2010-052rc romelco chpc

REPUBLIC OF THE PHILIPPINES ENERGY REGULATORY COMMISSION

SAN MIGUEL AVENUE, PASIG CITY

IN THE MATTER OF THE APPLICATION FOR THE APPROVAL OF THE AGREEMENT FOR THE SUPPLY OF ELECTRIC POWER BETWEEN CANTINGAS MINI-HYDRO POWER CORPORATION (CHPC) AND ROMBLON ELECTRIC COOPERATIVE, INC. (ROMELCO), WITH PRAYER FOR PROVISIONAL AUTHORITY

ERC CASE NO. 201 0-052 RC

ROMBLON ELECTRIC COOPERATIVE, INC. (ROMELCO) AND CANTINGAS MINI-HYDRO POWER CORPORATION (CHPC),

App1 i ca nts. x------------------------x

1)0 CJtTLTE]J Date: SA...... ?P1

-

DECISION

Before this Commission for resolution is the application filed by Romblon Electric Cooperative, Inc. (ROMELCO) and Cantingas Mini-Hydro Power Corporation (CHPC) on May 28, 2010 for the approval of their Agreement for the Supply of Electric Power (ASEP), with prayer for provisional authority.

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 July 16, 2010, were issued setting the case for initial hearing on August 5, 2010 and evidentiary hearing on August 6, 2010.

ROMELCO and CHPC pridirected to cause the publication of the Notice of Public Hearieir own expense, twice (2x) for wcJ) successive we (2) newspapers of general

ERC CASE NO. 2010- 052 RC (ROMELCO) Order/February 4, 2013 Page 2 of 25

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 the initial hearing. They were also directed to inform the consumers within ROMELCO's franchise area, by any other means available and appropriate, of the filing of the instant application, their reasons therefor and of the scheduled hearings 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 aforesaid hearings.

Likewise, the Offices of the Governor of the Province of Romblon and the Mayors of the Municipalities within the franchise area of ROMELCO were furnished with copies of the said Order and Notice of Public Hearing for the appropriate posting thereof on their respective bulletin boards.

On July 27, 2010, ROMELCO and CHPC filed their "Pre-Trial Brief'.

During the August 5, 2010 initial hearing, ROMELCO and CHPC appeared. No intervenor or oppositor appeared nor was there any intervention or opposition registered.

At the said hearing, ROMELCO and CHPC presented their proofs of compliance with the Commission's posting and publication of notice requirements which were marked as exhibits "A" to "H-7", inclusive. Thereafter, they made an expository presentation of their application. Subsequently, the Commission conducted the pre-trial conference.

During the hearing on August 6, 2010, ROMELCO and CHPC presented the following witnesses: 1) Engr. Rene M. Fajilagutan, ROMELCO's General Manager and also CHPC's Chief Operating Officer, who testified, among others, on the salient features of the ASEP, the forecasted energy demand and the need for a reliable and stable supply of electricity in the Sibuyan Island of Romblon; 2) Mr. Inocencio M. Montojo Board 13resident of ROMELCO who testified relative to Board Resolutioj14'.Jo. 04-2009 approving the PSA ROMELCO entered into ftvifrj CHPC; 3) Ms. Betty Corong,

OMELCO's Finance ManaIr, who testified on the financial


capacity and capability of ROMELCO; and 4) Engr. Aurelio R. Quitoriano, Jr., Senior Civil Engineer of VERGEL 3 CONSULT, who testified, among others, on the project preparation, cost estimates, financial analysis of the project and the basis of both the hydro rate and the projected energy escalation rate.

Subsequently, on September 6, 2010, the Commission issued an Order provisionally authorizing ROMELCO and CHPC to implement a generation rate of PhP3.7064/kWh for the Sibuyan Island.

On March 1, 2011 and April 11, 2011, ROMELCO and CHPC filed their "Compliance" and "Formal Offer of Evidence", respectively. On July 25, 2011, they filed an additional 'Compliance".

On February 1, 2013, the Commission issued an Order admitting the said formal offer of evidence for being relevant and material in the resolution of the case.

DISCUSSION

A. The Power Supply Agreement (PSA)

The Islands of Romblon are among the off-grid islands currently being served by the National Power Corporation-Small Power Utilities Group (NPC-SPUG) opened for private sector participation. CHPC has recognized the available potential of renewable source of power in the franchise area of ROMELCO, more particularly, in Sibuyan Island, which abounds with several rivers that can be harnessed into a hydro power source.

Pursuant to the policy of the State declared in Republic Act No. 7156 (R.A. 7156), otherwise known as the "Mini-Hydro Electric Power Incentive Act", CHPC invested on the development, construction, operation and maintenance of Mini-Hydro Power Plant to supply the power needs of ROMELCO. On the other hand, ROMELCO has also recognized the willingness of CHPC to develop a Mini-Hydro Plant and the benefits it can offero its member-consumers and thus, has agreed to purchase power/fm it under the stipulations in the ASEP.

ERC CASE NO. 2010- 052 RC (ROMELCO) OrderlFebruary 4, 2013 Page 4 of 25

The terms and conditions of the ASEP are as follows:

1. Salient Features:

Project Type Build-Own-and-Operate (BOO) Type of Plant Run-of-River Hydro Power

Type of Operation Base load

Cooperation : Thirty (30) years effective on the Period commencement of commercial

operation of the mini-hydro power plant as declared by CHPC

Installed Capacity : 900 kW (2 x 450 kW) with provision for additional 450 kW not later than five (5) years from initial commercial operation date

Energy Output : ROMELCO will pay for whatever Off take energy it has taken from the mini

hydro-power plant as measured at the delivery point/s

Delivery Point : The delivery point shall be the meter at the high side of the main transformer of the mini hydro- power plant

Power Quality : The power delivered and measured at the receiving end of ROMELCO shall be at plus or minus 10% of the required delivery voltage, 60 hertz and at minimum 90% power factor

Tie Line Arrangements

The cost of the transmission or tie-lines, including the maintenance of such facilities that may have to be constructed from each of the mini-hydro power plants to the tapping points of the existing 13.2 kV Sibuyan ''id of ROMELCO's electrical grid

I be for the account and onsibility of CHPC

V ERC CASE NO. 2010- 052 RC (ROMELCO) Order/February 4, 2013 Page 5 of 25

Metering Station : CHPC shall install at its own expense the switchyard and metering station at the mini hydro- power plant including the maintenance of said facilities

Operation and : CHPC shall be responsible for the Maintenance of the management, operation, maintenance Mini-Hydro Power and repair of the mini-hydro power Plant plant and ensure that it is in good

operating condition and capable of delivering electricity in a safe and reliable manner within the herein provisions and in accordance with the Philippine Grid and Distribution Codes (PGDC)

Downtime : CHPC shall be entitled to downtime intended for the repairs and maintenance of the mini hydro-power plant facilities. In such event, it shall notify ROMELCO of the occurrence of any Downtime and provide its best estimate of the probable timing and d.uration of such planned or unplanned Downtime

Priority Dispatch ROMELCO shall give priority dispatch to the energy generated from the mini hydro-power plants following the provisions of R.A. 7156

Purchase Rate : CHPC shall sell the energy and a "must" output from its mini-hydro power

plant at PhP5.40/kWh for the Sibuyan Island


Adjustment Clause and Price Cap

The initial selling rate shall be PhP5.40/kWh which shall be fixed for five (5) years from the commercial operation date. However, if an extraordinary event happens within the period that would require an additional investment by CHPC to the mini-hydro power plant, it shall be allowed to adjust its rate to recover its investment subject, however, to the Commission's prior approval. Further, after the aforesaid period, the parties should meet again to negotiate for the appropriate price cap to be imposed on CI-IPC's selling rate to ROMELCO

The subsequent rate adjustments after five (5) years are as follows:

Period Rate

(PhP/kWh) 06-10 years 5.65 11-15 years 6.10 16-20years 6.65 21-25years 7.10 26-30 years 7.65

2. Sources of Funds

The total cost of the mini-hydro project comprises of 78.12% debt and 21 .88% equity. The equity is comprised of the investment of ROMELCO and VERGEL, the technical consultant of the mini-hydro project. The rest of the financing required was sourced through a loan from the Development Bank of the Philippines (DB).

ERC CASE NO. 2010- 052 RC(ROMELCO) Order/February 4, 2013 Page 7 of 25

3. Manner of Payment

The billing meter shall be read every 25th day of the month, afterwhich, the billing shall be sent within five (5) days to ROMELCO. Such billing shall be due and payable without the necessity of further notice on or before the 30th day of immediately succeeding month from the time the bill is served on ROMELCO. Payment shall be made by ROMELCO to the principal office of CHPC which will be established in San Fernando, Romblon or to an authorized collector of the latter.

3.1 Prompt Payment Discount (PPD)

The due date for payment of billings for a given month notwithstanding, ROMELCO shall be entitled to a two percent (2%) PPD on the total monthly bill due provided that the total monthly bill is paid in full on or before the fifteenth (15th) day of the month immediately following the billing period and provided that ROMELCO has no unpaid power bill account including interests and other charges. Notwithstanding the PPD, ROMELCO shall, however, ensure the prompt release of the electricity fees.

3.2 Penalty for Overdue Amount

If ROMELCO fails to pay any power bill or account after it became due and payable, such overdue account shall bear a basic penalty interest payment equivalent to 8% per annum reckoned from the first day it becomes due and payable. Interest of overdue accounts shall be computed based on a 360-day year.

3.3 Rate Impact

The table below shows the impact of the proposed rate of PhP5.40IkWh as against the existing Subsidized Approved Generation Rate (SAGR) of PhP3.71/kWh on the overall rate of ROMELCO for the vear2009:


Particulars

Average kWh Used

Existing (PhP/kWh)

Proposed (PhP/kWh)

Impact (PhP/kWh) Remarks

Residential 48 354.99 388.58 33.60 Increase Commercial 196 1,352.55 1,489.73 137.18 Increase Public Building 140 941.47 1,039.46 97.99 Increase Street Lights 117 787.80 869.68 81.88 Increase Special Lights 280 1,969.01 2,164.99 195.98 Increase

4. PROCUREMENT PROCESS

The ASEP did not undergo a Competitive Selection Process (CSP) there being no New Power Provider (NPP) interested in investing in Sibuyan Island.

THE CANTINGAS MINI-HYDRO POWER PLANT

1. Hydro-Power Project

The hydro-power project is located in Sibuyan Island (within the franchise area of ROMELCO). Based on the actual records of ROMELCO, the peak demand for 2009 was 1,100 kW or an increase of 22.2% from 900 kW since 2002. With the entry of the mini hydro-power project, a projected increase in commercial and industrial loads will make the project much more attractive. On this note, the average demand growth rate for the entire franchise area is pegged at a conservative 3.7% per annum based on the historical trend or growth of the area. By the years 2010 and 2012, it was projected that the peak demand for Romblon would be 1,140 kW and 1,273 kW, respectively.

ROMELCO, in coming up with the ASEP, believes that since the hydro-power project has lower generation cost than the generation costs of other energy resources, such as NPC and other conventional power sources, said hydro-power project will result to a lower generation rate which is benetical to its consumers.


2. The Cantingas Hydro-Power Corporation

The primary purpose of the CHPC is to develop, construct, operate and maintain the mini-hydro power plant and sell power to distribution utilities in the Province of Romblon. ROMELCO's General Manager, Mr. Fajilagutan, concurrently serves as CHPC Board President with the majority of the Board of Directors of ROMELCO serving as Directors in the Board of CMHPC.

Initially, the authorized capital stock of CHPC is One Million Pesos (PhPI,000,000.00) divided into 10,000 shares with a par value of PhPI00.00 per share. However, in March 2009, the Articles of Incorporation of CHPC was amended to take into account the increase in its authorized capital stock from PhP1 M to PhP85M.

3. The Mini-Hydro Power Development Operating Contract (MHPDOC)

In June 2004, the Department of Energy (DOE) and ROMELCO (as the "DEVELOPER") signed a MHPDOC wherein DOE availed itself of the resources of ROMELCO under which ROMELCO shall furnish necessary services, technology and financing for the mini-hydro power development operations.

The MHPDOC has, among others, the following scope:

a. It is a contract for the Cantingas mini hydro-power project located at Sitio Cantingas, Barangay Taclobo, Municipality of San Fernando, Sibuyan Island, Romblon Province;

b. ROMELCO shall undertake, manage and execute the mini hydro-power development operations;

C. ROMELCO shall be responsible to the DOE for the execution of such operations and therefore, ROMELCO is appointed and constituted as the exclusive party to conduct such operati$?ts; and


d. During the term of the Contract, the total power generated in the conduct of such operation shall be accounted for in accordance with Section 7 of the R.A. 7156.

Under the said MHPDOC, ROMELCO will have the following rights and privileges:

a. Full exemption from payment of income taxes levied by the National Government for seven (7) years from the start of commercial operations;

b. Full exemption from payment of tariff duties and Value Added Tax (VAT) on importation into the Philippines of all machinery and equipment, including control and communication equipment, made within seven (7) years from the date of the awarding of the Contract;

C. Purchases of machinery, equipment, materials and parts from a domestic manufacturer made within seven (7) years from the date of issuance/awarding of the contract, which are directly needed and will be used exclusively by ROMELCO, shall be given tax credit equivalent to one hundred (100%) percent of the VAT and customs duties that would have been paid on the machinery, equipment, materials and parts had these items been imported;

d. Enjoyment of special realty tax rates on equipment and machinery not exceeding two and a half (2.5%) percent of their original costs; and

e. Exemption from VAT on the gross receipts derived from the sale of electric power whether wheeled through the NPC grid, electric cooperative grid or through the existing electric utility lines.

Section IX of the MHPDOC create a separate companydul ?E Exchange Commission (SEC), e generate power from the mint

provides that ROMELCO shall jistered with the Securities and g s9i1 company the authority to p9*er facility. It further provides


that ROMEL.CO and the newly-formed company shall enter into an agreement wherein the latter shall become the DEVELOPER under the MHPDOC. A Power Purchase Agreement (PPA) shall, likewise, be entered into between the new DEVELOPER and the outgoing DEVELOPER on the sale of power.

4. CERTIFICATE OF COMPLIANCE AND OTHER PERMITS

4.1 Certificate of Compliance (COC)

The Commission issued a COC to CHPC's 900 kW mini hydro-power plant on January 19, 2010. The economic life of the mini-hydro plant indicated in the said COC is fifty (50) years.

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

The DENR issued a Certificate of Non-Coverage to Cantingas Mini Hydro-Project stating, among others, that the said project is exempted from the coverage of Presidential Decree 1586 (P.D. 1586) pursuant to the Memorandum of Agreement (MOA) executed by and between DENR and DOE dated August 1997. However, the Commission noted the specific provision of the Certificate which stated that "the same is valid only for the construction and operation of a run-off-the-river mini hydro-power generation plant for remote island electrification with a maximum capacity of 0.90 megawatt and a low weir of 1.60 meter" and all its appurtenances as presented in the submitted documents. Said provision will limit CHPC's plans to provide for an additional capacity not later than five (5) years from its commercial operation.


C. ROMELCO's Power Supply

The NPC-SPUG provides all the energy requirements of ROMELCO in Sibuyan Island.

Upon its entry, the mini-hydro plant shall provide sixty percent (60%) of ROMELCO's power requirements with the other forty percent (40%) to be supplied by NPC-SPUG since it does not have adequate capacity to supply the total energy demand of ROMELCO. Moreover, NPC encourages the participation of the private sector, especially, renewable energy resources, like CMHP, in the business of generating power.

1. Historical Data of Customers for the Years 1999-2009 (Sibuyan Island)

Shown below are the historical data of ROMELCO's customers in the Sibuyan Island for the years 1999 to 2009. The largest number of customers pertains to Residential followed by those in the Commercial sector, to wit:

Historical System 1999 2000 2001 2002

Performance 2003 2004 2005 2006 2007 2008 2009

Residential 1,923 2,159 2,419 2,571 2,839 3,203 3,343 3,854 4,167 4,458 4,727 Commercial 140 146 146 148 145 143 407 383 364 359 360 PublicBldg 77 82 90 92 95 102 115 129 148 154 171 Street Light 21 1 34 34 1 30 27 1 21 21 20 1 18 18 1 15 BAPA 1 1 1 3 3 4 4 4 4 4 4 SpecialLight 2 4 4 2 11 19 27 34 25 41 50 TOTAL 2,164 2,426 2,694 2,846 3,120 3,492 3,917 4,424 4,726 5,034 5,327 Percentage (lo)

Base year 12.11 11.01 5.68 9.59 11.96 12.14 12.95 6.85 6.52 5.82

Note: No inclustnal Customer

Over the past ten (10) years, the average percentage of increase in the number of ROMELCO's customers is 9.46% which signifies a constant growth inAhe demand for supply of power in Sibuyan Island. / A /

ERC CASE NO. 2010- 052 RC (ROMELCO) OrderlFebruary 4, 2013 Page 13 of 25

2. Historical Tabulation on the Energy Sold for the Years 1999-2009 (Sibuyan Island)

Shown below is the historical tabulation of the energy sold by ROMELCO in Sibuyan Island for the years 1999 to 2009. For the past ten (10) years, the average percentage of increase on the energy sold to its customers is 14.46% which indicates a steady increase in the sale of energy in said Island:

Historical System Performance

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 (kWh) (kWh) (kWh) (ki) (kWh) (kWh) (kWh) (kWh) (kWh) (kWh) (kWh)

Residential 938468 987066 1,489,404 1,376,199 1,756896 1,690,963 1,780971 1,822,592 2,359,616 2,583,960 2,723,577 Conimrcial 148,704 130,199 200,488 164,363 188795 163,770 515156 479,193 604,966 669,801 817,356 lndusftial 01 0 01 0 01 0 01 01 0 01 0 Rth!ic Bldg 53,817 57,624 84,821 72,318 107,576 76,864 112,601 133,205 192,687 246,625 288,934

Street Light 33,882 34,639 38,050 36,298 46,881 29,932 25,536 22,427 25,491 30,953 21,711 BAPA 1,125 1,770 2,672 9,975 7,236 10,016 17,627 19,571 27,701 31,363 30,710

Spethl Light 1,212 1,339 3,790 2,350 16,773 27,114 41,770 43,136 87,884 149,340 166,344

TOTAL 1,177,208 1,212,637 1,819,225 1,661,503 2,124,157 1,998,659 2,493,661 2,520,124 3,298,345 3,712,042 4,048,632 Percentage (%) base year 3.01 50.02 8.67 27.85 5.91 24.77 1.06 30,88 12.54 9.07

3. Forecasted Energy Requirements Per ROMELCO's Distribution Development Plan (DDP)

Direct Sales to 2011 2012 2013 2014 2015 2016 2017 2018 1 2019 Customers (MWh) (MWh) (MWh) (MWh) (MWh) (MWh) (MWh) (MWh) (MWh)

Residential 6,421 6,973 7,612 8,310 9,071 9,902 11,015 12,253 13,631

Commercial 1,784 1,853 1,941 2,036 2,138 2,288 2,449 2,622 2,782

Industrial 241 281 331 411 510 634 787 953 1,153

Others 1 375 375 376 1 376 1 377 1 377 378 378 378 PublicBldg 1,3071 1,355 1,418 1,4801 1,620 1,767 1,969 2,213 2,533 StreetLight 80 1 82 1 84 1 88 1 92 1 97 102 1 107 1 112

TOTAL 10,208 10,919 11,7621 12,7011 13,8081 15,0651 16,7001 18,5261 20,589

C.,


Based on ROMELCO's DDP submitted to the DOE, it projected an annual increase of nine percent (9%) in its energy requirements. Thus, the power to be supplied from the mini-hydro plant will help deliver the anticipated increase in its energy demand in the coming years.

4. Determination of the Hydro Starting Rate by CHPC/ROMELCO

The CMHP has an installed capacity of 900 kW. The scheme of development is a run-of-river type and is currently operating as a base load power. It was completed, tested and commissioned in 2009 and is now operating and supplying about 70% of the power needs of the entire Sibuyan Island.

A methodology was adopted to determine the starting rate of CHPC, to wit:

Hydro Tariff Rate = CRR + O&MR + M

Where:

CRR = Capital Recovery Rate

O&MR = Operation and Maintenance Rate

M = Margin

The capital recovery rate was calculated using the formula shown below:

i(l+i 1 A = P L i(I+i) -1J,Capital Recovery Factor (CRF)

Where:

A = Annual Capital Recovery Amount (if capital is loan representing amortization)

P = Capital Investment at refer zero

= Interest in percent

N = Term (in years)

ERG CASE NO. 2010- 052 RC (ROMELCO) Order/February 4, 2013 Page 15 of 25

CHPC sourced its capital from the DBP at a debt-equity ratio of 90:10, interest rate ('I') of 9% and term ('N') of twelve (12) years to repay the loan. The starting hydro tariff rate shall be determined using the following formula:

First Year Operation & Maintenance Hydro Tariff = Annual Amortization + Including Benefit to Host Community + Margin (Contingency,

Rate Annual Energy Annual Energy Privilege Tax, Business Generation (kWh) Generation (kWh) Tax, Profit, etc.)

Based on the foregoing formula, the Capital Recovery Rate (CRR) shall be determined using the ratio of the annual capital recovery amount or the amortization and the annual energy generation.

The Operation & Maintenance Rate (O&MR) is equated to the first year of Operation and Maintenance (O&M) cost divided by the annual energy generation in PhP/kWh. The subsequent rate after the first year is modified by the Consumer Price Index (CPI) which accounts for the price inflation. The Margin Rate is added to account for contingency expenses and is pegged somewhere from five percent (5%) to eight percent (8%), one percent (1%) privilege tax required by Republic Act 9513, miscellaneous expenditures and marginal profit.

D. Issuance of Provisional Authority

On September 6, 2010, the Commission provisionally authorized ROMELCO and CHPC to implement a generation rate of PhP3.7064/kWh which is also the current SAGR for Romblon-Sibuyan Island.

E. Commission's Determination of CHPC's True Cost of Generation

The Commission made an evaluation of CHPC's proposed rate using the following factors to determine its true cost of generation:

qV 1. The Project Cost; 2. Weighted Average Cost of Capital (WACC); 3. Operating Cost for Plant Operation; 4. Asset Life; and 5. The billing determinant. it


1. The Project Cost

CHPC proposed a project cost of PhP140,928,420.04 broken down, as follows:

Description Project Cost (PhP) Weir and in-take Structure 13,846,516.35 Miscellaneous and Repair Works for Headrace and Surge Tank Civil Works 1,334,716.95 Earthworks for Penstock, Headrace Lines and Surgetanks 28,208,241.79 Construction of Powerhouse and All Associated Works 13,034,934.16 Installation of Powerhouse and Substation Grounding 611,500.00 Switch Gear, Supply and Installation 1,400,000.00 Local Cost Associated with Supply and Installation 1,747,297.02 Access Road 1,641,405.67 Installation/Laying of FRP5 for Headrace and Penstock 28,296,366.00 Mini Hydro Generating Sets, Panels, Power Transformer, etc. and Installation Supervision 19,277,382.68

Engineering Support Services 7,502,289.60 Pre-operating Expense 1,688,718.48 Take-off Facilities 700,000.00 Temporary Facilities 450,257.25 Interest During Construction 15,915,143.25 Working Capital 4,572,601.32 Contingency 701,049.52 TOTAL 140,928,420.04

The Commission adopted a total project cost of PhPII8,440,193.50 taking into consideration CHPC's updated cost of the power plant assets as reflected in its 2011 Audited Financial Statement (AFS) amounting to PhPlfl,,590,192.00 plus a working capital of PhP850,001 .50. / A 1


2. Weighted Average Cost of Capital (WACC)

In calculating the CRF, the Commission adopted a 16.44% Cost of Equity for CHPC based on the following: a) approved Feed-In-Tariff (FIT) rates; and b) recently approved PSAs. The Cost of Equity for NPC-SPUG areas may be relatively higher considering the economic factors involved such as proximity of location, the economic development in the area and the economic situation of ROMELCO itself.

3. Operations and Maintenance Cost

CHPC proposed an O&M cost of PhP7,930,000.00.

The Commission computed CHPC's O&M based on its 2011 AFS at PhP5,100,009.00 taking into account its operating expenses and cost of sales (directly attributed to the generation of energy) excluding depreciation, to wit:

Operating Expense Total Cost(PhP) Administrative and General Salaries 380,361.00

Outside Services Employed 531,721.00 Employees' Pension and Benefits 415,508.00 Officers' Allowance and Benefits 653,649.00 Travel 136,065.00 Insurance and Property Taxes 296,536.00 Miscellaneous General Expense 473,292.00 TOTAL 2,887,132.00

Cost of Sales Total Cost (PhP) Salaries and Wages 1,521,445.00 Repairs and Maintenance 691,432.00 TOTAL 2,212,877.00

OVER-ALL TOTAL t ihl / I 5,100,009.00

5


4. Plant Asset Life

The Commission adopted a plant life of thirty (30) years based on the amended COC of CHPC.

Under the FIT, the Commission used a twenty (20) year asset life while the "Asset Valuation Policy Guidelines for PSALM/NPC Generation Assets" sets the standard economic life of hydraulic production plants at forty (40) years.

5. Billing Determinant

Based on the data submitted, CHPC's average actual annual kWh generation from its start of operation until CY 2012 is 4,542,119 kWh.

The Commission made a determination of CHPC's appropriate load factor by comparing it with the load factors of various mini-hydro plants in the Philippines, to wit:

Mini-Hydro Power Plant (MHPP) ERC case No. Capacity Factors BOHECO I Sevilla MHPP 2008-007 RC 55% Solong MHPP 2008-021 RC 56% Hitoma 01 MHPP 2008-021 RC 53% Hitoma 02 MHPP 2008-021 RC 55% Capipiari MHPP 2008-021 RC 55% Smith Bell 2010-1 26 RC 52%

The Commission adopted a 57.61% load factor for CHPC and a billing determinant of 4,542,119 kWh based on the average actual annual kWh generation of the plant since it started its operation until CY 2012.

Further, under the FIT, the approved capacity factor is 47%. In its Decision dated July 27, 2012, the Commission stated that:


"To validate the reasonableness of NREB 's proposed net capacity factor, the Commission checked the current independent data available from the National Renewable Energy Laboratonj (NREL). 1 NREL 's comparison of capacity factors by technologies2 disclosed that capacity factors for hydropower generation range from 40% up to 50%, to wit:

100%

80% C

60%

40% V5 0.

3 20%

0% I-.-.- -.- -'

0

ERG CASE NO. 2010- 052 RC (ROMELCO) Order/February 4, 2013 Page 20 of 25

Given the hydrological risk, the Commission finds the conservative 47% net capacity factor acceptable, since project hydrology assessments, which are normally based on historical data, can be highly variable in its reliability, taking into consideration the recent experienced changes in the global weather patterns. The Commission is also mindful of the possible effect of climate change to the long-term energy yield of hydro plants, as capacity factor would be naturally reduced during extreme city season, such as during the outset of the El Nino phenomenon.

In view of the foregoing, the Commission finds the 47% proposed capacity factor reasonable considering that it is well within the 40% to 50% range of capacity factors for hydropower plants based on NREL 's comparative data."

F. Rate Derivation

The Commission made a determination of CHPC's Capital Recovery Fee (CRF) which will allow it to recover its investment with a reasonable rate of return. CHPC's required return on capital was benchmarked based on the recent approval of the Commission on similar mini-hydro plant.

Shown below is the derivation of the capacity fee:

Capital Cost PhP118,440,193.50 Asset Life 30 yrs Load Factor 57.61% Cost of Debt, 70% 9% Cost of Equity, 30% 16.44% Derived Annuity, PhP PhP 18,567,573.23 Derived CRF, PhP/kW/mo. PhP4.0879/kWh

The CRF was derived by using an annuity or net cash flow that would sufficiently cover the Debt Service repayment taking into consideration the term of the lof and at the same time satisfy the

5~//

cost of equity as compensation OL/s the return on Working Capital.


The computed annuity on the capital cost of PhP18,567,573.23 is divided by the annual energy of 4,542,119 kWh to arrive at the CRF of PhP4.0879/kWh.

Overall, the net cash flow should not result to an Equity Internal Rate of Return (IRR) more than the cost of equity and that the Net Present Value (NPV) of the net cash flow should be equal to the NPV of the capital cost funded through equity.

1. Operation and Maintenance Rate = PhPI .1228/kWh

The annual total O&M costs consist of the incremental O&M expenses associated with the operation of the project.

CHPC proposed a final O&M cost of PhP7,939,000.00. However, the Commission adopted an O&M of PhP5,100,009.00 taking into account CHPC's operating expenses and cost of sales (excluding depreciation), to wit:

O & M = Operating Cost + Cost of Sales (excluding Depreciation)

To calculate the O&M per kWh, the O&M cost of PhP5,100,009.00 is divided by the billing determinant of 4,542,119 kWh, resulting to PhP1.1228/kWh.

2. Generation Rate

Shown below is the breakdown of the computed generation rate:

Component PhP/kWh Capital Recovery Fee (CRF) 4.0879 Operation and Maintenance (O&M) 1.1228 Total Generation Rate 5.2107

'UI


3. Rate Impact to NPC-SPUG

The ASEP between ROMELCO and CHPC shall relieve the National Government from the allocation of subsidy for Romblon-Sibuyan Islands considering that CHPC did not pray for any subsidy from the Universal Charge-Missionary Electrification (UC-ME) allocation.

Shown below are the potential savings of NPC-SPUG as a result of the ASEP:

Recently Approved SAGR NPC-SPUG

for Romblon- Estimated Cost Sibuyan Islands of Generation for NPC-SPUG per ERC Case Romblon- Estimated Estimated NPC

No. 2006-020 RC Sibuyan Islands Subsidy Annual Savings in (PhP/kWh) (PhP/kWh) (PhP/kWh) Subsidy (PhP)

5.6404 12 . 7162* 7 . 0758** 32,139,1 25*** * Under ERC Case No. 2006-020 RC entitled "In the Matter of the Application for the

Approval of a Socially-Acceptable Generation Rate (SAGR) for Sixty (60) Remaining NPC-SPUG Areas" approved by the Commission in its Decision dated March 7, 2011.

** Difference between NPC Estimated True Cost of Generation Rate (TCGR) for Romblon - Sibuyan Islands of Ph13 12.7162/kWh and the recently approved SAGR of PhP5.6404/kWh under ERC Case No. 2006-020 RC.

The NPC-SPUG estimated subsidy of PhP7.0758/kWh multiplied by the Total Estimated Annual Generation of 4,542,119 kWh of CHPC.

CHPC's proposed TCGR will not affect the generation rate currently being imposed on the consumers of ROMELCO as the generation rate that will be imposed will still be the Commission-approved SAGR of PhP5.6404/kWh.

If CHPC's proposed TCGR is higher than the SAGR, the difference (the subsidy) shall be collected from NPC-SPUG through the UC-ME which is being collected from all electricity end-users.

The table below shows the impact of purchasing electricity from CHPC at the Commission's computed rate of PhP5.2107/kWh as opposed to NPC-SPUG's TCGR for its Sibuyan Island Power Plant of PhP38.3547/kWh4. The proposed TCGR will reduce the amount of subsidy being shouldered by all electricity end-users and will relieve the government from se ious losses in the operation of SPUG areas-missionary electrificati

Based on CY 2011 Result of Operation


CHPC's NPC's Estimated

NPC Cost of Estimated CHPC's Subsidy Decrease in SAGR Generation Subsidy TCGR Requirement Subsidy*

(PhP/kWh) (PhP/kWh) (PhP/kWh) (PhP/kWh) (PhP/kWh) (PhP/kWh) 5.6404 38.3547 32.7143 5.2107 0 32.7143

Difference between NPC's estimated subsidy and CHPCs estimated subsidy.

The proposed TCGR will reduce the UC-ME annual subsidy by approximately PhPI48.60 Million based on the PhP32.7143/kWh decrease in subsidy and CHPC's net expected energy level of 4,542.12 kWh.

Shown below is a comparison between CHPC's calculated rate and the approved generation rates of other mini-hydro power plants operating in the country, to wit:

Applicant

Run-of-the River Hydroelectric Power Plant Location

Plant Capacity

(MW) Rate

(PhPIkWh) BOHECO I Sevilla MHEP Visayas 2.500 4.2530 SUWECO Solong MHEP Luzon 2.300 5.3955

Hitoma 1 MHEPP Luzon 1.500 5.3955 Hitoma2 MHEPP Luzon 1.575 5.3955

MINERGY Cabulig MHEPP Mindanao 8.00 4.6899 NUVELCO Smith Bell Luzon 1.800 4.5000 AURELCO San Luis MHEPP Liuzon 0.800 4.395 ROMELCO CHPC Luzon 0.900 5.2107 FIT -

- 6.00 5.900

CHPC's proposed rate of PhP5.2107/kWh is comparable or within the level of the Commission's approved rates for other mini-hydro plants and is lower by PhPO.6893/kWh compared to the approved FIT for mini-hydro of PhP5.900/kWh.

WHEREFORE, the foregoing premises considered, the application filed by Romblon Electric Cooperative, Inc. (ROMELCO) and Cantingas Mini-Hydro Power Corporation (CHPC) for approval of their Agreement for the Supply of Electric Power (ASEP) is hereby APPROVED with modificationectto the following conditions:


1. Approved Generation Rate:

Component PhP/kWh Capital Recovery Fee (CRF) 4.0879 Operation and Maintenance (O&M) 1.1228 Total Generation Rate 5.2107

2. The Basic Energy Charge (excluding the Capital Recovery Rate and the component in the O&M that pertains to E.R. 1-94) shall be escalated or de-escalated annually by the Philippine Consumer Price Index (CPI) published by the National Statistical Coordination Board (NSCB).

Considering that the rate as approved herein is higher than the provisional rate granted by the Commission, ROMELCO is hereby directed to submit, within fifteen (15) days from receipt hereof, a collect scheme from the actual date of operation until the implementation of the final rates, including its calculations and supporting documents.

SO ORDERED. Pasig City, February 4, 2013.

fSZDUC >DA rperson r'

AREDA (C. REVES

Commitioner missioner

ALF4E C. Commissioner

rrm/njdAELCO PSA

(On Official Business) GLORIA VICTORIA C. YAP-TARUC

Commissioner


Copy Furnished:

1. Atty. Arnido 0. Inumerable Counsel for Applicant, ROMELCO 405 Elias St., U.E. Village, Cainta, Rizal

2. Romblon Electric Cooperative, Inc. (ROMELCO)\ Capaclan, Romblon, Romblon

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

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

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

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

7. Office of the Municipal Mayor Romblon, Romblon

8. Office of the Municipal Mayor San Fernando, Romblon

9. Office of the Municipal Mayor Cajidiocan, Romblon

10.Office of the Municipal Mayor Magdiwang, Romblon

2010-052rc romelco chpc

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