1

Republic of the Philippines

ENERGY REGULATORY COMMISSION
San Miguel Avenue, Pasig City


RULES GOVERNING THE EXECUTION, REVIEW, AND EVALUATION
OF POWER SUPPLY AGREEMENTS ENTERED INTO BY
DISTRIBUTION UTILITIES FOR THE SUPPLY OF
ELECTRICITY TO THEIR CAPTIVE MARKET

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


ARTICLE I

OBJECTIVES

These Rules seek:

(a) To enforce the Distribution Utilities (DUs) obligation to enter
into bilateral supply contracts for the supply of electricity to their captive
market.

(b) To establish and prescribe procedures, standards and
methodologies for the review of power supply agreements executed by
the DUs for the supply of electricity to their captive market.

(c) To provide guidance to the DUs and generation companies on
the ERC requirements regarding its review of power supply agreements
and expedite the review and approval process.

(d) To ensure transparent and reasonable prices of electricity for
the DUs captive market in terms of the generation component of their
retail rates.





2

ARTICLE II

DEFINITION OF TERMS


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

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

(b) Captive Market shall refer to electricity end-users who do
not have the choice of a supplier of electricity, as may be determined by
the ERC in accordance with the Act.

(c) Certificate of Compliance (COC) shall refer to the
document issued by the ERC to a Generation Company pursuant to the
Act, the Implementing Rules and Regulations (IRR) of the Act and the
applicable ERC Guidelines.

(d) Competitive Selection Process shall refer to the process
wherein a Generation Company is selected through transparent and
competitive bidding undertaken by the DU to secure supply of electricity
at the least cost.

(e) Distribution Utility shall refer to any electric cooperative,
private corporation, government-owned utility or existing local
government unit which has an exclusive franchise to operate a
distribution system in accordance with its franchise and the Act.

(f) Energy Regulatory Commission or ERC shall refer to
the regulatory agency created under Section 38 of the Act.

(g) Generation Company shall refer to any person or entity
authorized by the ERC to operate facilities used in the generation of
electricity.

(h) Power Supply Agreement shall refer to the agreement,
regardless of nomenclature, between a DU and a Generation Company
or Wholesale Aggregator for the supply of capacity and/or energy
intended for the DUs captive market.

3
ARTICLE III

REQUIREMENT OF COMPETITIVE SELECTION PROCESS

A DU shall undertake a transparent and competitive selection process
before contracting for the supply of electricity to its captive market. At a
minimum, the terms of reference to be used by the DU shall include the
following:

a. Required/Contracted Capacity and/or Energy Volumes.
b. Generation sources (Hydro, Coal, Natural Gas, Diesel and
others).
c. Method of procurement for fuel, if applicable.
d. Cooperation/Contract Period.
e. Fee Structure unbundled to Capacity Fees, Variable and Fixed
Operating and Maintenance (O&M) Fee, Fuel Fee and others,
including the derivation of each component.
f. Base Fee adjustment formula, if any.
g. Form of Payment (Pesos or Foreign Currency Denominated).
h. Penalties (if applicable).
i. If applicable, details regarding any transmission projects or Grid
connection projects necessary to complement the proposed
generation capacity, including identification of the parties what
will develop and/or own such facilities, any costs related to such
projects and specification of the parties responsible for recovery
of any cost related to such projects.
j. Other key parameters.



ARTICLE IV

REQUIREMENTS AND REVIEW PROCEDURES


Section 1. Filing of the PSA Following the execution of the PSA, the
parties thereto shall file with the ERC, within thirty (30) days therefrom, a
joint application for its approval of said PSA and for the determination of
the reasonable generation costs that the DU can recover from its captive
market as part of its retail rate.

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

4

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

Section 2. Pricing Structure. Until different pricing method for PSAs
shall have been approved, the PSAs shall incorporate a two-part pricing
method used in capacity transactions consisting of a capacity charge
and an energy charge based on the cost of generation to be supplied
plus a reasonable return thereon.

The ERC shall determine the reasonable generation cost under the said
PSA, taking into account the following fees, if applicable:

Capital Recovery Fee (CRF) - a capital-related component to
recover the cost of investment over the economic life of the plant
together with a reasonable rate of return.

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

1. Fixed O&M an element to recover fixed operating and
maintenance (O&M) costs. This cost is determined by the
capacity of the plant, not the level of utilization.

2. Variable O&M - an element to recover variable O&M costs and
which varies with the amount of electricity generated.

Fuel Fee - a component to recover fuel costs.





5
In support of the proposed pricing under the PSA, the following shall be
required:

a. Executive Summary.

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

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

d. Cash Flow specifying the following:
1. Initial Costs.
2. Breakdown of Operating and Maintenance expenses.
3. Minimum Energy Off-take (MEOT), if applicable

e. All details on the procurement process of fuel, including
requests, proposals received, tender offers, etc.

f. All costs analysis related to the generation in support of the
proposed pricing provisions of the contract.

g. Sworn Statement detailing how the fuel was competitively
procured, contract terms and unbundled price components
(product cost, transshipment, delivery, container, etc.), if
applicable.



6
Section 3. Other Documentary Requirements In addition to the
requirements under Section 2 hereof, the following supporting
documents/information are required to be attached to the application or
petition to be filed by Applicants:

a. Applications Involving New Generation Facilities

1. General Information

(i) Articles of Incorporation/Partnership (for
Corporation/Partnership) of Generation Company with
Securities and Exchange Commission (SEC)
Certificate of Registration;
(ii) Latest General Information Sheet (GIS) of the
Generation Company (SEC Form); and
(iii) Board of Investment (BOI) Certificate of Registration, if
applicable.

2. Financial Information

(i) Latest and Complete Set of Audited Financial
Statements of the Generation Company (Balance
Sheet, Income Statement, and Statement of Cash
Flows), including the audit opinion, the statement of
managements responsibility on the financial
statements, if available;
(ii) Bank Certification of Long-term Loans, to include the
following information: Amortization Schedule of Loan
Payments (Principal and Interest), interest rates and
credit terms (period and applicable penalties); and
(iii) Other documents showing proof of its entitlement to
any tax incentives and exemptions.

3. Technical Information

(i) Certificate of Compliance (COC) issued by the Energy
Regulatory Commission (ERC), if available;
(ii) Technical characteristics of the Generation
Companys Power Plant, to include: Type of
Technology, Installed Capacity and, Dependable
Capacity, Capacity Factor, and Mode of Operation
(Base load, Peaking, Intermediate-Peaking);

7
(iii) Certification (from the engine manufacturer or IPP) of
the net heat rate (initial and every after major
maintenance schedule) in liters per kWh, if
applicable;
(iv) If applicable, details regarding any transmission
projects or Grid connection projects necessary to
complement, the proposed generation capacity
including identification of the parties what will develop
and/or own such facilities, any costs related to such
projects and specification of the parties responsible
for recovery of any cost related to such projects;
(v) Certification that states the consistencies and
inconsistencies between the proposed generation
capacity and the Department of Energys (DOE)
Philippine Development Plan (PDP). Any
inconsistencies shall be supported by relevant
analysis including but not limited to, forecasts and
assessment of available generation capacity and
technology mix; and
(vi) Details regarding the load forecast projections in
accordance with the latest Distribution Development
Plan of the Distribution Utility and the variability of
those projections over the proposed contractual
period. An estimation of the potential for a reduction
in load supplied by the Distribution Utility due to retail
competition. Any inconsistencies shall be supported
by relevant analysis mix.



b. Applications Involving Existing Generation Facilities

1. General Information

(i) Articles of Incorporation/Partnership (for
Corporation/Partnership) of Generation Company with
Securities and Exchange Commission (SEC)
Certificate of Registration;
(ii) Latest General Information Sheet (GIS) of the
Generation Company (SEC Form); and
(iii) Board of Investment (BOI) Certificate of Registration, if
applicable.


8

2. Financial Information

(i) Complete Set of Audited Financial Statements of the
Generation Company for the 2 most recent 12-month
periods (Balance Sheet, Income Statement, and
Statement of Cash Flows), including the audit opinion,
the statement of managements responsibility on the
financial statements;
(ii) Bank Certification of Long-term Loans, to include the
following information: Schedule of Original Loans as
well as its updated balances (Principal and Interest
payments), interest rates and credit terms (period and
applicable penalties); and
(iii) Other documents showing proof of its entitlement to
any tax incentives and exemptions.

3. Technical Information

(i) Certificate of Compliance (COC) issued by the Energy
Regulatory Commission (ERC);
(ii) Technical characteristics of the Generation Companys
Power Plant, to include: Type of Technology, Installed
Capacity and, Dependable Capacity, Capacity Factor,
and Mode of Operation (Base load, Peaking,
Intermediate-Peaking);
(iii) Certification (from the engine manufacturer or IPP) of
the net heat rate (initial and every after major
maintenance schedule) in liters per kWh, or copy of
the latest heat rate test result, if applicable;
(iv) Details regarding the load forecast projections in
accordance with the latest Distribution Development
Plan of the Distribution Utility and the variability of
those projections over the proposed contractual
period. An estimation of the potential for a reduction in
load supplied by the Distribution Utility due to retail
competition. Any inconsistencies shall be supported
by relevant analysis mix.






9
Section 4. Procedural Requirements Prior to the filing with the ERC
of the application referred to in the preceding section, the parties shall
comply with Section 4 (e), Rule 3 of the IRR of the Act and Rule 6 of the
ERC Rules of Practice and Procedure. Any application that fails to
comply with the above requirements shall not be accepted. The
application shall be treated as a rate case and the procedure applicable
to rate cases shall be observed.

Section 5. ERC Action on the Application Any PSA submitted to
the ERC shall be reviewed and approved as to its reasonableness in
terms of costs, risk allocation, and other contractual terms.

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

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


ARTICLE V

FINAL PROVISIONS

Section 1. Transitory Clause All pending PSA applications with the
ERC shall not be affected by any new requirement imposed under these
Rules, except that for the ERCs action on these applications, Section 4,
Article IV hereof shall govern.

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

Section 3. Separability Clause If for any reason, any part or section
of these Rules is declared unconstitutional or invalid, the other parts or
sections hereof which are not affected thereby shall continue to be in full
force and effect.


10
Section 4. Repealing Clause The pertinent provisions of the
Guidelines for the Recovery of Costs for the Generation Component of
the Distribution Utilities Rates and such other ERC rules or guidelines
inconsistent herewith are hereby repealed or modified accordingly.

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


Pasig City, _________________ 2013.



ZENAIDA G. CRUZ - DUCUT
Chairperson








MARIA TERESA A. R. CASTAEDA
Commissioner

JOSE C. REYES
Commissioner



ALFREDO J. NON
Commissioner
GLORIA VICTORIA C. YAP-TARUC
Commissioner