| Republic of the Philippines San Miguel Avenue, Pasig City IN THE MATTER OF THE ‘APPLICATION FOR APPROVAL OF THE POWER SALES AGREEMENT BETWEEN DAVAO DEL NORTE ELECTRIC COOPERATIVE, INC. (DANECO) AND SARANGANT ENERGY — CORPORATION (SEC), WITH PRAYER FOR PROVISIONAL AUTHORITY ERC CASE NO. 2013-222 RC AVAO DEL NORTE ‘LECTRIC COOPERATIVE, INC. (DANECO) AND ED ARANGANT ENERGY eres CORPORATION (SEC), Me ~ Applicants. Me eee eee eee eee DECISION Before this Commission for resolution is the Joint Application filed on 20 December 2013 by Davao del Norte Electric Cooperative (DANECO) and Sarangani Electric Corporation (SEC) for the Approval of their Power Supply Agreement (PSA). PARTIES Davao del Norte Electric Cooperative, Inc. (DANECO) is a non-stock, non-profit electric cooperative organized and existing nder the laws of the Republic of the Philippines, with office address KM 100, Montevista, Province of Compostela Valley. DANECO has } franchise to distribute electricity in the City of Tagum, the Island Garden City af Samal, and the Municipalities of Asuncion, Kapalong, few Corella, San Isidro, and Talaingod, all in the Province of Davao del Norte; and the Municipalities of Compostela, Laak, Mabini, Maco, Maragusan, Mawab, Monkayo, Montevista, Nabunturan, New Bataan, nd Pantukan, all in the Province of Compostela Valley.ERC Case No. 2013-222 RC DECISION/06 September 2016 Page 2 of 25 | Sarangani Energy Corporation (SEC) 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 4* Floor, Alphaland Southgate Tower, 2258 Chino Roces Ave. corner EDSA, Makati City. Applicant SEC is the project company of Conal Holdings Corporation (“CHC’) for the construction and operation of the power generation facilities subject of the present Application. RELEVANT DATES Having found said application sufficient in form and in substance with the required fees having been paid, the Commission provisionally approved the subject PSA on 24 February 2014. The jurisdictional hearing, expository presentation, pre-trial conference and evidentiary hearing on the subject case were held on 6 March 2014, where no intervention or opposition was registered. On 23 February 2015, the Commission extended the provisional authority granted on 24 February 2014. On 30 August 2016, the Commission issued an Order admitting the applicants’ Joint Formal Offer of Evidence dated 07 April 2014. FACTUAL ANTECEDENTS DANECO and SEC filed a Joint Application for the approval of their Power Supply Agreement (PSA) for the supply by SEC to DANECO of 15 MW of baseload power for a period of 25 years coming from the 120 MW Circulating Fluidized Bed Combustor Boiler Coal- Fired Power Plant located in the province of Sarangani. DANECO and SEC cited in their Joint Application the following as the salient features of the subject PSA: © Type of Plant : Circulating —Fluidized =~ Bed. Combustor Boiler Coal-Fired Power Plant « Installed Capacity : one (1) unit of 120 MW (net dependable capacity of 105 MW) © TypeofOperation : Base load power plantERC Case No. 2013-222 RC DECISION/06 September 2016 Page 3 of 25 © Cooperation Period : 25 years commencing on the commercial operation date * Contracted Capacity: SEC shall supply or cause to supply to DANECO up to the Contracted Capacity of fifteen (15) MW and the Dispatchable Energy as indicated in and subject to the terms and conditions of the PSA, The capacity to be provided by SEC shall: always be the Contracted Capacity. In case the actual capacity delivered by SEC as per dispatch order or limitation of DANECO for a given billing month is less than the Contracted Capacity, the difference between the actual capacity utilized by DANECO and contracted capacity for that billing month shall be deemed delivered to and utilized by DANECO. « Payment Security : DANECO shall, not later than thirty (g0) days prior to the Scheduled Commercial Operation Date, deliver to SEC security in an initial amount equivalent to the unadjusted first monthly payment of the First Contract Year. + Consumption in Excess of Contracted Capacity and Dispatchable Energy During the term, SEC may, but is not obliged to make available to DANECO electric power in excess of the Contracted Capacity and Dispatchable Energy, as the case may be, upon written request of DANECO. If SEC agrees to grant such request and makes available to DANECO the electric power requested in excess of the Contracted Capacity and Dispatchable Energy, DANECO shall pay therefore an amount computed in accordance with the provisions of Section 7.2 of PSA (Monthly Payments). * Reduction in Contracted Capacity and Dispatchable EnergyERC Case No. 2013-222 RC DECISION/06 September 2016 Page 40f 25 DANECO shall be entitled to a reduction in its Contracted Capacity and Dispatchable Energy as a result of a transfer of any of DANECO’s contestable market customers upon written application by the DANECO to SEC at least sixty (60) days prior to such reduction; provided, that the reduction shall be allowed only in case (i) the transfer is direct to SEC, or (ii) if SEC is able to find an alternative market to sell the transferred Contracted Capacity and Dispatchable Energy. Both parties shall cooperate to minimize the impact of such reduction. Proposed Tariffs and Rate Structure The rates to be paid by DANECO to SEC depend on whether the power is delivered during commissioning or during commercial operations of the SEC Power Plant. These rates and their corresponding adjustments shall be computed based on the following formulae: Monthly Payments = CRF + FOMF + VOMF + AFC + SC + RCEC + BCEC + Taxes where: CRF = Capital Recovery Fees FOMF = Fixed Operation and Maintenance Fee VOMF = Variable Operation and Maintenance Fee AFC = Actual Fuel Cost sc = Start-up Costs RCEC = Réplacement Capacity and Energy Costs BCEC = Back up Capacity and Energy Costs ‘Taxes = Value-Added Tax and other applicable taxes, if any Applicable Rates: ‘ Proposed Rates Particular US Dollar Philippine Peso Capital Recovery Fee (CRE) . Year 1 US$22.05/KW per mo. | PAP 457.35/ KW per mo, Year 2 US$25.31/kW per mo. | PhP525.04/ kW per mo. Year 3 US$30.51/KW per mo. | PhP525.04/ kW per mo. ‘Year 4 and onwards US$30.51/kW per mo. | PhP632.83/ kW per mo. Fixed O&M Fee (FOME) PhP333.23/ kW per mo. ‘Variable O&M Fee (VOMF) PhP0.3170/kWh Thterconnection CRF US$2.85/kW per mo, PhP122.55/ kWh. Fuel Cost (AFC) Pass-through cost subject to efficiency cap Start-up Cost (SC): {Cold Start-up to Synchronization PhP743,324.00 {Warm-up Start-up to Synchronization PhP468,406.00ERC Case No, 2013-222 RC DECISION/06 September 2016 Page 5 of 25 |___ Hot Start-up to Synchronization PhP346,701.00 eee Re” and | pass-through Cost Taxes Pass-through Cost Monthly Adjustment As provided in the PSA, the monthly fees to be paid by DANECO are subject to adjustments based on various indices or factors in order to properly reflect the fluctuation of SEC’s costs in roducing electricity. As further stated in the Applicants’ PSA, SEC will build, own. d operate a 120 MW Circulating Fluidized Bed Combustor Boiler al-Fired Power Plant located in Maasim, Sarangani. The Department of Energy (DOE), in its Certificate of indorsement No. 2007-07-01 dated July 27, 2007, certified that the construction of SEC's Power Plant is consistent with the Power Development Plan (PDP). On April 20, 2009, the Department of Environment and Natural Resources (DENR) issued an Environmental Compliance Certificate (ECC) with Reference Code No. 0901-001-4021 for the SEC Power Plant. On 19 April 2016, the Commission issued a Certificate of Compliance with COC No. 16-04-M-00056M for SEC's Phase 1 Power ‘lant. .ANECO’s Supply-Demand Scenario In order to provide sufficient supply to its franchise area, DANECO has executed various contracts with power suppliers. DANECO executed a new Contract for the Supply of Electric Energy (CSEE) with the Power Sector Assets and Liabilities Management Corp. (PSALM) for an average of 30 MW until 2016. Under its previous CSEE, PSALM supplied DANECO an average of 47.02 MW during 2012 while under the new CSEE, PSALM reduced the contracted capacity to an average of only 30.11 MW for 2013 up to 2016, or equivalent to a significant reduction of 35.97%.‘ERC Case No. 2013-222 RC ‘DECISION/o6 September 2016 Page 6 of 25 | DANECO also executed a supply contract with Therma South, Inc. (TSI) for a baseload power supply of 15 MW commencing on 2015 for a period of 25 years. For DANECO’s peaking requirements, it executed a 10 year- contract with EEI Power Corp. (EI) for the supply of 13 MW. EEI has already commenced delivery of energy to DANECO. In addition to its peaking and intermediate power, DANECO is processing the renewal of its contract with Therma Marine, Inc. (TMI) for the supply of 15 MW until 2015. DANECO’s peak demand is forecasted to reach about 86.6 MW by 2015. Without the subject PSA, DANECO’s available power supply ps will only be 73 MW resulting to an average shortage of 13.6 | Thus, the implementation of the subject PSA will provide ANECO an additional 15 MW for firm baseload power supply which Will significantly contribute to DANECO’s available supply. The graph below shows DANECO’s average daily load curve (with and without the supply from the SEC Phase I Power Plant) paved on its submitted supply-demand scenario: sad | 2009 00 I} ine 600 4. sop 00 + 200 200 100ERC Case No. 2013-222 RC DECISION/06 September 2016 Page 7 of 25 Procurement Process As mandated under DOE Circular No. 2003-12-01, it is the obligation of a distribution utility to forecast, assure and contract for the supply of power for its franchise area. ‘As the electricity requirements of DANECO’s customers continue to increase, its current power-supply will be insufficient to meet its inereasing demand. Hence, there is a need for additional éapacity particularly baseload capacity. In 2011, SEC offered to supply a baseload capacity of 15 MW to DANECO. At that time, no other power provider made a firm offer to supply a baseload power to DANECO. SEC was the only power supplier with the necessary permits to commence construction of a baseload power plant in Mindanao and was already at an advanced stage in its project financing arrangements, providing DANECO with a high degree of certainty that SEC will indeed install new capacity to supply DANECO. It takes several years to undertake the mobilization needed before a power plant can be operational. Such mobilization includes the construction, testing and commissioning, as well as the securing of needed financing. Hence, there is an exigency of concluding a power supply agreement with a power provider at the soonest Bossible time.ERC Case No. 2013-222 RC DECISION/06 September 2016 Page 8 of 25 In consideration of the need for adequate power supply, and of the ability of SEC to supply DANECO’s power requirements in a timely manner, DANECO and SEC executed the PSA subject of the present Application. Accordingly, on 21 February 2012, the parties executed a Power Sales Agreement (PSA) for the supply of 15 MW for 25 years. ISSUE Whether or not the Commission should grant the instant Joint )plication for approval of PSA. DISCUSSION An evaluation of the subject PSA disclosed that the case involves the same SEC plant that has been the subject of previously approved contracts and that the rate structure: as well as the terms ahd conditions being proposed, are the same with the previously filed PSA applications already approved by the Commission2. Since the Commission is still implementing, in so far as practicable, the one plant, one rate policy, the subject PSA must be approved subject to the same rates, terms and conditions of the precedent cases involving the same power plant, such as ERC Case Nos. 2011-138 RC (SOCOTECO and SEC), 2013-010 RC (ANECO and. SEC) and 2013-012 RC (DANECO and SEC). Hence, the Commission considered the same components used in the aforementioned cases’ in determining the reasonableness of the proposed rates computed using the “long run avoidable cost” as bsis: ofthe plant IRC Case Nos, 2011-138 RC (SOCOTECO and SEC), 2013-010 RC (ANECO and SEC) and 2013- oe RC(ASELCO and SEC), except for the Start-up Cost 3 2 Pa ‘the only exception of the Start-up Cost, which is prorated to the share in the total capacityERC Case No. 2013-222 RC DECISION/06 September 2016 Page 9 of 25 v a. Capital Recovery Fee - a capital related element that allows the recovery of the cost of investment over the life of the plant and a reasonable rate of return; b. O&M Fee - a component that allows the recovery of the operating and maintenance costs. It is commonly composed of local and foreign costs. The local O&M cost represents the plant's locally-denominated operating costs, such as salaries, wages, overhead and technical expenses while the foreign O&M cost represents maintenance of spare parts, supplies and all other costs associated therewith, which are usually imported. The O&M Fee consists of the following: i, Fixed O&M - a component that allows the recovery of fixed O&M costs. It is determined by the capacity of the plant and not the level of its utilization; ii, Variable O&M — a component that allows the recovery of variable O&M costs. These non-fuel costs will vary depending on the amount of the generated electricity. ¢. Fuel Fee - a component that allows the recovery fuel costs. A. Capital Recovery Fee (CRF) The CRF allows SEC to recover the costs of the construction of its Power Plant and a reasonable return. Shown below are the formulae and the rates used in the calculation of the monthly CRF: CRF = (FCRF + DORF) x CC x F | Fee Year1 | Year2 | Year3 | Year 4 Onwards Foreign CRF (FC! (eee Wectmeeny | 2205] 2531] gost go.5t ene TW ner renth) 457.35 | 525.04] 525.04 632.83 SEC used an Audited Financial Model in calculating its sroposed rates. Said Financial Model was prepared by Hongkong and Shanghai Banking Corporation limited (HSBC). It projected the liscounted cash flow or discounted present value of a future stream of expected revenues and expenses. It required an input or assumptions, such as project costs, operating expenses and economic factors (interest rates, foreign exchange rates, etc). The rates were, then, * calculated and yielded an Internal Rate of Return (IRR) of 17.99%.ERC Case No. 2013-222 RC DECISION/06 September 2016 Page 10 of 25 paseo 1. Project Cost 1 SEC derived the CRF using the following components of the Project Cost: . Project Costs |___ Original Costs EPC Plant EPC 204,596,000.00 Spare Parts & Lab 1,202,000.00 EPC Contingency 4,116,000.00 ‘Non-EPC Construction Period Insurances 2,952,000.00 Pre-Operating Expenses 5,292,000.00 Development Fee 3,935,000.00 Social & Environmental 3,972,000.00 Land 4;762,000.00 Capitalized O&M 8,588,000.00 Commissioning ,931,000.00 Contingency 494,000.00 Other Taxes 210,000.00 Financing Costs 32,148,000.00 ‘TOTAL (USD) 280,198,000.00 Foreign Exchange Rate 43.00 TOTAL (PhP) 12,048,514,000.00 a) Engineering, Procurement and Construction (EPC): It is the contract for the design, engineering, procurement, supply, construction, erection, startup, testing and commissioning of a coal-fired power plant. The EPC Contract was entered into by and between Alsons Corporation and Daelim Industrial Co., Ltd and Daelim Philippines, Incorporated on March 30, 2011. The EPC fixed price was amended pursuant to their Amendment Agreement No.1 dated December 29, 2011. The EPC Cost, which is seventy percent (70%) of the total capital cost, was procured by SEC through international bidding. Having undergone competitive international bidding, the Commission considers the EPC Price as the best available cost that SEC could obtain in the international market. b) Spare Parts and Laboratory: This is the estimated cost of the initial inventory of spare parts, other than the boilerERC Case No. 2013-222 RC DECISION/06 September 2016 Page 11 of 25 and STG which were already included in the EPC, cost of laboratory building, equipment and consumables. c) EPC Contingency: It is roughly two percent (2%) of EPC Price and is intended to cover unexpected additional costs relating to the construction of the power plant. 4) Construction Period Insurances: These costs are the insurance policies on the SM100 Phase I Power Plant for the construction period of the Project, which consist of: i) the Marine Cargo Insurance which covers physical loss or damage to the cargo during transit; ii) the Erection All Risks (EAR) policy which covers physical loss or damage to the contract works during the course of execution; iii) the Third Party Liability (TPL); and iv) the Delay in Start-Up (DSU). e) Pre-operating Expenses: These are costs that are deferred until the related assets are ready for revenue service, which will, then, be charged to operations. These include Permitting, Contractors/Advisers, Administrative, Capital Expenditures and Marketing Expenses. f) Development Fee: This refers to the compensation to the developer for the time, risk, and resources in developing the Project. 8) Social & Environmental: These include activities that are critical to the successful delivery of the Project and the necessary resolution of the issues and risks that preclude successful delivery. It includes Relocation, Community Relations and Carbon Sink Reforestation Project (Maasim Watershed Development Project or Luntiang Maasim), which covers a minimum area of 3,750 hectares, for the sequestration of the carbon dioxide emitted by the Power Plant. h)Land: This represents the acquisition cost of the land where the Power Plant will be constructed. i) Capitalized O&M: This refers to the cost to be incurred during the Mobilization Period, which is twelve (12) months prior to the start of the Commercial Operations Date. J) Commissioning: These are the Fixed Charges incurred by the EPC contractor during the commissioning of the Plant.ERC Case No. 2013-222 RC DECISION/06 September 2016 Page 12 of 25 k) Contingency: A contingency fund is the amount set aside, at the start of a Project, to be used in case of need, for : example, to offset unforeseen increases in costs. It is roughly two percent (2%) of non-EPC Price and intended to cover unexpected additional costs relating’ to the construction of the Power Plant. 1) Other Taxes: These are the Import Duties and Taxes on the importation of coal during the construction period. m)Finaneing Costs: These are the accumulated interests during the construction period (capitalized interest). The Commission considers the SEC Project Cost to be reasonable as it is lower or comparable to the total project costs of the bther coal-fired power plants which have recently been approved. The ommission benchmarked or compared SEC's costs with the other coal-fired power plants in determining the reasonableness of the rate instead of using the actual cost valuation because the power plant is et to be constructed. The comparison was based on the total project cost and not per cost component because coal-fired power plants have different itemization of costs. The Commission, likewise, scrutinized the components of the Project Cost to determine any redundancy in the costs and ruled that the Commissioning Cost, Other Taxes and the corresponding Finance €ost should be excluded from the calculation of the Project Cost for the following reasons: a) The Commissioning Cost amounting to US$7,931,000.00, which refers to the costs of sand, coal, limestone and feedback power from the grid, should be included in the computation of the Commissioning Output Charge. b) The Other Taxes, which refer to the import duties and taxes on coal, are directly related to Commissioning Cost. Therefore, considering that the Commissioning Cost is excluded from the Project Cost, the corresponding Other Taxes should, likewise, be excluded. c) Considering that the Project Cost is reduced, the Finance Cost is correspondingly reduced by an amount of US$510,000.00. d) The cost of the land is not depreciated but forms part of the asset base that will be subject to a return on capital.‘ERC Case No. 2013-222 RC DECISION/06 September 2016 Page 13 of 25 i On the basis thereof, the Commission computed the total Project Cost and arrived at US$271.547 Million as the asset base to be used in deriving the CRF. Shown below is a comparison between the proposed and approved Project Costs: SEC's PROPOSED COSTS COMMISSION: | pirFERENCE Project Costs APPROVED ‘Original Costs] Updated Costs (a) (B) (Cc) (C-A) TOTAL (USD) 280,198,000.00 | _287,450,000.00 271,547,000.00 (8,651,000.00) TOTAL (PhP) | 12,048,514,000.00 | 12,216,625,000.00 | 13,676,521,000.00_| _(371,993,000.00) 2. Weighted Average Cost of Capital (WACC) The Commission adopted the WACC used in the computation of the approved rate for the PSA between SEC and SOCOTECO IL. Shown below is a comparison between the proposed and approved WACCs: Proposed Commission: Wace pproved ‘WACC . Debt Element: Pre-tax Cost of Debt 9.34% 9.34% Post Tax Cost of Debt 6.54% 6.54%. ' Weight of Debt 0% 70% 4.58% 4.58%. . Equity Element: , Cost of equity 19.28% 16.44% . Weight of Equity 30% 30% 5.78% 4.93% Post-tax WACC 10.36% 9.51% Pre-tax WACC 14.80% 13.59% SEC’s Capacity Factor and Expected kWh Generation The SEC Power Plant consists of one (1) generating unit with an installed capacity of 120 MW and a net dependable capacity of 105 MW. The table below shows the computation of the annual saleable generation of the plant (Billing Determinant): Net Dependable Capacity (NDC) 105 MW NDC in kW (205 x 1,000) 105,000 Multiplied by: Plant Capacity Factor 88.20% No. of hours/year 8,760 Billing Determinant (kWh) 811,263,600ERC Case No. 2013-222 RC JECISION/06 September 2016. Page 14 of 25 { 3. CRF Derivation | The Commission used the Financial Model in determining the CRF. The Project Cost input was changed to conform to the Commission's computed asset base and NDC. The Commission, then, set a rate that will yield an Equity Internal Rate of Return (EIRR) equivalent to the cost of equity of 16.44% and will satisfy the Average Debt Service Coverage Ratio (1.41x) and Minimum Debt Service Coverage Account required by the banks to assure the repayment of loan pursuant the indicative terms and conditions of the Loan Term Facility. A comparison between the proposed and approved CREs is shown below: Commission- Proposed CRF ‘Approved Difference FCRF DCRF FCRF DCRF FCRF DCRF USD/KW/ | PhP/KW7/ | USD/KW/ | PhP/kW/ | USD/kW/ | PhP/kW/ month | month | month |; month | month | month Year 1 22.05 457-35 20.32 427.32 (1.73) (30.03) ‘Year 2 25.31 525.04 23.33 490.56 G,98) (34-48) ver 3 | 30.51 525.04 28.69 490.56 G.82) (34.48) om won de 30.51 632.83 28.69 603.37 (82) (29.46) B, Operations and Maintenan Fee ‘The O&M costs are the recurring expenses in the operation of ower plant facilities. These are commonly composed of foreign and local costs and usually fluctuate proportionately with the changes in e predetermined economic factors, such as Consumer Price Index CPI). To address these changes: in cost, an adjustment ctor/formula is provided in the PSA to cover the fluctuations in the prices and costs of the foreign and/or locally manufactured materials, équipment, goods and other consumables purchased and used by an independent Power Producer (IPP) in the operation and maintenance 6f its power plant facilities. Based on the proposed tariff structure, DANECO shall pay SEC Fixed O&M Fee of PhP333.23/kW/month and a Variable O&M Fee of PhPo.3170/kWh, subject to adjustments depending on the rise and fall of the economic factors, such as US' Producer Price Index (PPT) for industrial goods and Philippines’ CPI for all items and General Wholesale Price Index (GWPI) in Metro Manila for mineral fuels, lubricants and related materials.ERC Case No. 2013-222 RC DECISION/o6 September 2016 Page 15 of 25 The Fixed O&M Fee is computed as follows: Fixed O&M Fee Amount i Staff 3,276,000.00 a Administration 894,000.00 Plant Operations and Maintenance §,604,000.00 Total (USD) 9,774,000.00 Foreign Exchange Rate 43.00 Total (PhP) 420,282,000.00 ivi Net Dependal i Divided aby Net spendable Capacity 105,100 Months/year 12, Fixed O&M Fee (PhP/kW/month) 333.23 The Variable O&M costs are incurred in relation to the volume Of the electricity generated by the power plant, which include ash isposal cost and consumables, such as coal, sand, limestone, lubricants, etc. The Variable O&M Fee was computed through the Financial Model with a rate of PhPo.3170/kWh. Ordinarily, the reasonableness of the O&M cost may be best established and validated by referring to the historical cost of Operations of the power plant as it reflects the power plant's true cost of generation. However, historical data cannot be used as basis in computing SEC's O&M cost since. it has not yet commenced its commercial dperation. Thus, the Commission benchmarked or compared SEC's O&M costs with the costs approved for other coal-fired power plants 4nd found the same to be reasonable as it is within the level of the approved costs. On the basis thereof, the Commission adopts a Fixed O&M Fee of PhP333.23/kW/month and a Variable O&M Fee of PhPo.: 3170/kWh. C. Fuel Cost The fuel cost to be charged shall be the actual fuel cost incurred which is computed using this formula: [FOB Coal Price + TC + Other Charges ‘Actual Fuel Cost = 1100049 x Consumption Rate * Forex * ED ‘onERC Case No. 2013-222 RC DECISION/06 September 2016 Page 16 of 25 The Fuel Cost is a pass through cost. Thus, SEC should not earn y revenue therefrom. The efficient fuel cost can be passed on to the consumers while inefficient fuel cost should be borne by SEC. When there is an increase in fuel consumption due to fuel quality, leterioration of the equipment or other reasons, SEC should shoulder the cost of the increase and the additional cost of improving efficiency, On the other hand, if SEC saves on its fuel consumption due to efficient operations and maintenance of the plant, the savings in fuel should be for DANECO's account. The Fuel Fee shall be adjusted to reflect the current costs of fuel being paid by SEC to its fuel suppliers consistent with the ‘ommission's policy that fuel cost is a pass through cost. The Fuel Cost to be passed on to the consumers shall be the actual cost based on the Fuel Agreement and is subject to a heating alue of 3,750kcal/kg and efficiency cap of 0.7kg/kWh plus 0.5% legradation factor or actual, whichever is lower. 1. Fuel Cost under the Fuel Agreement Under the Fuel Agreement for a period of ten (10) years, the price for the shipment of coal shall be the CFR (Cost and Freight) Invoice Price, which is the sum of the Coal Price and the Ocean Freight Rate calculated in accordance with Sections 12.2 and 12.4 of the Fuel Agreement, respectively. ‘The Coal Price shall be calculated as follows: Coal Price = Base Price x Actual NCV/6,000 x DF Where: DF = 0.9 for the Term The Base Price, which is applicable for all shipments for which ¢ Bill of Lading Date falls within the period from and including the Effective Date until and including the last day of the quarter in which the Effective Date occurs, shall be equal to the globalCoal Newcastle Index for the week immediately preceding the week in which the Effective Date occurs. It shall be reset every quarter following the uarter in which the Effective Date occurs. The Base Price, which is applicable for all shipments for which the Bill of Lading Date falls within and including the first day and the last day of such quarter, shall be equal to the arithmetic average of the lobalCoal Newcastle Index for the immediately preceding quarter (Sec. 12.2.1.1 of the Fuel Agreement).ERC Case No. 2013-222 RC 'DECISION/06 September 2016 Page 17 of 25 In the event that the Coal Price is less than the Coal Benchmark Price (the price benchmark to the coal sold under the Fuel greement) as determined pursuant to the Benchmark Price Regulation for the month of shipment of the coal, the Coal Price shall be 105% of the Coal Benchmark Price (Sec. 12.2.1.2 of the Fuel ‘Agreement). | _ The Base Freight Price of Coal to be delivered to SEC at the Discharge Port by the Supplier shall be fixed for the Term at US$12.95 per ton, subject to adjustments due to changes in the price bf bunker. ‘The Base Bunker Price, which is not subject to adjustment, shall be US$470 per ton. 2. Interconnection Capital Recovery Fee (ICRF) The Foreign Interconnection CRF (FICRF) and Domestic Interconnection CRF (DICRF) under the PSA are US$2.85/kW/month and PhP122.55/kW/month, respectively. Upon finalization of the EPC contract, the said FICRF and DICRF were ‘educed to” US$1.74/kW/month and PhP60.93/kW/month, -espectively, per the Financial Model. Shown below are the components of the project cost for the construction of the Interconnection Facilities: Components ‘Amount (US8) Plant EPC 15,662,000.00 EPC Contingency 548,000.00 VAT 1,945.000.00 Financing Costs 2,091,000.00 Total Project Cost | 20,246,000.00 SEC computed its proposed ICRF based on the term of the loan, hich is ten (10) years. The Commission, however, computed the CRF based on the life of the asset, which is twenty-five (25) years, as determined from the valuation of NGCP's Regulatory Asset Base (RAB) (summary of asset lives of subtransmission facilities), and on the agreement with SEC's contractor. . A comparison between the proposed and approved ICRFs is shown as follows: t Proposed Approved Foreign Foreign Local Costs u its shat Project Cost (US$) Costs al Costs | “Costs _ | Leal Costs 11,110,000 | 9,138,000 | 11,110,000 9,195,000lnc Case No. 2013-222 RC DECISION/06 September 2016 Page 18 of 25 ace 14.80% 1% Useful Life 10 25, nuity. 2,196,840.18 | 1,806,312.78 | 1,574,977.62 | 1,294,997.35 kW 105,000 105,000, Months/year 12 12 ICRE/kW-month (US$) 174 143 1.25 1.03 ForEx Rate 42.50 42.50 42.50 42.50 ICRF/kW-month (PhP) 74.10 60.93 53.12 43.68 ICRE/kWh (PhP) 0.18 0.45, The table below shows a comparison between the proposed ICRF per PSA and the approved ICRF: Foreign CRF Local CRF (USD/kW/month) | (PhP/AW/month) SEC's Proposed Rate 2.85 122.55 Approved ICRF 1.25 43.68 | Difference (1.60) (78.87) 3. Commissioning Output Charge SEC shall supply power to DANECO during the commissioning of the power plant and thereafter, during the full commercial perations of the plant. DANECO shall pay a lower rate for the lectricity delivered during the commissioning stage. SEC computed its Commissioning Output Charge, which consists of Fixed O&M Fee, Variable O&M Fee and Actual Cost of Fuel, using the following formula: COL = FOMP +VOMF + ACF + Taxes shown below is SEC's proposed Commissioning Output Charge computed similar to its proposed Fixed O&M Fee, Variable O&M Fee ind actual cost of fuel during commercial operations: i, Commissioning Output Particulars arge. tp Fixed O&M Fee PhP333.23/kW/month Variable O&M Fee PhPo.3170/kWh Actual Cost of Fuel Pass-through Cost The Commission deems it appropriate to exclude the Fixed O&M Fee in the computation of the Commissioning Output Charge, computed as follows:ERC Case No. 2013-222 RC DECISION/06 September 2016 Page 19 of 25 P 1 Commissioning Output Charge Variable O&M Fee PhPo.3170/kWh ‘Actual Cost of Fuel Pass-through Cost A comparison between the proposed and the approved mmissioning Output Charges is shown below: Commissioning Output Charge SEC's Proposal Approved Fixed O&M Fee PhP333.23/kW/month = Variable O&M Fee PhPo.3170/kWh_ PhPo.3170/kWh Actual Cost of Fuel | Pass-through Cost__| Pass-through Cost rt-up Cost In accordance with the PSA, DANECO shall pay SEC a start-up cost for the cost of starting up the power plant after a period of shutdown due to any reason attributable to SEC. The table below shows the previously approved start-up cost per event for the 70 MW capacity under the PSA between SEC and SOCOTECO II and the Commission’s approved prorated start-up cost er event for 15 MW capacity contracted by DANECO: os Cost per Event (PhP) ‘Type of Synchronization OMA Saw Cold Start-up 4;208,906.51 901,908.54 [Warm-up Start-up 2,872,221.20 615,475.97 Hot Start-up to Synchronization 1,227,515.30 263,038.99 Total 8,308,643.01 | 1,780,423.50 It is worth emphasizing that the start-up cost is not part of the tegular monthly payment and will be incurred only in the event of a force shutdown caused by DANECO. On the other hand, DANECO will not pay a start-up cost when the forced shutdown is beyond its control, such as by force majeure or caused by SEC or any third party. fomparison Between SEC’s Proposed Rates and the .pproved Rates Shown below is the summary of the approved Commercial peration rates compared to SEC’s proposed rates:.C Case No. 2013-222 RC DECISION/06 September 2016 Page 20 of 25 t Difference [__ Particutar Proposed Rate Approved Rate ens ‘Cipital Recovery Fee Vert PAPI, 350.00/EW] PHPI,250.00/KW7 | PhPi00.00/RW/ ‘month ‘month month Vean PhPi.549.80/RW7 PhP! 435.00/KW] | PhP ii4.80/EW7 ‘mont month month Freer PhP, 760.39/KW7 PHPI,652.22/KW7 | PhPL08.17/RW7 3 ‘month month month Frearaand onwards | POP##67 957007 FAPi765.00/kW7 | PhProa95/lWi] f PhP333.23/KW7 PhP333.23/KW7 Fiked O&M Fee (FOMF) 533.9 333.2 ° eons O&M Fee PhPo.3370/kWh PhPo.g170/kWh ° herconnecti PhP245.10/kW7 PhP96.Bo/KWT PhPias go/kW7 Inferconnection CRF month ‘month ‘month Pass-through cost 7 Pass-through cost me ‘Cost (AFC) a tocfficiency | subject to efficiency cap Sthrt-up Cost: (Cold Start-up to ee eee PhP 743,324.00 PhP 743,324.00 ° faren-up Start-up to pana eaten PhP 468,406.00 PhP468,406.00 ° Hot Start-up to Ee neninetion PhP346,701.00 PaP346,701.00 o The Commission has a mandate to protect the interest of the lectricity 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. After a thorough evaluation of the documents submitted and the testimonies of the witnesses presented, the Commission finds that the approval and implementation of the PSA will be beneficial to DANECO’s member consumers by way of reliable, continuous and éfficient supply of power within its franchise area at reasonable costs s mandated by the EPIRA. WHEREFORE, the foregoing premises considered, the plication filed on 20 December 2013 by Davao Del Norte Electric jooperative, Inc. (DANECO) and Sarangani Energy Corporation ISEC) is hereby APPROVED WITH MODIFICATION, subject to the following conditions: 1, Applicable Rate Upon Commercial Operation: Rhte Components Foreign Somponent Local Component Capital Recovery Fee Yéar 1 20.32/kW/month [427.32 /kW / month Yéar 2 23.33 /kW/month | 490.56 / kW / monthERC DECISION/06 September 2016 [Page 21 of 25 Case No. 2013-222 RC ‘economic indices provided in the PSA. Year 3 28.69 / kW / month 490.56 / kW / month Year 4 and onwards _| 28.69 /kW/ month 603.37 / kW / month eae) O8M Fee) 553.03 / kW/ month wou O&M Fee 0.3170 / kWh Interconnection CRF | 1.25 / kW / month 43.68 / kW / month Fuel Cost (AFC) Pass-through cost subject to efficiency cap ote: O&M Fee shall be subject to adjustment based on 2, The pass-through fuel cost shall be subject to efficiency cap of 0.70okg/kWh plus 0.5% degradation factor or the actual fuel consumed, whichever is lower. 3. Start-up cost per event shall be charged as follows: Type of Synchronization ony Cold Start-up 743,324.00 Warm-up Start-up 468,406.00 Hot Start-up 346,701.00 4. The Commissioning Output Charge is computed as follows: Commissioning Output Particulars Charge Variable O&M Fee PhPo.3170/kWh Actual Cost of Fuel Pass-through Cost Relative thereto, SEC is directed to submit its actual cost incurred during the Commissioning Period, andited and verified by an independent party; 5. DANECO is directed to include in its monthly calculation of its generation rate in accordance with Automatic Generation. Rate Adjustment (AGRA) Rules, the indices used by SEC in the calculation of monthly payment and the details of the fuel cost, including the relevant heat rates and actual consumption;ER va nm *D-201 ERC Case No. 2013-222 RC DECISION/06 September 2016 age 22 of 25, ae SSS 6. SEC is directed to submit its Audited Financial Statement (AFS) and the final Independent Engineer's Report, as soon as they become available; 7. The SEC’s actual cost of operation and construction shall be audited by Independent Third Party in accordance with the rules to be promulgated by the Commission and the approved rates herein shall be adjusted, if warranted. The test of reasonability shall not be the actual cost incurred but whether or not such cost is incurred based on a good utility practice and comparable or within the level of the power plants similarly situated to that of SEC. Further, the cost of audit shall be shouldered by SEC. SO ORDERED. Pasig City, 06 September 2016. LEMME | =| + - --- — | 4 7,026-00-014810'|_ JOSE VICENTE B. S, fp Chairman & CEO | eee L- : sea hen neler GxSP-Taruc Commissioner Commissioner LO JOSEFINA PAT! . MAGPALE-ASIRIT IRONIMO D. STA. ANA missioner Commissioner wt ! Mf 1CG/ APV Copy Furnished: 1. Davao del Norte Electric Cooperative, Inc. (DANECO) KM 100, Montevista, Province of Compostela Valley 2, Sarangani Energy Corporation (SEC) 4 Floor, Alphaland Southgate Tower, 2258 Chino Roces Ave. corner EDSA, Makati CityERC Case No. 2013-222 RC DECISION/06 September 2016 Page 23 of 25 | 3. Lachica & Associates Counsel for Applicants DANECO and SEC Suite 907-A, West Tower, Philippine Stock Exchange Center Exchange Road, Ortigas Center, Pasig City 4, Office of the Solicitor General 134 Amorsolo Street, Legaspi Village, Makati City 5. Commission on Audit Commonwealth Avenue, Quezon City s Senate Committee on Energy GSIS Bldg. Roxas Blvd., Pasay City House Committee on Energy Batasan Hills, Quezon City . x es Philippine Chamber of Commerce and Industry (PCCD) Campus Avenue corner Park Avenue, ‘MoKinley Town Center, Fort Bonifacio, Taguig City 9. Office of the Governor Davao del Norte 10. Office of the Local Government Legislative Body Davao del Norte 11. Office of the Governor Compostela Valley 12. Office of the Local Government Legislative Body . Compostela Valley 13. Office of the Mayor ‘Tagum City, Davao del Norte 14. _ Office of the Local Government Legislative Body ‘Tagum City, Davao del Norte 15, Office of the Mayor Island Garden City of Samal, Davao del Norte 16, Office of the Local Government Legislative Body Island Garden City of Samal, Davao del Norte 17. Office of the Mayor Municipality of Asuncioi, Davao del Norte 18. Office of the Local Government Legislative Body Municipality of Asuncion, Davao del Norte 19. Office of the Mayor Municipality of Kapalong, Davao del Norte 20. Office of the Local Government Legislative Body Municipality of Kapalong, Davao del Norte 21, Office of the Mayor ‘Municipality of Talaingod, Davao del NorteERC Case No. 2013-222 RC DECISION/06 September 2016 Page 24 of 25 22, Office of the Local Government Legislative Body Municipality of Talaingod, Davao del Norte 23, Office of the Mayor Municipality of New Corella, Davao del Norte 24. Office of the Local Government Legislative Body ‘Municipality of New Corella, Davao del Norte 25. Office of the Mayor ‘Municipality of San Isidro, Davao del Norte || 26. Office of the Local Government Legislative Body I ‘Municipality of San Isidro, Davao del Norte 27, Office of the Mayor ‘Municipality of Monkayo, Compostela Valley 28. Office of the Local Government Legislative Body Municipality of Monkayo, Compostela Valley 29. Office of the Mayor ‘Municipality of Montevista, Compostela Valley 30. Office of the Local Government Legislative Body Municipality of Montevista, Compostela Valley 31. Office of the Mayor Municipality of Nabunturan, Compostela Valley 32, Office of the Local Government Legislative Body Municipality of Nabuntoran, Compostela Valley 33. Office of the Mayor Municipality of Mawab, Compostela Valley 34. Office of the Local Government Legislative Body Municipality of Mawab, Compostela Valley 35. Office of the Mayor Municipality of Compostela, Compostela Valley 36. Office of the Local Government Legislative Body Municipality of Compostela, Compostela Valley 37. Office of the Mayor Municipality of New Bataan, Compostela Valley 38. Office of the Local Government Legislative Body Municipality of New Bataan, Compostela Valley 39. Office of the Mayor Municipality of Maragusan, Compostela Valley 40. Office of the Local Government Legislative Body Municipality of Maragusan, Compostela Valley 41. Office of the Mayor |” ” Municipality of Maco, Compostela Valley nERC Case No. 2013-222 RC DECISION/06 September 2016 Page 25 of 25 42. Office of the Local Government Legislative Body ‘Municipality of Maco, Compostela Valley 43- Office of the Mayor Municipality of Mabini, Compostela Valley 44. Office of the Local Government Legislative Body Municipality of Mabini, Compostela Valley _ 45. Office of the Mayor Municipality of Panatukan, Compostela Valley 46. Office of the Local Government Legislative Body Municipality of Panatukan, Compostela Valley 47. Office of the Mayor Municipality of Laak, Compostela Valley 48. Office of the Local Government Legislative Body Municfpality of Laak, Compostela Valley 49. PSA-TWG 2 Energy Regulatory Commission 17 Floor, Pacific Center, San Miguel Avenue, Pasig City