IN THE MATTER OF ..THE APPLICATION FOR ... 2015-199 RC.pdfcertifications from the Presiding Officer or Secretary of the Sangguniang Panlalawigan of theMunicipality ofSarangani, or

Republic of the PhilippinesENERGY REGULATORY COMMISSI

San Miguel Avenue, Pasig City

IN THE MATTER OF ..THEAPPLICATION FORAUTHORIZATION TO PROVIDEELECTRICITY SERVICE INBALUT ISLAND, SARANGANI,. DAVAO OCCIDENTAL, ASQUALIFIED THIRD PARTY(QTP) AND FOR ISSUANCE OFTHE CORRESPONDINGAUTHORITY TO OPERATE(ATO) AND FOR APPROVAL OFTHE QTP SERVICE ANDSUBSIDY CONTRACT (QSSC)WITH NATIONAL POWERCORPORATION (NPC), WITHPRAYER FOR ISSUANCE OF APROVISIONAL AUTHORITY,

ERCCASENO. 2015-199 RC

POWERSOURCE PHILIPPINES,INC. (PSPI),

Applicant.)(- - - - - - - - - - - - - - - -- - - - - - - - -)(

NOTICE OF PUBLIC HEARING

TOALL INTERESTED PARTIES:

Notice is hereby given that on 11November 2015, Power SourcePhilippines, Inc. (PSPI) filed an Application for authorization toprovide electricity service in Balut Island, Sarangani, DavaoOccidental as a Qualified Third Party (QTP), with request for theissuance of the corresponding Authority to Operate (ATO), and forapproval of the QTP Service and Subsidy Contract (QSSC) with theNational Power Corporation (NPC), with prayer for the issuance ofprovisional authority.

ERC CASE NO. 2015-199 RCNOTICE OF PUBLIC HEARING/ 22 February 2016Page 20f14

In support of said Application, PSPI alleged, among others, thefollowing:

1. This is an Application for authorization to provide electricityservice with request for the issuance of the correspondingAuthority to Operate (ATO) as a Qualified Third Party (QTP) inBalut Island, Sarangani, Davao Occidental, filed before thisCommission pursuant to and by virtue of the Rules for theRegulation of the Qualified Third Parties Performing MissionaryElectrification in Areas Declared Unviable by the Department ofEnergy (ERC QTP Guidelines) approved in ERC Resolution No.22, Series of 2006;

2. The instant Application likewise seeks the approval of the QTPService and Subsidy Contract (QSSC)l dated 09 October 2015,executed by and between PSPI and the NPC, including the FullCost Recovery Rate (FCRR) provided therein. A copy of the QSSCis attached to the Application as Annex "A";

3. PSPI is a corporation duly organized and existing under the lawsof the Republic of the Philippines with its principal office at the10th Floor, The Athenaeum Building, 160 Leviste Street, SalcedoVillage, Makati City, Metro Manila. Copies of Applicant's relevantcorporate documentation such as the Certificate of Registrationwith the Securities and Exchange Commission (SEC), Articles ofIncorporation, latest Audited Financial Statements and latestGeneral Information Sheet are attached to the Application asAnnexes "B" "c" "D" and "E" respecti el ., , , v y,

4. Applicant has the full legal, financial and technical capacity tooperate as a QTP. At present, the Department of Energy (DOE)still has to issue the Certificate of Endorsement stating thatApplicant was pre qualified in accordance with DOE Circular No.2004-06-006 and DOE Circular 2005-12-011. A copy of theCertificate of Endorsement will be attached to the Application asAnnex "F" once it is released by the DOE;

5. PSPI may be served with orders or other legal processes throughthe undersigned counsel;

, The QTP Service and Subsidy Contract (QSSC) is the resulting legal document after combiningthe provisions of the QTP Service Contract (QSC) and Subsidy Disbursement Agreement (SDA).

ERC CASE NO. 2015-199 RCNOTICE OF PUBLICHEARING/ 22 February 2016Page 3 of 14

COMPLIANCE WITH PRE-FILING REQUIREMENTS

6. In compliance with Rule 6 of the ERC Rules of Practice andProcedure, approved by the Commission on 22 June 2006 asResolution No. 38, Series of 2005, PSPI has furnished theSangguniang Panlalawigan of the Municipality of Sarangani withcopies of the Application with all its annexes. Copies of thecertifications from the Presiding Officer or Secretary of theSangguniang Panlalawigan of the Municipality of Sarangani, ortheir duly authorized representatives, attesting to the fact of suchservice, are attached as Annex "G"of the Application;

7. Furthermore, PSPI has caused the publication of the presentApplication in its entirety in a newspaper of general circulationwithin the Municipality of Sarangani. Copies of thecorresponding Affidavit of Publication and the newspaper areattached to the Application as Annexes "H" and "H-1",respectively;

STATEMENT OF FACTS

8. Under Section 59 of Republic Act No. 9136 or the Electric PowerIndustry Reform Act of 2001 (EPIRA) and Rule 14 of its. Implementing Rules and Regulations (IRR), the provision ofelectric service in remote and unviable areas that a distributionutility is unable to service shall be opened to QTP;

9. As stable and reliable supply of power is essential to economicgrowth and sustain ability, the electricity service provided by aQTP is envisaged to spur development in an economicallyunviable area and, in the long term, elevate such area to a level ofviability. However, the provision of electricity service in unviableareas is expectedly costly and not economically feasible. It wouldnot be reasonable to charge consumers in rural and remote areashigh cost of providing such service;

10. In accordance with Section 70 of the EPIRA, the entry of QTPs tostimulate economic growth in unviable areas is made feasible bya subsidy sourced from the Universal Charge for MissionaryElectrification (UC-ME). This enables a QTP to operate viably

ERC CASE NO. 2015-199 RCNOTICE OF PUBLICHEARING/ 22 February 2016Page 4 of 14 .

while charging its consumers at rates that are reasonablyacceptable in the area, as may be determined by the Commission;

11. Pursuant to Sections 59 and 70 of the EPIRA and its IRR, theDOE issued Department Circular No. 2004-06-006, whichprescribes the qualification criteria for QTPs, and DepartmentCircular 2005-12-011, which prescribes the guidelines for theparticipation of QTPs for provision of electric service in remoteand unviable areas;

12. At the time when the regulatory and administrative frameworkfor QTP projects, including mechanisms for the availment of UC-ME subsidy by QTPs, were still being developed, Applicantalready commenced its operations as a QTP in Barangay RioTuba, Bataraza, Palawan (Rio Tuba) and was about to begin itsoperations in Malapascua Island, Barangay Logon, DaanBantayan, Cebu;

13. PSPI is a pioneer QTP having been issued the very first Authorityto Operate as a QTP in the entire country for its Rio Tubaelectrification project. This exemplifies the successful economicupliftment of a remote and unviable area through the entry of aQTP;

14. The QTP Service Area. Balut Isaland, located in theMunicipality of Sarangani, Davao Occidental (QTP Service Area)is a remote and unviable area within the franchise area of Davaodel Sur Electric Cooperative, Inc. (DASURECO);

14.1. The QTP Service Area is located about 13 kilometers (8.1mi) from mainland Mindanao, separated by the SaranganiStrait. Balut, Sarangani and Olanivan Islands make up theisland group known as the Sarangani Islands. The groupcomprises the Municipality of Sarangani of DavaoOccidental. For Balut island, the total land area is 6,604hectares;

The Island is composed of eight barangays namely;Mabila - 1,160 HH, Tinina - 385 HH, Tucal - 209 HH,Gomtago - 167 HH, Batuganding - 431 HH, Konel - 446HH, Lipol - 455 HH, and Tagen - 317 HH and the total


potential HH is 3,570. Mabila is the town's center forcommerce and the local government;

14.2. Balut is served by NPC-SPUG under DASURECOfranchise. Electricity is currently available for 8 hours onlyfrom 4 pm to 12 midnight. The power plant is in goodcondition with a total capacity of 320 kW (2 x 160 kW).Mabila, Batuganding and Tucal are electrified barangayswhile the residents of the other barangaysare using solarpanels and small generators for their electricity. There isan existing distribution system in Mabila, Tucal andBatuganding. The distribution lines are still in goodcondition and can be extended for the electrification ofKonel and Lipol. The Electric Cooperative has no plans ofextending additional lines to the remaining 5 barangaysnor electrify Sarangani;

15. Selection of Applicant as Service Provider. DASURECOsought the participation of the private sector to improve thequality, operating hours of the electricity service and extendelectrification in said barangays. On 9 June 2014, Applicantsubmitted to DOE its Expression of Interest to be the QTP inBalut Island;

16.16.1. Having met the qualification criteria, the DOE informed

the Applicant on 26 June 2014 to submit its proposalwithin forty-five (45) days or no later than 22 August2014. In accordance with DOE's instruction, Applicantsubmitted its proposal on 20 August 2014;

16.2. Subsequently, the DOE issued Publication Notice No.2014-10-0003 dated 25 September 2014 to informinterested parties to submit their counter-proposals forBalut Island on or before 25 October 2014. Since no entitysubmitted a counter-proposal, DOE selected Applicant asthe QTP to provide electricity service in Balut Island;

17. Declaration of QTP Service Area as a Remote &UnviableArea. On 7April 2014, the DOE issued Publication No. 2014-04-0001, declaring as remote and unviable and thus open for QTPProgram the following barangays in Balut and Sarangani Islands:Mabila, Batuganding, Tucal, Konel, Lipol, Gomtago, Tinina,Tagen, Laker Island, Camahual, Patuco and Camalig. A copy of


said DOE Publication is attached hereto as Annex "J" of theApplication;

17.1. As a result of said declaration, DASURECO issuedResolution No. 50, Series of 2014, dated 8 March 2014,formally waiving its right to provide service in the QTPService Area. A copy of the said Resolution is attached tothe Application asAnnex "K" ;

17.2. On 27 May 2015, DASURECO and Applicant executed aWaiver Agreement, whereby DASURECOwaived in favorof Applicant the right to provide electricity service in theaforesaid area. A copy of the Waiver Agreement isattached to the Application as Annex "L";

18. QTP Operations. Currently, three (3) of the eight (8)barangays located on Balut Island are served at least in part bypower generated by NPC-SPUG's diesel generating plantthrough distribution lines and metering operated byDASURECO.Electricity is currently available for eight (8) hoursonly from 4pm to 12 midnight. The power plant is in goodcondition with a total capacity of 320 kW (2 x 160 kW)commissioned in 1997. Presently, however, DASURECO doesnot have plans of extending additional lines to the remainingfive (5) barangays nor electrify the other island, Sarangani;

18.1. Applicant will provide twenty four hour electricity serviceto at least five (5) barangays and solar home systems tothe remaining three (3) isolated and dispersed barangays.The community population of an estimated 2,701households will initially represent significant sales ofaround 638,581 kWh;

18.2. QTP operations shall be for a period of twenty (20) yearsin accordance with the Waiver Agreement withDASURECOand the QTP Service and Subsidy Agreementwith NPC;

18.3. Applicant's project has been a realization of the goal of theQTP program to stimulate economic progress in remoteand unviable areas through electrification. The beneficialimpact of stable and reliable electricity service to theeconomy of the local community in the QTP Service Areaas well as the daily lives of the consumers cannot beoverstated;

ERC CASE NO. 2015-199 RCNOTICE OF PUBLICHEARING/ 22 February 2016Page 70f14

SIGNIFICANT ASPECTS OF THE PROJECTAND THE QTP SERVICE AND SUBSIDY CONTRACT

19. Under the QSSC, PSPI shall provide 24-hour electricity servicein the QTP Service Area for a term of twenty (20) years. Inorder to ensure that PSPI will be able to viably serve the QTPService Area, it may be allowed to avail of the UC-ME Subsidy;

19.1. The Generation Facilities. Due to small loads in off-peak hours, Applicant will install a modular, flexible andhighly redundant diesel generating plant based on three(3) units of small high speed gensets, 1 x 100 kW and 2 x120 kW. This ensures modest capital cost and maximumflexibility in the early years of operations. As the load onthe island grows, Applicant may add 1 x 350 kW to theinstalled capacity on the third year;

19.2. The relevant Certificate of Non-Coverage (CNC) to beissued by the Department of Environment and NaturalResources (DENR) and Certificate of Compliance (COC)to be issued by the Commission covering the dieselgenerating units will be obtained prior to CommercialOperations Date;

19.3. Applicant intends to comply with Renewable PortfolioStandards and source a certain percentage of its powersupply from Solar Home Systems for the three (3)barangays in the QTP Service Area as indicated in theQSSC;

19-4. Availment ofUC-ME Subsidy. The QSSCprovides theterms and conditions governing Applicant's availment ofthe UC-ME Subsidy. For the provision of electricityservice, Applicant shall charge and collect from its endusers the SARR. Should the FCRR be higher than theSARR,Applicant shall be entitled to recover the differencefrom the UC-ME Subsidy through the mechanismprovided in the QSSC;

20. Financial Plans/Sources of Funds. As QTP, this projectshall be funded by the subsidy drawn from the UC-ME asdisbursed by the NPC and the SARR collected from the end-

ERCCASENO. 2015-199 RCNOTICE OF PUBLICHEARING/ 22 February 2016Page 8 of 14

users. A detailed discussion of the funding/financial aspects ofthe project is attached as Annex "M" of the Application;

20.1. Project Cost. The total capital cost is Thirty-ThreeMillion Sixty-Eight Thousand, Five Hundred SeventeenPesos (PhP33,068,517.00), consisting of the costs of theplant equipment, buildings, capitalized expenses andworking capital for initial stocks of fuels and lubes andmobilization during plant trials and personnel training. Asummary of the project cost components is contained inAnnex "N'" ,

20.2. Debt/Equity Ratio. The debt-equity ratio for thecapital cost of the Generation Facilities shall be 67:33;

20.3. Computation of Return on Investment/WeightedAverage Cost of Capital. The Weighted Average Costof Capital (WACC) for the project is 11%p.a. This wasobtained considering an interest of 9.5% p.a. on debtcapital;

2004. The minimum desired return for equity capital for theproject and the cost of debt capital are placed at 14.3%p.a. and 9.5% p.a., respectively, to reflect the significantlyhigher risks associated with providing electricity service ina remote and unelectrified rural community without anofftake guaranteed by a contractual counter-party. Acomputation of the above WACC is contained in Annex"0";

21. Purchased Power Rate. The Full Cost Recovery Rate("FCRR") consists of a levelized base rate of 37.14/kWh, whichshall be automatically adjusted for each billing period based onPhilippine and US consumer price indices as well as actual fuelcosts, in accordance with the adjustment mechanisms in theQSSC. In accordance with the ERC QTP Guidelines, Applicantshall charge and collect from the end-users SARR. Should theFCRR be higher than the SARR, Applicant shall be entitled torecover the difference from the UC-ME Subsidy. A detaileddiscussion on the FCRR, including its breakdown and therationale supporting the indexation, is attached to theApplication as Annex "P";

ERCCASENO. 2015-199 RCNOTICE OF PUBLICHEARING/ 22 February 2016Page 9 of 14

21.1. Breakdown of the FCRR. The FCRR reflects twenty(20) years of operations and use of the WACC of 11%asdiscounting factor for all costs and generated electricity. Asample computation of the FCRR and the ME Subsidyrequirement is attached to the Application asAnnex "Q";

22. Cash Flow.

22.1. Initial Costs, Operating and MaintenanceExpenses. The initial capital cost for the project consistsof diesel plant costs amounting to Thirty-Three MillionSixty-Eight Thousand, Five Hundred Seventeen Pesos(PhP33,068,517.00). The capital costs for the first five (5)years, as well as the breakdown of the operating andmaintenance expenses for the twenty (20) year term of theQSSC are shown in Annex "R";

23. Projected Demand. Considering the nature of the project,there is no minimum energy off-take, as the sale of power isbased on actual energy consumed by each end-user consumer.The FCRR is determined based on an assumed annual increasein actual energy demand of four percent (3.5%). A detaileddiscussion on the projected demand is contained in Annex "S."A survey study was commissioned by PSPI on the QTP ServiceArea. The results of the survey were considered as and used asthe assumption for the load demand and load growth in theFinancial Model. The survey summary report is attached to theApplication as Annex "T";

24. Procurement of Fuel. Applicant is sourcing and will sourceits future diesel fuel supply from potential suppliers willing todeliver fuel to the site. Applicant will procure fuel from the leastexpensive supplier should additional suppliers becomeavailable. Applicant will source its biomass fuel from localfarmers and will develop its own plantation to produce suchfuel.


RATE IMPLICATIONS OF THE QTP SERVICEAND SUBSIDY CONTRACT

25. The grant of an Authority to Operate and the approval of theQSSC, along with the corresponding subsidy support, willenable PSPI to operate viably and, at the same time, charge alower tariff on its customers in the QTP Service Area. In theabsence of an ERC-approved SARR,the tariff to be charged by itshall be equivalent to the ERC-approved retail rate ofDASURECO, in accordance with Section II, Article IV of theERC QTP Guidelines.

The following table shows the impact of the QSSC on theelectricity rates:

March 2015 March 2015Billim, BiIlin"

DASURECO PSPI--BALUT DASURECO- BALUT(SAGR) BALUT (Using QTP

NPCTCGR) (FCRR))

Generation Charees: 4.8600 31.0000Generation SystemChar"e 4.8024 ~1.000

GRAM 0.0"06

FCA

Forex 0.004

S~tem Loss Charae 0.6~1~ 0.6"1~DistributionCharl!es: 0.5782 0.5782

Demand Char"eDistribution SystemChar-e 0."782 0."782

Sunnlv Charaes: 0.6001 0.6001Retail CustomerCharoeSupply SystemChar-e 0.6001 0.6001

Meterinl! Charl!es: " .••.,26 "."~26Retail CustomerChar_e ".0000 ".0000Metering SystemChar"e 0.4~26 0.A026

Members'Contribution forCAPEX 0.200" 0.200"

Universal Charl!es: O.""2" 0.~52"Missionary

0.1<;61Electrification - SPUG 0.1561MissionaryElectrification - REDCIEnvironmentalChar-e 0.002" 0.002"

ERC CASE NO. 2015-199 RCNOTICE OF PUBLICHEARING/ 22 February 2016Page 11of 14

NPC StrandedContract Cost 0.lQ"8 0.19~8

FlTALL(Renewable) 0.0406 0.0406

Other Char"es: -0.0995 '0.0995

Lifeline Rate 0.1181 0.1181

Power Act ReductionSenior CitizenSubsidv 0.000.0 0.000.0

PPARefuud -0.2181 -0.2181

Effective Rate 12.6861 38.8261 37.14

* Subject to periodic adjustments based on consumer price indices, foreign exchange rate, and actual costs.n In the absence of an ERC~approved SARR, the retail rate of DASURECO shall be applied. Once the ERe

approves an SARR, the SARRshall apply.

26. The subsidy component necessary for the continued provisionof electricity supply that will sustain the economic growth of theQTP Service Area will have a reduction of Php1.6861/kWh onthe Universal Charge;

27. Applicant respectfully submits that the aforementioned amountis more than reasonable considering the 24-hour, enterpriselevel service provided under the QSSC that directly results inthe significant economic upliftment and improvement in thequality of life in the QTP Service Area beyond anything possiblein the traditional 6 to 12hour rural electrification systems;

ARGUMENTS IN SUPPORT OFREQUEST FOR INTERIM RELIEF & PROVISIONALAUTHORITY (PAl TO OPERATE IN THE QTP AREA

28. Rule 14 of the Commission's Rules of Practice and Procedureauthorizes the issuance of a PA and/or an interim relief prior toa final decision, provided that the facts and circumstanceswarrant the issuance thereof;

29. In the case of PSPI, it must be noted that the PA is necessaryfor the execution of its agreement with NPC which will embodythe seamless phase-in of its operation, and the eventual phase-out of NPC's generating function, in the QTP area;

30. Furthermore, the PA will be submitted by PSPI to itsprospective lenders as a requirement for the grant of loans,necessary to finance the project;

31. Moreover, it must be emphasized that PSPI has already securedoffers from third parties for the lease of the rights to the


generation and distribution facilities for the project. Applicantis, therefore, constrained to request for the issuance of the PAbefore the expiration of the aforesaid offers;

32. In the matter of interim relief, PSPI is seeking to collect a lowerrate through the Subsidized Approved Retail Rate (SARR)instead of the Full Cost Recovery Rate (FCRR) as ordered by theERC in consideration of the limited paying capacity of itsconsumers. The electrification of the QTP Service Area will notbe possible if consumers were charged at true cost;

33. Finally, the success of this project with the regulatoryimprimatur of this Commission will pave way for furtherinvestment by PSPI in more projects designed to spureconomic growth in remote and unviable areas through theprovision of a 24-hour reliable electricity service. Applicant'sinterest in other project sites will be dependent on the successof the present Application, particularly on the availment of thenecessary subsidy support under the QTP program. With suchsupport, PSPI looks forward to replicating the success of thisproject in other areas;

PRAYER

34. PSPI prays that, at the soonest possible time, the Commissiongrants it provisional and interim relief as follows:

1.1. Authority to Operate as a Qualified Third Party under theERC QTP Guidelines;

1.2. A Provisional Authority to Operate in the QTP Area beimmediately issued in its favor pending ERC Resolution;

1.3. The QTP Service Contract, including the Full CostRecovery Rate therein, be approved;

1.4. Authority to charge its customers a tariff equivalent to theERC-approved retail rate of DASURECO, in accordancewith Section II, Article IV of the ERCQTP Guidelines; and

ERC CASE NO. 2015-199 RCNOTICEOF PUBLICHEARING/ 22 February 2016Page 13 of 14

1.5. Permission to recover from the UC-ME Subsidy thedifference between the FCRR and rate charged by it to itsconsumers; and to this end, NPC be directed to release toPSPI such subsidy in accordance with the terms of theQTP Service Contract.

The Commission has set the Application for jurisdictionalhearing, expository presentation, pre-trial conference and evidentiaryhearing on 29 March 2016 (Tuesday) at ten o'clock in themorning (10:00 A.M.) at the Municipal Gymnasium, BalutIsland, Sarangani, Davao Occidental.

All persons who have an interest in the subject matter of theproceeding may become a party by filing, at least five (5) days prior tothe initial hearing and subject to the requirements in the ERC's Rulesof Practice and Procedure, a verified petition with the Commissiongiving the docket number and title of the proceeding and stating: (1)the petitioner's name and address; (2) the nature of petitioner'sinterest in the subject matter of the proceeding and the way andmanner in which such interest is affected by the issues involved in theproceeding; and (3) a statement of the relief desired.

All other persons who may want their views known to theCommission with respect to the subject matter of the proceeding mayfile their opposition to the Application or comment thereon at anystage of the proceeding before the Applicant concludes thepresentation of its evidence. No particular form of opposition orcomment is required, but the document, letter or writing shouldcontain the name and address of such person and a concise statementof the opposition or comment and the grounds relied upon.

All such persons who wish to have a copy of the Application mayrequest from the Applicant that they be furnished with the same,prior to the date of the initial hearing. The Applicant is herebydirected to furnish all those making such request with copies of theApplication and its attachments, subject to the reimbursement ofreasonable photocopying costs. Any such person may likewiseexamine the Application and other pertinent records filed with theCommission during the standard office hours.

ERCCASENO. 2015-199 RCNOTICE OF PUBLIC HEARING/ 22 February 2016Page 14 of 14

WITNESS, the Honorable Chairman, JOSE VICENTE B.SALAZAR, and the Honorable Commissioners, ALFREDO J.NON, JOSEFINA PATRICIA A. MAGPALE-ASIRIT andGERONIMO D. STA. ANA, Energy Regulatory Commission,this 22nd day of February 2016 at Pasig City.

ATTY.NAT J. MARASIGANChi of Staff

Office of the Chairman and CEO

IN THE MATTER OF ..THE APPLICATION FOR ... 2015-199 RC.pdfcertifications from the Presiding Officer or Secretary of the Sangguniang Panlalawigan of theMunicipality ofSarangani, or

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