REGULATORY FRAMEWORK AND POLICIES GOVERNING

PSA APPLICATIONS

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Points of Discussion

• GENERAL REGULATORY PRINCIPLE

• GENERATION CHARGE AS COMPONENT OF DU’S RETAIL RATE

• REVIEW AND APPROVAL OF RECOVERABLE GENERATION COST

• DRAFT PSA RULES

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GENERAL REGULATORY PRINCIPLE

Guiding Principles

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GENERATION SECTOR. Generation of electric power, a business affected with public interest, shall be competitive and open.

Upon implementation of retail competition and open access, the prices charged by a generation company for the supply of electricity shall not be subject to regulation by the ERC except as otherwise provided in this Act.

Regulatory Principle

Section 6, Chapter 2 of the Republic Act No. 9136 or the

Electric Power Industry Reform Act of 2001 (EPIRA)

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Regulatory Principle

Section 4 (e), Rule 5 of the Implementing Rules and Regulations of the EPIRA

“xxx Prior to the implementation of OARC, the prices charged by a Generation Company for the Supply of Electricity shall be subject to ERC regulation on the Retail Rates charged by Distribution Utilities xxx” 6

Regulatory Principle

Section 25, Chapter 2 of Republic Act No. 9136 or the

Electric Power Industry Reform Act of 2001 (EPIRA)

RETAIL RATE. The retail rates charged by distribution utilities for the supply of electricity in their captive market shall be subject to regulation by the ERC based on the principle of full recovery of prudent and reasonable economic costs incurred, or such other principles that will promote efficiency as may be determined by the ERC.

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Regulatory Principle

Section 23, Chapter 2 of the Republic Act No. 9136

Functions of Distribution Utilities.

A distribution utility shall have the obligation to supply electricity in the least cost manner to its captive market, subject to the collection of retail rate duly approved by the ERC.

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Regulatory Principle Section 45 (b) of Republic Act No. 9136 or the Electric

Power Industry Reform Act of 2001 (EPIRA)

Cross Ownership, Market Power Abuse And Anti-Competitive Behavior.

x x x

To promote true market competition and prevent harmful monopoly and market power abuse, the ERC shall enforce the following safeguards:

x x x

(b) Distribution utilities may enter into bilateral power supply contracts subject to review by ERC.

x x x.

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Regulatory Principle

Section 41. Promotion of Consumer Interests

“xxx The ERC shall handle consumer complaints and ensure the adequate promotion of consumer interests. xxx”

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Generation Charge as Component of DU’s Retail Rate

Biggest component of

the retail rate (around

50% to 60%)

Through the generation

charge, the DUs

recover the generation

costs associated with

their energy purchases

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Automatic Generation Rate

Adjustment (AGRA)

Mechanism

Translation into the

current billing month’s

Generation Charge

NPC Transition Supply

Contract

Power Supply

Agreement

Price Determination

Methodology

Rate Application

of NPC/DUs Published and served on

LGU Sanggunian

Notice of Hearing

published

Hearing conducted

ERC set NPC-TOU

rates as the TSC rate

ERC approves bilateral

contracts between DU

and GenCo

Regulation of

Generation

Component of

DU’s Retail

Rates

Section 67 Section 45 (b) Section 30

Section 25, EPIRA

Review of DU

bilateral contracts

WESM Price

Determination

Methodology

Retail rates to DU’s captive market, subject to ERC regulation

Full recovery of prudent and reasonable economic costs

PSA rates capped at

TSC rate, if NPC still

has excess capacity

PSA rates to be

determined by ERC if

NPC no longer has

excess capacity

Embodies pricing principles

under the WESM Rules:

Locational pricing

Gross pool concept

Full nodal pricing regime

For determination of

DU’s recoverable

generation costs

WESM

Subject to ERC post-

verification of any

over/under recovery

REVIEW AND APPROVAL

OF RECOVERABLE

GENERATION RATE

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Generation Rate Structure Review

What does the ERC

look into in its review

and evaluation?

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Generation Rate Components

Capacity Fee/Capital Recovery

Fee

Operations &

Maintenance

Fee

Fuel Recovery Fee/Energy Fee

Fixed O&M

Variable

O&M

Fixed

Cost

Variable

Cost

A

B

C

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Generation Rate Components

Capital Recovery Fee

a capital-related component to recover the cost of

investment (historical cost) over the economic life

of the plant together with a reasonable rate of

return

Fixed for the duration of the project life/plant

economic life

Derived using Discounted Cash Flow (DCF) Model 16

• PROJECT COST (EPC/VERIFIED ESTIMATES)

• PLANT TECHNICAL SPECIFICATIONS (ECONOMIC LIFE/RECOVERY PERIOD)

• RATE OF RETURN (WACC/COST OF EQUITY)

• PLANT DEPENDABLE CAPACITY (BILLING DETERMINANT)

Required Supporting Documents/ Input Parameters

Capital Recovery Fee

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Generation Rate Components

Operations & Maintenance Fee Fixed O&M

Variable O&M

Refers the recurring expenses related to the operations and

maintenance of the power plant facilities

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.

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

which varies with the amount of electricity generated. 18

• GENERAL AND ADMINISTRATIVE EXPENSES

• MAINTENANCE AND INSURANCE

• SUPPLIES AND SPARE PARTS

• GOV’T TAXES AND LICENSES

Required Supporting Documents/ Input Parameters

Operations and Maintenance Fee

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Generation Rate Components

Regulatory Authority over Expenses Management exercises its prerogative in incurring expenses

The Commission reviews the expenses incurred by management and decides whether or not to allow recovery of these cost from consumers

Prudency and reasonableness of the proposed expenses, and relationship to the provision of service

Operations & Maintenance Fee

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Generation Rate Components

Formula:

O&M Fee = Total Annual Expenses ÷ Billing Determinant

PhP/kWh = PhP ÷ kWh

Indexation of O&M Fee

A. PhP-Based O&M Fixed Variable

Philippine Consumer Price Index (PH CPI)

B. USD-Based O&M Variable

United States Consumer Price Index (US CPI)

Operations & Maintenance Fee

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Generation Rate Components

Fuel Recovery Fee/Energy Fee Variable

Cost

Pass-through cost to allow recovery

of fuel consumed to generate power

Cost also depends on the plant heat rate

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• FUEL SUPPLY CONTRACT/S

• FUEL PROCUREMENT PROCESS

• FUEL COST COMPUTATION (BASIS OF ASSUMED BASE COST/PRICES AND INDEXATION)

• CONSUMPTION RATE/HEAT RATE

Required Supporting Documents/ Input Parameters

Fuel Recovery Fee /Energy Fee

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Determination of Reasonable Fuel Efficiency level

• Guaranteed Heat rate or consumption

rate under IPP Contracts

• Generator Manufacturer’s Specifications

or Contractor guaranteed efficiency

level

• Benchmark to Heat rate of comparable

power plants

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Procedure for the Application of the PSA

Receipt of

LGU

Legislative

Body of the

Application/

Publication

of the

Application

Filing of the

Application

Commission

issues Order &

Notice of Public

Hearing

Earliest Date

for the Initial

Hearing

Last Day for

the Issuance

of Provisional

Authority

Earliest Day for

the issuance of

Provisional

Authority (P.A.)

Day 1 Day 10

After 30 days from the (a)

receipt of a copy of the

application by the LGU

Legislative Body or (b)

publication of the application,

whichever comes later

Day 34

Day 75

Issuance

of Final

Authority

Within 1

year from

the

issuance of

P.A.

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ERC CASE NO. 2013-005RM In the Matter of the Promulgation of the 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

• Article I: Objectives

• Article II: Definition of Terms

• Article III: Procurement Process

• Article IV: Requirements and Review Procedures

• Article V: Final Provisions

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Draft Rules Governing Execution, Review and Evaluation of PSA Applications

Key Provisions

of the Draft

Rules

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ARTICLE III

• 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.

Highlights/Key Provisions

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ARTICLE III

• 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.

Highlights/Key Provisions

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ARTICLE IV

• 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.

Highlights/Key Provisions

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ARTICLE IV • 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.

Highlights/Key Provisions

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ARTICLE IV • 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

Operating and Maintenance Fee

Fuel Fee

In support of the prosed pricing under the PSA, the Following shall be

required:

a. Executive Summary

b. Sources of Funds / Financial Plans

c. Details of the Purchase Power Rate

d. Details of Cash flow

e. Details on the procurement of fuel

Highlights/Key Provisions

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ARTICLE IV • 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.

Highlights/Key Provisions

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Competitive Selection Process

Benchmark Rate

Joint Application

Walk-away Clause

NEXT… Discussion of Major

Issues/Comments