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Republic of the ENERGY REGULATORY COMMISSION San Miguel Avenue, Pasig City

IN THE MATTER OF THE APPLICATION FOR THE FRANCHISING OF A CONSORTIUM TO OWN AND OPERATE SUBTRANSMISSION ASSETS AND ISSUANCE OF A CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY (CPCN)

ERC CASE NO. 201 2-002 MC

CAGAYAN SUBTRANSMISSION COMPANY, INC. (CSl), Applicant. D 0 C K E T B B x------x Date:

DECISION

Before this Commission for resolution is the application filed on February 6, 2012 by Subtransmission Company, Inc. (CSCI) for approval of the franchising of a consortium to own and operate subtransmission assets and issuance of a Certificate of Public Convenience and Necessity (CPCN).

Having found the 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 May 7, 2012, were issued setting the same for initial hearing on June 18, 2012.

CSCI was directed to cause the publication of the Notice of Public Hearing, at its own expense, once (lx) in a newspaper of general circulation in the Philippines, at least ten (10) days before the scheduled date of initial hearing. It was also directed to inform the customers within its franchise area,by any other means available and appropriate, of the filing of the ins aht application, its reasons therefor and of the scheduled hearin,, ERC CASE NO. 2012-002 MC DECISION/April 15, 2013 Paae2ofll

The Office of the Solicitor General (OSG), the Commission on Audit (COA) and the Committees on Energy of both Houses of Congress were furnished with copies of the Order and the Notice of Public Hearing and were requested to have their respective duly authorized representatives present at the aforesaid initial hearing.

Likewise, the Offices of the Governors and Mayors of the Cities and Municipalities within its franchise areas of Cagayan I Electric Cooperative, Inc. (CAGELCO I) and Cagayan II Electric Cooperative, Inc. (CAGELCO II) were furnished with copies of the Order and the Notice of Public Hearing for the appropriate posting thereof on their respective bulletin boards.

On June 14, 2012, CSCI filed its "Pre-Trial Brief'.

During the June 18, 2012 initial hearing of this case, only CSCI appeared. No oppositor/intervenor appeared nor was there any opposition/intervention registered.

At the said hearing, CSCI presented its proofs of compliance with the Commission's posting and publication of notice requirements which were duly marked as Exhibits "A" to "13-35", inclusive. Thereafter, it conducted an expository presentation of its application and presented the following witnesses: 1) Engr. Rudolph Q. Adviento, CAGELCO il's Technical Manager, who testified, among others, on the following: a) organization of the CSCI and its technical capability to operate and maintain subtransmission assets; b) the identities of persons who shall be responsible for managing the consortium; c) the technical benefits that may be derived by the consumers; and d) the documents submitted in support of the instant application; and 2) Mr. James A. Nichols, CSCI's Financial Consultant, who testified, among others, on the following: a) the Lease Purchase Agreement (LPA) entered into by and between CSCI and the National Transmission Corporation (TRANSCO); b) the total purchase price agreed upon by the parties in the said LPA; c) the prospective consumers of the consortium after CSCI takes over the subtransmission assets described in the aforementioned LPA; d) the standard practices to be adopted by the consortium once it will operate and maintain the subtransmission assets; e) the rate impact on consumers and the effects of the deferred Connection Charges/Residual Subtransmission Charges (CC/RSTC); f) the financial capability and feasibility of the consortium once it subsequently operate and maintain the subtransmission assØ. In the course thereof, various documents were presented and çifufl' marked as exhibits. The direct examinations of the said witnsj&s having been terminated, the ERC CASE NO. 2012-002 MC DECISION/April 15, 2013 Paae3ofll

Commission propounded clarificatory questions. CSCI was, then, directed to file its formal offer of evidence.

On June 21, 2012, CSCI filed its "Formal Offer of Evidence".

On March 15, 2013, the Commission issued an Order admitting the said formal offer of evidence and declaring the case submitted for resolution.

DISCUSSION

I. Formation of the Consortium

Pursuant to Section 8 of Republic Act No. 9136 (R.A. 9136), CAGELCO I and CAGELCO II created and organized a consortium, CSCI, for the acquisition of various subtransmission assets where they are both connected.

Relative thereto, Section 2 of the Commission's "Rules to Govern the Issuance of Certificate of Public Convenience and Necessity (CPCN) to Entities Engaged in the Transmission and Distribution of Electricity' provides that only applicants with the following qualifications shall be issued a CPCN:

(a) Filipino citizens or corporations, co-partnerships, associations or joint-stock companies constituted and organized under the laws of the Philippines: Provided, that sixty (60) per centum of the stock or paid up capital of any such corporation, co-partnership, association or joint stock company must belong entirely to citizens of the Philippines;

(b) Technical capability;

(c) Financial capability; and

(d) Franchise for operating and maintaining a transmission or distribution system isued by the Congress of the Philippines or the Co/4pission pursuant to Section 8 of R.A. 9136 or the "Elfrtjic Power Industry Reform Act of

2001" (EPIRA). I I/i / 11 ERC CASE NO. 2012-002 MC DECISION/April 15, 2013 Paae4of 11

II. Technical and Financial Capability

A. System Reliability

As Distribution Utilities (DU5), the Commission found that CAGELCO I and CAGELCO II are both technically qualified to operate and maintain the subtransmission assets.

CAGELCO I and CAGELCO II are presently operating and maintaining similar 69 kV assets within their respective franchise areas, to wit:

CAGELCO I: Twenty-Five (25) km. 69 kV line from Maddarulug, Solana to Sta. Barbara, Fiat, Cagayan, supplying a 10 MVA power substation which was commissioned in November 2007.

CAGELCO II: Forty-Four (44) km. 69 kV line from Magapit, Lal-lo to Lucban, , Cagayan, supplying two (2) units of 5 MVA power substations in Zitanga, Ballesteros and Lucban, Abulug. The said 69 kV line was commissioned in October 1984.

18.4-km. 69 kV line from Casambalanga to Tangatan, Sta. Ana which was commissioned in May 2012.

It was also established that CSCI has complied with the technical criteria prescribed in the "Guidelines to the Sale and Transfer of the TransCo's Sub-transmission Assets and Franchising of Qualified Consortiums", to wit:

a) It has technical e$'prience in the operation and maintenance of simil* jubtransmission assets; ,1 ERC CASE NO. 2012-002 MC DECISION/April 15, 2013 Page 5 of 11

b) It has existing inventory of materials for immediate replacement during emergency repair and maintenance of the lines;

c) CAGELCO II has 58.42% Reliability Performance which is lower than the weighted average ceiling of eighty percent (80%), as prescribed in the Guidelines; and

d) CAGELCO I and CAGELCO II filed their respective Statements of Compliance to the Philippine Grid Code (PGC) and the Philippine Distribution Code (PDC). Based on the above submissions, they have substantially complied with qualifications criteria for the acquisition of the subject subtransmission assets.

B. Financial Capability

CSCI has established its financial capability to maintain and operate the subject subtransmission assets. It has fully complied with the financial criteria prescribed in the Guidelines, to wit:

a) CAGELCO I and CAGELCO II are current in their financial obligations relative to their outstanding debt to all creditors;

b) CAGELCO I and CAGELCO Il's respective current and debt ratios are within the criteria set forth in the Guidelines;

c) CAGELCO I and CAGELCO Il's respective average collection periods are below the criteria set in the Guidelines, which should not be more than ninety (90) days; and

d) CAGELCO Il's net profit margin and return on assets are in accordance with the criteria set forth in the Guidelines. Although CAGELCO I failed to comply with the profit margin and return on assets criteria, Section 3, Article IV of the Guidelines proAides that at least one (1) DU in the consortium shouldqórijply with all the criteria. ERC CASE NO. 2012-002 MC DECISION/April 15, 2013 Paae 6 of 11

Customer Policy

Pursuant to its customer policies, CSCI will adhere to the following:

1. The consortium is a subtransmission company, and not a distribution company nor is it an Electric Cooperative (EC). Therefore, only distribution utilities (DU5) and EC5 can be customers of the consortium;

2. The only customers of the consortium are CAGELCO I and CAGELCO II. They are the only DU5 connected to the 69 kV subtransmission lines, particularly the - Alcala 69 kV Line; Alcala - Magapit - 69 kV Line; and the Magapit - Sta. Ana 69 kV Line;

3. End-Users who are presently connected to subject subtransmission lines will be considered as the customers of either CAGELCO I and CAGELCO II depending on their locational connections;

4. To maintain the viability of the consortium, neither CAGELCO I and CAGELCO II shall remove any existing loads from the subject subtransmission lines; and

5. For new connection consumers, they shall be considered as consumers of either CAGELCO I or CAGELCO II depending on their geographical location and connection point.

Practices and Procedures

CAGELCO I and CAGELCO II will be the only customers of the consortium upon the transfer of ownership of the subject subtransmission assets. They will pay the Commission's approved residual subtransmission charges imposed by the National Grid Corporation of the Philippines (NGCP) for the different connection points prevailing at the time of assumption of ownership of the subtransmission lines. / ,V ERC CASE NO. 2012-002 MC DECISION/April 15, 2013 Pane 7 of 11

Within its initial six (6) months of operation, CSCI and the National Irrigation Administration (NIA) should conduct mutual discussions on the acceptable rates which will be the subject of their Subtransmission Wheeling Services Agreement or Connection Agreement. Said Agreement shall be subject to the Commission's approval.

CAGELCO I and CAGELCO II should share in the maintenance responsibilities of the subject subtransmission assets in the meantime that CSCI has not yet established its own crew to operate and maintain the assets. The cost sharing shall be based on their respective equity share as follows:

Distribution Utility Share CAGELCOI 10% CAGELCOII 90%

The funding for the acquisition of the subtransmission assets will be sourced from loans and capital contributions of CAGELCO I and CAGELCO II. CSCI will own the assets and should provide separate books of accounts for its operation and maintenance of the assets.

The Commission noted the Certificate of Incorporation of CSCI dated May 28, 2010 issued by the Securities and Exchange Commission (SEC).

A perusal of the evidence presented herein showed that the approval of the instant application will redound to the benefit of CAGELCO I and CAGELCO Il's consumers in terms of continuous, reliable and efficient power supply as mandated by Republic Act No. 9136, or the Electric Power Industry Reform Act of 2001 (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 application filed by the Cagayan Subtransmission Company, Inc. (CSCI) for the issuance of a Franchise and Certificate of Public Convenience and Necessity (CP9f) is hereby APPROVED, effective April 15, 2013 to April 14, 203ZC/Jghtpnd/ftccordingly, CSCI is authorized to operate and maintain the eIec power system serving the

ERC CASE NO. 2012-002 MC DECISION/April 15, 2013 Paae8ofll

Tuguegarao - AIcala 69 kV Line; Alcala - Magapit - Camalaniugan 69 kV Line; and the Magapit - Sta. Ana 69 kV Line, all in the Province of Cagayan. The copies of the Certificate of Franchise and CPCN are hereto attached as Annex "A".

SO ORDERED.

Pasig City, April 15, 2013.

DA G. CRUZ- DUCUT P Cha irperson

MARIA AFiEDA JOSE C. REVES issioner

y ALFcON Gfi..ORIA VICTORIA ç. YAP-TARUC Commissioner CommisMoner

CPCN/DECISIOI'J/201 2-002 MC ERC CASE NO. 2012-002 MC DECISION/April 15, 2013 Pacie 9 of 11

Copy Furnished:

1. ATTY. RANULFO M. OCAMPO Counsel for CSCI 8/1' STRATA 100 Building, F. Ortigas Jr., Road Ortigas Center, Pasig City

2. CAGAYAN SUB-TRANSMISSION COMPANY, INC. (CSCI) do CAGAYAN II ELECTRIC COOPERATIVE, INC. (CAGELCO II) Attention: ENGR. GABRIEL A. TORDESILLAS President Macanaya, , Cagayan

3. CAGAYAN I ELECTRIC COOPERATIVE, INC. (CAGELCO I) Attention: MR. TITO R. LINGAN General Manager Maddarulug, Solana, Cagayan

4. CAGAYAN II ELECTRIC COOPERATIVE, INC. (CAGELCO II) Attention: ENGR. GABRIEL A. TORDESILLAS General Manager Macanaya, Aparri, Cagayan

5. The Office of the Solicitor General 134 Amorsolo Street, Legaspi Village, Makati City Metro Manila

6. The Commission on Audit Don Mariano Marcos Avenue Diliman, Quezon City, Metro Manila

7. The Committee on Energy Senate of the Philippines GSIS Building, Roxas Blvd., Pasay City, Metro Manila

8. The Committee on Energy House of Representatives Batasan Hills, Quezon City, Metro Manila

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

10. Office of the City Mayor Tuguegarao City, Cagayan

11.Office of the Municipal Mayor Rizal, Cagayan ERC CASE NO. 2012-002 MC DECISION/April 15, 2013 Paqe 10 of 11

12.Office of the Municipal Mayor , Cagayan

13. Office of the Municipal Mayor Piat, Cagayan

14. Office of the Municipal Mayor Sto. Nino, Cagayan

15. Office of the Municipal Mayor Solana, Cagayan

16.Office of the Municipal Mayor Eririle, Cagayan

17.Office of the Municipal Mayor Penablanca, Cagayan

18. Office of the Municipal Mayor , Cagayan

19. Office of the Municipal Mayor , Cagayan

20. Office of the Municipal Mayor Alcala, Cagayan

21.Office of the Municipal Mayor , Cagayan

22.Office of the Municipal Mayor Abulug, Cagayan

23. Office of the Municipal Mayor , Cagayan

24. Office of the Municipal Mayor Aparri, Cagayan

25.Office of the Municipal Mayor Ballesteros, Cagayan

26. Office of the Municipal Mayor , Cagayan

27. Office of the Municipal Mayor Camalaniugan, Cagayan

28.Office of the Municipal Mayor Claveria, Cagayan

29.Office of the Municipal Mayor , Cagayan ERC CASE NO. 2012-002 MC DECISION/April 15, 2013 Paaell of 11

30. Office of the Municipal Mayor Gonzaga, Cagayan

31.Office of the Municipal Mayor Lal-lo, Cagayan

32. Office of the Municipal Mayor , Cagayan

33.Office of the Municipal Mayor Pamplona, Cagayan

34.Office of the Municipal Mayor Sanchez-Mira, Cagayart

35.Office of the Municipal Mayor Sta. Ana, Cagayan

36.Office of the Municipal Mayor Sta. Praxedes, Cagayan

37. Office of the Municipal Mayor Sta. Teresita, Cagayan 0. E'RENERGY REGULATORY COMMISSION C• PNILIflINIS —nOn-

Certificate No. CPCN-13-02 CERTIFICATE OF FRANCHISE S CERTIFICATE OF PUBUC CONVENIENCE AND NECESSITY

THIS IS TO CERTIFY that, pursuant to the power and authority conferred upon it by Republic Act No. 9136, the ENERGY REGULATORY COMMISSION after having duly considered the application filed in ERC Case No. 2012-002 MC for the issuance of Certificate of Franchise and Certificate of Public Convenience and Necessity to operate and maintain the electric light and power system serving the Tuguegarao - Aicala 69kV Line; Alcala - Magapit - Camalaniugan 69kv Line; and the Magapit - Sta. Ana 69kv Line, in the Province of Cagayan and the evidence submitted in support thereof, has rendered a decision on April 15, 2013 declaring that the operation by the applicant of the business described therein will promote public interest in a proper and suitable manner.

WHEREFORE, the COMMISSION hereby issues to CAGAYAN SUBTRANSMISSION COMPANY, INC. this CERTIFICATE OF FRANCHISE AND CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY which shall be valid for a period of 25 years from April 15, 2013 or until April 14, 2038 subject to the rules and regulations issued by the Commission in accordance with law.

Given at Pasig City, Philippines, this 15th day of April 2013. • JNA"ICDA GCR -DUCUT hairperson

AL 0 J. NON LORIA VICTORIA C. y*P-TARUC MA A QCommissioner ComnnssionM Co

Attested by:

ATTY. FRA IS NINOcIJLJAN E xe tive Director Ill