGI is overdue for more than six (6) months,

VECO shall pay an additional penalty of one percent (1%) per month for

every additional month of delay beyond six (6) months.

4. Procurement Process

In view of NPC's inability to supply electricity to distribution utilities, VECO

had to enter into a power supply agreement with a power generator.


Consequently, it negotiated with GCGI to supply its power requirements,

pursuant to the Commission's Resolution No. 21, Series of 2006, entitled ''A

Resolution Suspending the Effectivity and Implementation of Cerlain Rules

Issued by the Energy Regulatory Commission" which suspended, in the

meantime, the bidding process as a method of selecting a power supplier.

Thus, on December 23, 2010, VECO and GCGI executed a PSA providing

for the terms and conditions of the supply of electric energy commencing on

December 26, 2010 until December 25, 2015.

5. GCGI Geothermal Power Plants

On October 23, 2009, GCGI took over the control and possession of the

192.5 MW Palinpinon Geothermal Power Plant (PGPP) and 112.5 MW Tongonan

Geothermal Power Plant (TGPP) through an open and competitive public bidding

process which was managed by the PSALM in connection with the privatization

of NPC assets.

When the PGPP and TGPP were awarded to GCGI, various CSEE

between NPC and several distribution utilities were, likewise, attached to be

served by GCGI.

5.1 Palin pinon and Tongonan Geothermal Power Plants

The PGPP consists of two (2) power stations, PGPP I and II, and

has a combined installed capacity of 192.5 MW. Commissioned in 1983,

the PGPP I comprises three (3) units each with a rated capacity of 37.5


MW. It is located in Barrio Puhagan, Valencia, Negros Oriental,

approximately 21 kilometers southwest of Dumaguete City. PGPP II,

which was commissioned in 1992, has a combined installed capacity of 80

MW and located at three (3) sites, namely Nasuji (1 x 20 MW), Okoy (1 x

20 MW) and Sogongon (2 x 20 MW), which are approximately 3 to 4

kilometers from one another and approximately 5 kilometers from PGPP I.

The TGPP was commissioned in 1983 and has a total installed

capacity of 112.5 MW (3 x 37.5 MW). It is located in Kananga, Leyte.

Both plants are condensing-type geothermal power plants utilizing

geothermal steam supplied by the Energy Development Corporation

(EDC).

5.2 Rehabilitation of the Power Plants

Considering the condition and age of the power plants, GCGI is

undertaking rehabilitation activities to improve their reliability and

availability. The said rehabilitation is expected to increase the total net

dependable capacity of the power plants from 230 MW to 245 MW, as

follows:


Installed Dependable Capacity Capacity

Plants Upon Present Target Gross Net Take-over (MW) (MW) Net(MW) Net Net

j_MW) (MW) PGPP 1_(3 units x 37.5 MW) 112.5 106.0 82.0 * 92.0 104.0 PGPP II (4 units x 20 MW) 80.0 76.0 72.0 ** 75.0 75.0

TGPP (3 units x 37.5 MW) 112.5 106.0 56.0 *** 63.0 66.0 (2 units) (2 units) (2 units)

*

**

Total 305.0 288.0 210.0 230.0 245.0

Plant efficiency (steam rate) has deteriorated after twenty-seven (27) years of operation. Plant reliability has gone down due to frequent problems on the vacuum system, cooling (lube oil/water) system and the outdated analog control system. Initial repairs have resulted to an increase in net capacity of 10 MW

Plant efficiency has deteriorated after seventeen (17 years) of operation. Increase in net capacity of 3 MW resulted from immediate repairs implemented by GCGI

*** Plant efficiency has deteriorated after twenty-seven (27) years of operation. Plant reliability has gone due to frequent problems on the vacuum system, cooling (lube oil/water) system and the outdated analog control system. One (1) rotor has a cracked shaft, hence, unfit for use. Another rotor has a bent shaft and high vibration issues. Quick-fix activities have resulted to an improvement in net capacity of 7 MW

In view of the limited steam supply for the TGPP, the net capacity

of Unit 1, which has a bent shaft and high vibration issues, is not being

considered for long-term bilateral contracting.

5.3 Power Supply Contracts Assigned to GCGI

Pursuant to the Asset Purchase Agreement (APA) entered into by

and between GCGI and PSALM, GCGI shall assume the rights and

obligations of PSALM under the CSEE previously entered into by NPC.

The twelve (12) CSEE assigned to GCGI are as follows:


Customer

Iloilo I Electric Cooperative, Incorporated (ILECO I) Aklan Electric Cooperative, Incorporated IAKELCOl Guimaras Electric Cooperative, Incorporated (GUIMELCO) Philippine Foremost Milling Corporation IPFMC) Iloilo Provincial Government{IPG) Central Negros Electric lncoroorated-ICENECO)

Cooperative,

VMC Rural Electric Service Cooperative, Incorporated (VRESCO) Dynasty Management Development Corooration (DMDCl Don Orestes Romualdez Electric Cooperative, Incorporated (DORELCO) Leyte II Electric Cooperative, lncoroorated ILEYECO II)

Philippine Associated Smelting and Refinino Corporation (PASAR) Philippine Phosphate Fertilizer Corooration (PHILPHOS)

5.4 Target Saleable Plant Capacity

CSEE Expiration Date

December 25, 2009

December 25, 2009

December 25, 2012

March 25, 2016

December 25, 2011

December 25, 2010

December 25, 2010

March 15, 2016

September 25, 2010

December 25, 2009

September 25, 2009

December 25, 2011

The plant capacity available for contracting is 236 MW, which is the

estimated dependable capacity of GCGI's power plants less systems loss

factor, as approved by the Commission for the Visayas Grid, to wit:

245 MW- 3.67% = 236 MW

The estimated plant factor is eighty percent (80%), which is typical

for a base load power plant.


5.5 Target Contracted Capacities

The total contracted capacity of GCGI's existing customers with

CSEEs or PSAs that are still effective until December 26, 2011 is

approximately 218 MW which represents only ninety-two percent (92%) of

the total net capacity of 236 MW (net off systems loss). GCGI, therefore,

needs to look for and contract with other customers or to sell to the WESM

the remaining net plant capacity of approximately 18 MW.

Customers Generated at Plant Delivered to Customer

(MW) (MW) Panay Island

AKELCO 10.0 9.6 CAPEL CO 12.0 11.6 ILECO I 3.1 3.0 ILECO II 2.1 2.0 GUIMELCO 3.3 3.2 PFMC 3.1 3.0 lPG 0.9 0.9 EDC'S NNGP (ILECO I) 15.6 15.0

Negros Island DMDC 2.6 2.5 VRESCO 7.0 6.8 DUCOM 1.0 1.0 NORECO I 2.0 1.9 NORECO II 25.9 25.0 NOCECO 4.0 3.9

Cebu VECO 62.2 60.0 BEZ 5.2 5.0

Leyte PASAR 33.2 32.0 PHILPHOS 9.7 9.4 DORELCO 3.1 3.0 LEYECO II 11.4 11.0 LEYECOV 6.2 6.0

Others EDC's NNGP Backfeed 1.0 1.0 BGI's Bac-Man Backfeed 1.0 1.0

Total 225.8 217.8 Target Contracted Capacity 245.0 236.0 Net 19.2 18.2


6. Certificate of Compliance and Other Permits

6.1 Certificates of Compliance (COC)

On June 7, 2010, the Commission issued COC No. 05-07-GXT

2861-13419 for PGPP I and II. Subsequently, on July 26, 2010, it issued

COC No. 1 0-07-GXT-286f-10243 for TGPP.

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

On January 13, 1992, PGPP II was issued an ECC by the DENR

through its Environmental Management Bureau (EMB) after complying

with the Environmental Impact Assessment (EIA) requirement, as

prescribed in the promulgated Guidelines implementing Section 3 (b) of

Presidential Decree Nos. 1121 and 1535.

7. Rate Impact

VECO's blended generation with and without GCGI's supply of electricity

would result to PhP5.0019/kWh and PhP5.0715/kWh, respectively. This means

an estimated net savings for its customers equivalent to PhP0.0696/kWh.

VECO's blended generation rate with GCGI's supply of electricity at

Current/Time-of-Use (TOU) Rate would result to PhP4.8000/kWh, whereas the

implementation of the PSA would result to a rate of PhP5.0200/kWh or an

increase of PhP0.2200/kWh.

In determining the foregoing, GCGI made a series of simulation using its

actual billing to VECO for the period March 26, 2011 to April 25, 2011, to wit:


Coincident Demand

GCGI Contract Capacity

CEDC Contract Capacity

CPPC

NPC

GCGI- TOU RATE+

Electricity Fee

Coincident Demand

GCGI Contract Capacity

KSPC Contract Capacity

CPPC

NPC

• PSA Rate

374,260

60,000

105,000

56,040

140,394

374,260

60,000

105,000

56,040

140,394

Actual Consumption Basic Charge %VAT Total Amount Due Electricity Fee • 44,640,000.00 • 4.8554 0% • 213,277,424

• 78,120,000.00 • 4.6321 • 12% 405,282,810 • • 109,644,052 11,982,286.00 8.1701 12% • 3.8263

206,362,917.00

Blended

The tables below are comparisons of rates between and among existing

suppliers in the Visayas Grid:

Computation of Line Rental Loss for the Billing Period February 26, 2011 to March 25, 2011

Contracted Energy {I<W) 60,000 Monthly kWh from GCGI 43,200,000 WESM Line Rental Bill for GCGI (PhP) 766,503.96 Line Rental Charge (PhP/kWh) 0.02/kWh


Estimated March 2011 Monthly Line Rental

Existing Suppliers Percentage (%) CEDC 5.48 KSPC 4.08 PEDC -9.94 GCGI 0.37

Power Rates Exclusive of Line Rentals

Existing Suppliers PhP/kWh CEDC 6.6640 KSPC 5.4570 PEDC 7.3464 GCGI 4.8554

Power Rates Inclusive of Line Rentals

Existing Suppliers PhP/kWh CEDC 7.0290 KSPC 5.6794 PEDC 6.6160 GCGI 4.8731

Based on the foregoing, it can be gleaned that GCGI has the lowest Basic

Energy Charge, whether exclusive or inclusive of Line Rental Losses.

8. Reasonableness of the Proposed Rates

8.1 Capital Recovery Fee (PhP1.2722/kWh)

The Capital Cost is the cost associated with the investment of the

project. GCGI's cost of capital to be recovered is PhP12,678,835,817.00,

consisting of the acquisition cost in the amount of PhP10, 165,337,657.00

and the rehabilitation cost for PGPP I and II and TGPP amounting to

PhP2,513,498, 160.00.


GCGI is undertaking rehabilitation activities primarily to improve the

reliability and availability of the power plants considering their condition

and age. The rehabilitation activities are expected to increase the total net

dependable capacity of the power plants from 230 MW to 245 MW.

Since all capital contributions were provided by EDC, the Weighted

Average Cost of Capital (WACC) of GCGI is equal to the required return

on equity.

In the cost recovery computation of GCGI, the effective return on

equity it considered and used is only 16.65% at the applicable rate of

PhP4.8554/kWh. The Commission adopted the same for WACC as it is

considered reasonable and will fairly cover the risks related to the

investment.

In computing for the capital recovery fee, the Commission used the

Plant/Economic Life of twenty-two (22) years as proposed by GCGI.

However, the same will still be subject to re-evaluation.

The Billing Determinant means the number of kWh that a power

plant can produce in a year. The net dependable capacity of both the

PGPP and the TGPP is estimated to be 245,000 kW at eighty percent

(80%) plant capacity factor which is the typical capacity factor for base

load power plants. Based on the foregoing parameters, the plant is


estimated to generate an average annual energy of 1,716,960,000 kWh,

computed as follows:

Net Dependable Capacity 245,000 kW Multi!Jiy: Hours in a Year 8,760 hours Multiply: Plant Capacity Factor 80% Saleable Generation 1,716,960,000 kWh

The Capital Cost Recovery Fee (Capacity Cost per kWh) is the

cost associated with the recovery of capital investment of the project

which includes a reasonable return on its investment.

Shown below is the calculation of GCGI's annual recovery:

Capital Cost PhP12,678,835,817 Plant Life 22 years WACC 16.65% Annual Recovery Fee PhP2, 184,340,644 Estimated Annual Energy 1,716,960,000 kWh Capacity Cost per kWh PhP1.2722/kWh

The capacity cost per kWh of PhP1.2722 was calculated by dividing

the computed annual recovery on the capital cost of PhP2, 184,340,644 by

the estimated annual energy of 1,716,960,000 kWh.

8.2 Operating Cost Recovery Fee (PhP0.5911/kWh)

The Operating and Maintenance (O&M) Fee consists of the

incremental O&M expenses associated with the operation of the plant.


VECO submitted the following breakdown and allocation of

operating cost:

Operating_ Cost PhP O&M Costs 778,578,780 Purchased Services and Utilities 49,463,380 General and Administrative Expenses 186,922,141' Total 1,014,964,301 O&M Fee PhP0.5911/kWh

The Operating Cost Recovery of PhP0.59/kWh was derived by

dividing the O&M amount of PhP1 ,014,964,301 by the billing determinant

of 1,716,960,000 kWh.

8.3 Fuel Fee (PhP2.9921/kWh)

VECO proposed a fuel fee of PhP2.9921/kWh. This was based on

GCGI's actual fuel cost of PhP2,648,634,896.00 for the first half of 2010

and the actual885,215,571 kWh delivered for the same period.

Actual Fuel Cost (1st half of 201 0) I PhP2,648,634,896 Actual kWh Delivered (1st half of 2010) I 885,215,571 kWh Fuel Fee (Geothermal steam) I PhP2.9921/kWh

Fuel constitutes almost sixty-two percent (62%) of the

PhP4.8554/kWh Basic Energy Rate being applied for by VECO. However,

the same will still be subject to re-evaluation.


8.4 Generation Rate

The table below shows the breakdown of the computed cost of

generation:

Component PhP/kWh Capital Recovery Fee 1.2722 Operations and Maintenance Fee 0.5911 Fuel Fee (Geothermal Steam\ 2.9921 Total Generation Rate• 4.8554

• At 1 00% load factor and exclusive of systems loss

The Commission has a mandate to protect the interest of the consumers

insofar as they are affected by the rates, particularly, in the light of the pervading

global financial crises.

An initial evaluation of the instant application discloses that the PSA

entered into by and between VECO and GCGI will redound to the benefit of

VECO's customers in terms of continuous, reliable, efficient and affordable power

supply as mandated by Republic Act No. 9136, otherwise known as the Electric

Power Industry Reform Act of 2001 or the EPIRA [Section 2. Declaration of

Policy - (b) "to ensure the quality, reliability, security and affordability of the

supply of electric power'].

WHEREFORE, the foregoing premises considered, the Commission

hereby PROVISIONALLY APPROVES the Power Supply Agreement (PSA) of

Visayan Electric Company, Incorporated (VECO) with Green Core Geothermal,

Incorporated (GCGI) at a Basic Energy Charge of PhP4.8554/kWh (at 100%

Load Factor and exclusive of systems loss), subject to the following

conditions:


a. The final generation cost that can be recovered shall be determined by the Commission in its Decision in the instant application;

b. In the event that the rates provisionally approved are found to be higher than the final rates, the amount corresponding to the excess shall be refunded by VECO to its customers by crediting the same in their electric bills over a period to be determined by the Commission; and

c. The Basic Energy Charge (excluding the Capital Cost Recovery Fee and the component in the O&M pertaining to E.R. 1-94) shall be escalated or de-escalated annually using the Philippine Consumer Price Index as published by the National Statistical Coordination Board, provided that no escalation or de-escalation shall be made within one (1) year from the Effective Date of the PSA.

SO ORDERED.

Pasig City, May 16,2011.

~~vJq ~-r~ ENAIDA G. CRUZ-DUCUT

Chairperson!""'(,/

(On Official Travel) RAUF A. TAN Commissioner

~% ai GCGI PSA/2011·047 RC/provisional authority

~L Commi sioner


Copy Furnished:

1. J.P. Garcia & Associates Attn: Atty. Joan A. Giduquio-Baron Counsel for VECO Unit 902, Ayala Life -FGU Center Mindanao Avenue, Cebu Business Park, Cebu City

2. Visayan Electric Company, Incorporated (VECO) D. Jakosalem St., Cebu City

3. Office of the Solicitor General 234 Amorsolo Street, Legaspi Village, Makati City

4. Office of the Commission on Audit Don Mariano Marcos Avenue, Dillman, Quezon City

5. The Committee On Energy Senate of the Philippines GSIS Building, Roxas Blvd., Pasay City

6. The Committee On Energy House of Representatives Batasan Hills, Quezon City

7. Office of the City Mayor Cebu City 6000

8. Office of the City Mayor Mandaue City 6014

9. Office of the City Mayor Talisay City 6045

10. Office of the Municipal Mayor Consolacion, Cebu 6001

11. Office of the Municipal Mayor Lila-an, Cebu 6002

12. Office of the Municipal Mayor Minglanilla, Cebu 6046

13. Office of the Municipal Mayor Naga, Cebu 6037

14. Office of the Municipal Mayor San Fernando, Cebu 6018

15. Office of the Governor Province of Cebu

16. Engr. Robert F. Mallillin c/o San Miguel Energy Corporation G/F SMC Building, 40 San Miguel Avenue, Mandaluyong City

17. Ape Cement Corporation (APOCEMCO) APO Cement Plant Compound, Barangay Tina-an, Naga City, Cebu

18. Philippine Chamber of Commerce and Industry (PCCI) 3'• floor, ECC Building, Sen. Gil Puyat Avenue, Makati City

Documents

Republic of the Philippines ENERGY REGULATORY COMMISSION