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

IN THE MATTER OF THE JOINT PETITION FOR THE ADOPTION OF PROPOSED GUIDELINES FOR AN INCENTIVE SCHEME TO LOWER SYSTEM LOSSES OF DISTRIBUTION UTILITIES, PRIVATE ELECTRIC POWER OPERATORS ASSOCIATION, INC. (PEPOA), PHILIPPINE RURAL ELECTRIC COOPERATIVES, INC. (PHILRECA) AND MANILA ELECTRIC COMPANY (MERALCO) Petitioners. ERC CASE NO. 2011-002 RM

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INVITATION TO SUBMIT COMMENTS

Notice is hereby given that the 2nd draft of the "Rules to Govern the Implementation of a Benefit-Sharing Scheme to Lower the System Losses of Electric Distribution Utilities" is hereby posted for comments. All interested parties may submit their comments (in both hard and soft copies) on the proposed rules at the Energy Regulatory Commission (ERC), Pacific Center Building, San Miguel Avenue, Pasig City, not later than January 15, 2013. Electronic copies may be sent to standards@erc.gov.ph. The proposed rules may be photocopied at cost, during the regular office hours at the ERC Main Office or may be downloaded from the ERC website at www.erc.gov.ph. Pasig City, December 10, 2012. FOR AND BY THE AUTHORITY OF THE COMMISSION:

ATTY. FRAN ~S SATURNINO C. JUAN Exe utive Director III

REM/LLG/FBD

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

RULES TO GOVERN THE IMPLEMENTATION OF A BENEFIT-SHARING SCHEME TO LOWER THE SYSTEM LOSSES OF ELECTRIC DISTRIBUTION UTILITIES

Pursuant to Section 10 of Republic Act No. 7832, otherwise known as the "AntiPilferage of Electricity and Theft of Electric Transmission Lines/Materials Act of 1994" and the Rule IX Section 3 of its amended Implementing Rules and Regulations, the Energy Regulatory Commission (ERC) hereby adopts and promulgates the following "Rules to Govern the Implementation of a Benefit-Sharing Scheme to Lower the System Losses of Electric Distribution Utilities".

ARTICLE I GENERAL PROVISIONS

Section 1. This Rules shall have the following objectives: (a) To promote transparency and accountability services provided by Distribution Utilities; in all phases involving the

(b) To promote a policy of full disclosure of all transactions interest;

involving public

(c) To protect the public interest as it is affected by the rates and services of Distribution Utilities and other providers of electric Energy; and (d) To establish a methodology for the implementation of a system loss benefitsharing scheme to lower Distribution System Losses for the benefit of the end-users.

Section 2. Guiding Principles. Performance Incentives for Private Distribution Utilities or DUs (under the Rules for Setting Distribution Wheeling Rates or RDWR) and Electric Cooperatives or ECs (under the Rules for Setting the Electric Cooperatives' Wheeling Rates or RSEC-WR in ERC Resolution No. 20, Series of 2009, and the promulgation of the rules on Tariff Glide Path or TGP) provide for a scheme to adjust the distribution rates through performance incentives, of which system loss is one component. In addition to the Performance Incentive Schemes (PIS) under the RDWR and RSEC-WR, this Rules is to further motivate the Private DUs and ECs, respectively, to bring down system loss further below the system loss cap since the associated Operating Expenditures (OPEX) and Capital Expenditure (CAPEX) become higher and savings below the cap are passed on to consumers.

Rule IX, Section 3 of the amended Implementing Rules and Regulations (IRR) of R.A. 7832 provides that whenever the actual system loss level of any DU falls below the prevailing cap set by the ERG, a benefit-sharing scheme shall be implemented, primarily for the benefit of the end-users. To this end, the Amended IRR states that, "a separate guideline shall be promulgated to embody the process and procedures for its implementation. " Section 3. Scope. This Rules shall apply to all electric power DUs, including but not limited to the following: (a) (b) (c) (d) Privately-owned DUs; Electric Cooperatives; Local government unit owned-and-operated DUs; Other duly authorized entities engaged in the Distribution of Electricity.

Section 4. Definition of Terms. The following words and phrases shall have the meanings set forth below in this Rules: (a) "Distribution System" refers to system of wires and associated facilities belonging to a franchised distribution utility, extending between the delivery points on the transmission or subtransmission system or generator connection and the point of connection to the premises of the end-User. (b) "Distribution Utility (DU)" refers to any electric cooperative, private corporation, government-owned utility, or existing local government unit, which has an exclusive franchise to operate a distribution system in accordance with Republic Act No. 9136, including DUs operating in the economic zones. (c) "Electric Cooperative (EC)" Refers to a distribution utility organized and incorporated pursuant to Presidential Decree No. 269, as amended by Presidential Decree 1645 and Republic Act No. 6938, otherwise known as the Cooperative Code of the Philippines. (d) "End-User" refers to any person or entity requiring the supply and delivery of electricity for its own use. (e) "Energy" refers to the integral of power with respect to time, measured in kilowatt-hour (kWh) or multiples thereof. (f) "Energy Regulatory Commission (ERC)" refers to the regulatory agency created under Section 38 of Republic Act No. 9136. (g) "Performance Incentive Scheme (PIS)" refers to the scheme under the RDWR and RSEC-WR wherein each regulated entity is rewarded for achieving specified performance target levels and penalizes it for failing to achieve specified target levels. (h) "Rules for Setting Distribution Wheeling Rates (RDWR)" refers to the Rules promulgated by the ERC to govern the entry of private DUs into performance-based regulation and any amendments thereto. (i) "Rules for Setting Electric Cooperatives' Wheeling Rates (RSEC-WR)" Rules promulgated by the ERC that embody the new regulatory framework for the On-Grid ECs.

0)

"System Loss" refers to the difference between the electric energy input (including those delivered to the distribution system by the transmission system, embedded generating plants, other distribution systems, and user systems with generating facilities) and the electric energy output (i.e., electric energy delivered to the end-users of the distribution system) for a specified billing period.

(k) "System Loss Cap" refers to the level of system loss recoverable from customers as provided for under Republic Act No. 7832 or the "AntiPilferage of Electricity and Theft of Electric Transmission Lines/Materials Act of 1994" and the provision under Republic Act No. 9136 or the EPIRA.

ARTICLE II BENEFIT-SHARING SCHEME FOR SYSTEM LOSS REDUCTION

Section 1. The Benefit-Sharing Scheme for System Loss Reduction. A benefit-sharing scheme shall be implemented whenever the actual system loss level of the DU falls below the prevailing system loss cap set by the ERC or the DU's lowest consecutive five-year average system loss beginning with the immediately preceding five-year period from the effectivity of this Rules. The scheme shall provide an equitable sharing between the DU and the end-users, with the DU's share not to exceed 50% of the cost difference between the DU's actual annual system loss and whichever is lower between the lowest consecutive five-year average system loss or the system loss cap. In the first year of implementation, the lowest consecutive five-year average system loss shall be the average of the preceding five-year period. Section 2. System Loss Rate (SLR). In the implementation of this benefitsharing scheme, the system loss rate shall be calculated and billed each calendar month using the formula: SLR (TGR + A TR) U + OSLA as prescribed under ERC Resolution No. 16, Series of 2009 (A Resolution Adopting the Rules Governing the Automatic Cost Adjustment and True-up Mechanisms and Corresponding Confirmation Process for Distribution Utilities) except for the computation formula for the gross-up factor "U", which shall be as follows:

% System Loss (1 - Actual % System Loss)

Where: (1) The % System Loss is based on the prevailing System Loss Cap or the lowest consecutive five-year average system loss, whichever is lower. In case the actual system loss for the most recent 12 month average is higher than the lowest consecutive five-year average system loss, the former shall be used but not to exceed the cap; and The Actual % System Loss is based on the Actual System Loss for the most recent 12-month period.

(2)

Accordingly, to incorporate the effect of the system loss benefit-sharing scheme to the calculation of the system loss rate over/under recovery (SLOUR), the formula prescribed under Article 4, Section 4 of ERC Resolution No. 16, Series of 2009, as amended in ERC Resolution No. 21, Series of 2010 shall be used, except that the computation formula for the Allowable System Loss Cost (ASLC) Gross Up Factor "U" and the Allowable System Loss Revenue (ASLR) shall be computed as follows:

(a)

For the ASLC Gross Up Factor "U": % System Loss (1 - Actual % System Loss)

Where: (1) The % System Loss is based on the prevailing System Loss Cap or the lowest consecutive five-year average system loss, whichever is lower; and The Actual % System Loss is based on the Actual System Loss for January to December.

(2)

(b)

For the ASLR: ASLR

Total actual System Loss Charge revenues for generation and transmission billed to customers for the recovery period except those associated with special programs and Sale for Resale Agreements, if such sales have different system loss charge rates from regular customers, net of System Loss Charge Savings, if any, under Section 4 hereof, computed using the same formula in Article 4, Section 4 of ERC Resolution No. 16, Series of 2009, as amended in ERC Resolution No. 21, Series of 2010, except that: SLRt = Actual implemented System Loss Charge rate each month during the recovery period, net of System Loss Charge Savings, if any, under Section 4 hereof

Section 3. System Loss Charge (SLC). In the implementation of this benefitsharing scheme, the system loss charge shall be calculated and billed each calendar month using the formula: SLC

= SLR

(computed as per Section 2 of these rules) x kWh sales.

Section 4. System Loss Savings under the Benefit-Sharing Scheme. A new line item in the DUs' electric bill is hereby introduced in this set of Rules, which shall be referred to as "System Loss Savings" (SLS).

The SLS shall be computed by multiplying the System Loss Savings Rate (SLSR) per kWh to the kWh sales plus forgone share of the DU, if any. The SLSR per kWh shall be computed by getting the difference between the computed SLR as discussed in Section 2 hereof and the computed SLR under ERG Resolution No. 16 series of 2009. The difference will be multiplied by 50% which is the End-users share of benefit in the incentive scheme.

Section 5. Application of System Loss Rewards and Penalties. To arrive at the ultimate benefit-sharing, any system loss reward given to the DUs that may be derived from the PIS under the RDWR for private DUs and the RSEG-WR for EGs shall be deducted from the DU share, except when the net benefit (rewards derived from System Loss Benefit Sharing Scheme less PIS Rewards) is less than the PIS Rewards of the DU, in which case the DU will retain the rewards under the PIS and forego its share under this Benefit-Sharing Scheme. The foregone share of the DU shall be added to the End-user share correspondingly. Any system loss incurred over the prevailing cap set by the ERG should be shouldered by the DUs.

Section 6. Incentive Fund Utilization. DUs are allowed to use its system loss savings share to finance its system loss programs to further lower system loss, such as: (1) Undertaking special OPEX programs (i.e., personnel to help reduce electricity theft); and additional project-hired

(2)

Investing in special GAPEX projects or equipment primarily used to lower system loss.

ARTICLE '" VERIFICATION AND MONITORING

At the end of each year, the monthly" System Loss Savings" billed to End-users shall be subject to confirmation and true up to determine whether there is over or underprovision of savings. When the actual system loss for the year becomes available, the "System Loss Savings" for the year that should have been provided to end-users will be computed and then compared with the actual "System Loss Savings" billed to endusers. Any over or under provision shall be spread over the succeeding 12-month period as an addition or reduction to the monthly "System Loss Savings" for this period.

ARTICLE IV ADMINISTRATIVE SANCTIONS

Any violation of this set of Rules shall be subject to the penalty which the ERG may impose in accordance with its Guidelines to Govern the imposition of Administrative Sanctions in the form of Fines and Penalties pursuant to Section 46 of the EPIRA.

ARTICLE V SEPARABILITY CLAUSE If, for any reason, any provision of this Rules is declared unconstitutional or invalid by final judgment of a competent court, the other parts or provisions hereof which are not affected thereby shall continue to be in full force and effect.

ARTICLE VI REPEALING CLAUSE Any rule or regulation inconsistent with the provisions of these Rules is hereby repealed and modified accordingly.

ARTICLE VII EFFECTIVITY This Rules shall take effect fifteen (15) days after its publication in a newspaper of nationwide circulation. Pasig City, ,2012.

ZENAIDA G. CRUZ-DUCUT Chairperson

MARIA TERESA R. CASTANEDA Com missioner

JOSE C. REYES Commissioner

GLORIA VICTORIA C. TARUC Commissioner

ALFREDO J. NON Commissioner