Posting San Miguel Avenue, Pasig City

Republic of the Philippines Approved for ENERGY REGULATORY COMMIS Posting San Miguel Avenue, Pasig City

IN THE MATTER OF THE APPLICATION FOR APPROVAL OF THE AMENDMENT TO THE POWER SALES CONTRACT (APSC) BETWEEN NEGROS ORIENTAL I ELECTRIC COOPERATIVE, INCORPORATED (NORECO I) AND KEPCO SPC POWER CORPORATION (KSPC), WITH MOTION FOR THE ISSUANCE OF PROVISIONAL AUTHORITY

ERC CASE NO. 201 3-057 RC

NEGROS ORIENTAL I ELECTRIC COOPERATIVE, INCORPORATED DOCKETBD (NORECO I) AND KEPCO SPC Date: UUL .052013 POWER CORPORATION (KSPC), Br ------4±CT.... A p p11 ca nts. x ------x

ORDER

On April 2, 2013, Negros Oriental I Electric Cooperative, Incorporated (NORECO I) and KEPCO SPC Power Corporation (KSPC) filed an application for approval of their Amendment to the Power Sales Contract (APSC), with motion for the issuance of provisional authority.

In the said application, NORECO I and KSPC alleged the following:

The APSC will not terminate, suspend or in any way affect their PSC as approved by the Commission and as implemented and continue t9')De implemented by them, save for the new fuel base ~re and the fuel base price factor brought about by tqfjiI1onesian Ministry of Energy

I ERC Case No. 2013-057 RC ORDER/June 10, 2013 Page 2 of 18

and Mineral Resources (MEMR), which is the subject matter of the instant application. It is in this regard that, pending the final approval of the instant application, they request that they be allowed to adopt the new fuel base price and the fuel base price factor in the KSPC price adiustment formula. (Emphasis supplied)

2. Since the implementation of the Indonesian MEMR, KSPC has been incurring losses since September 2011. As of December 2012, it already incurred a total loss of PhP296,702,338.94 and it will continue to incur more losses without the proper intervention of the Commission.

The table below shows the effect of the Indonesian MEMR without adopting the new fuel base price and the fuel base price factor being applied for as of December 2012:

1) Fuel costs/Expenses Coal Fuel Fuel Expenses Billing Period Consumption cost FOREX (PhP) kWh Sold (MT) (US$1MT) (PhPUS$) (a) Sep 26-Oct 25, 2011 89,312,506.00 54,191.82 43.285 196,827,109.48 Oct 26-Nov 25, 2011 89,845,836.00 54,515.43 83.91 43.629 199,576,053.48 Nov 26-Dec25, 2011 86,478,144.00 52,472.03 43.684 192,337,504.13 Dec26, 2011-Jan 25, 2012 111,926,454.00 67,913.21 43.186 236,567,695.56 Jan 26-Feb25, 2012 112,563,826.00 68,299.94 80.66 42.768 235,612,052.00 Feb 26-Mar 25, 2012 77,222,558.00 46,856.05 43.049 162,699,779.80 Mar 26-Apr 25, 2012 111,402,164.00 67,595.09 42.718 231,550,780.07 Apr 26-May 25, 2012 108,127,288.00 65,608.00 80.19 43.576 229,257,938.29 May 26-Jun 25, 2012 100,977,897.00 61,269.99 ______42.492 208,773,419.40 Jun 26-Jul 25, 2012 43,262,000.00 26,249.93 42.037 80,630,418.04 Jul 26-Aug 25, 2012 94,198,068.00 57,156.22 73.07 42.164 176,093,937.27 Aug 26-Sep 25, 2012 96,870,500.00 58,777.76 41.741 179,273,044.72 Sep 26-Oct 25, 2012 96,536,968.00 58,575.38 41 .376 163,836,382.45 Oct 26-Nov 25, 2012 82,559,400.00 50,094.27 67.60 41.085 139,129,111.52 Nov 26-Dec 25, 2012 80,352,404.00 48,755.14 41.058 135,320,893.70 Total 1,381,636,013.00 838,330.26 1 77.09 1 42.523 2,767,486,119.91

(~)Y q ERG Case No. 201 3-057 RC ORDER/June 10, 2013 Page 3 of 18

Existing Fuel Pass- Revenue % Pass- Billing Period Remarks Through (PhP/kWh) Variance Through kWh Sold (PhPIkWh) (b) (b-a) (b/a) Sep 26-Oct 25,2011 89,312,506.00 1.7469 156,020,016.73 (40,807,092.75) 79.3% Loss 0ct26-Nov25, 2011 89,845,836.00 1.7607 158,191,563.45 (41,384,490.03) 79.3% Loss Nov 26-Dec 25, 2011 86,478,144.00 1.7630 152,460,967.87 (39,876,536.26) 79.3% Loss Dec 26, 201 1-Jan 25, 2012 111926,454.00 1.6863 188,741,579.38 (47,826,116.18) 79.8% Loss Jan 26-Feb 25, 2012 112,563,826.00 1.6700 187,981,589.42 (47,630,462.58) 79.8% Loss Feb 26-Mar 25, 2012 77,222,558.00 1.6810 129,811,120.00 (32,888,659.80) 79.8% Loss Mar 26-Apr 25,2012 111,402,164.00 1.6630 185,261,798.73 (46,288,981.34) 80.0% Loss Apr26-May 25, 2012 108,127,288.00 1.6964 183,427,131.36 (45,830,806.93) 80.0% Loss May 26-Jun 25, 2012 100,977,897.00 1.6542 167,037,637.22 (41,735,782.18) 80.0% Loss Jun 26-Jul25, 2012 43,262,000.00 1.4881 64,378,182.20 (16,252,235.84) 79.8% Loss Jul 26-Aug 25, 2012 94,198,068.00 1.4926 140,600,036.30 (35,493,900.98) 79.8% Loss Aug 26-Sep 25,2012 96,870,500.00 1.4776 143,135,850.80 (36,137,193.92) 79.8% Loss Sep 26-Oct 25, 2012 96,536,968.00 1.4006 135,209,677.38 (28,626,705.07) 82.5% Loss Oct 26-Nov 25, 2012 82,559,400.00 1.3907 114,815,357.58 (24,313,753.94) 82.5% Loss Nov 26-Dec 25,2012 80,352,404.00 1.3898 111,673,771.08 (23,647,122.62) 1 82.5% Loss Total 1,381,636,013.00 1 1.5974 2,218,746,279.50 (296,702,338.94) 1 79.6% 1 Total Loss

3. With respect to the Power Sales Contract (PSC) between them, KSPC already incurred losses of more than PhP5 Million, as follows:

1) Fuel Costs/Expenses Fuel Coal - Fuel Expenses Billing Period ConsumptIon Cost FOREX (PhP) kWh Sold (MT) (US$/MT) (PhPUS$) (a) Sep 26-Oct 25, 2011 1,771,200.00 1,074.70 43.285 3,903,374.70 Oct 26-Nov 25, 2011 1,591,650.00 965.76 83.91 43.629 3,535,558.68 Nov 26-Dec 25, 2011 1,490,400.00 904.32 43.684 3,314,823.87 Dec 26, 2011-Jan 25, 2012 2,008,800.00 1,218.87 43.186 4,245,798.65 Jan 26-Feb 25, 2012 1,874,011.00 1,137.09 80.66 42.768 3,922,570.80 Feb 26-Mar 25, 2012 1,345,200.00 816.22 43.049 2,834,194.43 Mar 26-Apr 25, 2012 1,998,000.00 1,212.32 42.718 4,152,867.79 Apr 26-May 25, 2012 1,930,800.00 1,171.54 80.19 43.576 4,093,797.56 May 26-Jun 25, 2012 1,848,500.00 1,121.61 42.492 3,821,803.36 Jun 26-Jul 25, 2012 859,400.00 521.46 42.037 1601,723.94 Jul 26-Aug 25, 2012 1,264,800.00 767.44 73.07 42.164 2,364,418.05 Aug 26-Sep25, 2012 1,252,900.00 760.22 41.741 2,318,674.91 Sep 26-Oct 25, 2012 967,768.00 587.21 41.376 1,642,434.10 Oct 26-Nov 25, 2012 1,527,600.00 926.90 67.60 41.085 2,574,311.72 Nov 26-Dec 25, 2012 1,443,580.00 1 875.92 41.058 2,431,122.48 Total 23,174,609.00 1 14,061.57 77.09 42.523 46,757,475.03 ERC Case No. 2013-057 RC ORDER/June 10, 2013 Pacie 4 of 18

Existing Fuel Pass- Revenue % Pass- Billing Period Remarks Through (PhP/kWh) Variance Through kWh Sold (PhP/kWh) (b) (b-a) (bla) Sep 26-Oct 25, 2011 1,771,200.00 1.7469 3,094,109.28 (809,265.42) 79.3% Loss Oct26-Nov25, 2011 1,591,650.00 1.7607 2,802,418.16 (733,140.53) 79.3% Loss Nov 26-Dec 25,2011 1,490,400.00 1.7630 2,627,575.20 (687,248.67) 79.3% Loss Dec 26,2011-Jan 25,2012 2,008,800.00 1.6863 3,387,439.44 (858,359.21) 79.8% Loss Jan 26-Feb 25, 2012 1,874,011.00 1.6700 3,129,598.37 (792,972.43) 79.8% Loss Feb 26-Mar 25, 2012 1,345,200.00 1.6810 2,261,281.20 (572,913.23) 79.8% Loss Mar 26-Apr 25,2012 1,998,000.00 1.6630 3,322,674.00 (830,193.79) 80.0% Loss Apr26--May25, 2012 1,930,800.00 1.6964 3,275,409.12 (818,388.44) 80.0% Loss May 26-Jun 25,2012 1,848,500.00 1.6542 3,057,788.70 (764,014.66) 80.0% Loss Jun 26-Jul25, 2012 859,400.00 1.4881 1,278,873.14 (322,850.80) 79.8% Loss Jul 26-Aug 25, 2012 1,264,800.00 1.4926 1,887,840.48 (476,577.57) 79.8% Loss Aug 26-Sep 25, 2012 1,252,900.00 1.4776 1,851,285.04 (467,389.87) 79.8% Loss Sep 26-Oct 25, 2012 967,768.00 1.4006 1,355,455.86 (286,978.24) 82.5% Loss Oct 26-Nov 25, 2012 1,527,600.00 1.3907 2,124,433.32 (449,878.40) 82.5% Loss Nov 26-Dec 25, 2012 1,443,580.00 1.3898 2,006,287.48 (424,835.00) 82.5% Loss Total 23,174,609.00 1.5974 37,462,468.79 1 (5,284,093.28) 79.6% Total Loss

4. Without the provisional authority prayed for, KSPC will continue to incur an average monthly losses of PhP350,000.00 with respect to its PSC with NORECO I alone. Thus, they are constrained to request for a provisional authority to adopt and implement the new fuel base price and the fuel base price factor in the price adjustment formula to avoid further losses detrimental to the continued operation of KSPC. Moreover, being a base-load energy supplier of NORECO I, it would be in the best interest of both parties to be granted the requested provisional authority at the earliest possible time.

5. The energy supply in the Visayas is already critical according to the Department of Energy's (DOE) "Visayas Power Situation (A 2009 Update on the Philippine Energy Plan)". Thus, the continued operation of KSPC based on the actual cost of its fuel would ensure a reasonable and dependable supply of energy to its customers.

In the same application, NORECO I and KSPC prayed that their motion for the issuance of provisional authority allowing KSPC to adopt and use the new fuel base price and the fuel base price factor in its Price Adjustment Formula be granted prior hearing and issuance of final authority and that their APSC be approved.

Relative to the prayer for provisional authority, the Commission initially reviewed the ins pplication, as follows: 1/ ERC Case No. 201 3-057 RC ORDER/June 10, 2013 Paqe 5 of 18

1. Parties to the APSC

NORECO I is a franchised electric cooperative organized and existing under the laws of the Republic of the Philippines, with principal office at Bindoy, Negros Oriental. It has been granted a franchise by the National Electrification Administration (NEA) to distribute electric service in the Cities of Canlaon and Bais and in the Municipalities of Ayungon, Bindoy, Guihulngon, Jimalalud, La Libertad, Mabinay, Manjuyod, Tayasan and Vallehermosa, all in the Province of Negros Oriental (Franchise Area).

KSPC is a generation company duly authorized and existing under and by virtue of the laws of the Republic of the Philippines with principal address at 7" Floor, Cebu Holdings Center, Cebu Business Park, Cebu City.

2. The Commission's Approval of KSPC's Fuel Cost

On various dates, the Commission approved the PSCs between KSPC and several electric cooperatives (ECs) in the Visayas Region, one of which is NORECO I.

In its Decision dated December 16, 2008 in ERC Case. No. 2008-039 RC1 , the Commission lengthily discussed its approval of KSPC's fuel cost, to wit:

"The 2006 LRAC Price in the PSC was determined using a coal price of US$31. 12/ton. The initial Base Index Price (globalCOAL FOB Newcastle) to be used in the price adjustment mechanism was pegged at (3't1 US$47. 621ton Quarter average, 2005). Under the original PSC, it provides for maximum allowable adjustments to the base price of +/- 30% initially and +/- 10% for subsequent adjustments. However, after the execution of the original PSC, global coal prices increased. As of the last quarter of 2007, global coal price index reached US$83. 23/ton which is almost twice the initial US$47.621ton. (The globalCOAL physical index, FOB Newcastle, is the reference for the Base Index Price in the PSC).

In the Matter of the Application for Appr 5ales Contract Between Negros Oriental I Electric cooperative, Incorporate KEPCO SPC Power Corporation (KSPC), NORECO I and KSPC - Applicanl

jIli ERG Case No. 2013-057 RC ORDER/June 10, 2013 Paae 6 of 18

Also, marine diesel oil prices have risen sharply since the execution of the PSC. The price of marine diesel oil significantly affects the cost of coal, particularly the transport cost. In the first PSC, changes in the price of marine diesel oil affected only fifteen percent (15%) of the adjustment of the Transportation Base Price.

Further, the initial Bunker Basis Price was pegged at US$53.30 cents/liter (3" Quarter, 2005). However, as of the 4th Quarter, 2007, the price index of marine diesel oil increased to US80. 18 cents/liter.

For the initial computation of Transportation Base Price (TBP), which takes into account fixed and variable costs of fuel prices as part of total freight costs, only 15% was allotted for the variable portion of the fuel costs out of the total costs with a cap of 10% adjustment or limit for the TBP. But due to the recent unprecedented increase in oil prices, this 15% variable portion was increase to almost 51%. However, despite the removal of the allowable adjustment to Base price ceiling for the recover,' of fuel cost, KSPC decided to reflect only 25% to account for the adjustment in oil prices.

KSPC procured two (2) Coal Supply Contracts through international public bidding, one for 420,000 metric tons annually and the other for 180 metric tons annually, for a period of ten (10) years. Due to the drastic increase of fuel cost and the limitation to recover only up to 30% of such increase, KSPC's coal supplier for 420,000 metric tons term mated the contract. Thus, KSPC was forced to conduct another international public bidding for additional supply. The prices of the new supplier (US$51.901ton) and that of the earlier remaining supplier (US$54. 76/ton) have a weighted coal price of US$52.571ton, about twice the price of US$31.1 2/ton used in determining the 2006 LRAC price. This new coal price is incorporated in the determination of the new KSPC price in the Amended PSC.

The Commission concurs that the actual fuel cost utilized in generating electricity should be passed on to the customers. There should be nc$ap on the fuel cost to be passed on to the customerp As long as within the efficiency set by the Commisi41! Thus, any inefficiency ERC Case No. 2013-057 RC ORDER/June 10, 2013 Paae 7 of 18

in the coal quality and plant heat rate (2,5261kcal/kg) previously approved by the Commission shall not be passed on to the customers.

The fuel cost shall also be subject to adjustment to account for its upward/downward changes as well as transportation cost"

3. Amendment to the Fuel Cost

In September 2010, the Indonesian MEMR issued MEMR No. 17, Series of 2010 regulating coal exportations from Indonesia. The law requires that the coal price in a contract must be equal to or higher than the Coal Reference Price (CRP) to be issued by the MEMR. The basic tenets of the CRP affecting KSPC's coal contracts are as follows:

a. The CRP applies to all long-term contracts [contracts lasting for more than three (3) years] for the exportation of coal;

b. The CRP of a particular contract is the average CRP for the three (3) months immediately preceding the execution of the relevant contract;

c. The coal price must be equal to or higher than the CRP [the CRP itself being based on Freight on Board (FOB)];

d. KSPC's contract price of coal is Cost and Freight (CFR), so the delivered price of coal is coal price (FOB) plus transportation price;

e. The CRP must be applied for one (1) year (i.e., the CRP at the time of execution of the contract, e.g., PT Inkor Prima Coal (PT IPC) contract (July 2011) is USD 56.15/ton while PT Jaya Samudra Karunia Mining (PT JSKM) contract (October 2011) is USD 54.49/ton. Quarterly adjustments under the CSC must be equal to or higher than the blended CRP of both contracts at USD 55.47;

f. If quarterly adjustment is lowerAhan the CRP, then the price to be used for that quarter wilyké the CRP; I ERC Case No. 2013-057 RC ORDER/June 10, 2013 Page 8 of 18

g. A new CRP will be computed at each anniversary date of each contract and will be used until the end of that anniversary year; and

h. To export coal properly from Indonesia, a supplier must have an Izin Usaha Pertambangan Operasi Produksi (IUP) license and must comply with the CRP.

To secure the coal requirements for the next ten (10) years and assure the customers of supply of electricity, KSPC entered into coal supply contracts with PT IPC on July 18, 2011 and PT JSKM on October 13, 2011.

KSPC procures its coal requirements from Indonesia since: a) it is the cheapest and its specifications are the most compatible with the requirements of a circulating fluidized bed combustor (CFBC) coal plant; b) China does not export coal anymore and prefers to use their own coal for their own consumption; c) Australian coal is expensive and its calorific value is too high for a CFBC type plant; and b) the Philippine coal calorific value is still higher than what is required by KSPC and the cost is higher than Indonesia.

To reflect the changes in the fuel base price, which was affected by the Indonesian MEMR No. 17, Series of 2010, KSPC has to adopt a new fuel base price consistent with the new coal supply contract so that the actual cost of fuel will be passed-through to the distribution utilities, pursuant to the Decisions of the Commission on the "pass-through" nature of fuel in its previous applications, to wit:

"the actual fuel cost utilized in generating electricity should be passed on to the customers [of the DU]. There should be no cap on the fuel cost to be passed on to the customers as long as within the efficiency set by the Commission."

Accordingly, KSPC incorporated in the price adjustment formula in the Amendment to the PSC subject of this application the Fuel Base Price Factor (Ef).

Shown below is a comparison between the original and amended Coal Supply Contracts (9cC), particularly, the change in the Fuel Base Price (Coal and Traprt Prices): \JJØV ERC Case No. 201 3-057 RC ORDER/June 10, 2013 Paae9ofl8

Fuel Base Price, $/MT Original CSC Amended CSC Q4,2007 Q4,2011 Weighted Weighted Coal Transportation Average Coal Transportation Average Cost Cost 27.72 24.85 52.57 142.38 21.14 63.52

Likewise, the table below summarizes the details of KSPC's Indonesian coal contracts vis-ã-vis its previous and present suppliers:

Original csc Amended csc Remarks Suppliers PT Kasih (Indonesia), PT PT IPC and PT JSKM Termination of CSC with IPC (Indonesia) and (both Indonesia) PT Kasih due to MGMEC (Philippines) passage of MEMR regulations and non- compliance; termination of MGMEC CSC due to inability of MGMEC to deliver because of problems with their mine operations Contracted PT Kasih 320,000; PT IPC PT IPC 500,000; PT Quantities 180,000; MOMec 300,000 JSKM 350,000 Delivery Barges only at 5,500 to Mother vessel with 45,000 Vessels 8,000 DWT capacity DWT capacity, lighter barges will be used to transfer from mother vessel to jetty Price PT Kasih USD25 for base PT IPC USD40.72 for Base Price for coal is price, USD25 for base price, USD20.72 for now required to be equal transportation base price, transportation base price, to or higher than the coal PT IPC USD32.26 for base PT JSKM USD42.00 for reference price issued price, USD20.50 for base price, USD 19.93 for by the MEMR of transportation base price, transportation base price Indonesia as of the MGMEC USD30.50 for base execution date of the price, USD22.07 for coal supply contract and transportation base price every anniversary thereof. Kcal PT Kasih 4100, PT IPC PT IPC 4100, PT JSKM 4375, MGMec 4300 4050 Unloading PT Kasih 6,000 metric PT IPC 6,000 metric Rate tons/day, PT IPC 7,000 tons/day, PT JSKM 6,000 metric tons/day, MGMec metric tons/day 7,000 metric tons/day Delivery Laycan days now allowed Terms (number of days when the vessel is alj,owed to arrive before %'yer has the option ,67, cancelling a particuáØffelivery)

41 j r

ERC Case No. 201 3-057 RC ORDER/June 10, 2013 Paae 10 of 18

4. Amendment to KSPC's Price Adjustment Formula

As previously discussed, there is a need to amend the price adjustment formula to reflect the changes in the revised base fuel cost of KSPC. The new price adjustment formula is basically the same as the original except for the new factor denominated as F f, to wit:

Original KSPC Price Adjustment Formula:

FCP CF FX LCP1 KA 0.540+0.065x +0.305x " + 0090 x FC CFO]FXO} I LCJ

New KSPC Price Adjustment Formula:

FC'P CF FX LC'P1 KAd] 0.540 + 0.065x + 0.305 x--xF + 0090 x FP0 F0 ]} I WJ

Where:

KAdJ = Adjustment factor of KSPC during the Billing Month

FCPn The Arithmetic average of the values of the United States Producers' Price Index for industrial goods and the United States Consumer Price Index (CPI) for all items, both as last published on or before the Adjustment Date (the last day of the billing month) by the International Monetary Fund (IMF), provided that if the IMF ceases to publish such indices, the relevant indices published by the U.S. Department of Labor Bureau of Labor Statistics (US-BLS) shall apply

FCPO = The Arithmetic average of the values as of January 2008 of the United States Producers' Price Index for industrial goods and the US CPI for all items, both as published on by the IMF, provided that if the IMF ceases to publish such indices, the relevant indices published by the US-BLS shall apply

CFn = BPn + TBP

CF0 = 8P0 + TBPO f ,A ERC Case No. 2013-057 RC ORDER/June 10, 2013 Paaell ofl8

Where:

8P0 = shall be the blended rate (FOB + insurance) of the new Coal Supply Contracts2

TBPQ = shall be the blended transportation rate (transportation + wharfage) of the new Coal Supply Contracts3

Ff = Fuel Base Price Factor = (FBP,,/FBPO)

Where:

FBPn = New Fuel Base Price 4

FBPO = Old Fuel Base Price5

FX = Philippines Peso vs. US Dollar exchange rate as published by the Bangko Sentral ng Pilipinas (BSP) at the last working day of the Billing Month

FX0 = An exchange rate of PhP40.65 vs. US$1.00

LCPn The Arithmetic average of the values of the CPI in Philippines for all items and General Wholesale Price Index in Metro Manila for Mineral fuels, lubricant and related materials, both as last published on or before the Adjustment Date (the last day of the billing month) by the National Statistics Office (NSO)

LCPO = The Arithmetic average of the values as of January 2008 of the CPI in Philippines for all items and General Wholesale Price Index in Metro Manila for Mineral fuels, lubricant and related materials, both as published by the NSO

Where:

a. Adiustments to Base Price (BPs)

2 current BPo rate as of 4 " 2011: USD42.38 Current TBPo rate as of 41h 2011: USD 21.14 41h Current New Fuel Base Price of 2011: USD 63. 4th Old Fuel Base Price as of 2007: USD 52.57 ERC Case No. 201 3-057 RC ORDER/June 10, 2013 Paqe 12 of 18

The BPn shall be adjusted quarterly to reflect the increase or decrease of the price of Global Coal FOB Newcastle as of the first day of loading as per the formula stated below:

(BH, I BP = x or BP ~! CRP BhI 2 )

Where:

BPn Base Price as of current quarter computed as per formula above or the current CRP, whichever is higher

= Base Price as of preceding quarter6 . In case of a new Coal Supply Contract, the initial BP, shall be the blended rate (FOB + insurance) of the new CSC

B1P 1 = Base Index Price as of preceding quarter

BlP..2 = Base Index Price as of preceding quarter to BlP 1

CRP = the CRP provided by the MEMR as determined annually per CSC anniversary date, which is FOB only

Notes:

The quarter shall refer to a calendar quarter

• Base Index Price .shall be the quarterly average of the Global coal physical index, FOB Newcastle. For reference, the initial BIPn2 shall be US$83.23 per ton

• The initial price adjustment shall be made on the First Delivery Date which shall be effective until the end of the quarter of the First Delivery Date

4th 6 Initial BP 1 for the current CSC as of 2011: usD42.38 ERC Case No. 2013-057 RC ORDER/June 10, 2013 Paqe 13 of 18

• The next price adjustment after the First Delivery Date will be on the next calendar quarter and the price shall be adjusted on the first day of every quarterthereafter

• Any applicable and export-related taxes, duties and other charges imposed by the respectWe governments of the exporters shall be ac/ded to the coal Base Price of each supplier/exporter under the CSCs while any appllcable and related taxes, duties, and other charges imposed by any Government Authority having jurisdiction over either of the parties shall be added to the blended Base Price as of current quarter (BP)

• The coal Base Price for each shipment of coal supplied by the supplier CFR hereunder to the KSPC's delivery point at the Cebu Power Plant shall be the Base Price, as applicable to that shipment and adjusted in accordance with the immediately preceding formula under Annex F of the PSC (Base Price), provided, however, that if such coal Base Price is less than the applicable Coal Reference Price, the coal Base Price shall be equivalent to the applicable Coal Reference Price

b. Adjustment of Transportation Base Price (TBP0 )

The TBPn shall be adjusted quarterly to reflect the increase or decrease of the price of Marine Diesel Oil as of the first day of loading as per the formula stated below:

TBP = (TBP, x 0.75)+ {TBPUI (BBP,,, x 0.251 t\ BBJ'n2 J 5

Where:

TBPn = TBP as of current quarter

TBP 1 = TBP as of preceding quarter7 . In case of a new Coal Supply Contract, the initial TBP.., shall be the blended transportation rate (transportation + wharfage) of the new Coal St.

4(h Initial TBP01 for the current C.SC as of 2011: USD21.14 no ERC Case No. 201 3-057 RC ORDER/June 10, 2013 Paae 14 of 18

BBP 1 = Bunker Basis Price in US cents as of preceding quarter

BBP 2 = Bunker Basis Price in US cents as of preceding

quarter to BBP 1

75% = Fixed Cost

25% = Variable Cost

Notes:

The quarter shall refer to a calendar quarter

• Bunker Basis Price shall be the quarterly average of the Pertamina Publicly Listed Price Index for Marine Diesel Oil posted in PT Pertamina website (www. pertamina- bunker.comj. For reference, the initial BBP 2 shall be US$0.80 18 per liter

• The initial price adjustment shall be made on the First Delivery Date which shall be effective until the end of the quarter on the First Deliver,' Date

• The next price adjustment after the First Dellveiy Date will be on the next calendar quarter and the price shall be adjusted on the first day of ever,' quarter thereafter

• The Transportation Base Price for coal shall include the cost of wharfage

5. Provisional Authority

/ 0 ERC Case No. 2013-057 RC ORDER/June 10, 2013 Paqe 15 of 18

In its original PSC with NORECO I, KSPC disclosed the computation for its fuel and used the same in its Price Adjustment Formula. This disclosure is pursuant to the request of KSPC's customers to be informed of all relevant information relating to the fuel component of its rate. The original fuel cost was based on its original CSCs. When MEMR No. 17, Series of 2010 was issued by the Indonesian Government requiring that the coal price in a contract must be equal to or higher than the CRP to be issued by the MEMR, the original coal suppliers of KSPC defaulted on their contracts with it since they did not have the necessary license under the new regulation and they did not want to revise the contracts to conform with the requirements of the MEMR. Thus, KSPC had to adopt in its fuel cost the new Indonesian CRP as well as secure new coal supply contracts with suppliers who are compliant with the new regulation.

Although the fuel cost is a full pass-through cost, KSPC cannot fully pass-on the same when it adopted the new CSCs or new fuel base price since the Price Adjustment Formula (Kadj) is tied-up or fixed, specifically, with previous Fuel Base Price (Old Coal Supply Contract, US$ 52.57/MT), i.e., [0.305 (CFnI52.57)]. The existing (old) formula cannot cover the fuel cost if there are any changes in the coal supply contracts or new fuel base price.

KSPC submitted that it already incurred losses amounting to PhP296 Million as of December 2012 (PhP548 Million per the Commission's calculation). Further, considering that it is not yet implementing the actual fuel cost but still using the original fuel base cost, KSPC is continuously suffering losses every month by approximately PhP40 Million. Hence, the early implementation of the amendment is expected to ease the continuing losses being incurred by it.

WHEREFORE, the foregoing premises considered, the Commission hereby PROVISIONALLY APPROVES the Amendment to the Power Sales Contract (APSC) between Negros Oriental I Electric Cooperative, Incorporated (NORECO I) and KEPCO SPC Power Corporation (KSPC), subject to the following conditions:

a. Pursuant to the Automatic Generation Rate Adjustment (AGRA) Rules, NORECO I shall, in computing its monthly generation rate, INCLUDE the indices used by KSPC in the calculation of monthly payment and the details of fuel cost calculation including the relevant Mat rates; • ERC Case No. 2013-057 RC ORDER/June 10, 2013 Page 16 of 18

b. The final Fuel Base Price that can be recovered shall be determined by the Commission in its Decision in the instant application; and

c. In the event that the final rate is higher than that provisionally approved, the resulting additional charges shall be recovered by KSPC from NORECO I and the latter shall pass the same to its customers. On the other hand, if the final rate is lower than that provisionally approved, the amount corresponding to the reduction shall be refunded by KSPC to NORECO I and the latter shall pass the same to its customers.

SO ORDERED.

Pasig Cay, June 10, 2013.

No irperson

MARIA AAEDA JOfi C. REYES Cdmmissioner

(On Official Travel) GLORIA VICTORIA C. YAP-TARUC ALFR 0 J. NON Commissioner Commissioner

iv NORECO land KSPC/PSC/2013-057 RC/provisional authority ERC Case No. 2013-057 RC ORDER/June 10, 2013, Paae 17 of 18

Copy Furnished:

1. Alabado and Partners Law Offices Attention: Atty. Russel S. Alabado Counsel for NORECO I and KSPC 3rd Floor, Builder's Center Building, 170 Salcedo Village St., Legaspi Village, Makati City

2. Negros Oriental I Electric Cooperative, Incorporated (NORECO I) Bindoy, Negros Oriental

3. KEPCO SPC Power Corporation (KSPC) 7th Floor, Cebu Holdings Center, Cebu Business Park, Cebu City

4. Office of the Solicitor General 134 Amorsolo Street, Legaspi Village, Makati City

5. Commission on Audit Don Mariano Marcos Avenue, Diliman, Quezon City

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

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

8. Office of the City Mayor Bais City, Negros Oriental

9. Office of the City Mayor Canlaon City, Negros Oriental

10. Office of the Municipal Mayor Ayungon, Negros Oriental

11.Office of the Municipal Mayor Bindoy, Negros Oriental

12.Office of the Municipal Mayor Guihulngan, Negros Oriental

13. Office of the Municipal Mayor Jimalahud, Negros Oriental

14.Office of the Municipal Mayor La Libertad, Negros Oriental

15. Office of the Municipal Mayor Mabinay, Negros Oriental

16.Office of the Municipal Mayor Manjuyod, Negros Oriental ERC Case No. 2013-057 RC ORDER/June 10, 2013 Pane 18 of 18

17.Office of the Municipal Mayor Tayasan, Negros Oriental

18. Office of the Municipal Mayor Vallehermoso, Negros Oriental

19. Office of the Governor Province of Negros Oriental

20.Philippine Chamber of Commerce and Industry (PCCI) 3rd Floor, ECC Building, Sen. Gil Puyat Avenue, Makati City