Republic of the Philippines

ENERGY REGULATORY COMMISSION

San Miguel Avenue, Pasig City

RULES GOVERNING THE EXECUTION, REVIEW, AND EVALUATION

OF POWER SUPPLY AGREEMENTS ENTERED INTO BY
DISTRIBUTION UTILITIES FOR THE SUPPLY OF
ELECTRICITY TO THEIR CAPTIVE MARKET

Pursuant to Sections 25 and 45 (b) of Republic Act No. 9136 or “the Act”
and Rule 5, Section 4 (e) and Rule 11, Section 5 of the Implementing
Rules and Regulations (IRR) of the Act, the Energy Regulatory
Commission (ERC) hereby adopts and promulgates these Rules:

ARTICLE I

OBJECTIVES

These Rules seek:

(a) To enforce the Distribution Utilities’ (DUs) obligation to enter

into bilateral supply contracts for the supply of electricity to their captive
market.

(b) To establish and prescribe procedures, standards and

methodologies for the review of power supply agreements executed by
the DUs for the supply of electricity to their captive market.

(c) To provide guidance to the DUs and generation companies on

the ERC requirements regarding its review of power supply agreements
and expedite the review and approval process.

(d) To ensure transparent and reasonable prices of electricity for

the DUs’ captive market in terms of the generation component of their
retail rates.

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 ARTICLE II

DEFINITION OF TERMS

As used in these Rules, the following terms shall have the following
respective meanings:

(a) “Act” unless otherwise stated, shall refer to Republic Act No.
9136, otherwise known as the “Electric Power Industry Reform Act of
2001”;

(b) “Captive Market” shall refer to electricity end-users who do not

have the choice of a supplier of electricity, as may be determined by the
ERC in accordance with the Act;

(c) “Certificate of Compliance (COC)” shall refer to the document

issued by the ERC to a Generation Company pursuant to the Act, the
Implementing Rules and Regulations (IRR) of the Act and the applicable
ERC Guidelines;

(d) “Competitive Selection Process” shall refer to the process

wherein a Generation Company is selected through transparent and
competitive bidding undertaken by the DU to secure supply of electricity
at the least cost;

(e) “Distribution Utility” shall refer 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 its franchise and the Act;

(f) “Energy Regulatory Commission” or “ERC” shall refer to the

regulatory agency created under Section 38 of the Act;

(g) “Generation Company” shall refer to any person or entity

authorized by the ERC to operate facilities used in the generation of
electricity;

(h) “Minimum Energy Off-take (MEOT)” shall refer to the minimum

amount of kilowatt-hours that the DU agrees to purchase from the
Generation Company;

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(i) “Power Supply Agreement” shall refer to the agreement,
regardless of nomenclature, between a DU and a Generation Company
for the supply of capacity and/or energy intended for the DU’s captive
market;

(j) “Power Purchase Rate” shall refer to the total generation cost
consisting of CRF, O&M Fee and Fuel Fee; and

(k) “Retail Rate” shall refer to the total price paid by end-users
consisting of the charges for generation, transmission, and related
ancillary services, distribution, supply and other related charges from
electric service.

ARTICLE III

PROCUREMENT PROCESS

Section 1. Award of PSA to Generation Company. – PSA shall be

awarded to the winning Generation Company following a successful
transparent and competitive selection process or by Direct Negotiation
as provided in Section 3 below. A CSP is successful if the DU receives
at least two (2) qualified bids from entities with which the DU is not
prohibited from entering into a contract for power supply in accordance
with Rule 11, Section 5 (b) of the EPIRA IRR.

Section 2. Competitive Selection Process. - A DU shall undertake a

transparent and competitive selection process before contracting for the
supply of electricity to its captive market in accordance with Appendix “A”
of this Rules. At a minimum, the terms of reference to be used by the DU
shall include the following:

(a) Required/Contracted Capacity and/or Energy Volumes.

(b) Generation sources (Hydro, Coal, Natural Gas, Diesel and
others).
(c) Method of procurement for fuel, if applicable.
(d) Cooperation/Contract Period.
(e) Tariff Structure unbundled to Capacity Fees, Variable and
Fixed Operating and Maintenance (O&M) Fee, Fuel Fee
and others, including the derivation of each component.
Base Fee adjustment formula, if any.

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 (f) Form of Payment (Pesos or Foreign Currency
Denominated).
(g) Penalties (if applicable).
(h) If applicable, details regarding any transmission projects
or Grid connection projects necessary to complement the
proposed generation capacity, including identification of
the parties that will develop and/or own such facilities, any
costs related to such projects and specification of the
parties responsible for recovery of any cost related to
such projects; and
(i) Other key parameters.

Section 3. Direct Negotiation. – Direct negotiation with interested party

for the supply of electricity may be made by the DU after at least two (2)
failed CSPs. A CSP is considered failed when during its conduct, any of
the following circumstances exist:

a. No proposal was received by the DU;

b. Only one supplier submitted an offer; and
c. Competitive offers of prospective suppliers failed to meet the
requirements prescribed under the Terms of Reference, as
determined by the DU Bids and Awards Committee.

Section 4. Benchmark Rate. – The ERC shall in the future endeavor to

establish a benchmark rate that shall serve as reference price that may
be used to assess the price that a Generation Company may offer. Such
benchmark rate shall consider the type of generating plant, type of
operation, installed capacity, and location, among others.

ARTICLE IV

REQUIREMENTS AND REVIEW PROCEDURES

Section 1. Filing of the PSA – The PSA shall be a joint responsibility by

the generation company and the DU. Following the execution of the
PSA, the parties thereto shall file with the ERC, within thirty (30) days
therefrom, a joint application for the approval of said PSA and for the
determination of the reasonable generation costs that the DU can
recover from its captive market as part of its retail rate.

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The application for approval of the PSA shall be accompanied by the
following supporting documents:

a. The duly signed PSA using the attached Appendix “B”;

b. All details on the procurement process used by the DU
leading to the selection of the Generation Company including
the terms of reference used by the DU, and the proposals
received by the DU;
c. A sworn certification that a public bidding was conducted;
d. All the information enumerated in the preceding Article; and
e. Other information that ERC shall require during the approval
process.

Section 2. Review of the ERC – ERC’s evaluation of the PSA and the
generation rate will be based on its satisfaction of the following:

a. That the PSA was awarded in accordance with the prescribed

procurement process prescribed under Appendix A of the rules,
as applicable;
b. That the PSA guarantees suppliers compliance with the required
technical, environmental and financial standards set out in the
bid documents; and
c. That the PSA have substantially complied with the PSA
Template under Appendix “C” that accords the parties with
equitable rights and that the risks associated with the supply of
electricity such as those pertaining to the tariff structure,
economic indices, foreign exchange fluctuations, volatility of fuel
prices and the like are efficiently allocated between the parties.

Section 3. PSA Pricing Structure. The ERC shall determine the

reasonable generation cost under the said PSA, taking into account the
following fees:

Capital Recovery Fee (CRF) - a capital-related component to

recover the cost of investment over the economic life of the plant
together with a reasonable rate of return. In the case of an
Independent Power Purchase Agreement, the CRF shall pertain to
the recovery of fees paid/payable to NPC to operate the plant. This
amount shall include a reasonable amount of return on capital based
on an ERC approve WACC.

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 O&M Fee - a component to recover operating and maintenance cost.
The power plant O & M cost may be broken down into local and
foreign, where the local O & M cost represents locally-denominated
plant operating cost, while foreign O & M cost represents
maintenance of spare parts, supplies, and all other associated costs
that are usually imported.

1. Fixed O&M – an element to recover fixed operating and

maintenance (O&M) costs. This cost is determined by the
capacity of the plant, not the level of utilization.

2. Variable O&M - an element to recover variable O&M costs and

which varies with the amount of electricity generated.

Fuel Fee - a component to recover fuel costs, if applicable.

In support of the proposed pricing under the PSA, the following shall be
required:

a. Executive Summary.

b. Sources of Funds/Financial Plans.

1. Debt/Equity Ratio.
2. Project/Asset Cost and the economic life.
3. Computation of Return on Investment /Weighted Average
Cost of Capital (WACC) with justification/s.
4. Certification from the Bank/Lending Institution specifying
the principal amortization, term and interest during the
period of the loan agreement.

c. Purchased Power Rate:

1. Breakdown of the base prices of Operation and
Maintenance, Capacity Fee, Fixed Operation Fee; and
Energy Fee, Sample Computation of Power Rates with
supporting documents on the proposed fees and on the
assumptions taken.
2. Statement of its impact on the overall rates of the DU
once the contract is approved.
3. Basis/rationale of indexation and level of indexation, if
applicable.

d. Cash Flow specifying the following:

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 1. Initial Costs.
2. Breakdown of Operating and Maintenance expenses.
3. Minimum Energy Off-take (MEOT), if applicable, including
justification thereof.

e. All details on the procurement process of fuel, including

requests, proposals received, tender offers, etc.

f. All costs analysis related to the generation in support of the

proposed pricing provisions of the contract.

g. Sworn Statement detailing how the fuel was competitively

procured, contract terms and unbundled price components
(product cost, transshipment, delivery, container, etc.), if
applicable.

Section 4. Other Documentary Requirements – In addition to the

requirements under Section 3 hereof, the following supporting
documents/information are required to be attached to the application or
petition to be filed by Applicants:

1. General Information

(i) Articles of Incorporation/Partnership (for

Corporation/Partnership) of Generation Company with
Securities and Exchange Commission (SEC) Certificate of
Registration;
(ii) Latest General Information Sheet (GIS) of the Generation
Company (SEC Form); and
(iii) Board of Investment (BOI) Certificate of Registration
including the complete set of the terms and conditions, if
applicable.

2. Financial Information

(i) Latest and Complete Set of Audited Financial Statements of

the Generation Company (Balance Sheet, Income Statement,
and Statement of Cash Flows), including the audit opinion,
the statement of management’s responsibility on the financial
statements, if available;

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 (ii) Bank Certification of Long-term Loans, to include the
following information: Amortization Schedule of Loan
Payments (Principal and Interest), interest rates and credit
terms (period and applicable penalties); and
(iii) Other documents showing proof of its entitlement to any tax
incentives and exemptions.

3. Technical Information

(i) Certificate of Compliance (COC) issued by the Energy

Regulatory Commission (ERC), if available;
(ii) Technical characteristics of the Generation Company’s Power
Plant, to include: Type of Technology, Installed Capacity and,
Dependable Capacity, Capacity Factor, and Mode of
Operation (Base load, Peaking, Intermediate-Peaking);
(iii) Certification (from the engine manufacturer or IPP) of the net
heat rate (initial and every after major maintenance schedule)
in liters per kWh, if applicable; and
(iv) Latest Distribution Development Plan (DDP) submitted by
the Distribution Utility to the DOE accompanied by the details
of the load forecast projections and the variability of those
projections over the proposed contractual period. An
estimation of the potential reduction in the load supplied by
the Distribution Utility due to retail competition. Any
inconsistencies shall be supported by relevant analysis mix.

In addition with the above requirements, the following

information are required to be submitted for applications involving
new generation facilities:

(i) If applicable, details regarding any transmission projects or

Grid connection projects necessary to complement, the
proposed generation capacity including identification of the
parties what will develop and/or own such facilities, any costs
related to such projects and specification of the parties
responsible for recovery of any cost related to such projects;
and

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 (ii) Department of Energy (DOE) Certificate of Endorsement
indicating that the proposed power plant project is consistent
with the Power Development Plan (PDP) of the Government
or with the Missionary Electrification Development Plan
(MEDP) for power plant project located in isolated grids. Any
inconsistencies shall be supported by relevant analysis
including but not limited to, forecasts and assessment of
available generation capacity and technology mix.

Section 5. Procedural Requirements – Prior to the filing with the ERC

of the application referred to in the preceding section, the parties shall
comply with Section 4 (e), Rule 3 of the IRR of the Act and Rule 6 of the
ERC Rules of Practice and Procedure. Any application that fails to
comply with the above requirements shall not be accepted. The
application shall be treated as a rate case and the procedure applicable
to rate cases shall be observed.

Section 6. ERC Action on the Application – Any PSA submitted to

the ERC shall be reviewed and approved as to its “reasonableness” in
terms of costs, risk allocation, and other contractual terms.

In the exercise of its discretion and on the basis of all the submissions
made, the ERC shall determine whether or not to approve the full pass
through or prohibit some or all energy costs from being passed on to the
DU’s captive market and whether or not to disapprove or modify certain
contractual stipulations of the parties.

The ERC’s decision and judgment shall bind both parties and shall not
be rendered ineffective or nugatory by any termination or “walk-away”
clause incorporated in the PSA.

ARTICLE V

FINAL PROVISIONS

Section 1. Transitory Clause – All pending PSA applications with the

ERC shall not be affected by any new requirement imposed under these
Rules, except that for the ERC’s action on these applications, Section 4,
Article IV hereof shall govern.

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Section 2. Exception Clause – Where good cause appears, the ERC
may allow an exception from any provisions of these Rules if such
exception is found to be in the public interest and is not contrary to law
or any other related rules and regulations.

Section 3. Separability Clause – If for any reason, any part or section

of these Rules is declared unconstitutional or invalid, the other parts or
sections hereof which are not affected thereby shall continue to be in full
force and effect.

Section 4. Repealing Clause – The pertinent provisions of the

Guidelines for the Recovery of Costs for the Generation Component of
the Distribution Utilities’ Rates and such other ERC rules or guidelines
inconsistent herewith are hereby repealed or modified accordingly.

Section 5. Effectivity – These Rules shall take effect on the 15th day
following its publication in a newspaper of general circulation.

Pasig City, _________________ 2013.

dbb/fpss/ajmo/fgbd/FSCJ

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