~-..<" •••. "".{;GUV>. TO;;y /> '"' CQ~ Republic of the jJiJ ~!1, "".•' (;.'1), ENERGY REGULATORY COMMISSION'" "lPpro,;;i,l for 0 San Miguel Avenue, Pasig City l. POsting Z . In\w,erc,go.l,pn , ~ IN.,THE MATTER OF THE JOINT APPLICATION FOR APPROVAL OF THE ELECTRIC POWER PURCHASE AGREEMENT (EPPA) ENTERED INTO BY AND BETWEEN ELECTRIC COOPERATIVE, INCORPORATED (LANECO) AND FDC MISAMIS POWER CORPORATION (FDC MISAMIS), WITH PRAYER FOR THE ISSUANCE OF PROVISIONAL AUTHORITY

ERC CASE NO. 2015-035 RC

LANAO DEL NORTE ELECTRIC COOPERATIVE, INCORPORATED (LANECO) AND FDC MISAMIS POWER CORPORATION (FDC MISAMIS), Applicants. J(------J(

ORDER

On March 3, 2015, Lanao del Norte Electric Cooperative, Incorporated (LANECO) and FDC Misamis Power Corporation (FDC MISAMIS) filed an application for approval of their Electric Power Purchase Agreement (EPPA), with prayer for the issuance of provisional authority.

In support of their prayer for the issuance of a provisional authority, LANECO and FDC MISAMIS alleged the following:

1. The turnover of the output of Mt. Apo 1 and 2 Geothermal Power Plants ,is scheduled on December 26, 2014. FDC MISAMIS will start payment of the monthly and generation fees upon issuance of the Certificates of Closing and Effectivity on December 26,. 2014. A ERC Case No. 2015-035 RC ORDER/May 11, 2015 Page 2 of 18

provisional approval of the EPPA with indicative rate from the Commission will allow it to perform its obligation to supply the requirements of LANECO and for the latter to receive power from the power plants. The issuance of the provisional authority will allow LANECO to charge and collect the respective fees enumerated in the EPPA as well as authorize it to pass on the full amount to its member-consumers;

2. Pursuant to the ERe Rules of Practice and Procedure, the Commission may exercise its discretion by granting provisional authority or interim relief prior to a final Decision; and

3. It is understood that the interim relief sought by them that may be granted by the Commission, shall be subject to adjustments and other conditions that the Commission may impose after hearing and final determination.

In the same application, LANECO and FDC MISAMIS prayed that the Commission:

1. Approve their duly negotiated EPPA;

2. Issue an Order: i) treating Annex "N" and the information contained therein as confidential; ii) directing their non- disclosure pursuant to Rule 4 of the ERC Rules; and iii) prescribing the guidelines for the protection thereof;

3. Provisionally approve their EPPA thereby authorizing LANECO to pass-on the full amount of the fees and charges contained therein to its member-consumers; and

4. After trial on the merits, issue a permanent approval of their EPPA, as amended, which would authorize LANECO to charge and collect the fees contained therein as well as authorize it to pass-on the full amount to its member-consumers.

Relative to the prayer for a provisional authority, the Commission initially reviewed the instant application, as follows: ERC Case No. 2015-035 RC ORDER/May 11, 2015 Page 3 of 18

1. Parties to the EPPA

LANECO is a non-stock, non-profit electric cooperative duly organized and existing under the Philippine Laws, with principal office at Tubod, Lanao del Norte. It serves the power requirements of the Municipalities of Bacolod, Baloi, , Kapatagan, , , Lala, , Magsaysay, , , , , Salvador, , Sultan Naga Oimaporo, Tangkal and Tubod, all in the Province of Lanao del Norte.

FOC MISAMIS is a corporation duly organized and existing under the Philippine Laws, with principal office address at 23'd Floor, PBCom Tower, 6795 Ayaia Avenue corner VA Rufino St., Makati City. It was formerly known and registered under the names Green Renewable Power Holdings, Incorporated and Strong Field Energy Corporation. It is a wholly-owned subsidiary of FOC Utilities, Incorporated.

2. Salient Features of the EPPA .

Contract Term The Term of the EPPA shall be two (2) years, unless extended by mutual written agreement by the Parties but in no case shall be longer than June 25, 2024

Type of Plant Geothermal Power Plants

Rated Capacity 108.48 MW (2 x 54.24 MW)

Outage Allowance The Supplier shall have an Outage Allowance of seven hundred twenty (720) hours per Contract Year. Unutilized Outage Allowance hours in any particular Contract Year shall not be carried forward to the succeeding Contract Year. The Customer may not cause the deferment of the Supplier's utilization of the Outage Allowance for any reason ERC Case No. 2015-035 RC ORDER/May 11, 2015 Page 4 of 18

Replacement Power in The Supplier shall exert best efforts to Excess of Outage procure Replacement Power beyond Allowance the Outage Allowance. Notwithstanding any provision in this Agreement to the contrary, the Supplier has the right to source Replacement Power for the Customer from other current or future facilities of the Supplier or of any third party, including the Wholesale Electricity Spot Market (WESM) or its equivalent, at the sole election of the Supplier. The Supplier shall not in any case have the obligation to procure Replacement Power other than from the Grid

Service Specification

Contracted 5,000 kW Demand Contracted 40,200,000 kWh Ener Plant Gate - Mt. Apo 1 Delivery Point and 2 Geothermal Power Plants Voltage at the 138 kV Plant Gate

Customer Failure to If the Customer off-takes power less Off-take Power than the Contracted Energy, the Customer shall still pay the full Generation Charge for the Contracted Energy and all applicable fees, charges and costs

Transmission Fees, The Customer shall pay for Ancillary Services Transmission Fees, Ancillary Services Charges, Line Rental Charges, Line Rental Charges, and Charges, and WESM WESM Costs. All other transmission Costs charges and market related fees/charges that are not part of the generation charge shall be for the account of Customer ERC Case No. 2015-035 RC ORDER/May 11, 2015 Page 5 of 18

Security Deposit The Security Deposit shall be in an amount equivalent to one hundred percent (100%) of the projected highest monthly Power Bill for the first Contract Year of the Agreement

Assignment In all cases of valid assignment, the assignee shall assume all the rights and obligations of the assignor under this Agreement

Adjustments Due to The Supplier shall have ninety-six (96) Force Majeure .hours to restore interrupted supply counted from the time a Force Majeure Event prevented it from supplying electric power to the Customer. The Customer shall not be entitled to interruption adjustment during such period. On the other hand, the Customer shall have ninety-six (96) hours to resume taking electric power counted from the time a Force Majeure Event prevented it from fully taking its Contracted Energy

Generation Charge LANECO shall pay the generation charge consisting of administrative charge, fixed charge and energy charge, as follows:

Monthly Generation Charge = Administrative Charge + Fixed Charge + Energy Charge

Where:

Administration Charge = (PhP100.64/kW/month) x (CD) x (LCP1/LCPO)

Fixed Charge = (PhP1,628.69/kW/month) x (CD) . , ERC Case No. 2015-035 RC ORDER/May 11, 2015 Page 6 of 18

Energy Charge = L Demandsched x BER/LF x 1- n, such that if In < 1, In = 1

And where:

Administration Charge = (PhP100.64/kW/month) x (CD) x (LCP1/LCPO)

CD = Contracted Demand

Demandsched = Hourly Scheduled Demand, as defined under Schedule 2

BER = Base Energy Rate, PhP3.034/kWh

LF = Load Factor, L Demand,om / Monthly Contracted Energy

In = Inflation Factor for the Billing Month

3. LANECO's Demand - Supply Scenario

The Mindanao Grid is heavily dependent on hydroelectric power. More than fifty percent (50%) of its total dependable capacity consist of hydroelectric generating capacity. As a consequence, available power supply in the said Grid was drastically reduced during summer months.

As a result, the Mindanao Island, including LANECO's franchise area, has experienced and is at risk of suffering power outages, adversely affecting local businesses and the daily lives of all electricity consumers. The lack of sufficient and reliable power supply has long been a barrier to much needed capital investment

The lack of supply was substantiated by the System Operator's frequent issuances of system red alert

The diagram below shows the supply-demand outlook in the Mindanao Grid, as published by the Department of Energy (DOE): ERC Case No. 2015-035 RC ORDER/May 11, 2015 Page 7 of 18

Mindanao Supply - Demand Outlook (2014-2020)

2014 2015 2016 2017 3toO Apr.13.6MW"TUd.1y3 ~r. 150 PSN Therm3 SOU'.h2 Mar. 25 t.m Lake MaInIt HEP J

1800 j ... t'.,.," 16'" I,-' .1 ::] llXlO """' •• , .. ,., .•.••.••...•. , ••.•..•••.• ,. _" ...• ,. _'. ,. , •. , •.•...•.••••..•••• , • ,1 • ~ ~ • ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ m = ~ ~ ~ ~ ~ ~ 0 0 COO 0 0 0 NS N NS NS NS NS NS N NS NS NS NS NS NS NS NS NS NS NS NS NS NS NS NS NS NS NS NS NS NS NS NS NS SN NS NS NS N~ NS NS NS NS i' i' i' i' i i' i' ~~!r:;'1~ z ~ ~ ~r:;"1~ z ~ ~ ~r:;"1~ z ~ ~!r:;"1~z ~ ~!'r:;"1~z ~ I ~r:;'1~ z ~ 2!r:;"1~ z _Committed _A'I.1l1JbleClpaclty -'uk Demlnd --- Requltel!ReleJve

With the privatization of PSALM's generation plants and coupled with insufficiency of supply in the Mindanao, it has become increasingly difficult for PSALM to sustain the demands of its Mindanao customers. Likewise, PSALM confirmed that it has insufficient capacity to supply the additional power requirements of the Mindanao distribution utilities beyond the contracted energy and equivalent demand in its existing Contracts for the Supply of Electric Energy (CSEEs).

Based on LANE CO's actual and forecasted load data, its contract energy and demand requirements for the next ten (10) years will Significantly increase. Notably, the deficiency is expected to increase on its franchise area due to the reduction of LANECO's contracted energy with PSALM by year 2015.

Thus, there is a need for LANECO to procure additional power in order to meet its obligations to its member-consumers and ensure sure that its power requirements are fully covered by supply contracts. ERC Case No. 2015-035 RC ORDER/May 11, 2015 Page 8 of 18

4. Mt. Apo 1 and 2 Geothermal Power Plants

The Mt. Apo Geothermal Power Plants of the Philippine National Oil Company - Energy Development Corporation (PNOC- EDC) was built more than a decade ago and to date, it is the sole and biggest investment in the City of Kidapawan. It generates a total of 108 MW of electricity that supplies industrial plants in the Mindanao Region.

On October 24, 2014, PSALM declared FDC MISAMIS as the highest bidder in its selection and appointment of the Independent Power Producer Administrator (IPPA) for the output of the Mindanao I and II (Mt. Apo 1 and 2) Geothermal Power Plants - the National Government's first IPPA auction in the Region.

The IPPA Agreement shall commence upon issuance of PSALM's Certificate of Effectivity and shall expire on June 25, 2024.

5. Evaluation of the Proposed Rates

The Mt. Apo 1 and 2 Geothermal Power Plants are owned by the National Power Corporation (NPC)/PSALM but were built and operated by EDC by virtue of a Power Purchase Agreement (PPA).

Pursuant to the Electric Power Industry Reform Act of 2001 or the EPIRA, PSALM is mandated to take possession and title over the NPC Independent Power Producer (IPP) contracts and to appoint qualified independent entities which shall act as the IPPAs following a public bidding in transparent and open manner.

These IPPAs refer to qualified independent entities appointed by PSALM to administer, conserve and manage the contracted energy output of the NPC IPP contracts, including the sale of contracted energy output of the said contracts and the offer of Ancillary Services (AS), if applicable.

On September 24, 2014, PSALM conducted the opening of bids for the selection and appointment of an IPPA for the output of the Mt. Apo 1 and 2 Geothermal Power Plants.

On October 24, 2014, the 108.48 MW capacity of Mt. Apo 1 and 2 Geothermal Power Plants was awarded to FDC MISAMIS. ERC Case No. 2015-035 RC ORDER/May 11, 2015 Page 9 of 18

Accordingly, it executed an IPPA Agreement with PSALM providing, among others, the bid price and rights and obligation of the IPPA, to wit:

5.1 Rights of the IPPA

a. The rights to enter into bilateral contracts with third parties and AS contracts, and to trade, sell or transact through the Interim Mindanao Electricity Market (1MEM) or WESM, as the case may be, in all cases for its own account and at its own risk and cost. These shall include the right to receive revenues from such activities without obligation to account therefore to PSALM or any third party, except when provided in the Agreement; and

b. The rights which are reasonably necessary for or incidental to the Administrator's performance of its obligations within PSALM's authority to grant.

5.2 Obligations of the IPPA

a. The IPPA shall assume and accept full risk, responsibility and liability with respect to these activities and when applicable;

b. The IPPA shall pay PSALM all sums due under the IPPA Agreement;

c. The IPPA shall trade the output of Mt. Apo 1 and 2 in the IMEM or WESM and make the necessary payment and settlement in accordance with the IMEM and WESM Rules;

d. The IPPA shall observe the existing nomination arrangement between PSALM and IPP. Any subsequent nomination arrangement between the Administrator and the IPPA shall not amend the PPA provisions; ERC Case No. 2015-035 RC ORDER/May 11, 2015 Page 10 of 18

e. The liability and payment for IMEM or WESM market fees, costs and charges that are determined to be applicable to the Administrator;

f. The IPPA shall pay NGGP applicable metering and transmission service fees and other related fees;

g. Through its interface with IPP, the IPPA shall permit the Power Station to comply with the System Operator's dispatch instruction to make generation available to the Grid;

h. The IPPA shall maintain the Performance Bond in full force and effect with a Qualified Bank; and

I. The IPPA shall comply with the terms of the IPPA Agreement.

In view of the right to enter into a bilateral contract and its payment obligation to PSALM, FDG MISAMIS entered into an EPPA with LANEGO.

The proposed rates of FDC MISAMIS for the duration of its EPPA with LANEGO are as follows:

Rates PhP1,628.61/kW/month PhP100.64/kW/month PhP3.034/kWh

The foregoing rates were translated into PhP/kWh, to wit:

Amount Component PhP/kWh 2.0110 3.0340 0.2172 0.1377 5.3999 ERC Case No. 2015-035 RC ORDER/May 11, 2015 Page 11 of18

Thus, the proposed pricing structure IS equivalent to a generation rate of PhP5.3999/kWh.

Given the unique characteristic of the IPPA structure, the Commission believes that the methodology it typically uses is not applicable since the IPPAs are not required to pay for the plant acquisition cost upfront, but are required to pay the bid price through monthly payments .out of cash flows.

For purposes of evaluating the proposed EPPA rates, the Commission identified the following monthly payment by FDC MISAMIS to PSALM:

Amount PhP128,000,888.88 PhP3.034/kWh

The monthly payment should be a pass-through cost on the part of FDC MISAMIS to its customers. The equivalent rate of the said pass-through cost in terms of PhP/kWh is PhP5.0450/kWh.

As regards the proposed fixed charge of PhP1,628.61/kW/month, FDC MISAMIS alleged that said rate was derived basically to cover the monthly fixed payments required to be paid to PSALM under the IPPA Agreement plus a desired Margin.

The following table shows the derivation of the proposed fixed charge:

Fixed Monthlv Pavment to PSALM PhP128,000,888.88 Proposed Margin 10.80% Fixed Monthly Payment plus Margin 141,824,985 Billing Determinant, Net of 30 Days Outage 87,083 kW Fixed Charge PhP1,628.61/kW/month

To validate the Fixed Monthly Payment of PhP128,000,888.88, the Commission referred the same to the IPPA Agreement. The Commission found that the submitted fixed monthly payment is provided under the IPPA Agreement. Hence, the Commission believes that the said monthly payment should be adopted In computing the applicable fixed charge. ERC Case No. 2015-035 RC ORDER/May 11, 2015 Page 12 of 18

With regard to the Margin or return on capital, the proposed Margin shall compensate the risk that the IPPA assumed relative to its responsibility to ensure that it is able to trade the contracted capacity and able to generate cash flows sufficient to cover its fixed obligations.

The Commission believes that the proposed Margin requires further justification. Hence, for purposes of provisional authority, the Commission deems it prudent to adopt a Fixed Charge of PhP1,469.87/kW/month (PhP2.011/kWh). However, the same will still be subject to re-evaluation.

Fixed Monthly Payment to PSALM PhP128,000,888.88 Billing Determinant, Net of 30 Days Outage 87,083 kW Fixed Charge PhP1,469.87/kW/month

The other component of the total energy fee is the Administration Charge that allows FDC MISAMIS to recover the operating expenses incurred in administering the IPPA Agreement. This is the rate that will accrue to FDC MISAMIS plus the Margin included in the Fixed Charge.

Shown below is the breakdown of the proposed Administration Charge:

Particulars Amount Maintenance and Other Operating Expense 46,001,765.55 Office and Vehicle Rental 16,000,000.00 Travel Expenses and Per Diem 10,000,000.00 Trainino and Education 1,500,000.00 Marketing Expenses 3,000,000.00 Miscellaneous Expenses 15,501,765.55 Personal Services 35,000,000.00 Performance Bond Premium 1,000,000 Business Tax 23,170,000 Total Annual O&M 105,171,766 O&M (PhP/kW/month) 100.6428 O&M (PhP/kWh) 0.1377

The reasonableness of the total O&M Fee may be best established and validated by referring to historical cost of operations of the Administrator. Parenthetically, the same is inapplicable in the instant case since the IPPA Agreement has not yet commenced. ERC Case No. 2015-035 RC ORDER/May 11, 2015 Page 13 of 18

In the absence of such historical information, the Commission bench marked the computed O&M Fee with that of the recently approved geothermal power plants.

The Commission noted that the proposed IPPA Administration Expense is within the level of the actual General and Administrative Expense of another IPPA Administrator, as evidenced in the latter's Audited Financial Statements (AFS).

Notwithstanding the foregoing, the Commission deems it prudent to adopt the proposed Administration Fee.

Shown below is a comparison between the proposed and the provisionally approved rates:

Provisionally Component Proposed Rate Approved Rate Difference PhP/kWh PhP/kWh PhP/kWh 2.0110 2.0110 3.0340 3.0340 0.2172 0.1377 0.1377 5.3999 5.1827

The resulting rate of PhP5.1827/kWh is lower than the proposed rate of PhP5.3999/kWh.

From the total rate of PhP5.1827/kWh, a rate of PhP5.0450/kWh (PhP2.0110/kWh + PhP3.0340/kWh) will be paid by FOC MISAMIS to PSALM. On the other hand, a rate of PhPO.1377/kWh will be for FOC MISAMIS as compensation for the Administration Cost it incurred.

The Commission benchmarked the Administration Cost of PhPO.1377/kWh (IPPA Fee which will accrue to FOC MISAMIS) with similarly situated IPPAs of power plants recently filed for its approval and found that the same is comparable or within the level of the said power plants. .. ERC Case No. 2015-035 RC ORDER/May 11, 2015 Page 14 of 18

The Commission further benchmarked the proposed rates with its recently approved power supply agreements (PSAs) involving geothermal power plants and found that the same is comparable or within the level of the said power plants.

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

An initial evaluation of the instant application disclosed that the EPPA entered into by and between LANECO and FDC MISAMIS will redound to the benefit of LANECO's member-consumers in terms of reliable, continuous, and efficient supply of power within its franchise area at reasonable costs as mandated by 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 Electric Power Purchase Agreement (EPPA) between Lanao del Norte Electric Cooperative, Incorporated (LANECO) and FDC Misamis Power Corporation (FDC MISAMIS), subject to the following conditions:

1. The applicable generation rate shall be as follows:

Rates PhP1,469.87/kW/month PhP100.64/kW/month PhP3.034/kWh

2. The foregoing applicable generation rate shall be subject to adjustments based on the formula provided in the EPPA;

3. The final generation cost that can be recovered shall be determined by the Commission in its Decision in the instant application; and ERC Case No. 2015-035 RC ORDER/May 11,2015 Page 15 of 18

4. In the event that the final rate is higher than that provisionally granted, the resulting additional charges shall be collected by FOC MISAMIS from LANECO. On the other hand, if the final rate is lower than that provisionally granted, the amount corresponding to the reduction shall be refunded by FOC MISAMIS to LANECO.

SO ORDERED.

Pasig City, May 11, 2015.

ENAIDA G. 4RJ~ Chairperson

Ck Q.. . Jfe-4RiA ViCTORIA 8!Y AP-TARUC Commissioner Commissioner

JOSEFINA PAT~. MAGPALE.ASIRIT ERONIMO D. STA. ANA ;';'~i:Sioner Commissioner ERC Case No. 2015-035 RC ORDER/May 11,2015 Page 16 of 18

Copy Furnished:

1. Atty. Eleuterio F. Diao, IV Counsel for LANECO 1906 Bontong Camaman-an, Cagayn de Oro City

2. Quiason Makalintal Barot Torres Ibarra and Sison Counsel for FOC MISAMIS 21st Floor, Robinsons-Equitable Tower, 4 ADB Avenue corner Poveda St., Ortigas Center, Pasig City

3. Lanao del Norte Electric Cooperative, Inc. (LANECO) Tubod, Lanao del Norte

4. FOC Misamis Power Corporation (FOC MISAMIS) 23'd Floor, PBCom Tower, 6795 Ayala Avenue corner VA Rufino St., Makati City

5. Office of the Solicitor General (OSG) 134 Amorsolo Street, Legaspi Village, City of Makati 1229

6. Commission on Audit (COA) Commonwealth Avenue, Quezon City 1121

7. Senate Committee on Energy GSIS Building, Roxas Boulevard, Pasay City 1300

8. House of Representatives Committee on Energy Batasan Hills, Quezon City 1126

9. Office ofthe Municipal Mayor Bacolod, Lanao del Norte

10. OffiCe of the Municipal Mayor Baloi, Lanao del Norte , - ERC Case No. 2015-035 RC ORDER/May 11, 2015 Page 17 of 18

11. Office of the Municipal Mayor 8aroy, Lanao del Norte

12. Office of the Municipal Mayor Kapatagan, Lanao del Norte

13. Office of the Municipal Mayor Kauswagan, Lanao del Norte

14. Office of the Municipal Mayor Kolambugan, Lanao del Norte

15. Office of the Municipal Mayor Lala, Lanao del Norte

16. Office of the Municipal Mayor Linamon, Lanao del Norte

17. Office of the Municipal Mayor Magsaysay, Lanao del Norte

18. Office of the Municipal Mayor Maigo, Lanao del Norte

19. Office of the Municipal Mayor Matungao, Lanao del Norte

20. Office of the Municipal Mayor Munai, Lanao del Norte

21. Office of the Municipal Mayor Poona Piagapo, Lanao del Norte

22. Office of the Municipal Mayor Salvador, Lanao del Norte

23. Office of the Municipal Mayor Sapad, Lanao del Norte ERC Case No. 2015-035 RC ORDER/May 11, 2015 Page 18 of 18

24. Office of the Municipal Mayor , Lanao del Norte

25. Office of the Municipal Mayor Tangkal, Lanao del Norte

26. Office of the Municipal Mayor Tubod, Lanao del Norte

27. Office ofthe Governor Province of Lanao del Norte

28. Philippine Chamber of Commerce and Industry (PCCI) 3'd Floor, Chamber and Industry Plaza (CIP), 1030 Campus Avenue corner Park Avenue, McKinley Town Center, Fort Bonifacio, Taguig City

/