Cepalco Kirahon 1 Decision,+ERC+Case+No.+2014-020+RC

Republic of the Philippines
ENERGY REGULATORY COMMISSION

San Miguel Avenue, Pasig 'City
IN THE MATTER
OF THE
APPLICATION FOR APPROVAL
OF THE
POWER
SUPPLY
AGREEMENT (PSA) BETWEEN
CAGAYAN ELECTRIC POWER
AND
LIGHT
COMPANY,
INCORPORATED
(CEPALCO)
AND
KIRAHON
SOLAR
ENERGY
CORPORATION
(KSEC), WITH PRAYER FOR
PROVISIONAL AUTHORITY
ERe CASE NO. 2014-020 RC
CAGAYAN ELECTRIC POWER
AND
LIGHT
COMPANY;
INCORPORATED (CEPALCO),
Applicant.
)(
----------------------
DOC
Date:,
K J] .T iiI)
M!QY,..~. .l,~,Qlt
~:.., _.V~,._
)(
DECISION
Before the Commission for resolution is the application filed on
March 10, 2014 by Cagayan Electric Power and Light Company,
Incorporated
(CEPALCO) for approval of its Power Supply
Agreer:m(nt (PSA) with Kirahon Solar Energy Corporation (KSEC),
with pfayer for provisional authority.'
.
In the said application, CEPALCO alleged, among others, that: .
1.
It is a domestic corporation with principal office address at

44 Don Toribio Chaves Street, Cagayan de Oro City;
.
2.
It is the sole and duly authorized franchisee (3nd holder of

a Certificate of Public Convenience and Necessity
(CPCN) to install, operate, and maintain a heat, light, and
power distribution system in the City of Cagayan de Oro,
and in the Municipalities of Tagoloan, Villanueva and
Jasaan, all in the Province of Misamis Oriental;
ERC Case No. 2014-020 RC

DECISION/October 22, 2014
Page 2 of 29
3.
Presently, it sources about ninety percent (90%) of its

power requirements from the National Power Corporation
(NPC) under a Contract for the Supply of Electric Energy
(CSEE) which will expire on March 25, 2015.
The
remainder of its power requirements is sourced from
Mindanao Energy Systems, Incorporated (MINERGY), FG
Bukidnon Power Corporation's Agusan River Hydro
Electric Plant, and from its own Photovoltaic Power Plant;
4.
It is uncertain whether NPC still has the capacity to supply

its power requirements beyond March 2015 as NPC is set
to privatize its assets in Mindanao. Most of these assets
are hydro-electric power plants which become unavailable
during the dry season;
5.
At present, the National Grid Corporation of the

Philippines (NGCP) is already imposing curtailment to its
transmission load customers in Mindanao due to lack of
available power supply;
6.
Based on its forecasted power demand, it needs

additional power generation capacity by 2015 and it has
to prepare therefore to enable it to provide continuous
and reliable electric service to its customers;
Based on historical data, its demand grows at an average
of around five percent (5%) per year. Starting 2015,
however, it is projecting a substantial addition to its
demand requirement due to a number of commercial and
industrial
customers
which
applied
for
service
connections.
Tabulated below is CEPALCO's demand
projection for Years 2015 to 2024:
Year
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Projected Demand, MW
186
220
272
281
290
299
309
320
331
342

Page 3 of 29
7.
In order to augment its power supply, particularly, for

serving its peaking requirement during daytime, it entered
into a PSA with KSEC on November 21, 2013, for the
latter to supply power from its proposed 10 MWac
Photovoltaic Plant, which is to be located in Kirahon,
Villanueva, Misamis Oriental;
8.
The salient provisions of the PSA are as follows:

8.1
Cooperation Period. KSEC shall supply electric

power to CEPALCO for a period of twenty-five (25)
years, commencing from its commercial operation
expected to be on January 31, 2015 (Section 2.01
of the PSA);
8.2
Energy Delivery.
KSEC guarantees to deliver
18,000,000 kWh of electricity to CEPALCO for the
first year while for each year thereafter it guarantees
to deliver ninety-nine percent (99%) of the energy
for the previous year (Section 2.02 of the PSA);
8.3
Rates to be Charged by KSEC to CEPALCO. For

the electricity drawn by CEPALCO, KSEC shall
charge a rate of PhP9.68/kWh subject to escalation
of three percent (3%) for every twelve (12) months
of operation from start of commercial operation
(Section 3 and Schedule 1 of the PSA);
8.4
Must-Take as Available Plant/Declared Capacity.

The net installed capacity shall be 10 MWac.
However, KSEC and CEPALCO agree that the plant
is a must-take as available plant (no minimum offtake) and therefore KSEC shall not be obligated to
ensure the dependable availability of the Declared
Capacity per month at all times. (Section 2.03 of the
PSA);
8.5
Interconnection
to CEPALCO's
Distribution
Grid. The cost of interconnection to CEPALCO's
grid shall be for the account of and provided by
CEPALCO (Section 4.03.2 of the PSA); and

Page 4 of 29
8.6
9.
Expansions.
CEPALCO and KSEC may, by
mutual
consent,
increase
the net installed
generating capacity of the plant up to a maximum of
20 MWac, provided, that the energy fee for such
additional
capacity
does
not
exceed
the
Commission-approved energy fee provided in the
PSA (Section 5.05 of the PSA);
The total cost of the project is US$29,122,000.00.

This
translates to PhP1.31 Billion at PhP45.00/US$1.00
exchange rate. The total project cost includes all taxes
and financing costs;
Seventy percent (700/0) of
funded by loans at an all-in
of 7.500/0. The remaining
project cost will be funded
rate of 14.20/0;
the total project cost will be

interest rate (excluding taxes)
thirty percent (30%) of the
through equity at a nominal
The projected pre-tax Weighted Average Cost of Capital

(WACC) of the project is at ten percent (10%);
The detailed breakdown of the project cost and the
computation of the WACC are attached to the application;
10.
The over-all rate impact to its customers if the PSA will be

implemented, and if compared to other alternative
peaking plant, are as follows:
Energy
Without KSEC
No
With
Alternative
Alternative
Su lier
su
lier
1,050,725,417 1,063,865,417
1,063,865,417
Energy
7,005,358,943
7,136,496,143
7,132,554,142
6.6672
6.7081
6.7044
13,140,000
None
None
Particulars
Total
Annual
Re uirement, kWh
Total Cost of Annual
Re uirement, PhP
Average
Generation
PhP/KWh
Unserved Ener
Over-all Rate 1m act
With Alternative Su
With KSEC
Solar is chea er b
Cost,
Ph PO.0409/kWh
PhPO.0372/kWh
PhPO.0037/kWh
With KSEC

Page 5 of 29
1
2
3
4
5
6
7
8
9
10
11
12
13
14
11.
Aside from the rate advantage, the use of a cleaner

renewable energy source such as solar power is also
beneficial as there are no harmful emission of pollutants
that will be released to the environment;
12.
In support of the application,

documents:
it attached the following
Name of Document
Annex
KSEC's Articles of Incor oration
A
Securities and Exchange Commission (SEC) Certificate
B
of Re istration of the said Articles of Incor oration
List of Shareholders Latest GIS of KSEC-SEC Form
C
Board of Investment BOI Certificate of Re istration
D
Environmental Compliance Certificate (ECC) issued by
E
the Department of Environment and Natural Resources
DENR
PSA
F
Details of the PSA
G
All details on the procurement process of fuel, including
H
re uests, ro osals received, tender offers, etc.
Copy of Related Agreements
(i.e., Transmission
Wheelin Contract, Fuel Su I A reements, etc.
Certificate
of Compliance
(COC) issued by the
J
Commission
Certification by NPC whether the Transition Supply
K
Contract (TSC) capacity and energy is expected to be
available during the contractual period, including
relevant supporting documentation, data and analyses
su ortin each statement
All relevant technical and economic characteristics of the
L
generation
capacity,
installed capacity,
mode of
o eration, and de endable ca acit
Details on the procurement process it used leading to
M
the selection
of KSEC, including request(s) for
ro osals, ro osal it received, tender offers, etc.
Details
regarding
transmission
projects
or grid
N
connection projects necessary to complement the
proposed generation capacity, identification of the
parties that will develop and/or own such facilities, any
cost related to such project, and specification of the
parties responsible for recovery of any costs related to
such ro'ects

Page 6 of 29
15 Certification
that
states
the
consistencies
and
inconsistencies
between the proposed generation
capacity and the Department of Energy's (DOE)
Philippine
Development
Plan
(PDP).
Any
inconsistencies shall be supported by relevant analysis
including but not limited to, forecasts and assessment of
available eneration ca acit and technolo
mix
16 Details regarding the load forecast projections in
accordance with the latest DDP
13.
It will comply with the requirements in Section 4 (e), Rule

3 of the Rules and Regulations of Republic Act 9136,
otherwise known as the Electric Power Industry Reform
Act of 2001 or the EPIRA, in relation to Rule 6 of the ERC
Rules of Practice and Procedure, prior to the filing of the
application;
Allegations in Support of the
Prayer for Provisional Authority
14.
As mentioned earlier, NGCP is already rationing power to

its transmission load customers in Mindanao due to lack
of available power supply;
15.
It is also uncertain whether NPC can supply its power

requirements beyond 2015 as most of its assets in
Mindanao are set to be privatized, and that most of these
assets consist of hydro-electric power plants which could
be unavailable during the dry season;
16.
Construction of a solar power plant like the proposed

power plant normally takes one (1) year;
17.
If the target date of commissioning the proposed power

plant in 2015 is to be met, construction has to start within
March 2014.n Any delay incurred in the project timeline
will likely cause it to be unable to cope with its load
growth requirements;
18.
KSEC intends to get loan for financing the project and to

enable it to proceed, it has to secure financial closing. It
has already discussed the project with potential financing
institutions. However, these financing institutions require

Page 7 of 29
the issuance of at least a provisional authority/rate from
the Commission in the instant application as a condition
to financial closing;
19.
It is therefore seeking a provisional authority/rate for the

proposed power plant so that financial closing for the
project could be achieved in a timely manner. This will
then enable KSEC to start the construction of the
proposed power plant in time for the target commissioning
year in 2015; and
Prayer
20.
Thus, it prays that:

20.1 Upon filing and pending hearing of the application, a
provisional authority/rate be issued in favor of the
proposed power plant; and
20.2 After due notice and hearing, a decision
rendered approving the proposed PSA.
be
Having found said application sufficient in form and in

substance with the required fees having been paid, an Order and a
Notice of Public Hearing, both dated April 15, 2014, were issued
setting the case for jurisdictional hearing, expository presentation,
pre-trial conference, and evidentiary hearing on May 28,2014.
CEPALCO was directed to cause the publication of the Notice
of Public Hearing, at its own expense, twice (2x) for two (2)
successive weeks in two (2) newspapers of general circulation in the
Philippines, with the date of the last publication to be made not later
than ten (10) days before the scheduled date of initial hearing. It was
also directed to inform the consumers within its franchise area, by
any other means available and appropriate, of the filing of the instant
application, its reasons therefor and of the scheduled hearing
thereon.
The Office of the Solicitor General (OSG), the Commission on
Audit (COA) and the Committees on Energy of both Houses of
Congress were furnished with copies of the Order and Notice of
Public Hearing and were requested to have their respective duly
authorized representatives present at the initial hearing.

Page 8 of 29
Likewise, the Offices of the Provincial Governor of Misamis

Oriental and the Mayors of the City and Municipalities within
CEPALCO's franchise area were furnished with copies of the Order
and Notice of Public Hearing for the appropriate posting thereof on
their respective bulletin boards.
On May 20, 2014, Engr. Robert F. Mallillin filed his "Motion to
Participate as Intervenor" and "pre-Trial Brief'.
On May 22,2014, CEPALCO submitted its "pre-Trial Brief'.
On May 27, 2014, the National Association of Electricity
Consumers for Reforms, Incorporated (NASECORE) - Region X
Chapter filed its "Petition for Intervention".
During the May 28, 2014 initial hearing, CEPALCO, Engr.
Mallillin, Mr. David A. Tauli, NASECORE - Region X Chapter and the
Konsumanteng Kagay-anon, Incorporated (KKI) appeared. No other
intervenor/oppositor
appeared
nor
was
there
any
other
intervention/opposition registered.
In the said hearing, KKI initially manifested its intention to
participate as an intervenor in the instant application. The same was
provisionally allowed by the Commission subject to the filing of the
required formal petition for intervention within five (5) days from said
date of hearing.
CEPALCO then presented its proofs of compliance with the
Commission's posting and publication of notice requirements which
were duly marked as Exhibits "C" to "L-1", inclusive. Thereafter, it
conducted an expository presentation of its application.
At the termination of the expository presentation and upon
motion of CEPALCO, the Commission issued an Order of general
default against other interested parties who failed to appear during
the hearing despite sufficient notice.
Subsequently,
the
Commission
conducted
a pre-trial
conference where the parties stipulated on the facts and issues to be
resolved in the instant application.

Page 9 of 29
CEPALCO, then, presented the following witnesses:
a) Mr.
Michael J. Lichtenfeld, KSEC's Director and a Renewable Energy
Executive, who testified, among others, on the urgent need for the
grant of provisional authority, the authority of KSEC to establish, own
and operate the solar power plant, the capability of KSEC to supply
the power requirements of CEPALCO, the cost of the power plant,
and the rates that it will charge CEPALCO under the PSA; and b) Mr.
Richard S. Ratunil, CEPALCO's Economic Regulatory Compliance
Officer, who testified, among others, on CEPALCO's load forecast
and procurement process, and the rate impact of the said PSA on its
power rates.
In the course of their respective direct examinations, the
witnesses identified various documents which were duly marked as
exhibits.
The direct examinations having been terminated, the said
witnesses were lengthily cross-examined by Engr. Mallillin, Mr. Tauli,
NASECORE - Region X and KKI, and were required to address the
c1arificatory questions propounded by the Commission.
CEPALCO was directed to submit various documents to
facilitate the evaluation of the instant application. Thereafter, KKI
withdrew its previous manifestation to participate as an intervenor
and that he will be considered as an oppositor. The Commission
granted the same.
On even date, Mr. Tauli furnished the Commission with a copy
of his "Petition to Intervene".
On June 3, 2014, CEPALCO filed its "Compliance".
Subsequently, on June 4 and 16, 2014, CEPALCO filed a
"Motion for Withdrawal of Prayer for Provisional Authority" and a
"Supplemental Motion for the Withdrawal of the Prayer for Provisional
Authority", respectively.
On June 19 and 23, 2014, CEPALCO filed two (2) separate
compliances.
At the continuation of the hearing on July 1, 2014, Messrs.
Lichtenfeld and Ratunil were recalled to address the additional cross-

Page 10 of 29
examinations of Engr. Mallillin as well as the c1arificatory questions
propounded by the Commission.
On July 4, 2014, CEPALCO filed its "Formal Offer of Exhibits".
On July 28, 2014, the Commission issued an Order directing
CEPALCO and KSEC to submit various documents and information.
On October 8,2014, the Commission issued an Order admitting
CEPALCO's formal offer of exhibits for being relevant and material in
the evaluation of the instant application.
DISCUSSION
1.
Parties to the Contract
CEPALCO is a domestic corporation with principal office

address at 44 Don Toribio Chaves St., Cagayan de Oro City. It is the
sole and duly authorized franchisee and holder of a CPCN to install,
operate, and maintain a heat, light, and power distribution system in
the City of Cagayan de Oro, and in the Municipalities of Tagoloan,
Villanueva and Jasaan, all in the Province of Misamis Oriental.
KSEC 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 Unit 1605, Ayala Tower One, Makati City. It is an
entity which shall undertake the engineering,
procurement,
construction, commissioning, financing, ownership, and operation of
solar photovoltaic electric power generation facilities to supply the
electric power requirements of CEPALCO.
2.
CEPALCO's
Demand - Supply Scenario
At present, CEPALCO sources approximately ninety percent

(90%) of its power requirements from the NPC pursuant to a Contract
for the Supply of Electric Energy (CSEE) which will expire on March
25, 2015. The remainder of its power requirements is sourced from
Mindanao Energy Systems, Incorporated (MINERGY), First Gen
Bukidnon Power Corporation (FG Bukidnon), Agusan River Hydro
Electric Plant, and from its own Photovoltaic Power Plant.

Page 11 of 29
As stated earlier, CEPALCO is uncertain whether NPC still has
the capacity to supply its power requirements beyond March 2015 as
the latter is set to privatize its assets in Mindanao. Most of these
assets are hydro-electric power plants which become unavailable
during dry season.
Likewise, the NGCP is already imposing
curtailment to its transmission load customers in the region due to
lack of available power supply.
Based on its historical data, CEPALCO needs additional power
generation by 2015 and it has to prepare therefore to enable it to
provide continuous and reliable electric service to its customers.
Beginning 2015, its demand grows at an average of five percent (5%)
per year and is projected to have a substantial addition to its demand
requirement due to a number of commercial and industrial customers
which applied for service connection.
Shown below is CEPALCO's demand projection for years 2015
to 2024:
Year
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Projected
Demand, MW
186
220
272
281
290
299
309
320
331
342
In order to augment its power supply, particularly, for serving its

peaking requirement during daytime, on November 21, 2013,
CEPALCO entered into a PSA with KSEC for the latter to supply
power from its proposed 10 MWac Photovoltaic Plant, which is to be
constructed in Kirahon, Villanueva, Misamis Oriental.
3.
CEPALCO's
Procurement
Process
CEPALCO adopted the following procedures in selecting KSEC

to supply a portion of its power supply requirement for peak periods:

Page 12 of 29
a.
Forecast the power requirement for the next ten (10)

years by determining normal load growth based on
historical data, using the resulting load growth in
projecting the demand of existing customers for the next
ten (10) years, identifying and adding the expected load
of big customers which signified intention to connect to it
in the next five (5) years, and plotting the hourly demand
based on typical load profile to determine the annual
power supply requirement for base, intermediate and
peaking loads;
b.
Identify potential suppliers

of
requirement for each type of load;
c.
Solicit supply offers; and
d.
Negotiate with the chosen supplier.
3.1
Demand Forecast (Step 1)
the
power
supply
CEPALCO projected a substantial addition to its demand

requirement due to a number of commercial and industrial
customers which applied for service connection, to wit:
Name of Customer
Avida Condominium - Corrales St., CM Recto
Primavera Condominum Tower 2 - Masterson
Avenue
Gaisano Puerto - Puerto
Shell Oil Depot - Corrales Extension
BMEG Feedmill - Villanueva, Misamis Oriental
Bottling Plant (Additional Load) Coca-Cola
Villanueva, Misamis Oriental
LKKS Center (Additional Load)
Subtotal
3.2
Demand,
kW
2,000
2,000
2,000
2,000
5,000
4,000
5,000
22,000
Typical Load Profile (Step 2)
CEPALCO plotted its hourly demand forecast based on

the load profile for a typical week-day period. Shown below is
the expected load profile for year 2015. As shown in the graph,

Page 13 of 29
CEPALCO has an immediate power supply requirement
peak period starting year 2015.
250
for
r-------...-...-...----.-.---....----.----------.-
200
Peaking Supplier
::
~
150
'ti'
c
lQ
E
III
o 100
50 -
PSALM
I M~st-~U!11lly~ro
t6.~C,fi,~~n,,M1.~,ID',
Ca~u~) i
i
I
I
.... .... .... .... .... .... .... .... .... .... l\J l\J l\J l\J 0
0
0
0
0
0
0
~ (Jl 0) ..... co (0 R .... l\J ~ ~ ~ ~ :-:l ~ ~ 0 .... l\J W 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
-,
0
....
0
0
3.3
l\J
0
W
Identify Suppliers
for Peak Load Requirement
(Step 3)
The foregoing load profile established the required

additional supply for peak period. Due to the urgent nature of
the requirement, CEPALCO identified the peak suppliers that
will be available in year 2015, namely:
Interim Mindanao
Electricity Market (IMEM); Modular Diesel Generating Sets;
Non-Firm Supply from existing Bunker-C fired power plants;
Coal-Fired Power Plant in Davao; and KSEC.
3.4
Evaluation
(Step 4)
of the Reasonableness
of the Price Offer
CEPALCO's PSA with KSEC is the most economical

choice for the supply of a portion of its peak load requirement
for the reasons that KSEC has lowest electricity price among
the power suppliers for peak period and the annual price
adjustment is lower compared to the projected price adjustment
of other generation technologies.

Page 14 of 29
As part of its evaluation, CEPALCO made a comparative
analysis of the electricity prices of its identified suppliers.
Based on the said analysis, KSEC emerged as the cheapest
among them. Shown below is the comparative analysis of
generation costs. The comparison excludes the Power Delivery
Service (PDS) Charge of NGCP which KSEC can avoid being
an embedded generator:
Rate
Component
.-
Capital Recovery
Fee
Fixed O&M Fee
Variable
O&M
Fee
Effective
Rate,
excluding Fuel
Add: Fuel Cost,
PhP/kWh
Average Rate,
excluding PDS
PhP/kWh
CoalBunkerModular
Bunkerfired at
C fired
Diesel
C fired
Peaking
B
., (SO.
A (TMI)
(TSI)
(MPC) . Energy)
10.51
1.37
3.63
2.19
2.12
0.29
1.19
0.17
1.13
0.15
1.07
0.59
12.92
2.73
3.47
5.28
1.97
7.17
7.17
10;60
14.89
9.90
10.64
15,.88
KSEC
9.68
9.68
The business of power generation is dependent on the

current demand of its customers and the power generator has
to contract in advance the power that it can generate to
maximize its dependable capacity. Load forecasting is solely
the responsibility of the distribution utility and, in the instant
case, KSEC accepted the contract quantity requested by
CEPALCO.
By accepting the contract quantity, KSEC committed itself
to supply the same only to CEPALCO and the latter also
committed itself to accept and pay the additional contract
quantity.
4.
Executive
Summary of the Project
Project Name
Kirahon Solar Power Plant
Project Location

Page 15 of 29
Generating Technology
Solar Photovoltaic (PV)
Gross Installed Capacity
12.5 MWdc
Net Installed Capacity
10.0 MWac
Commercial Operation Date
January 31, 2014
Solar Specific Production
1,450 kWh/kW DC/year
Capacity Factor
Annual Energy Production
18,000,000 kWh/year
Annual Energy Output Degradation
0.75%/year
Land Area
15 hectares
Interconnection
CEPALCO's 34.5 kV distribution line
The Kirahon Solar PV Plant will be interconnected to

CEPALCO's existing 34.5 kV distribution line using a 3-phase, 336
MCM ACSR line. This 3-phase, 34.5 kV line that will interconnect the
proposed PV Plant to CEPALCO's existing distribution facilities is
located within the Tambal Resettlement Site in Villanueva, Misamis
Oriental.
The proposed Electricity Fee of PhP9.68/kWh is equivalent to
the Feed-In Tariff (FIT) for Solar PV, as approved by the
Commission. The said rate is subject to a three percent (30/0)annual
escalation.
5.
Salient Features of the PSA

5.1
Cooperation Period. KSEC shall supply electric power

to CEPALCO for a period of twenty-five (25) years,
commencing from its commercial operation which is
expected to be on January 31, 2015;
5.2
Energy Delivery.
KSEC guarantees
to deliver
18,000,000 kWh of electricity to CEPALCO for the first
year while for each year thereafter, it guarantees to
deliver ninety-nine percent (99%)
of the energy for the
previous year;

Page 16 of 29
5.3
Rates to be Charged by KSEC to CEPALCO. For the

electricity drawn by CEPALCO, KSEC shall charge a rate
of PhP9.68/kWh, subject to escalation of three percent
(31o) for every twelve (12) months of operation from start
of commercial operation;
5.4
Must-Take as Available Plant/Declared Capacity. The

net installed capacity shall be 10 MWac. However, KSEC
and CEPALCO agree that the plant is a must-take as
available plant (no minimum off-take) and therefore KSEC
shall not be obligated to ensure the dependable
availability of the Declared Capacity per month at all
times;
5.5
Interconnection
to CEPALCO's Distribution Grid. The
cost of interconnection to CEPALCO's distribution grid
shall be for the account of and provided by CEPALCO;
5.6
Expansions.
CEPALCO and KSEC may, by mutual
consent, increase the net installed generating capacity of
the plant up to a maximum of 20 MWac, provided that, the
energy fee for such additional capacity does not exceed
the Commission-approved Energy Fee provided in the
PSA',
5.7
Electricity in Excess of Contract Quantity. In the event

that KSEC's plant has capacity in excess of the above
prescribed requirements, it shall grant CEPALCO the right
of first refusal for the purchase of such excess capacity
based on the contracted price. For this purpose, each
year and every year thereafter until the end of the
cooperation period, KSEC shall submit to CEPALCO its
capacity for the year to enable it to decide whether or not
it shall purchase the excess capacity; and
5.8
Sources of Funds/Financial Plans. The total cost of the

project is US$26,263,000.00. This translates to PhP1.18
Billion at PhP45.00/US$1.00 exchange rate. The said
amount is inclusive of all taxes and financing costs.
The projected pre-tax Weighted Average Cost of Capital
(WACC) of the project is ten percent (10/0).

Page 17 of 29
6.
Evaluation
of the Proposed Rate
Under the PSA, the proposed rate of PhP9.68/kWh is subject

to a fixed escalation of three percent (3%) for every twelve (12)
months of operation from start of commercial operation.
Inasmuch as the proposed rate is equivalent to the approved
FIT for solar power plants, the Commission deems it necessary to
determine the reasonableness of the same by referring to the
assumptions it used in determining the FIT applicable for said solar
power plants.
KSEC used exactly the same financial model used in the FIT
calculation. However, there are differences in the assumptions used,
to wit:
Particulars
All-in Project Cost, USD/kW
Cost of Equity
Pre-tax WACC
Net Plant Factor
FIT
2,406
16.440/0
11.1%
22%>
KSEC
2,101
15.4%
10.10/0
16.2%
Although there are differences in assumptions used, the

resulting proposed rate is still the same with the approved FIT for
solar power plants since the variable under the KSEC model is the
cost of equity while the variable under the FIT model is the rate.
KSEC fixed its rate equivalent to the approve FIT of PhP9.68/kWh
and determined whether the resulting equity internal rate of return
(IRR) (cost of equity) is acceptable. On the other hand, -the FIT
model fixed the equity IRR (cost of equity) or the WACC and
determined a rate that would yield equal to the predetermined IRR or
theWACC.
In calculating the proposed Energy Fee in the PSA, CEPALCO
and KSEC utilized a cost-based approach. The Commission verified
the following major assumptions and calculations made by KSEC:
6.1
Project Cost
The project cost includes upfront capital costs as well as

costs during project operations.
In addition to Equipment,

Page 18 of 29
Procurement and Construction (EPC) costs, KSEC identified
the cost of land acquisition, financing costs, initial working
capital requirements, development costs, technical advisory
services, contingencies during construction and taxes.
Shown below is an updated breakdown of the capital cost
requirements for the project based on the latest information:
ment Costs
ital and Technical Advisor

Sum
USD 000
23,037
2,306
PhP 000
1,036,659
103,775
920
41,407
26,263
1,181,841
It bears stressing that during the evaluation for approval

of the FIT, the Commission then was already cognizant that the
module prices are declining.
KSEC, likewise, admitted that
solar panel prices have declined over time.
However, it
submitted that during the past eighteen (18) months, this trend
has generally flattened out and prices have not fallen
significantly.
This is due to several factors including the
removal of subsidies from the Chinese Government for Chinese
panel manufacturers and the increase in demand for solar
panels from new markets such as Japan and Latin America.
These factors have reduced supply and increased demand
resulting in higher solar panel prices.
lVI<>dule price
index:
A.pril 2014:
Little
m<>V'emen1:
t;:. t!>;*':ti:,!:' ,~, :.:2:alJi:r.J'ia::' .~:.':EjJ:i:!:,t:tl:" :C"3i.i,i::, .;::=* MI!!:J: Jt:.: ,~:.:::::
a.co
'~==========---l~
~
I
CI.5O
ace
cue
,0-20
---------===-------=======
c:--_
.
---..--C_
...
_.0
{~
--.,:S
.. ~
JlibTU .
_'31
.........
;~
__
ClloIoooa
--
..
- Qlir;a ";I'''l':1'~
~~~~;
ten.cIt .
,k.lC
-.'u
,:
S<rp.U--.,.
_0
-''31
'14
-'w-
Wlthl'n01'e
U\an 10.000 rrg;j5te~
trade <ustorners..
pvXc::haftge is OW'0# ~'~ -.-td"'s
btgg<e$t bloket"a~
platfOfl'ftS for solas' modules and i.n_rters..
Tea ye.ars
Off ~en<e
In the n.arkd.'tnd U- ~_
01 n--e
th.3n 20..000 suc~'fUI
bustness. tr~lon$
are the
basi:$. ~
pwX<hang.e~ rn02tth1y ,;;tn:.a!ys.es of'
cnodule
price ~topInents
1ntbe Eu.opean PV rnos:1"ket..
t:Aore infCrrna;u-..: _-PV~_CDrft
n.e

Page 19 of 29
Further, solar module costs only account for a portion of

the total project cost. KSEC averred that the balances of
system (BOS) costs are very significant and have not been
declining.
These BOS costs include steel mounting structures,
copper cabling, inverter stations, transformer and switchgear,
shipping costs, labor costs, civil works and financing costs. As
mentioned earlier, these have not been declining over time and
some have actually increased in price. KSEC utilized actual
EPC bid proposals, financing documents and market data to
forecast its total project cost.
Moreover, solar projects incur significant operating costs.
These include scheduled O&M, refurbishment
of major
equipment (particularly, inverters stations which are typically
replaced in year 10), insurance costs, lender's technical advisor
costs during operations, and general and administrative costs,
broken down as follows:
Operating Cost
Operation and Maintenance (O&M) Agreement
Insurance Costs
General and Administrative (G&A)
Lender's and Owner's Technical Advisors
Sum
Refurbishment (Inverters, Panels)
Year
USD 000 PhP 000

11,250
250
4,500
100
100
4,500
3,375
75
26,263 1,181,841
2,000
90,000
10
KSEC alleged that these costs are based on actual O&M

bid proposals from service providers, KSEC's principals'
experiences and market data. These operational costs were
taken into consideration in calculating the PSA base tariff, to
wit:
Operating Cost
USD 000
Capital Costs
26,263
Operating Costs for 25 Years +
15,125
Refu rbish ment
Total
41,388
PhP 000
1,181,841
590,625
% Total
1,772,466
100
63
37

Page 20 of 29
6.2
Energy Production
For purposes of determining the expected revenue

stream, KSEC calculated the energy that the solar project
would produce. It engaged the services of Snowy Owl Energy,
Incorporated, a third-party independent engineer, to conduct a
detailed solar energy analysis. The analysis was based on sitespecific data, and utilized the ten (10)-year onsite solar
irradiation data (2004-2014) gathered from CEPALCO's 1 MW
Indahag Solar Plant from, located near the Kirahon Solar
Project site. This is considered to be an accurate analysis.
KSEC provided the Commission a detailed analysis on the said
study, the results of which are as follows:
12,500
10,000
1,418
17,725,000
16.20%
The annual energy production of 17,725,000 kWh is lower
than what was used in the FIT as the latter was based on actual
resource data. However, this is more than sufficient to provide
the required energy of CEPALCO under the PSA.
It should be noted that in the FIT, the Commission
assumed a twenty-two percent (22%) capacity factor. On the
other hand, KSEC submitted that the figure in the PSA is based
on net capacity rating and not on gross capacity. This resulted
in a higher calculated number.
The FIT financial model
submitted by the National Renewable Energy Board (NREB)
appears to have utilized the gross capacity rating, which is
similar to KSEC's approach.
KSEC manifested that the twenty-two percent (22%)
capacity factor assumed by the Commission is based on United
Stated (US) solar projects, which have higher capacity factors
due to sunny desert conditions and the use of "tracking"
technology that enables the solar panels to follow the sun
across the sky. It further manifested that this technology is not
appropriate in the Philippines where the structure needs to be
resistant to typhoon strength wind loads. The Philippines also
experiences significant rainy seasons that lower the annual
energy yield.

Page 21 of 29
Thus, what is significant is the actual total energy

production.
KSEC's project has the benefit of utilizing longterm data from the only large operational solar plant in the
Philippines - CEPALCO's 1 MW Indahag Plant.
Based on the submitted independent engineer's report,
solar panels experience a degradation of energy output due to
natural solar technology degradation.
The industry-wide
%
accepted rate of degradation is 0.75 - 1.00% per year which
varies by panel manufacturer. Thus, KSEC's expected annual
energy output degradation
rate was also taken into
consideration in determining the Energy Fee under the PSA.
6.3
Cost of Capital
In deriving the Energy Fee, KSEC targeted a specific

return on investment. For purposes of being consistent with the
Commission's FIT Rules, KSEC set a WACC of 10.0%. Based
on the above-discussed factors, the project would yield to a
WACC of 9.60/0 only. KSEC posited this is acceptable to its
shareholders.
Taking into consideration the upfront and operation
project costs, the expected energy output, and the target
WACC, the proposed Energy Fee of PhP9.68/kWh was
calculated using the NREB's FIT model
From the foregoing, the Commission believes that the rate
should be calculated not only based on the cost assumptions used by
KSEC but also by adopting the WACC, cost of equity and plant factor
used in the FIT model.
This resulted in a rate equivalent to
PhP7.39/kWh.
In deriving the approved rate, the Commission modified some
parameters in KSEC's financial model by using the plant factor and
cost of equity approved in the FIT, to wit:
Per KSEC Per Commission
Particulars
22.00 0/0
Plant Factor
16.200/0
16.44%
15.40%
Cost of EQuitv

Page 22 of 29
The following data were, likewise, used by the Commission in
deriving the approved rate:
Per Commission's
Calculation
US$26,263,000
US$2,101,000
25 ears
16.44%
10.4%
24,079,000 kWh
Particulars
220/0
The financial model used in deriving the rate of PhP7.39/kWh is
consistent with the FIT calculation. It is a discounted cash flow (DCF)
model which mainly values projects by discounting all estimated cash
flows using the opportunity cost of capital to its present value.
Below is a schematic diagram of the DCF model as used in the
FIT:
Construction
Cost
Debt
h+ I
Equity
Production
Volume
t
n
Revenues
Less
4";,
.::.:.
Using Excel's
Goal-Seek
Net Capacity
Factor &
Installed
Capacity
Target WACCor
Equity IRR
Rate, P/kWh (?)
1---1
Present Value of
cash flows to
equity investor
equals equity
investment cost
I
O&M andG&A
Costs
Annual CAPEX
and Debt Service
Income & Local
Taxes
Eauals
After-tax free
cash flow
~------------------------------------------------

Page 23 of 29
The financial model considers inputs and assumptions that are
used in the construction and operating period calculations which are
then used to develop the financials (Income Statement, Cash Flow
Statement and Balance Sheet).
The Input and Assumptions Sheet in the financial model uses
key parameters applied for each technology, as follows:
a.
b.
c.
d.'
e.
f.
g.
h.
i.
j.
k.
I.
Gross installed capacity;

Net capacity factor;
, ,~:'.,'::'r, :;.11
All-in Project Cost (US$/kW);
. ,. .",;.,.,:
Operations and Maintenance Costs;
..".. ,.General and Administrative Costs;
Rates and terms of financing;
Corporate Income Tax Rate;
Income Tax Holiday Incentive;
Duration of Construction and Operating periods;
Debt to Equity Ratio;
Local and Foreign Capital Ratio; and
Local and Foreign Inflation Rate.
1:'
! ,.'
The Construction Calculation considers the costs in putting up

the plant which include the EPC cost (i.e., equipment cost,
transportation cost to project site and balance of plant), transmission
line cost, switchyard and transformer, development and other costs,
access roads and infrastructure costs, VAT, construction contingency
allowance, financing and interest cost during construction, and initial
working capital. It then considers the required sources of funding
(i.e., debt and equity).
The Operating Calculation, on the other hand, considers the
O&M costs, spare parts, tools and equipment, G&A, fuel costs (for
Biomass only), local taxes, interest expense, depreciation and
income taxes.
The net cash flow is computed using the revenues of the
project (after considering a net capacity factor for the plant to
determine the production volume and an assumed FIT) less the
principal or loan repayments, interest expenses, O&M and G&A
costs, and income and local taxes. The after-tax free cash flow is
discounted to its present value, and this is used to compute for the
equity IRR. The model automatically calculates the WACC based on
the assumed cost of debt and the equity IRR. The FIT required is
then calculated to achieve a target equity IRR.

Page 24 of 29
From the foregoing, the calculated rate of PhP7.39/kWh is

significantly lower than the FIT of PhP9.68/kWh. The difference is
mainly due to the billing determinant used. The calculated FIT used a
twenty-two percent (22%) capacity factor vis-a-vis KSEC's 16.2%. In
this regard, the Commission finds no reason to deviate from the load
factor it approved under the FIT. As stated, liThe Commission has
decided to adopt a 22% capacity factor, which is the middle range of
the capacity factors for PV crystalline technologies based on NREB's
2011 data. The Commission finds the same reasonable since, being
a tropical country located close to the equator, the Philippine PV
Plants should naturally have a higher capacity factor due to the more
favorable insolation level as compared to Germany and various
locations in the United States, which have a winter season. Further,
the continued improvements in the performance of PV technology
resulting in better cell efficiencies and lower electrical conversion
losses, will likewise improve the levels of capacity factors of the new
PV installations. "
7.
Rate Adjustment
Formula
The proposed rate in the PSA is subject to a three percent (3%)

fixed escalation factor.
KSEC alleged that this escalation factor has been agreed upon
in order to mitigate the effects of local inflation and foreign exchange
fluctuations. The three percent (3%) is based on the historical trends
of these two (2) factors in the Philippines, specifically, the consumer
price index (CPI) and the Philippine Peso currency values against the
US Dollar.
Since the PSA is for a term of twenty-five (25) years, KSEC
submitted that it is appropriate to utilize a twenty-five (25)-year
historical annual average inflation rate and foreign exchange
movements. However, it also considered the short-term trend.
The following table shows the projected adjustment, which is
based on historical data:
Particulars
CPI
ForEx
Total Adjustment
Factor
Based on a
25-Year Data
6.550/0
0.220/0
6.77%
Based on a
2-Year Data
3.700/0
0.38%
4.08%

Page 25 of 29
CEPALCO and KSEC initially negotiated on a formula in

calculation of the PSA that would adjust the energy fee annually. In
such calculation, the proportion of upfront and operational project
costs that are invested in the Philippine Peso is adjusted based on
the percentage difference in local CPI from the base year of
investment.
Likewise, the proportion of upfront and operational costs to be
invested in US dollar is adjusted based on the percentage difference
in PhP/USD exchange rate from the base year of investment and is
further adjusted by US inflation.
CEPALCO and KSEC alleged that given the complexity of the
calculation, such might be unnecessarily burdensome and may be
subject to dispute. In order to simplify the matter, a fixed annual
escalation factor was agreed upon.
They believe that the three percent (3%) fixed factor which is
quite modest compared to historic trends of actual CPI economic
inflation and foreign exchange, as mentioned above.
Further, it is stated that the agreed fixed escalation factor would
benefit the customers of CEPALCO by hedging against future
economic factor volatility and providing predictable pricing. This will
assist CEPALCO and its customers in planning more efficiently and
accurately for their operating budgets in the future.
The Commission believes that by adopting the cost-based
methodology, the justifications provided by KSEC to adjust the entire
Energy Fee with a fixed escalation rate is without basis. The capital
cost incurred, which is the basis of CRF, is considered sunk cost.
The cost was already incurred and no longer affected by price
inflation. Consistent with the other PSAs, only the periodic expense
should be affected by the price movement as this cost would be
incurred in the future. Thus, the level of the cost thereof is dependent
on the future prices of goods and services.
In this regard, the Commission deems it prudent to adopt the
adjustment factor approved under the FIT system.

Page 26 of 29
The Commission has a mandate to protect the interest of the
electricity 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
CEPALCO's customers by way of reliable, continuous and efficient
supply of power within its franchise area at reasonable costs as
mandated by the EPIRA [Section 2. Declaration of Policy - (b) lito
ensure the quality, reliability, security and affordability of the supply of
electric power].
WHEREFORE,
the foregoing
premises considered,
the
application filed by Cagayan Electric Power and Light Company,
Incorporated
(CEPALCO) for approval of its Power Supply
Agreement (PSA) with Kirahon Solar Energy Corporation (KSEC) is
hereby APPROVED WITH MODIFICATION and subject to the
following conditions:
a.
The applicable generation rate shall be PhP7.39/kWh

which shall be adjusted based on the Feed-in-Tariff (FIT)
Rules;
b.
KSEC is directed to submit, for its first year of commercial

operation, its Audited Financial Statement (AFS), the final
Independent Engineer's Report and actual plant capacity
factor. The actual cost of operation and construction shall
be audited by an Independent Third Party. 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
KSEC. Further, the cost of audit shall be shouldered by
KSEC; and

Page 27 of 29
c.
The approval of t~e PSA is without prejudice to the

evaluation of KSEC's application for a Certificate of
Compliance (COC).
SO ORDERED.
PasigCity, October 22,2014.
NAIDA
A{(~
d CROZ-DUCUT
Chairperson
G. 'If,'~kL
ALFR
DO J. NON
GL~~CTORIA
Commissioner
Commissioner
JOSEFINA PAT I
Co
~CEPALCO&K~/~2014-o20
C.fr~P-TARUC
RC/deci,ion

Page 28 of 29
Copy Furnished:
1.
Cagayan Electric Power and Light Co., Inc. (CEPALCO)

44 Toribio Chaves St., Cagayan de Oro City
ATTN: Atty. Isidro O. Baculio, Jr.
Atty. Roel O. Camorro
Atty. Maynard Eugenio C. Ylagan
2.
Engr. Robert F. Mallillin

151 EDSA, Brgy. WAck-Wack, Mandaluyong City
3.
Mr. David A. Tauli

306 Talisay St., P.N. Roa Subdivision,
Cala-anan, Canitoan, Cagayan de Oro City
4.
Konsumanteng Kagay-anon, Incorporated (KKI)

321 San Lucas Ext. St., Capisnon,
Brgy. Kauswagan, Cagayan de Oro City
ATTN: Mr. Rene Michael D. Banos
5.
National Association
of Electricity
Consumers for
Reforms, Inc. (NASECORE) - Region X Chapter
Lico Law Office, Cinco Bldg., Pabayo Gomez St., Cagayan
de Oro City
ATTN: Atty. Isidro Q. Lico
6.
Office of the Solicitor General (OSG)

134 Amorsolo Street, Legaspi Village, Makati City
7.
Commission on Audit (COA)

Commonwealth Avenue, Quezon City
8.
Senate Committee on Energy

GSIS Bldg., Roxas Boulevard, Pasay City
9.
House Committee on Energy

Batasan Hills, Quezon City
10.
Office of the City Mayor

Cagayan de Oro City, Misamis Oriental

Page 29 of 29
11.
Office of the Municipal Mayor

Jasaan, Misamis Oriental
12.

Tagoloan, Misamis Oriental
13.

14.
Office of the Provincial Governor

Province of Misamis Oriental
15.
Philippine Chamber of Commerce and Industry (PCCI)

3rd Floor, ECC Building, Sen. Gil Puyat Avenue, Makati City

Cepalco Kirahon 1 Decision,+ERC+Case+No.+2014-020+RC

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cepalco Kirahon 1 Decision,+ERC+Case+No.+2014-020+RC

Uploaded by

Copyright:

Available Formats

Republic of the Philippines

ENERGY REGULATORY COMMISSION

It is a domestic corporation with principal office address at

It is the sole and duly authorized franchisee (3nd holder of

ERC Case No. 2014-020 RC

Presently, it sources about ninety percent (90%) of its

It is uncertain whether NPC still has the capacity to supply

At present, the National Grid Corporation of the

Based on its forecasted power demand, it needs

ERC Case No. 2014-020 RC

In order to augment its power supply, particularly, for

The salient provisions of the PSA are as follows:

Cooperation Period. KSEC shall supply electric

Rates to be Charged by KSEC to CEPALCO. For

Must-Take as Available Plant/Declared Capacity.

ERC Case No. 2014-020 RC

The total cost of the project is US$29,122,000.00.

the total project cost will be

The projected pre-tax Weighted Average Cost of Capital

The over-all rate impact to its customers if the PSA will be

ERC Case No. 2014-020 RC

Aside from the rate advantage, the use of a cleaner

In support of the application,

it attached the following

ERC Case No. 2014-020 RC

It will comply with the requirements in Section 4 (e), Rule

As mentioned earlier, NGCP is already rationing power to

It is also uncertain whether NPC can supply its power

Construction of a solar power plant like the proposed

If the target date of commissioning the proposed power

KSEC intends to get loan for financing the project and to

ERC Case No. 2014-020 RC

It is therefore seeking a provisional authority/rate for the

Thus, it prays that:

Having found said application sufficient in form and in

ERC Case No. 2014-020 RC

Likewise, the Offices of the Provincial Governor of Misamis

ERC Case No. 2014-020 RC

ERC Case No. 2014-020 RC

Parties to the Contract

CEPALCO is a domestic corporation with principal office

Demand - Supply Scenario

At present, CEPALCO sources approximately ninety percent

ERC Case No. 2014-020 RC

In order to augment its power supply, particularly, for serving its

CEPALCO adopted the following procedures in selecting KSEC

ERC Case No. 2014-020 RC

Forecast the power requirement for the next ten (10)

Identify potential suppliers

Solicit supply offers; and

Negotiate with the chosen supplier.

Demand Forecast (Step 1)

CEPALCO projected a substantial addition to its demand

Typical Load Profile (Step 2)

CEPALCO plotted its hourly demand forecast based on

ERC Case No. 2014-020 RC

for Peak Load Requirement

The foregoing load profile established the required

of the Price Offer

CEPALCO's PSA with KSEC is the most economical

ERC Case No. 2014-020 RC

The business of power generation is dependent on the

Summary of the Project