1. ERC’s Role in the Regulation of the Power Generation Rates ERC’s Role in the Regulation of the Power Generation Rates S.B.Allam National Economic and Development Authority (NEDA) Regional Development Committee-Mindanao 04 August 2011 Top Plaza Hotel, Dipolog C ity 1

2. Section 6, Rule 5 of the IRR of the EPIRA (a) Within ninety (90) days from the effectivity of these Rules, the ERC shall issue guidelines for the regulation of power sales by Generation Companies applicable prior to the implementation of Retail Competition and Open Access or establishment of WESM, whichever comes first. ERC’s Role in the Regulation of the Power Generation Rates ERC’s MANDATE 2

3. The retail rates charged by distribution utilities for the supply of electricity in their captive market shall be subject to regulation by the ERC based on the principle of full recovery of prudent and reasonable economic costs incurred, or such other principles that will promote effeciency as may be determined by the ERC. ERC’s Role in the Regulation of the Power Generation Rates Section 25, Chapter 2 of the Republic Act No. 9136 or the Electric Power Industry Reform Act of 2001 (EPIRA) 3 ERC’s MANDATE

4. Section 4(e), Rule 5 of the IRR of the EPIRA Prior to the implementation of Open Access and Retail Competition, the prices charged by a Generation Company for the Supply of Electricity shall be subject to ERC regulation on the Retail Rates charged by Distribution Utilities and transition supply contracts (TSCs) as specified in Section 67 of the Act. ERC’s Role in the Regulation of the Power Generation Rates ERC’s MANDATE 4

5. Regulated Generation Cost 5 Division in- charge of approval PSATWG-PSA Feed-In-Tariff (FIT)TWG-RE Ancillary Services (ASPA)TRD

6. Section 45(b) of the EPIRA Dus may enter into bilateral power supply contracts subject to review by the ERC. For the purpose of preventing market power abuse between associated firms engage in generation and distribution, no DU shall be allowed to source from bilateral power supply contracts more that 50% of its total demand from an associated firm engaged in generation, but such limitation, however, shall not prejudice contracts entered into prior to the effectivity of this act. ERC’s Role in the Regulation of the Power Generation Rates Other Provisions 6

7. Section 45 of the EPIRA No company or related group can own, operate or control more than 30% of the installed generating capacity of a grid and/or 25% of the national installed generating capacity. ERC’s Role in the Regulation of the Power Generation Rates Other Provisions 7

8. Unbundled ChargesRate ( PhP/kWh) Amount Generation 4.3885658.28 Transmission 0.9163137.45 System Loss 0.7305109.58 Distribution Supply Metering 0.5729 0.5271 0.2435 5.00 PhP/Cu/mo 85.94 79.07 36.53 5.00 Subsidies Lifeline Inter-class 0.1323 19.85 Government Taxes VAT GENERATION VAT TRANSMISSION DIST, SUPP, METER SYSTEM LOSS Local Franchise Tax 10.44 % 10.69 % 12.00 % 10.49 % 0.50% 68.72 14.69 27.17 11.49 5.66 Universal Charge Missionary Electrification Environmental Charge NPC Stranded Debt & Cost DU Stranded Cost Equalization of Taxes & Royalties Cross-subsidy 0.373 0.0025 0 5.60 0.38 0 TOTAL AMOUNT 1,265.41 Total Amount (less tax) 1,137.68 Distribution Utility’s Retail Rate ERC’s Role in the Regulation of the Power Generation Rates8

9. RATE STRUCTURE Cost Component Capacity Fee/Capital Recovery Fee Fixed Cost Operations & Maintenance Fee/Service Fee Fixed O & M Variable O & M Variable Cost Fuel Recovery Fee/Energy Fee 9

10. ERC’s Role in the Regulation of the Power Generation Rates Sample RATE STRUCTURE 10 Rate Component Commercial Operation (at 100% Load Factor) Capital Recovery FeePhP2.5853/kWh Peso O&M Fee 1 PhP0.3811/kWh Dollar O&M Fee 2 US$0.0082/kWh Fuel Cost 3 Pass-through cost 1.Subject to Philippine CPI adjustment with May 2009 base index of 158.8 except for the component in the local taxes pertaining to ER 1-94 2.Subject to US CPI adjustment with May 2009 base index of 213.856. Reference exchange rate in PhP/US$ is on the meter reading date, as published by the Bangko Sentral ng Pilipinas (BSP) 3.To be computed based on a consumption rate of 0.70kg/kWh escalated at a rate of 1.5% per year or actual, whichever is lower. The average fuel cost of PEDC based on its latest purchases is PhP2.3648/kWh

11. ERC’s Role in the Regulation of the Power Generation Rates Computation of Generation Cost 11  Asset Base Methodology  Benchmarking A. Capital Recovery Fee (CRF): - computed using annuity method [A/P,i,n] - fixed i= WACC (11%-15%) n=Cooperation Period/Economic Life P=Total Project Cost ÷Billing Determinant, kWh = Capital Recovery Fee, PhP/kWh WACC = [ (Debt / (Debt + Equity)) * Cost of Debt] + [(Equity / (Debt + Equity)) * Cost of Equity]

12. ERC’s Role in the Regulation of the Power Generation Rates Computation of Generation Cost 12 Other Methodology  discounted cash flow DCF (NREB)  Market Base  LRAC (EC Consortiums)  12% RORB (QTP)  Based on Avoided Cost of thermal plants (RE) Based on Avoided Cost of thermal plants (RE) Other Financing Method:  Free Cash Flow (FCF)  Dividend Discount Model (DDM)

13. Internalizing the External Cost RE Generation Cost (cost-based) - EU Avoided Costs / External Costs (value-based) – US, ADB

14. ERC’s Role in the Regulation of the Power Generation Rates Computation of Generation Cost 14 Energy Billing Determinant = Net Capacity x Capacity Factor x Hrs per year x Load Factor Where: Net Capacity= Rated Cap.- Auxiliary Load 21.76MW – 1.6MW 20.16 MW Capacity Factor= (less downtime and fuel availability) 85% Hours per year= 365 Days X 24 Hrs/Day 8760 Hours Load Factor=100% Billing Determinant= 150,111,360 kWh Billing Determinant Computation:

15. ERC’s Role in the Regulation of the Power Generation Rates Computation of Generation Cost B. O&M COST: PhPBased: Indexed to PH CPI Fixed Variable USDBased: Indexed to US CPI Variable 15

16. ERC’s Role in the Regulation of the Power Generation Rates Computation of Generation Cost C. FUEL COST:  Conventional: Pass through cost Diesel – Mean Of Platts Singapore (MOPS) Coal – New Castle Index  Renewables: Geothermal : Index to CPI New Castle Index Biomass : Index to CPI 16

17. ERC’s Role in the Regulation of the Power Generation Rates Recent ERC Base Tariff Approvals PhP/kWh Coal : 6.0697 Diesel : 9.00 Mini-Hydro (run-of river): 3.00 Hydro: Ave. TOU = 4.2500 (PA) Biomass Bagasse Cogeneration: 2.8978 Biomass Rice-Husk: 4.0199 Geothermal: 4.85 (PA) 17

18. Technology Proposed by RE Developers NREB Approved June 2010 Oct. 2010 Nov. 2010 April 2011 Degression Rates Biomass 1/ 9.8411.489.94 8.22 7.000.5% after 2nd year Run-of-River Hydro 2/ 7.807.447.40 6.56 6.150.5% after 2nd year Solar 3/ 22.6423.8120.55 19.11 17.956% after 1st year Wind 11.2311.9211.85 11.29 10.370.5% after 2nd year Ocean 18.52 17.65None 1/ For a solid biomass project 2/ For a project with capacity between 1MW and 10MW 3/ For a ground-mounted project with more than 500kW capacity 18 NREB Proposed FIT

19. ERC’s Role in the Regulation of the Power Generation Rates APPROVAL a)Provisional Approval/Authority b)Final Approval/Authority 19

20. ISSUES/PROBLEMS ENCOUNTERED IN EVALUATION OF THE PSAs Gap in the understanding of the contract between the DU and the Generating Company 20 ERC’s Role in the Regulation of the Power Generation Rates

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22. FIT Rules  For emerging renewable energy resources Wind Solar Ocean Run-of-river Hydro Biomass  Per Technology  Fixed (sect 2.3…premium)  Time of Use  20 years  Annual Adjustment  Subject to Degression

23. NGCP FIT-ALL FIT Framework