Republic of the Philippines ENERGY REGULATORY COMMISSION San Miguel Avenue, Pasig City Posting wr. er.go.ph Dye IN| THE MATTER OF THE APPLICATION FOR APPROVAL OF THE ANNUAL, REVENUE REQUIREMENT AND THE PERFORMANCE INCENTIVE SCHEME IN ACCORDANCE WITH THE PROVISIONS OF THE RULES ON SETTING _ DISTRIBUTION WHEELING RATES (RDWR) ERC CASE NO. 2006-045 RC MANILA ELECTRIC COMPANY (MERALCO), Applicant. x DECISION DOCKETED Date: AVE. By: RECITAL OF FACTS ‘A. Filing of Application On September 1, 2006, Manila Electric Company (MERALCO) filed an application for approval of its annual revenue requirement and performance incentive scheme covering the Second Regulatory Period from July 1, 2007 to June 30, 2011 in accordance with the provisions of the Rules for Setting Distribution Wheeling Rates (RDWR). In the said application, MERALCO prayed for the approval of, among others, its proposed: a) Regulatory Asset Base (RAB); b) Capital Expenditure (CAPEX); c) Operating Expenditure (OPEX); d) taxes; and e) Weighted Average Cost of Capital (WACC). A determination of the saidERC Case No. 2006-045RC DECISION/August 30, 2007 Page 2 of 14 proposals shall lead to a price reset which would authorize MERALCO to charge revised/adjusted rates to its customers, In compliance with Section 4 (e), Rule 3 of the Implementing Rules and Regulations (IRR) of Republic Act No. 9136, MERALCO submitted together with the said application, proofs that it published the same in a newspaper of nationwide circulation in the country and that a copy thereof had been received by the Sangguniang Panlungsod of Pasig. Finding said application sufficient in form and substance, the Commission set the same for expository hearing on October 12, 2006 and evidentiary hearings on November 20 and 21, 2006. Said public hearings were so scheduled with the end view of reaching out to as many stakeholders including consumers, as would be affected by the resolution of the application B. Jurisdictional, Expository and Pre-Trial Hearings At the October 12, 2006 hearing, only MERALCO as represented by its counsel and Engr. Robert Malilin representing the Napocor Industrial Consumers Association, Inc. (NICAI) appeared. NICAI was provisionally admitted as an intervenor subject to its submission of its manifestation to intervene within five (5) days from said hearing. Engr. Maliilin committed to filing said manifestation the next day. Relative thereto, MERALCO moved for a declaration of general default against all other parties who failed to appear or file a manifestation to intervene as of that date, The Commission granted said motion considering that a considerable length of time from the publication of the application, as wellERC Case No. 2006-045RC DECISION/August 30, 2007 Pago 3 of 14 as of the Notice of Public Hearing for the same had lapsed, thus, affording any interested party sufficient time and opportunity to file the required manifestation to intervene. In the same hearing, applicant presented proofs of its compliance to the publication and posting of notice requirements as reflected in its “Compliance” submitted in open court. Thereafter, the Commission directed applicant to proceed with its exposition of the application. MERALCO, through its representatives Lawrence Femandez and Roderick Nocum presented an overview of the application, including major details on how the figures applied for were arrived at. After said presentation, NICAI, as well as the Commission propounded clarificatory questions to MERALCO. Finally, parties agreed to hold the pre-trial during the said hearing MERALCO having filed its “Pre-Trial Brief’ prior to the hearing and intervenor NICAI having been given time to examine the same, NICAI manifested that it has no objection to the facts proposed for admission, as well as the issues submitted for resolution by MERALCO for this case. C. — Evidentiary Hearings The evidentiary hearings for presentation of MERALCO's witnesses were held on November 20 and 21, 2008. For purposes of these hearings, the Commission, as early as the pre-trial have given specific directions to the parties of record on how said hearing should be conducted, as follows: a) the judicial affidavits of witnesses together with the documents to be testified on by them should be furnished theERC Case No. 2006-045RC DECISION/August 30, 2007 Page 4 of 14 intervenor, at least five (5) days bei. 1 e date of hearing, as they will constitute the direct examination of said witnesses; b) intervenor was directed to be prepared for cross-examinati an of the witnesses when they attend the hearing; c) evidentiary hearings should be devoted to identification and confirmation by the witnes ses of their affidavits on the stand and thereafter, cross-examination by the? intervenor of record; and d) the direct examination and cross-examinatio’ of the witness would be terminated in the same day that he is presented as such witness. During said evidentiary hearings, two parties registered their opposition, Mr. Genaro Lualhati and the National Association of Electricity Consumers for Reforms, inc. (NASECORE) represented by its president, Mr. Pete llagan. As such oppositor, the Commission explained to them the difference between being an oppositor and an intervenor of record as provided in the ERC Rules of Practice an Procedure. More specifically, the Commission informed said oppositors that cross- examination of applicant's witnesses and presentation ot -vidence against the application is a function of the intervenor of record and not the oppositor. An opposition is intended solely to alert the Commission and the parties to a proceeding of the fact and nature of the objcctions to or comments on an application and does not become evidence in the proceeding. The filing of an opposition or comment does not make the filer a party to the proceedings (Section 6, ERC Rules of Practice and Procedure).ERC Case No. 2006-045RC DECISION/August 30, 2007 Page 5 of 14 The following witnesses were presented by MERALCO to testify on the hereunder subject matters: November 20, 2006 Hearing WITNESS: SUBJECT MATTER Orlando N. del Rosario Liza Rose Serrano-Diangson Price Linked Incentive Scheme and | Guaranteed Service Level Scheme Forecasts on Energy Sales and Demand, Consumer Price Index and Foreign Exchange Rates Rolando M. Cagampan Forecasts on Capital Expenditures and Operating and Maintenance Expenditures Roselita G. Orlino Antonio R. Valera Rolled Forward Regulatory Asset Base, Forecasts on Disposals and Depreciation and Other taxes (other than income tax), Levies and Duties _ weighted average cost of capital (WACC) Ruben A. Sapitula November 21, 2007 Hearing Inclusion in the Regulatory Asset Base | of Corporate Wellness Center and | MERALCO Fitness Genter WITNESS Michael mmerton, Filipina L. Tuazon [_____ SUBJECT MATTER Valuation of Assets Valuation of Assets Ivana dela Pena Model Results, Annual Revenue Requirement, Corporate Income Tax Forecasts, Maximum Annual Price and Calculation of -~—- Demonstrative Unbundled Rates, Ruben A. Sapitula Inclusion in the Regulatory Asset Base of Corporate Wellness Center and MERALCO Fitness Center All of the abovementioned witnesses were lengthily cross-examined by intervenor NICA\ at the time they were presented as witnesses. Said witnesses were likewise required to address clarificatory questions as propounded by the Commission and its technical consultants.ERC Case No. 2006-045RC DECISION/August 30, 2007 Page 6 of 14 D. _ Issuance of the Draft Determination In the meantime, the RDWR and the Regulatory Reset Position Paper, require the Commission to issue a Draft Determination not later than February 16, 2007. However, the Commission issued the Draft Determination on May 16, 2007. Said Draft Determination embodied the Commission's preliminary position on the price control arrangements that are to apply to the Second Regulatory Period. It likewise described the Commission's initial evaluation of MERALCO's proposals in the instant application, as well as the evidence presented in support thereof during the public hearings to the date of its issuance. It is important to note that the Draft Determination (DD) is not a final decision, The DD provided an opportunity for interested parties to comment and discuss the Commission's initial evaluation during the public consultations and/or hearings to be held for that purpose and before the final determination is made. Moreover, the DD do not have any effect insofar as the final rates to be charged by MERALCO are concerned. For purposes of eliciting comments from stakeholders, on May 16, 2007, the Commission issued an Order setting the DD for public consultation on June 26, 2007 (Tuesday) at nine o'clock in the morning (9:00 A.M.) at the ERC Hearing Room, 15" Floor Pacific Center Building, San Miguel Avenue, Ortigas Center, Pasig City. In the same Order, the Commission directed MERALCO to post a copy of the Notice of Public Consultation and the DD in its main office, branch offices and at least three (3) conspicuous places within its franchises area. Finally,ERC Case No. 2006-045RC DECISION/August 30, 2007 Page 7 of 14 MERALCO was directed to undertake othe: possible means of disseminating information to the public relative to the DD. On even date, the DD was posted on the Commission's website and interested parties were given until June 15, 2007 to submit their written comments thereon. On various dates before the scheduled public consultation, MERALCO, NICAI and NASECORE submitted the:ir respective written comments to the DD. At the June 26, 2007 public consultation, the following appeared and actively participated in the dit cussion of all of the parties’ comments on the DD: Ms. Ivanna de la Pesta, Ms. Liza Rose Serrano-Diangson, Mr. Ruben SApitula, Ms. Angie Atan. cio, Atty. Ronald Valles, Mr. Rolando Cagampan, Mr. Gilbert Orino, Mr. Bemardo Imperial, Mr, Rommy Mendiola and Mr. Joseph Amosco for MERALCO, Mr. Raul Conception for Oil Price Watch, Engr. Robert Mallillin for NICAI, and Mr. Pete llagan and Atty. Manuel Chan for NASECORE. The Commission takes note of the written comments and verbal manifestation of the parties who have filed and participated during the publication consultation for the DD, and whatever relevant matters agreed upon during the said public consultation are thoroughly reflected in the subsequent discussionERC Case No. 2006-045RC DECISION/At Page 8 of 14 ugust 30, 2007 DISCUSSION ‘The detailed discussion of the Commission's resolution on each and every issue in this case is embodied in a separate document denominated as “Final Determination” hereto attached as Annex “A” and made an integral part of this Decision. WHEREFORE, the foregoing premises considered, the Commission hereby APPROVES Manila Electric Company's (MERALCO) application for an annual revenue requirement and performance incentive scheme, as follows: 1) ADOPTS a position where the regulatory reset Final Determination provides the decisions which relate to the provision of Regulated Distribution Services under the Rules for Distribution Wheeling Rates (RDWR) by MERALCO for the Second Regulatory Period; 2) DIRECTS MERALCO to separately account for the costs to provide Distribution Connection Services, as described in the Distribution Services Open Access Rules (DSOAR), but to include the recovery of these costs with the Regulated Distribution Services under the RODWR, until further instruction in this regard is received from the Commission; 3) APPROVES the Performance Incentive Scheme described in the attached Final Determination as follows: a. The Price linked incentive scheme, with the setting of the performance band levels set as follows: Penalty ‘Average [Performance index Units [Weight | Level € | Level | Level C inleupton frequency rate (FR) | No 030_| 2016] 1540 mulative iteruption Time (CIT) "| Houre | 0.20 | 1289] 9.56 forced only Cumulative nteruption Tine (CIt)= | Hows | 045] 832] 679 | preananged only sist | seesie| test : Probably of voltage fevels fang | % 070 om | 5% within prescribed limits ‘System losses. % 005 NN 5277 0.10 ag time to cones ‘Average time fo process application | Days {for Regulated Distribution Services the Regulated Distribution System ct premises to | Days | 0.10 7 Call center performance a0 [same [355% 266% | 823%ERC Case No. 2006-045RC DECISION/August 30, 2007 Page 9 of 11 b. The Guaranteed Service Level Scheme, with the setting of the relevant penalty levels set as follows: Performance Measure Weighting | Threshold | Pay-out level | a _ (Phe) ‘GSLT- Customer experiencing a cumulative duration | 37.0% 36 hours 420.00 of sustained service interruptions in @ Regulatory Year that exceeds the threshold é GSL2: Customer experiencing a total number of 35% 2 times 720.00 sustained service interruptions in a Regulatory Year that exceeds the threshold i a GSL3. Restoration of supply to a customer after a B2% TShours 420.00 fault on the secondary distribution network taking longer than the threshold time L Performance Measure Weighting | Threshold | Pay-out | Maximum | level per | pay-out : : i day(PhP) | (PhP) _| ‘GSL4 = Customer Gonnection not provided [11.3% | More than 1 | 47.00 235.00 con the day agreed with the customer day late satel | acta 4) ADOPTS the following values as the Annual Revenue Requirement (ARR) for MERALCO under section 4.7.7 of the RDWR for the Second Regulatory Period (all in nominal terms): [Regulatory Year — a fr [ree zDD see eae ‘Return on capital (PAP milion) 43,583 13,955 ‘Opex (PRP milion) a 1 11,78 Regulatory depreciation (PHP milion) 5.200 5.548 ‘Corporate income tax (PAP milion) 3343 | ___ 3,980 Levies, duties & other taxes (PhP million) 297 | 272 ‘Subtotal 33,694 35,444 GSI allowance (PAP rnin) “168. 77 TOTAL (PHP million) 33,852 35,622 5) ADOPTS the following values as the Smoothed Maximum Annual Price (SMAP) for MERALCO under section 4.15.4 of the RDWR for the Second Regulatory Period (all in nominal terms): [Regutatory Year 2008 2008 2010 2041 'SMAP forecast (PAPTAWh) tier | 1260 [1367 | Aart 6) APPROVES the following values and settings for the values of those parameters defined in the RDWR which are the primary ‘outcomes for the regulatory reset under the RDWR: a b. Po value equal to zero; and Minus 4.62% as the X factor for the MAP equation under section 4.2.1 of the RDWR, which implies a 4.62% real increase in the price cap for each year of the Second Regulatory PeriodERC Case No. 2006-045RC DECISION/August 30, 2007 Page 10 of 14 7) APPROVES the values and settings for the values of those parameters defined in the RDWR, on which the determination of the above ARR, SMAP and X-factor was based, as described in the attached Final Determination; 8) DIRECTS MERALCO to convert its maximum average price (MAP) set in terms of this Final Determination into a distribution rate structure to be filed with the Commission by October 15, 2007 SO ORDERED. Pasig City, August 30, 2007. (On Leave) RODOLFO B. ALBANO, JR. Chairman Peufe (On Leave) RAUF A. TAN ALEJANDRO Z. BARIN Commissioner Commissioner E Cc, REYES Com Cémmissioner 1 nmrERC Case No. 2006-045RC DECISION/August 30, 2007 Page 11 of 14 Copy furnished: 4. ATTYS. RAUL CORALDE & RONALD VALLES 8™ Floor, Lopez Bldg., MERALCO Compound Ortigas Avenue, Pasig City 2. THE OFFICE OF THE SOLICITOR GENERAL 234 Amorsolo St., Legaspi Village Makati City 3. THE COMMISSION ON AUDIT Don Mariano Marcos Avenue Diliman, Quezon City 4. THE COMMITTEE ON ENERGY Senate of the Philippines GSIS Building, Roxas Bivd., Pasay City 5. THE COMMITTEE ON ENERGY House of Representatives Batasan Hills, Quezon City 6. ENGR. ROBERT MALLILLIN Napocor Industrial Consumers Assoc. Inc. (NICAI) ‘San Miguel Energy Corporation GIF SMC Building 40 San Miguel Avenue, Mandaluyong City 7. NATIONAL ASSOCIATION OF ELECTRICITY CONSUMERS FOR REFORMS (NASECORE) No. 10, 680 Quirino Ave., Bayside Court Compound 1700 Tambo, Paranaque City