Socoteco 2 Therma Marine Decision,+ERC+Case+No.+2014-081+RC

Republic of the Philippines
ENERGY REGULATORY COMMISSION

San Miguel Avenue, Pasig City
IN THE MATTER
OF THE
APPLICATION FOR APPROVAL
OF THE SUPPLEMENT TO THE
ENERGY SUPPLY AGREEMENT
BETWEEN SOUTH COTABATO
II ELECTRIC
COOPERATIVE,
INC.
(SOCOTECO
II)
AND
THERMA MARINE, INC. (TMI)
ERC CASE NO. 2014-081 RC
SOUTH
COTABATO
II
ELECTRIC COOPERATIVE, INC.
(SOCOTECO II) AND THERMA
MARINE, INC. (TMI),
Applicants.
no
CKlil'L'lIJJ
Date'...................
DE~ 2 2015
It'q":'i ..... __
x- - - - - - - - - - - - - - - - - - - - - - - x
DECISION
Before the Commission for resolution is the application filed on

June 9, 2014 by South Cotabato II Electric Cooperative, Inc.
(SOCOTECO II) for the approval of the Supplement to the Energy
Supply Agreement (Supplement Agreement) it executed with Therma
Marine, Inc. (TMI).
In the said application, SOCOTECO II alleged, among others,
the following:
1.
SOCOTECO
II is a non-stock, non-profit electric
cooperative organized and existing under the laws of the
Republic of the Philippines with office address at J.
Catolico Avenue, Lagao, General Santos City. It is the
grantee of a franchise from the National Electrification
Administration (NEA) to maintain and operate an electric
light and power distribution system in the Province of
South
Cotabato,
General
Santos
City and the
MunidpaH\les of Alabel, Glan, Malapatan, Malun9
/?

DECISION/October 20, 2015
Page 2 of 28
Polomolok, Tupi, Kiamba, Maitum and Maasim, all in the

Province of South Cotabato;
2.
The application seeks approval by the Commission of the

Supplement Agreement entered into on December 3,
2013 with TMI, which is a generation company duly
organized and existing under the laws of the Republic of
the Philippines with principal office address in Aboitiz
Corporate Center, Gov. Manuel A. Cuenco Avenue,
Kasambagan, Cebu City. It owns and operates the 100
MW Power Barge No. 117 (PB 117) in Nasipit, Agusan
del Norte and the 100 MW Power Barge No. 118 (PB
118) in Maco, Compostela Valley, upon their privatization
by the Power Sector Assets and Liabilities Management
Corporation (PSALM) under Republic Act No. 9136,
otherwise known as the "Electric Power Industry Reform
Act of 2001 (EPIRA)";
3.
On November 24, 2010, SOCOTECO II entered into an

ESA with TMI for the supply of 18 MW1 for a term of one
(1) year from Effective Date. The ESA was approved by
the Commission in a Decision dated November 26, 2012
in ERC Case No. 2011-057 RC. In accordance with the
provisions of the ESA, SOCOTECO II and TMI agreed to
renew the terms and conditions of the ESA for an
additional period of one (1) year or until September 25,
2013 (Renewal Term). The said renewal is the subject of
a manifestation before the Commission in the same ERC
Case No. 2011-057 RC;
4.
On March 1, 2013, SOCOTECO II executed with TMI an

Amendment to the ESA, stipulating that the ESA shall
remain in force for an additional period of three (3) years
from the expiration of the Renewal Term (Additional
Term), unless either Party sends a written notice of pretermination to the other Party at least sixty (60) days prior
to the end of each contract year. Upon expiration of the
Additional Term and any extension thereof, the Parties
may agree to further extend the term of the Agreement
and/or revise the Billing Capacity and/or make such other
modifications on the terms and conditions of the
Agreement as may be agreed upon by the Parties;
, The Contracted Capacity was increased to 23 MW in February 2012 and was further increased
to 30 MW in April 2012.
/('

Page 3 of 28
5.
On December 3,2013, SOCOTECO II executed with TMI

a Supplement Agreement, stipulating that the rights and
obligations of the Parties during the Additional Term shall
be under the same terms and conditions of the ESA,
subject to the following:
SALIENT PROVISIONS OF THE SUPPLEMENT AGREEMENT

6.
CF
FOM
EF
HFCR
LOCR
Electricity
Fees. Beginning on the expiration of the
Renewal Term, the Electricity Fees shall be computed
based on the following values:
PhP/kW/mo
PhP/kW/mo
PhP/kWh
UkWh
LlkWh
2013
296
239
0.14864
0.23580
0.00240
2014
323
314
0.15245
0.23580
0.00240
2015
305
314
0.15245
0.23580
0.00240
2016
287
314
0.15245
0.23580
0.00240
2017
268
314
0.15245
0.23580
0.00240
2018
250
314
0.15245
0.23580
0.00240
Furthermore, the formula for FC in Item 2 (Contract

Energy Fee Per Month) of Schedule III (Contract Energy
Fee) of the ESA shall be deemed amended to read as
follows:
INS = INSy -
INS!
Where:
INSy =
Actual insurance cost for the two barges for the

current year
PhP43,035,782.00 for the two barges, representing
insurance cost included in the FOM
Hence, the formula for Contract Energy Fee per Month

shall be:
.'
"

Page 4 of28
Contract Energy Fee per Month
CEF=FC+VC
FC = [CF + (FOM) (IFr)] BC + [(;:)(To:a~BC)]

VC = [(EF)(IF,) + FLRJEDm
For calendar month m = 1, 2, ... ,12
Where:
CEF
= Contract Energy Fee in PhP
EF
= Energy Fee (Before Adding the Applicable VAT) for the

Billing Period in PhP/kWh
FC
= Fixed Charge per Month in Pesos
VC
= Variable Charge per Month in Pesos
CF
= Capacity
FOM
= Fixed O&M Fee in PhP/kW/month
1Ft
= Inflation Factor for Fixed O&M Fee
BC
= Billing Capacity in kW
INS
= INSy-INS1
Fee
Contract Year
in
PhP/kW/month
for
the
Current
Where:
INSy
INS1
= PhP43,035,782.00
Actual Insurance Cost for the Two Barges

for the Current Year
Representing
the FOM
for the Two Barges,

Insurance Cost Included in
IFv
= Inflation Factor for Energy Fee
Total
BC
= Total
Billing Capacity
for All Energy
Supply
Agreements Entered into by Supplierwhich have4

DECISION/October 20,2015
Page 5 of 28
achieved effectivity date and for the duration of such
effectivity, as such terms and conditions are defined
under the respective Energy Supply Agreements
FLR
= Fuel Oil, Lube Oil and Related Fuel Rate in PhP/kWh
EDm
= The
Sum of the Hourly Volumes of Contract Energy as

found in the Schedule of Contract Energy (or as
revised by the Parties or by MSO/MSO RCC) for the
Billing Period primarily associated with calendar month
m (for example December 26-January 25 is associated
with January) (and adjusted for transmission losses, if
any, imputed by the transmission service provider if
measured at a meter other than the Generator
Metering Point), in kWh
The Fixed Charge (FC) shall be proportionately adjusted if :

a. The Contract Energy Delivery days in a Billing Period are
less the total number of days in the Billing Period (to adjust
to first and last Billing Periods of the ESA); and
b. The non-delivery days (or fraction thereof) in any Billing
Period caused by Allowed Downtime described under
Section 8 of the ESA.
Finally, the base indices in Item 3 (Inflation Factor)

of Schedule III (Contract Energy Fee) of the ESA
shall be deemed to read as follows:
PCPlb
= Philippine
CPI of 126.4 as of June 2011
UCPlb = US CPI of 225.722 as of June 2011

ECPlb = EURO CPI of 113.10 as of June 2011
JCPlb = Japan CPI of 99.9 as of June 2011
7.
Billing Capacity. In the event that TMI is required to

reduce its installed capacity in order to remain compliant
with Section 45 of the EPIRA, TMI shall have the right to
reduce the Billing Capacity of SOCOTECO II to the extent
of the reduction required under Section 45 of the EPIRA~
\'

Page 6 of28
provided that the reduction in the Billing Capacity of
SOCOTECO II shall not exceed its pro rata share in the
total Billing Capacity of TMI in relation with its other
offtakers;
8,
Considering that under the

rights and obligations of the
Term shall continue to be
following salient terms and
continue to be in effect:
Supplement Agreement, the

Parties during the Additional
governed by the ESA, the
conditions of the ESA shall
9,
Contract Energy,
Under the ESA, TMI shall make
available, on a monthly basis, the capacity of 18 MW, to
be delivered in accordance with the Schedule of Contract
Energy of the ESA The Contracted Capacity was
increased to 23 MW in February 2012 and was further
increased to 30 MW in April 2012;
10,
Purchased Power Rate, For 2013 to 2015, it shall be

liable to pay such electricity fees, as follows:
Rates
2013
2014
2015
Fuel and Lube Oil Rate
296
323
305
239
0,14891
Pass-thru cost based on fuel
consumption rates of 0.2358
liter/kWh or actual, whichever is
lower, for Heavy Fuel Oil (HFO)
and 0,0024 liter/kWh or actual,
whichever is lower, for Lube Oil
La
11,
Additional Energy.
TMI may, at its option, make
available to SOCOTECO II such energy in excess of the
contracted energy for which SOCOTECO II shall be liable
to pay the Additional Energy Fee consisting of variable
and fixed charges pro-rated for the hours of delivery of
the additional energy, subject to annual adjustments, The
Based on the Decision dated November 26, 2012 in ERC Case No. 2011-057 RC
','
"
"

Page 7 of28
same formula for the Additional Energy Fee Rate under
the ESA shall continue to be in effect;
12.
Load Curtailment Adjustment.

For Contract Energy
subject of load curtailment, SOCOTECO II shall pay the
Load Curtailment Adjustment in lieu of the Capacity Fee
component of the electricity fees. The same formula for
the Load Curtailment Adjustment Rate under the ESA
shall continue to be in effect;
13.
Replacement Power. TMI has the option but not the

obligation to source replacement or alternative supply
from its own back-up facility and/or any third party to
supply all or part of the contract energy;
14.
The extension of the Contract Term under the

Amendment Agreement and Supplement Agreement and
the implementation thereof will redound to the benefit of
SOCOTECO II's consumers which may otherwise be
forced to bear the cost of 30 MW purchased from the
Interim Mindanao Electricity Market (IMEM).
In
undertaking the extension of the ESA under the
Supplement Agreement, SOCOTECO II seeks to comply
with its obligation of providing stable and continuous
power supply, pursuant to the Department Circular No.
DC 2012-12-0011 dated December 10, 2012 of the
Department of Energy (DOE);
SUBMISSIONS
15.
In support of the application and in compliance with Rule

20 (B) of the ERC Rules of Practice and Procedure,
SOCOTECO II submitted the following:
a.
Supplement to the ESA dated December 3, 2013

entered into with TMI (Annex "A" of the Application);
b.
Amendment to the ESA dated March 1, 2013

enteredintowith TMI (Annex"8" of the APPlicatio~
"
"

Page 8 of 28
c.
ESA dated November 24, 2010 entered into with

TMI (Annex "C" of the Application);
d.
Securities and Exchange Commission (SEC)

Certificate of Registration of TMI (Annex "0" of the
Application);
e.
Articles of Incorporation of TMI (Annex "E" of the

Application);
f.
General Information Sheet (GIS) of TMI (Annex "F"

of the Application);
g.
Board of Investments (BOI) Certificate of

Registration of TMI (Annex "G" of the Application);
h.
Environmental Compliance Certificate (ECC) issued

by the Department of Environment and Natural
Resources (DENR) to TMI (Annex "H" of the
Application);
Sources of Funds/Financial Plans (Annex "I" of the

Application);
j.
Purchased Power
Application);
k.
Fuel Procurement Process of TMI (Annex "K" of the

Application);
I.
Transmission Service Agreement (TSA) it executed

with the National Grid Corporation of the Philippines
(NGCP) (Annex "L" of the Application);
m.
Transmission Service Agreement (TSA) between

TMI and NGCP (Annex "M" of the Application);
n.
Certificate of Compliance (COC) issued to TMI

(Annex "N" of the APPliCaliOn);'1?
Rate
(Annex
"J"
of
the

Page 9 of 28
16.
o.
Certification from the PSALM of the insufficiency of

its supply to meet its requirements (Annex "0" of the
Application);
.
p.
Relevant technical and economic characteristics of

the TMI Power Barges (Annex "P" of the
Application);
q.
Its Distribution Development Plan (DDP) (Annex "Q"

of the Application);
r.
Cash Flow of TMI (Annex "R" of the Application);

and
s.
Latest Audited Financial Statement (AFS) of TMI

(Annex "S" of the Application);
In further compliance with the requirements of the

Commission, SOCOTECO II considered several
scenarios based on the number of running hours of TMI.
The Rate Impact Simulation based on these scenarios is
attached to the application as Annex 'T' and may be
summarized as follows:
Case 1
Case 2
Case 3
Case 4
Condition
tRunnina Hours)
6 hours
12 hours
16 hours
20 hours
Rate Impact!
Increase
0.2478
0.4946
0.6047
0.7222
MOTIONS FOR PROVISIONAL AUTHORITY AND

NON-DISCLOSURE OF CONFIDENTIAL INFORMATION
17.
SOCOTECO II moved for the issuance of a provisional

approval of the Supplement Agreement, pending trial on
the merits thereof, upon the following reasons:
a.
d
?
Mindanao Power Crisis. The power shortage in

Mindanao has remained a critical problem
"
"

Page 10 of 28
SOCOTECO II which continues to suffer rotating

brownouts in the grid. A bilateral agreement, such
as the Supplement Agreement, will significantly aid
it in minimizing or even eliminating the rotating
brownouts in its franchise area which has had a
debilitating impact upon the local economy;
b.
Insufficiency of the National Power Corporation

(NPC)/PSALM Supply.
The reduction of the
NPC/PSALM Contract for the Supply of Electric

Energy (CSEE) capacity from SOCOTECO II's
portfolio renders imperative a bilateral supply
contract to answer for the equivalent capacity, lest it
be compelled to resort to the unpredictable and
expectedly higher prices in the IMEM or worse, be
curtailed for insufficient contracted capacity; and
c.
As illustrated in
SOCOTECO II's DDP, it is expecting a growth in the
total demand of its end-users so that, coupled with
reduction of the NPC/PSALM capacity, there is a
wide supply gap that urgently needs to be filled.
Without the Supplement Agreement, it will be
incapable of satisfying the electricity requirements
of its end-users who must be forced to suffer
brownouts resulting from its curtailment;
Continuing
Demand Growth.
18.
Considering the foregoing, SOCOTECO II requested the

Commission for the provisional approval of the
Supplement Agreement to enable it to draw under the
said agreement. This will avoid the power interruptions
which have caused irreversible losses upon economic
productivity within its franchise area. The Affidavit in
support of the prayer for the issuance of Provisional
Authority is attached to the application as Annex "U";
20.
Under Article 13 of the ESA, each Party undertook to

keep in strict confidence and not to disclose to any third
party any and all Confidential Information3 of the other
Party;
Confidential Information means all infomnation relating to or concerning such other Party, its
subsidiaries, affiliates, associates, associated companies or customers which by reason of [the
ESA], are made known to the receiving Party or its subsidiaries and affiliated companies, or
directors, trustees, employees and representatives, including, without limitation attorneys a/f
\,

Page 11 of 28
21.
Under Rule 4 of the ERC Rules, the Commission may,

upon request of a party and determination of the
existence of conditions which would warrant such
remedy, treat certain information submitted to it as
confidential. Pursuant to its undertaking, SOCOTECO II
moved that Annexes "I" , "J" , "R" and "S" not be disclosed
and be treated as confidential documents in accordance
with Rule 4 of the ERC Rules. These documents contain
certain non-public information, data and calculations
involving business operations and financial trade secrets
reflecting TMI's investment and business calculations;
22.
SOCOTECO II submitted one (1) copy of Annexes "I", "J",

"R" and "S" in a sealed envelope, with the envelope and
each page of the document stamped with the word
"Confidential'" ,
23.
SOCOTECO II prayed that the Commission:

a.
Issue an Order treating Annexes "I", "J", "R" and "S"

and
the
information
contained
therein
as
confidential, directing their non-disclosure pursuant
to Rule 4 of the ERC Rules, and prescribing the
guidelines for the protection thereof;
b.
Pending trial on the merits, provisionally approve

the Supplement Agreement effective September 26,
2013; and
c.
After trial on the merits, approve with finality the

Supplement Agreement, including the rates set out
in paragraphs 6 and 10 to 13 thereof.
outside legal counsel, accountants, consultants and professional advisers to whom such
Confidential Information is disclosed, including but not limited to, any business, technical,
marketing, operational, organizational, financial or other information, and trade secrets, whether
in electronic, oral or written form, and all notes analyses, compilations, studies or other /
information which contain or reflect such information.
/

Page 12 of 28
On July 4, 2014, TMI filed a "Motion to be Admitted as CoApplicant with Entry of Appearance" alleging, among others, that it
has an interest in the subject matter and outcome of the instant
application considering that it is a party to the ESA and the
Supplement Agreement
It further alleged that it is in a position to
provide pertinent information and evidence required by the
Commission, particularly on matters relating to the rate charged by
TMI under the Supplement Agreement
It prayed that it be granted
leave to participate in the instant application as a party co-applicant
On July 21, 2014, the Commission issued an Order granting
TMl's motion. Thus, TMI is considered as a co-applicant in this
application.
Having found the 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 July 21, 2014, were issued
setting the case for jurisdictional hearing, expository presentation,
pre-trial conference and evidentiary hearing on August 19, 2014.
In the same Order, SOCOTECO II and TMI were directed to
cause the publication of the Notice of Public Hearing, at their 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. They were also directed to inform
the consumers within SOCOTECO II's franchise area, by any other
means available and appropriate, of the filing of the 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 hearing.
Likewise, the Office of the Governor of the Province of South
Cotabato and the Mayors of the City and Municipalities within the
franchise area of SOCOTECO II were furnished copies of the Order
and Notice of Public Hearing for the appropriate posting thereof ~
their respective bulletin boards.
/f

Page 13 of 28
On August 14, 2014, SOCOTECO
respective "Pre-trial Briefs".
II and TMI filed their
During the August 19, 2014 initial hearing, only SOCOTECO II

and TMI appeared. No intervenor/oppositor appeared nor was there
any intervention/opposition registered.
At the said hearing, SOCOTECO II and TMI presented proofs
of their compliance with the Commission's publication and posting of
notice requirements which were duly marked as Exhibits "F" to "F-24".
Thereafter, SOCOTECO II and TMI conducted an expository
presentation of their application.
The Commission propounded
clarificatory questions.
Subsequently, a pre-trial conference was conducted.
At the termination of the pre-trial conference, SOCOTECO II
and TMI presented the following witnesses: 1) Mr. Crisanto C. Sotelo,
SOCOTECO II's Officer-in-Charge (OIC) General Manager, who
testified, among others, on the following: a) salient features of the
Amendment Agreement dated March 1, 2013 and the Supplement
Agreement dated December 3, 2013; and b) rate impact of the ESA,
as amended; and 2) Mr. Theodore U. Bisnar, Account Officer of the
Sales and Marketing Department of Aboitiz Power Corporation, who
testified, among others, on the following: a) electricity fees relevant
to the computation of Contract Energy Fees; b) fees payable by
SOCOTECO II under the ESA, as amended; and c) amendments
made to the formula for the Contract Energy Fee. In the course of
their respective direct examinations, various documents were
presented and marked as exhibits.
Thereafter, the Commission
propounded clarificatory questions and directed SOCOTECO II and
TMI to file their respective formal offers of evidence, within fifteen (15)
days from said date of hearing.
On August 29, 2014, TMI filed its "Formal Offer of Evidence"
(FOE).
4'
On September 9,2014, SOCOTECO II filed its "Formal Offer of

Exhibits for the Applicant South Cotabato II Electric Cooperative, Inc.
(SOCOTECO II)".
"
...

Page 14 of 28
On October 8, 2015, the Commission issued an Order admitting
the exhibits contained in the respective FOEs of SOCOTECO II and
TMI for being relevant and material in the final resolution of the case.
Relative to SOCOTECO II's motion to treat as confidential
information Annexes "1"4, "J"S, "R"e and "S,,7of the Application, as well
as Annexes "A" , "B" and "0,,8 of TMI's "Formal Offer of Evidence"
dated August 29, 2014, the Commission resolves to deny the same
since said documents or information are necessary in the evaluation
and determination of the reasonableness of the rates to be charged
to the consumers. Moreover, Annex "s" of the Application, which is
the Independent Auditors' Report, is, at the time of the request,
already available to the public on a non-confidential basis since
copies thereof were submitted to the Bureau of Internal Revenue as
shown in the "stamped received" copy submitted to the Commission.
Thus, they must be disclosed to those who would ultimately be
burdened or affected thereby. TMI may have the right to protect its
proprietary or business concerns but it cannot outweigh the
paramount duty of the State to protect and uphold public interest by
ensuring "transparent and reasonable prices of electricity" pursuant to
Section 2 (c) and (f) of the EPIRA.
DISCUSSION
I.
EVALUATION OF THE PROPOSED RATES
TMI's approved total project cost is PhP1,833,440,0009

(PhP870,884,000 for PB 118 and PhP962,556,000 for PB 117).
Under the Supplement Agreement,
agreed on the following rates:
TMI and SOCOTECO
II
Sources of Funds [Debt-Equity Ratio, Project Cost, Weighted Average Cost of Capital (WACC),
breakdown of O&M and Minimum Energy Off-Take (MEaT)]
Breakdown of the base prices
Cashflow
Independent Auditors' Report
WI
Justification for "Other Lubricants", Fuel Oil Sales Agreement and Supply Agreement
9 Page 3 of the Orders dated July 9, 2012 resolving the "Motion for Reconsideration"
filed
Cagayan Electric Power and Light Company, Inc. (CEPALCO) in ERC Case Nos. 2010-011
RC and 2010-014
~/

Page 15 of 28
Year
2013
2014
2015
2016
2017
2018
CF
(PhP/kW/mo.l
296
323
305
287
268
250
SOCOTECO II and TMI alleged that the proposed rates under

the Supplement Agreement were derived and consistent with the
Commission's previous approval.
A.
CAPACITY FEE (CF)
Shown below is the approved CF based on the Commission's

Decision on the Original ESA entered into by TMI and several
distribution utilities:
Year
2011
2012
2013
2014
2015
CF
(PhP/kW/mo.l
344
278
296
323
305
The foregoing CF was computed based on the annual revenue

requirements provided in the July 9, 2012 Orders of the Commission
in ERC Case Nos. 2010-011 RC and 2010-014 RC [Application for
Approval of the Ancillary Services Procurement Agreement (ASPA)
between the National Grid Corporation of the Philippines (NGCP) and
TMI]. This approval has been consistently used by the Commission in
approving the ESAs of TMI with several distribution utilities. The said
annual revenue requirements and their corresponding CF were
derived based on the following factors:

Page 16 of 28
1.
The acquisition costs of PB 117 and PB 118 in the

amounts of PhP739,467,200.00 and PhP651,233,800.00,
respectively, plus the cost of procurement of the excluded
equipment and replenishment of spare parts - In the
aforesaid Orders, the Commission resolved that the Asset
Base to be used in determining the CF shall be the
acquisition cost instead of the appraised value;
2.
The life of the asset, which is ten (10) years;
3.
The rate should be unlevelized as the contract term is for

a short period only;
4.
The billing determinant for the first two (2) years (2010
and 2011) should be based on the actual capacity
available and scheduled; and
5.
The billing determinant for the succeeding years should

be based on the actual contracted quantity recognizing
that TMI has already contracted most of its capacity under
a bilateral supply contract or seventy percent (70%)
capacity factor.
Thus, the Commission set TMI's CF using a billing determinant

of seventy percent (70%) capacity factor or actual output, whichever
is higher, to wit:
Year
2011
2012
2013
2014
2015
Revenue
Requirement
(PhP)
562,687,547.2850
535,185,947.2850
507,684,347.2850
480,182,747.2850
452,681,147.2850
Billing
Determinant
(kW)*
1,633,474.79
1,924,585.80
1,714,000.00
1,485,124.59
1,485,124.59
*based on seventy percent (70%) capacity fa~r

whichever is higher
/{
CF
(PhP/kW/mo.)
344
278
296
323
305
actual/projected capacity,
'"

Page 17 of 28
The Commission already approved the declining annual
revenue requirements for TM!. However, the said rates should be
subjected to recalculation depending on the updated actual
contracted capacity.
Upon perusal of the Supplement Agreement, the Commission
verified that the proposed rate provided therein is the same CF it
approved in several ESAs involving TMI's power plants.
However, to determine the updated actual contracted capacity,
the Commission subjected it once more to the billing determinant test,
where the billing determinant should be the actual contracted
capacity or seventy percent (70%) capacity factor, whichever is
higher. Thereafter, the Commission tested the CF for 2014-2016
using the following values:
Year
2014
2015
2016
Revenue
Requirement
-CPhP)
480,182,747.2850
452,681,147.2850
425,179,547.2850
70% Plant
Capacity Factor
CkW)
1,485,124.59
1,485,124.59
1,485,124.59
Contracted
Capacity
CkW)
2,280,000
1,022,000
90,000
Note: 2014-Actual; 2015-2016 - Based on Projection
In this regard, the Commission believes that the CF for 2014

should be adjusted by using the actual billing determinant instead of
seventy percent (70%) capacity factor to reflect the resulting rate,
consistent with its previous approvals of TMl's ESAs with various
distribution utilities.
Shown below is a comparison
between the CFs (in
PhP/kW/mo.) based on a seventy percent (70%) capacity factor, as
approved
under the Original ESAs, and the Commission's
recalculalion
usingTMI'sactua'data~

Page 18 of 28
Year
At 70% Plant
Capacity Factor
(a)
2014
2015
2016
323
305
286
Note: (a)
Approved
CF Under
the
Original
ESA
(b)
323
305
Revised
(c)
Approved
CFs
211
443
4,724
211
305
286
CF based on seventy percent (70%) plant capacity factor
(b)
Calculated CF during the approval of the Original ESAs
(c)
Calculated CF based on actual contracted capacity for 2014 and

projected capacity factor of forty-five percent (45%) (1,022,000 kW)
for 2015 and four percent (4%) capacity factor (90,000) for 2016.
This will be subject to annual true-up determination.
For the year 2014, the approved CF is PhP323.00/kW/mo.

where the billing determinant used therein is the seventy percent
(70%) capacity factor.
However, the Commission noted that the
actual contracted capacity was higher than the seventy percent (70%)
billing determinant. Thus, the resulting CF was accordingly reduced.
On the other hand, for the years 2015 to 2016, the CFs are
calculated based on the seventy percent (70%) capacity factor since
the projected quantity is below the same.
The Commission is cognizant that TMI may not fully recover its
CF in the event that it would not be able to contract at least seventy
percent (70%) of its plant capacity. On this note, the risk for not
being able to sell the plant capacity is borne by TMI and not its
customers.
Shown below is a comPzrison

Commission's approved CF,
etween TMI's proposed and the

Page 19 of 28
Year
2014
2015
2016
B.
TMI's Proposed CF
(PhP/kW/mo.)
323
305
286
Approved CF
(PhP/kW/mo.)
211
305
286
FIXED OPERATIONS AND MAINTENANCE
(FOM) FEE
The FOM under the ESA is based on annual FOM costs of

PhP466,648,382.00 for the Power Barges, as approved by the
Commission
in its Decision involving TMI's ESAs. Hence,
SOCOTECO II and TMI agreed that the proposed FOM Fee is
PhP314.00/kW/mo., based on the approved annual FOM Fee and
seventy percent (70%) capacity factor.
Pursuant to its Decisions, the Commission
following annual FOM Fee and its equivalent rate:
Year
2011
2012
2013
2014
2015
FOM Revenue
Requirement
(PhP)
466,648,382.00
466,648,382.00
466,648,382.00
466,648,382.00
466,648,382.00
Billing
Determinant
(kW)
1,633,474.79
1,924,585.80
1,714,000.00
1,485,124.59
1,485,124.59
calculated
the
FOM Fee
(PhP/kW/mo.)
285.68
242.47
272.26
314.21
314.21
Similar with the CF, the Commission recalculated the applicable

FOM Fee (in PhP/kW/mo.) based on the updated actual contracted
capacity. This is to compare the billing determinant used based on
updated actual contracted capacity and the seventy percent (70%)
plant capacity factor, to wit

Page 20 of 28
Year
At 70% Plant
Capacity Factor
(PhP/kW/mo.)
(a)
2014
2015
2016
314
314
314
Approved
FOM Under
the Original
ESA
(PhP/kW/mo.)
(b)
314
314
Revised FOM
(PhP/kW/mo.)
(c)
Approved
FOM
(PhP/kW/mo.)
205
457
5,185
205
314
314
Note: (a)
FOM based on
capacity factor
seventy
percent
(70%)
plant
(b)
Calculated FOM during the approval of the Original

ESA
(c)
Calculated
FOM based on actual contracted
capacity for 2014 and projected capacity factor of
forty-five percent (45%) (1,022,000 kW) for 2015
and four percent (4%) capacity factor (90,000 kW)
for 2016. This will be subject to annual true-up
determination.
Thus, the revised FOM is as follows:

TMI's Proposed
PhP/kW/mo.
2014
314
314
2015
314
2016
Year
Approved
PhP/kW/mo.
205
314
314
It is worth mentioning that in the application, TMI's proposed

FOM of PhP314.00/kW/mo. is consistent with the Commission's
previous calculation.
C.
VARIABLE
OPERATIONS AND MAINTENANCE
(VOM) FEE
The projected VOM Fee under the Original ESA is based on

total estimated VOM of PhP115,406,480, broken down as fOIiOW/1

Page 21 of 28
Expense
Diesel Generator Units
Auxiliary Systems
DOE ER 1-94 Payments
Total YOM
Approved YOM
Additional: Lubricants
Revised Total YOM
Amount (in PhP)

85,950,934.00
18,804,862.00
7,760,740.00
112,516,536.00
112,311,596.00
3,094,884.00
115,406,480.00
On the other hand, the proposed YOM under the Supplement

Agreement is based on the annual YOM costs of PhP115,406,480.00
for the Power Barges and based on the approval by the Commission
of PhP112,311 ,596.00 plus the additional costs for the lubricants of
PhP3,094,884.00.
The additional cost for system lubricant was not included in the
YOM cost from TMl's previous applications. This system lubricant is
applied to the bearings and other movable parts in the auxiliary
equipment of the power plant. TMI calculated the said cost based on
the 2014-2019 operating projections of the power plant, to wit:
Particulars
2014
2015
2016
2017
2018
2019
2014-2019
Average
3.788,429.00
2.787.026.00
2,873,424.00
2,968.247.00
3,057.295.00
3.057,295.00
3,088,619.00
Other
lubricants,
PhP
Hence, TMI derived its YOM as follows:
Annual YOM
Billinq Determinant
YOM Rate
PhP
kWh/yr
PhP/kWh
115,406,480.00
755,580,000
0.1527
It should be noted that the rate of PhPO.1527/kWh is the

updated estimate of the Annual YOM. However, TMI undertook that
to charge SOCOTECO II the same rate of PhPO.15245/kWh as
initially agreed.

Page 22 of 28
On another note, TMI derived its Energy Fee (EF)

PhPO.14891/kWh
by dividing
the Annual
VOM
Cost
PhP112,516,536
over the net annual energy production
755,580,000 kWh.
of
of
of
Though the Commission approved the same VOM cost of

PhP112,516,536.00 in the ASPA cases without disallowance, arriving
at an EF of PhPO.14891/kWh, it made an adjustment for each plant
from PhP3,880,370.00 to PhP3,777,900.00 since the DOE Energy
Regulations (E.R.) 1-94 state that the Generation Company and/or
energy resource developer shall set aside one centavo per kilowatthour (PhPO.01/kWh) of the total electricity sales as Financial Benefit
to the Host Communities (FBHC) of such Generation Facility. Hence,
the Commission arrived at an EF of PhPO.14864/kWh.
In the application, TMI proposed a VOM of PhPO.15245/kWh,
which considers the additional cost for system lubricant.
Inasmuch as SOCOTECO II and TMI failed to substantiate their
proposed VOM, the Commission is constrained to approve a VOM
Fee of PhPO.14864/kWh.
D.
FUEL COST
In the Original ESA, TMI proposed fixed fuel consumption rates

of 0.2210 liter/kWh for Heavy Fuel Oil (HFO) and 0.00313 liter/kWh
for Lube Oil.
Subsequently, TMI submitted a Plant Performance Test Report
made by NPC on the test it conducted on PB 117 and PB 118 on
January 24 to 27, 2011. The said report is in compliance with the
Commission's directive to conduct a fuel heat rate testing.
The result of heat rate testing 10, which is also the proposed fuel
consumption rates in the application, showed that the consumption
rates for HFO and Lube Oil are 0.2358 liter/kWh and 0.0024
liter/kWh, respectively.
10
"Plant Performance Test Report of Therma Marine Mobile 1 and Therma Marine Mobile 2",
attached as Annex E of TMI's "Manifestation with Motion for Non-Disclosure of Confidential
Information" dated August 19, 2011

Page 23 of 28
Shown below is a comparison between the proposed and the

consumption rate test results:
Fuel
TMl's Proposal
(ii/kWh)
HFO
Lube Oil
0.22100
0.00313
Consumption
Rate Result
(ii/kWh)
0.2358
0.0024
Difference
(ii/kWh)
(0.01480)
0.00073
In the Decision approving the Original ESA, the Commission

adopted TMI's proposed fuel consumption rates, subject to the
condition that it shall be the actual or proposed, whichever is lower.
It bears stressing that in most recent ESAs of TMI and several
distribution utilities, the Commission ruled that the fuel rate shall be
pass-through cost based on fuel consumption rates of 0.2358
liter/kWh or actual, whichever is lower, for Heavy Fuel Oil (HFO{ and
0.0024 liter/kWh or actual, whichever is lower, for Lube Oil (LO) 1.
Further, considering that TMI's diesel power plants will be
dispatched for peaking load, the Commission compared the proposed
fuel heat rate with power plants involving the same technology and it
was disclosed that the said proposed fuel consumption rate is lower
than the previous approvals of other diesel plants. In this regard, the
Commission deems it prudent to adopt the proposed fuel heat rate,
subject to adjustment if the actual consumption rates are lower.
The Commission recognizes that the fuel cost utilized in
generating electricity may be passed-on to the customers, however,
the same should be within the efficiency levels set by it. Further, the
fuel cost shall be subject to adjustment to account for its
upward/downward changes as well as the transportation cost.
The Commission believes that the efficient fuel cost will be a
passed-on cost to the end-users and the power producer should not
make revenue from it.
11
Approved Fuel Consumption Rates in most recent cases of TMI, particularly,

with ZANECO, ZAMSURECO I, ZAMSURECO II, ZAMCELCO, MOELCI I,
MOELCI II, COTELCO, SUKELCO, BUSECO, and CAMEL~
,.

Page 24 of 28
Any inefficiency should not be passed on to the end-users but
should be absorbed by TM!. In case there is an increase in fuel
consumption due to fuel quality, deterioration of the equipment or
other reasons, it will be the responsibility of TMI to shoulder the cost
for the increase in fuel consumption and the additional cost of
improving efficiency.
On the other hand, if TMI saves on fuel consumption due to its
efficient operations and maintenance of the plant, then the savings in
fuel will be passed-on to SOCOTECO II's customers.
Further, considering that the fuel cost is a pass-on cost and
there is no long-term fuel supply contract for TMI, the Commission
believes that the fuel procurement process should be monitored with
the objective of obtaining the fuel supplier with the least cost possible.
E.
REPLACEMENT
POWER
As regards the replacement power, SOCOTECO

alleged that:
II and TMI
'TMI has the option but not the obligation to source

replacement or alternative supply from its own back-up
facility and/or any third party to supply all or part of the
contract energy."
It must be noted that in the event TMI fails to supply power to
SOCOTECO II beyond the allowed downtime, it should be incumbent
upon TMI to source replacement power for SOCOTECO II since the
failure to supply power is due to its fault, except in case of Force
Majeure.
Moreover, it is TMI's obligation under the Supplement
Agreement to supply power to SOCOTECO II for the entire duration
or term of the contract (less the allowed downtime per year).
The failure to supply power, beyond the allowed downtime due
to the fault of the supplier, is considered as an inefficiency of the
supplier. Thus, such supplier should bear the consequence of its
inefficiency by sourcing replacement power at its own expense. It
should not merely be an option on the part of the supplier but should
be an obligation since the supplier undertook to supply the contracted
energy of the distribution utility for the entire duration or term of t~

Page 25 of 28
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 Supplement to the ESA
entered into by and between SOCOTECO II and TMI will redound to
the benefit of SOCOTECO II's customers in terms of continuous,
reliable, efficient and affordable power supply as mandated by the
EPIRA [Section 2. Declaration of Policy - (b) "to ensure the quality,
reliability, security and affordability of the supply of electric power'].
WHEREFORE,
the foregoing
premises considered,
the
application filed by South Cotabato II Electric Cooperative, Inc.
(SOCOTECO II) and Therma Marine, Inc. (TMI) for the approval of
their Supplement to the Energy Supply Agreement (ESA), is hereby
APPROVED
with MODIFICATION,
subject to the following
conditions:
1.
The applicable rates shall be as follows:
YEAR
2014
2015
2016
RATES
(PhP/kW/month)
CAPACITY
FIXED O&M
FEE
205
211
314
305
314
286
PhP/kWh
ENERGY
FEE
0.14864
0.14864
0.14864
2.
The foregoing applicable generation rates shall be subject

to adjustments based on the formula provided in the
Supplement to the ESA;
3.
The Fuel and Lube Oil Rates shall be based on

consumption rates of 0.2358 lilkWh for HFO or actual,
whichever is lower, and 0.0024 Ii/kWh for LO or actual,
whichever is lower;

Page 26 of 28
4.
TMI shall have the obligation to source replacement

power to fulfill the contracted energy of SOCOTECO II
and shall shoulder any incremental cost in providing the
same. In the event that TMI fails to source replacement
power, SOCOTECO
II shall be allowed to find
replacement power, the incremental cost of which shall be
for the sole account of TMI; and
5.
SOCOTECO II is directed to include in the monthly

calculation of its generation rate in accordance with the
Automatic Generation Rate Adjustment (AGRA) Rules,
the indices used by TMI in the calculation of monthly
payment and the details of the fuel cost calculation,
including the relevant heat rates and actual consumption.
SO ORDERED.
Pasig City, October 20,2015.
==
..
_,~
JOSE VICENTE B. SALAZAR

Chairman
ALF~~ON
Commissioner
JOSEFINAP~A
(On Official Travel)

GLORIA VICTORIA C. YAP-TARUC
Commissioner
A. MAGPALE-ASIRIT
~commissioner
G RONIMO D. STA.ANA
I
Commissioner
ERe
Office of the Chafrman
1I~I!I!II'III"I~II~IIII~~
. l-2015-004-02045
"

Page 27 of 28
Copy Furnished:
1.
Atty. Virgilio P. Alconera

Counsel for SOCOTECO II
Room 203/2F, Arenas Building,
Pioneer Ave., General Santos City
2.
Atty. Jerwin James C. Lim

PUYAT JACINTO AND SANTOS
Counsel for TMI
th
5 and 1ih Floors, VGP Center (formerly the Manilabank
Building), 6772 Ayala Avenue, Makati City
3.
Atty. Katrina Platon

Counsel for TMI
16th Floor, NAC Tower,
32nd St., Bonifacio Global, Taguig City
4.
South Cotabato II Electric Cooperative, Inc. (SOCOTECO II)

J. Catolico Avenue, Lagao, General Santos City, South
Cotabato
5.
Office of the Solicitor General

134 Amorsolo Street, Legaspi Village
Makati City, Metro Manila
6.
Commission on Audit
Commonwealth Avenue
Quezon City, Metro Manila
7.
Senate Committee on Energy

GSIS Bldg. Roxas Blvd., Pasay City
Metro Manila
8.
House Committee on Energy

Batasan Hills, Quezon City, Metro Manila
9.
Office of the Provincial Governor

Province of South Cotabato
10.
Office of the City Mayor

General Santos, South Cotabato
11.
Office of the Municipal Mayor /;

Alabel, South Cotabato
hi
)<
"

Page 28 of 28
12.
Office of the Municipal Mayor

Glan, South Cotabato
13.

Malapatan, South Cotabato
14.

Malungon, South Cotabato
15.

Polomolok, South Cotabato
16.

Tupi, South Cotabato
17.

Kiamba, South Cotabato
I
18.

Maitum, South Cotabato
19.

Maasim, South Cotabato
20.
President
Philippine Chamber of Commerce and Industry (PCCI)
1030 Campus Avenue corner Park Avenue,
McKinley Town Center, Fort Bonifacio, Taguig Ci

Socoteco 2 Therma Marine Decision,+ERC+Case+No.+2014-081+RC

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Republic of the Philippines

ENERGY REGULATORY COMMISSION

Before the Commission for resolution is the application filed on

ERC CASE NO. 2014-081 RC

Polomolok, Tupi, Kiamba, Maitum and Maasim, all in the

The application seeks approval by the Commission of the

On November 24, 2010, SOCOTECO II entered into an

On March 1, 2013, SOCOTECO II executed with TMI an

ERC CASE NO. 2014-081 RC

On December 3,2013, SOCOTECO II executed with TMI

SALIENT PROVISIONS OF THE SUPPLEMENT AGREEMENT

Furthermore, the formula for FC in Item 2 (Contract

Actual insurance cost for the two barges for the

Hence, the formula for Contract Energy Fee per Month

ERC CASE NO. 2014-081 RC

FC = [CF + (FOM) (IFr)] BC + [(;:)(To:a~BC)]

= Contract Energy Fee in PhP

= Energy Fee (Before Adding the Applicable VAT) for the

= Fixed Charge per Month in Pesos

= Variable Charge per Month in Pesos

= Fixed O&M Fee in PhP/kW/month

= Inflation Factor for Fixed O&M Fee

Actual Insurance Cost for the Two Barges

for the Two Barges,

= Inflation Factor for Energy Fee

ERC CASE NO. 2014-081 RC

= Fuel Oil, Lube Oil and Related Fuel Rate in PhP/kWh

Sum of the Hourly Volumes of Contract Energy as

The Fixed Charge (FC) shall be proportionately adjusted if :

Finally, the base indices in Item 3 (Inflation Factor)

CPI of 126.4 as of June 2011

UCPlb = US CPI of 225.722 as of June 2011

Billing Capacity. In the event that TMI is required to

ERC CASE NO. 2014-081 RC

Considering that under the

Supplement Agreement, the

Purchased Power Rate, For 2013 to 2015, it shall be

Fuel and Lube Oil Rate

ERC CASE NO. 2014-081 RC

Load Curtailment Adjustment.

Replacement Power. TMI has the option but not the

The extension of the Contract Term under the

In support of the application and in compliance with Rule

Supplement to the ESA dated December 3, 2013

Amendment to the ESA dated March 1, 2013

ERC CASE NO. 2014-081 RC

ESA dated November 24, 2010 entered into with

Securities and Exchange Commission (SEC)

Articles of Incorporation of TMI (Annex "E" of the

General Information Sheet (GIS) of TMI (Annex "F"

Board of Investments (BOI) Certificate of

Environmental Compliance Certificate (ECC) issued

Sources of Funds/Financial Plans (Annex "I" of the

Fuel Procurement Process of TMI (Annex "K" of the

Transmission Service Agreement (TSA) it executed

Transmission Service Agreement (TSA) between

Certificate of Compliance (COC) issued to TMI

ERC CASE NO. 2014-081 RC

Certification from the PSALM of the insufficiency of

Relevant technical and economic characteristics of

Its Distribution Development Plan (DDP) (Annex "Q"

Cash Flow of TMI (Annex "R" of the Application);