Petitioner,

-versus-

MANILA ELECTRICCOMPANY (MERALCO),

Respondent.)(---------------------------------------)(

ERC CASE NO. 2016-002 DR

NOTICE OF PUBLIC HEARING

TO ALL INTERESTED PARTIES:

Notice is hereby given that on 10 May 2016, PetitionerMillennium Energy Inc. (MEl) filed a "Petition for Dispute Resolutionwith Application for Interim Relief' dated 6 May 2016 qgainst theManila Electric Company (MERALCO) to seek relief from thepayment of distribution wheeling charges pursuant to theirDistribution Wheeling Service Agreement which was effective from 15March 2015 to 25 March 2016 on the following grounds:

1. that MEl suffered serious financial losses in in therehabilitation and operation of the Navotas Gas TurbinePower Plant (NGTPP); and

2. that the total amount of distribution charges paid toMERALCO by MEl already exceeds the cost of theinterconnection facilities that were installed by MERALCO inorder for MEl to have access to the former's distributionsystem.

In support of MEl's position, the following were alleged:

ERC CASE NO. 2016-002 DRNOTICE OF PUBLIC HEARINGf26 May 2016Page20f20

I.PARTIES

1.01. Millennium Energy Inc. ("MEl", for brevity) is acorporation duly organized and existing under the laws of thePhilippines with principal office address at 3204-B, EastTower, Philippine Stock Exchange Center, Exchange Road,Ortigas Center, Pasig City.

1.02. Manila Electric Company ("MERALCO", for brevity) is acorporation duly organized and existing under the laws of thePhilippines with principal office address at Lopez Building,Ortigas Avenue, Pasig City.

II.

STATEMENT OF THE FACTS AND OF THE CASE

2.01. On 3 February 2011, MEl acquired from the NavotasCity the Navotas Gas Turbine Power Plant ("NGTPP")l whichis composed of the non-operationa11xlOo MW Gas Turbine("GT") unit and 3X70 MW GTs. The GTs, which werepreviously called as Navotas I and II respectively, are nowknown after the mentioned acquisition as the Millennium GasTurbine Power Plant ("MGTPP").

2.02. Prior to MEl's acquisition of the MGTPP and while thesame was still being managed and operated by the NationalPower Corporation ("NPC"), the NGTPP was previouslyconnected to the Malabon and Grace Park 115kv sub-transmission/distribution lines of MERALCO and that itsgeneration output was dedicated and/or directly delivered toMERALCO through the latter's previously Bilateral ContractQuantity ("BCQ") with NPC.

2.03. In the year 2014, despite the huge amount of fundsnecessary to rehabilitate and to make the MGTPP operational,MEl responded to the Department of Energy's ('DOE") call foradditional capacity in anticipation of the power shortage forthe year 2015, by pursuing the activities required for therehabilitation ofthe MGTPP or Navotas plant.

2.04. In relation to MEl's response to the DOE's call, on 3September 2014, a Distribution Impact Study ("DIS") wasundertaken by MERALCO, as per request of MEl incompliance with the requirements for the rehabilitation, re-commissioning, and re-connection of the MGTPP to theMalabon and Grace Park 115kV sub-transmissionline/distribution lines ofMERALCO.

, Formerly known as "HOPEWELL Power Plant".

ERC CASE NO. 2016-002 DRNOTICE OF PUBLIC HEARING/26 May 2016Page 3 of 20

2.05. Thereafter, on 11September 2014, MEl wrote a letter tothe DOE, formalizing its intention, as signified in the previousmeeting to help the DOE with regard to the Emergency PowerSituation in Luzon, by rehabilitating and commissioning its1X100 MW GT MGTPP-Navotas Power Plant. A copy of thesaid letter is hereto attached and made an integral parthereof asAnnex "A".

2.06. On 24 November 2014, a Distribution Asset Study(DAS) was undertaken by MERALCO in compliance with therequirements for the rehabilitation, re-commissioning and re-connection of the power plant to the Malabon anq Grace Park115kV sub-transmission line/distribution lines of MERALCO.This has been pursued by MERALCO after it has released theDAS it has conducted for MEL

2.07. Under the DAS, MERALCO will incur an estimatedTwenty Six Million Six Hundred Thirty ThreeThousand Three Hundred Fourteen and 9/100 Pesos(P26,633,314.09) to provide all the interconnectionfacilities it needs with respect to the MGTPP (for brevity to bereferred herein as "26M Interconnection Cost"). A copy of thepertinent portion of the DAS is hereto attached and made anintegral part hereof asAnnex "B".

2.08. On 29 December 2014, a Memorandum of Agreement("MOA") was executed between the DOE & the MEl, regardingthe "establishment of trust accounts for accrued financialbenefits from the commercial operations of the 1 x 100 MWGT Power Plant". A copy of the MOA is hereto attached andmade an integral part hereof asAnnex "C".

2.09. On 22 January 2015, the DOE issued a Certificate ofEndorsement No. 2015-01-004 in favor of MEl, consistentwith the DOE Power Development Plan ('PDP") as per EPlRA(the "Electric Power Industry Reform Act"). A copy of the saidcertificate is hereto attached and made an integral parthereof asAnnex "D".

2.10. On 30 March 2015, the MGTPP through its Operationsand Management ("O&M") provider completed the series ofpre and post - Synchronization tests as required by thePhilippine Grid Committee ("PGC"). The reports of said testswere submitted to NGCP for the MGTPP's accreditation andcertification.

2.11. On 11 May 2015, the Energy Regulatory Commission(ERC) issued to MEl a Certificate of Compliance No. 15-05-M-ooolOL for its Navotas I GT with a rated capacity of 100 MWand dependable capacity of 85MW. A copy of the said

ERC CASE NO. 2016-002 DRNOTICE OF PUBLIC HEARING/26 May 2016Page 4 of 20

Certificate of Compliance is hereto attached and made anintegral part hereof asAnnex "E".

2.12. On May 12, 2015, NGCP recognized and certifiedMGTPP as a "Fast Start Capable" unit after it has successfullysynchronized to the grid in less than fifteen (15) minutes. Acopy of the said certification is hereto attached and made anintegral part hereof asAnnex "F".

2.13. On 29 July 2015, MERALCO and MEl entered into anInterconnection Agreement ("IA") pursuant to the DAS thatwas undertaken by MERALCO which contains the distributionassets and costs necessary to accommodate the connection ofthe MGTPP and the Navotas switchyard to MERALCO'sdistribution system. It was agreed upon that the IA will beeffective retroactively on 15 March 2015. A copy of theInterconnection Agreement is hereto attached and made anintegral part hereof asAnnex "G".

2.14. Thereafter, on 26 August 2015, MEl and MERALCOentered into a Distribution Wheeling Services Agreement("DWSA"). As stipulated in the DWSA the same will beeffective from 15March 2015 to 25 March 2016. A copy of theDWSA is hereto attached and made an integral part hereof asAnnex "H".

2.15. Since the effectivity of the DWSA on 15 March 2015,MEl has been paying MERALCO Distribution WheelingCharges ranging from Twelve Million Pesos (P12,000,000) toFifteen Million Pesos (P15,000,000), which is computed basedon the minimum billing demand or the actual highest demandregistration within a billing month, whichever is higher.

2.15.1. MEl also deposited with MERALCO a BillDeposit in the amount of P5,821,365.00, a copyof which is hereto attached asAnnex "I".

2.16. As of 30 November 2015, MEl had already paid thetotal amount of Ninety Two Million One Hundred SixThousand Fifty Three Pesos and 34/100(P92,106,053.34) VAT inclusive by way of DistributionWheeling Charges as billed by MERALCO pursuant to theDWSA. Copies of MEl's MERALCO billings from 15 March2015 to October 2015 and the corresponding receipts ofpayment are hereto attached and made integral parts hereofas Annexes "J" and "J-1", "K" and "K-1", "L" and "L-1", "M" and "M-1", "N", "0" and "0-1"; "P" and "P-1","Q" and "Q-1".

ERC CASE NO. 2016-002 DRNOTICE OF PUBLIC HEARING/26 May 2016Pages Of20

2.17. This is in addition to the substantial costs in the totalamount of Forty Nine Million Three Hundred fifty FiveThousand Thirty One Pesos and 50/100(P49,355,031.50) that MEl had shouldered and advanced,in order to expedite the interconnection activities such asconstructioJ;l of the pedestal, foundation, metering facilities,telecommunication and tele - protection, Supervisory Controland Data Acquisition / Remote Terminal Unit [SCADA/RTU"]equipment, among others.2 Copies of the receipts for thesecosts are hereto collectively attached and made integral partshereof asAnnex "R".

2.18. Subsequently, through a letter dated 11December 2015,a copy of which is hereto attached and made an integral parthereof as Annex "8", MEl formally asked MERALCO for thediscontinuance of its Distribution Wheeling Charges paymentsciting the following reasons:

a. MERALCO has already recouped more thanjtsP26 Million Interconnection Costs as early as30 November 2015 or the time MEl hasalready paid the amount of P92,106,053.34 byway of Distribution Wheeling Charges;

b. The continued payment of DistributionWheeling Charges will result to higherelectricity cost that will impose additionalburden to the consumer public who will bemade to shoulder such cost.

2.19. MEl discussed the same matters with MERALCO duringa meeting for that purpose on 21 December 2015 and addedthat --

a. Due to MEl's very tight and precarious currentfinancial condition, it can no longer continuepaying the Distribution Wheeling Charges for themonth of November 2015 which was due on 11December 2015, a copy ofMERALCO's Novemberbilling statement to MEl is hereto attached andmade an integral part hereof as Annex "T".Neither can it sustain the payment thereoffor theremainder of the contract period until itsexpiration on March 25, 2016. This is by reasonof the fact that the MGTPP was barely called togenerate electricity during the nine (9) months ofits initial operations or from March 2015 toDecember 2015.

2 Please see Annex "B".

ERC CASE NO. 2016-002 DRNOTICE OF PUBLIC HEARING/26 May 2016Page 6 Of20

b. The chances of ruiming in the coming monthsuntil the DWSA expiration on March 25, 2016 isalmost, if not, totally nil, as the incrementaldemand for electricity as foreseen by the DOE inthe latter part of 2014, was adequately and timelymatched by the corresponding increase in thesupply of electricity mostly coming fromrenewable energy and baseload plants.

2.20. In its letter dated 22 December 2015, a copy of which ishereto attached and made an integral part hereof as Annex"U", MERALCO made a counter - proposal to MEl's requestfor the waiver of the Distribution Wheeling Charges relayed asfollows:

a. Re-billing of the November 2015 bill, with themodification on the computation of demandcharges to supersede the previously issued bill,from P9,078,71O.36 to P3,399,735.82, which is areduction by 62.5%.

b. For future bills from December 2015 to February2016 (end of contract), the billing demand shallbe computed based on the average weekly actualpeak demand or Guaranteed Minimum BillingDemand ("GMBD"), whichever is higher.

2.21. In its letter dated 12 January 2016, MEl replied that itcould really no longer continuously pay the DistributionWheeling Charges for export power based on the reasons ithad earlier pointed out. A copy of this letter is heretoattached and made an integral part hereof asAnnex "V".

2.22. Thereafter, on 18 March 2016, MEl sent a letter toMERALCO (received on the same day) that it was no longerrenewing their DWSA which was set to expire on 25 March2016. A copy of the said letter is hereto attached and madean integral part hereof asAnnex "W".

2.23. Consequently, in view of the expiration and non-renewalof its DWSA with MERALCO, MEl, through its letter dated 23March 2016, notified and requested the Philippine ElectricityMarket Corporation (PEMC) for the cessation of itsregistration as a Trading Participant in the WholesaleElectricity Spot Market (WESM) effective 26 March 2016 atooooR. A copy of the said letter is hereto attached and madean integral part hereof asAnnex "X".

2.23.1. In its letter dated 30 March 2016, a copyof which is hereto attached and made an integralpart hereof as Annex "Y", the PEMC confirmed

ERC CASE NO. 2016-002 DRNOTICE OF PUBLIC HEARING/26 May 2016Page70f2o

the "cessation of WESM membership of MEl asDirect WESM Member and Trading Participant(Generator Category) effective 1April 2016".

2.24. Too, MEl received -- as copy-furnished -- the e-mail ofMERALCO also notifying the WESM of the termination of theDWSA between them effective 25 March 2016, a copy ofwhich is hereto attached and made an integral part hereof asAnnex "Z".

2.25. On 29 March 2016, MEl wrote MERALCO requesting ameeting between their duly designated representativespursuant to the dispute resolution procedure provided in theirDWSA. A copy of the said letter, which was received byMERALCO on 30 March 2016, is hereto attached and madean integral part hereof asAnnex "AA".

2.25.1. According to Article XI, Section 11.2 of theDWSA, the parties had thirty (30) days fromreceipt of the written notice of a dispute to beresolved within which to "make everycommercially reasonable effort to resolve" thesame - or until 29 April 2016 as MERALCO, asabove-stated, received MEl notice on 30 March2016.

2.25.2. Attached as Annexes "BB" to "EE" arecopies of the rest of MERALCO's billingstatements to MEl for distribution wheelingcharges from December 2015 to 25March 2016when the DWSA expired.

2.25.3. The total of the Distribution Wheelingcharges from November 2015 to March 2016amounted to P34,501,920.04. Subtracting theBill Deposit of P5,821,365.00, left a balance ofP28,680,555.04.

2.26. MEl and MERALCO, through their respectiverepresentatives met on 30 March 2016 where MERALCO gaveMEl a letter averring, among others, that it could not waivepayment of the distribution wheeling charges as this willpurportedly lead "to a discriminatory practice, but moreimportantly, to cross-subsidies, which is expressly prohibitedunder Republic Act No. 9136 (EPlRA)." A copy of this letter ishereto attached and made an integral part hereof as Annex"FF".

2.27. In view of the positions of both parties, no settlementwas reached. And on 21April 2016, MERALCO sent MEl an e-mail for the collection and payment of the Distribution

ERCCASE NO. 2016-002 DRNOTICE OF PUBLIC HEARING/26 May 2016Page 8 Of20

Wheeling Charges in the total amount of P34,501,920.04, acopy of which is hereto attached and made an integral parthereof as Annex "GG". Hence, as provided in the DWSA,MEl is now submitting this dispute to the HonorableCommission for resolution as stipulated in Article XI, Section11.2, thus:

"11.2 Any dispute arising out of or in connectionwith or relating to this Agreement (including anybreach or alleged breach of this Agreement) shallbe resolved in accordance with the followingprocedure: Each Party shall notify the other Partyor its designated representative(s) for thispurpose who will meet at a mutually agreed timeand place to discuss and make every commerciallyreasonable effort to resolve such dispute within(30) calendar days of receipt by any Party ofwritten notice of a dispute to be resolved. If theParties' representatives fail to resolve the disputewithin such 30-day period, then the dispute shallbe submitted to the jurisdiction of the ERC.

In case such dispute does not fall within thejurisdiction of the ERC, the Parties agree that thevenue for such dispute or action shall lieexclusively in the City of Pasig."

III.

ISSUES

3.01. Whether or not MEl should still be held liable forremaining distribution wheeling charges of MERALCO or thatthe same should already be waived.

3.02. Whether or not MERALCO had already over-recoveredfrom the payments made by MEl and if so whether or notMERALCO should make the proper refunds to MEl as may bejustified by the circumstances.

3.03. Whether or not the distribution wheeling charges, rulesand rates should be revisited to take into account thepeculiarities of embedded generators.

IV.

DISCUSSION

MEl's payment of more than P92 Million(VAT inclusive) to MERALCO fordistribution wheeling charges was more

ERC CASE NO. 2016-002 DRNOTICE OF PUBLIC HEARING/26 May 2016Page90f2o

than sufficient to recover its cost inconnecting the Navotas plant and earnreasonable rate ofreturn.

4.01. Section 43 of R.A. No. 9136, otherwise known as theElectric Power Industry Reform Act (EPlRA) provides that thedistribution wheeling rates, among other rates, "must be suchas to allow the recovery of just and reasonable costs and areasonable retum on rate base (RORE) to enable the entity tooperate viably."

4.02. In the case of MEl, as of 30 November 2015, it had paidMERALCO the total amount of P92,106,053.34 (VATinclusive) or P82,861,265.29 (VAT exclusive) for distributionwheeling charges. Clearly, therefore, MERALCO had alreadyrecouped in full its P26,633,314.00 share in the costs underthe DAS for the interconnection project of the Navotas plantto its distribution system. Add to this, MEl's share to the tuneof almost P50 Million for the project.

4.03. Aside from fully recouping its costs, embeddedgenerators (such as MEl's Navotas plant) provide manybenefits to distribution utilities (such as MERALCO):

"5.3 BENEFITS EMBEDDED GENERATORSPROVIDE TO THE SYSTEM

In general, the distribution of generationthroughout the network will provide an enhancedvoltage profile compared to the situation wherethere are only a few large generating centres. Thiswill inherently reduce losses and reduce therequirement for additional voltage controldevices.

Hence embedded generation, by virtue of beingdistributed at load locations, can improve systemsecurity by reducing the reliance on largegeneration centres, reduce network loading andprovide local voltage support. Embeddedgenerators may also assist system restart in somecases."3

4.04. As to recovery of a reasonable rate on return base, asshown in MEl's computation, a copy of which is heretoattached and made an integral part hereof as Annex "HH",MEl has already paid MERALCO an amount which is almosteighteen (18) times more than what the said company shouldhave received under the Return on Rate Base (RORB) formula

3 Frontier Economics, "Review of the treatment of embedded generation, Report Prepared for theEnergy Market Authority and the Economic Development Board", July 2006, p. 13.

ERC CASE NO. 2016-002 DRNOTICE OF PUBLIC HEARINGf26 May 2016Page 10 Of20

for recovery of its capital investment based on a one (1) yearperiod of operation.

4.05. Moreover, the distribution wheeling charges MEl hadpaid from March 2015 to October 2015 in the amount of morethan P82 Million, VAT exclusive, is more than enough to coverthe amount that MERALCO can receive for a fifteen (15) yearperiod of operation, i.e. P67.36 Million - applying the RORBformula with an estimated fifteen (15) years project duration.

4.06. Notably, under the Performance Based Regulation,which is the methodology adopted by the ERC, the principlesof reasonable costs and reasonable returns as laid down in theEPlRA is upheld. The Amended Distribution Services andOpen Access Rules (DSOAR) - in relation to the Rules forSetting Distribution Wheeling Rates (RDWR), provide:

"5.3 DISTRIBUTION UTILITIES OPERTINGUNDER THE RDWR

5.3.1 GENERAL

The focus of these proVlsIOns is primarily ratedesign under the RDWR; that is, the allocation ofrevenue requirements to Customer Segments andthe conversion of the revenue requirement for aparticular Customer Segment into various rateelements paid monthly by the customers withinthat customer segment.

The RDWR provides flexibility to expeditiouslyadjust rates between Regulatory Resets subject toa maximum average price ("MAP"). The MAP is acompany-wide measure without much constrainton individual rate elements. The intent ingranting such flexibility is to promote efficient DUoperations; however, the Commission alsointends to ensure that use of such flexibilityadheres to the policies set forth in the EPlRA.Specifically, all DUs shall only charge rates thatreflect the cost-based unbundled structure setforth in the UFR. At no time may costs orrevenues that should be recovered from oneunbundled function be shifted onto otherunbundled functions. The rate design shall befree of inter-class subsidies. That is, costs orrevenues that should be recovered from onecustomer segment shall not intentionally beshifted onto other customer segments. The SideConstraints set forth in 5.17 of the RDWR shallnot be used to justify the shifting of revenues from

ERC CASE NO. 2016-002 DRNOTICE OF PUBLIC HEARING/26 May 2016Page 11of 20

one customer segment to other customersegments.

The RDWR applies only to privately ownedDistribution Utilities that have commenced theRegulatory Reset Process and are thereforedefined as Regulated Entities in terms of theRDWR. It determines the manner in which themaximum electricity distribution wheeling ratesfor providing Regulated Distribution Services maybe charged by Regulated Entities and thePerformance Incentive Scheme to beimplemented under PBR.

The RDWR describes a form ofPerformance Based Regulation (PBR) forRegulated Distribution Services.Fundamentally, it sets a cap on themaximum average rates for providingdistributing wheeling services. This pricecap is set for each Regulated Entity toallow them to recover efficientexpenditure only and provide anappropriate return to investors in theRegulatedDistribution Systems. In addition,built-in incentives exist to further improve theefficiency of operating and capital expenditures,as well as network and service performance levels.

Regulation occurs in four-year periods and theannual average price-caps are set in accordancewith the actual Philippines consumer price index(CPO and Philippine Peso/US dollar exchangerate experienced over the Regulatory Period,modified by an efficiency factor (X-factor) that isdetermined in terms of the RDWR. This is avariant of the "CPI-X" form of regulation."(Emphasis supplied)

4.07. Thus, in light of all the foregoing, the waiver of theremaining balance of distribution wheeling fees still beingcharged to MEl is clearly warranted as its previous paymentshas already more than complied with what the EPlRA.mandates. It should no longer be held liable thereto.

4.08. Indeed, to make MEl continue paying the distributionwheeling charges is what would go against the EPlRA with itsexpress condition of, and emphasis on, the reasonableness ofthe costs and returns of the distribution utility.

ERCCASE NO. 2016-002 DRNOTICEOF PUBLIC HEARINGf26 May 2016Page 120f20

To compel MEl to pay the remammgdistribution wheeling charges in thehuge amount of P34,501,920.04 willhasten the company's financialhemorrhage and threaten its businesssurvival.

5.01. MEl fast-tracked the revival and rehabilitation of theNavotas plant (MGTPP) upon the DOE's urgent plea in 2014to ensure that there will be enough electricity for the comingyear 2015, particularly during its summer months wheredemand was anticipated to spike and traditionally does spike -- and therefore prevent costly power interruptions due tosupply lack.

5.02. But in heeding the government's call, MEl not only hadto incur, in addition to rehabilitation costs, almost P50 Millionto fix the Navotas plant, it had to pay distribution wheelingcharges to MERALCOto be able to export the energy the plantgenerates using the latter's distribution facilities.

5.03. Before entering into the Distribution Wheeling ServiceAgreement (DWSA), however, MEl had already aired, andcommunicated to MERALCO, its concerns regarding thedistribution wheeling charges in its letter dated 18 February2015, a copy of which is hereto attached and made anintegral part hereof asAnnex "II":

"1) On the required payment of a Bill Deposit -

MEl is requesting for a waiver on the payment ofthe (security) bill deposit, equivalent to '1 monthestimated billing for all DWS charges', computedby Meralco in the amount PhP20MM, more orless, based on a projected plant capacity factor of25%. Firstly, the projected capacity factor of 25%may be quite optimistic and unrealistic, becausethe Millennium Gas Turbine Power Plant(MGTPP) is a peaking plant, not a base load plant,and as such, it will most probably be operatingonly during the peak hours of the current year'santicipated critical period and the succeedingsummer months/dry season thereafter, clearlynot on a 24/7 period. Hence, it will be impossibleto reach such a high capacity factor of 25%.Secondly, the required bill deposit is simply toodifficult for the MEl to shoulder, consideringmany costs and expenses it has alreadyshouldered pursuant to the MGTPP rehabilitationproject, in line with its commitment to theDepartment of Energy (DOE) to help provide

ERC CASE NO. 2016-002 DRNOTICE OF PUBLIC HEARING/26 May 2016Page 13 Of20

additional capacity for the coming dry season,where power supply is projected to beprecariously tight.

If total waiver of the bill deposit payment is notpossible, then at the very least, a mitigation of thetotal amount of the I-time bill deposit isrequested, so that said amount may be used maybe used for other equally important purposes forthe completion and commissioning of the MGTPPproject.

2) On the payment of the Guaranteed MinimumBilling Demand (GMBD) and other wheelingcharges andfees -

The MEl is likewise requesting for the waiver ofthe wheeling charges, most especially the GMBD,for the same reasons as stated in Item 1. Indeed,the payment of such charges can possibly lead tohigher electricity costs at the expense of the end-user/general public who will be made toeventually shoulder the burden of paying thesame. Certainly, both parties do not want abacklash from the general public because of thismatter.

Again, if total waiver is not possible, then the MElis requesting for a mitigation of payment of theGMBD to a more reasonable amount or level,especially during the critical period so as to givethe MEl a reprieve from payment of the same.Moreover, during the months where the MGTPPwill most likely not run because of low demandfor electricity, the payment of the GMBD shouldbe totally dispensed with."

5.04. And even though adjustments were made, MEl'sapprehensions remained. However, with the hot summermonths fast approaching and impelled by public interest andthe DOE's encouragement, MEl signed the DWSA despite itsmisgivings. It had hardly a choice considering the Navotasplant is an embedded generator within the franchise area ofMERALCO and therefore had to go through its distributionfacilities in order to export its generated energy.

5.05. But throughout the term of the DWSA, the Navotas plantwas called to run or dispatch energy only a few times --leading to a very low capacity factor of 1.58% in 2015 and0.28% in the first quarter of 2016.

ERCCASE NO. 2016-002 DRNOTICE OF PUBLIC HEARING/26 May 2016Page 140f20

5.06. Nonetheless, MEl diligently and in utmost good faithtried to pay MERALCO's distribution wheeling charges evenwhen it was losing -- and did so until it could really no longerafford to do so.

5.07. During the ten-month commercial operations of MGTPP,particularly for the period from 26 May 2015 to 25 March2016, total revenues from sale of power to WESM amounted toOne Hundred Thirty One Million One Hundred FiftySix Thousand Nine Hundred Ninety Five and 52/100Pesos (P131,156,995.52) while direct generation costs(including distribution wheeling charges, among others)totaled Three Hundred Eighty Four Million FourHundred Seventy Nine Thousand Five Hundred SixtyTwo and 4/100 Pesos (P384,479,562.04). Hence, grossloss amounted to Two Hundred Fifty Three MillionThree Hundred Twenty Two Thousand Five HundredSixty Six and 52/100 (P253,322,566.52). A copy of thestatement of gross loss is hereto attached and made anintegral part hereof asAnnex "JJ".

5.08. The foregoing notwithstanding, as MEl had repeatedlypointed out, its payments already covered what MERALCOhas spent for this project including reasonable rate of return.

5.09. Consequently, with the substantial payments of MEl,being enough for MERALCO to recover its cost and even earnrevenue - compounded by the serious financial losses sufferedby MEl to the point of threatening its viability as a business -the remaining distribution wheeling charges should justifiablybe waived.

Waiver of the remammg distributionwheeling charges imposed on MEl doesnot amount to discrimination; neitherwould it result in cross-subsidization.

6.01. MERALCO alleged that it could not waive payment ofdistribution wheeling charges because to do so wouldsupposedly lead to cross-subsidies, which is prohibited underthe EPlRA. "Inter-Class Cross Subsidy" is defined as "anamount charged by distribution utilities to industrial andcommercial end-users as well as to other subsidizingcustomer sectors in order to reduce electricity rates of othercustomer sectors such as the residential end-users, hospitalsand streetlights". 4

4 R.A. No. 9136 (EPlRA), Chapter I, Section 4(cc).

ERC CASE NO. 2016-002 DRNOTICE OF PUBLIC HEARINGf26 May 2016Page 15 Of20

6.02. MEl, however, asserts that since MERALCO hasrecouped its costs and earned revenue from the paymentsalready made by MEl for distribution wheeling services, therecould not be any cross-subsidization in this instance as therewould be nothing to subsidize.

6.03. The computation for the distribution wheeling charge isbased on maximum average price which is defined as annualrevenue requirement (ARR) over energy delivered. Since theinvestment cost of MERALCO has already been paid, it willnot be included in the list of assets in the ARR to be recovered.And, therefore, without an asset to be recovered there is nobasis to recover from other MERALCO customers ifMERALCO waives payment of the remainder of thedistribution wheeling charges of MEL

6.04. Too, granting the waiver of the distribution wheelingcharges will not lead to discrimination. To illustrate, althoughalso an embedded generator within the MERALCO franchise,Therma Mobile Inc. (TMO) cannot be deemed similarlysituated with MEl because TMO has a power supplyagreement with MERALCO while MEl does not. As providedin the Amended DSOAR:

"1.5 NONDISCRIMINATION

All DDs shall make available uponreasonable request all regulated services at rates,terms and conditions that are duly approved bythe ERC and shall not unjustly orunreasonably discriminate in the rates, terms,and conditions of service to similarly situatedcustomers.

xxx xxx(Emphasis supplied)

xxx"

6.05. Stated differently, the similarity between MEl and TMOas embedded generators require that they be treated the sameway. If TMO does not pay wheeling charges, neither shouldMEL Indeed, MEl and TMO are dissimilar in another light -TMO has a contract, it was able to make projections on itscosts versus its income and the fact that MEl does not have asupply contract put it in gross and unreasonable disadvantagethat it is easy to conclude there is greater reason to dispensewith MEl's wheeling charges.

6.06. Hence, neither cross-subsidization nor discriminationapplies in MEl's particular case and are not hindrances to thewaiver of the remainder of the distribution wheeling feescharged.

ERC CASE NO. 2016-002 DRNOTICE OF PUBLIC HEARING/26 May 2016Page 160f20

Revisitthe rules, rates and chargesof distribution wheeling servicestaking into consideration thepeculiarities of embeddedgenerators.

7.01. MERALCO insisted that the amount of distributionwheeling charges it has imposed on MEl are ERC-approvedand are what is charged on all embedded generators using itsdistribution system to export and sell its power in the WESM.

7.02. But there lies the problem. The embedded generatorsare taken as a single class - and all of them seeminglysimilarly-situated. However, it is undeniable that differentgenerators or power plants have different peculiarities:peaking plants, base load plants, renewable energy plants, oil-based plants, coal plants, plants with power supplyagreements and those which sell wholly in the WESM, amongothers. And the Honorable Commission had come out withissuances that took cognizance of these differences such asexemptions of renewable energy generators from distributionwheeling charges and additional compensation for oil-basedplants under the secondary price cap rules.

7.03. To reiterate, TMO and MEl may seem similarly situatedbut, in fact, they are not because MEl does not have a powersupply contract with MERALCO unlike TMO.

7.04. Given this milieu, and as exemplified by MEl's case,there is a necessity for revisiting the charges for distributionwheeling services and the rules and rates for settingdistribution wheeling charges for embedded generators -especially considering that the distribution wheeling rates thattook effect starting 1 July 2015 were only provisional [ERCCase No. 2015-112 RC filed by MERALCO entitled "In theMatter of the Application for Approval of: (A) An InterimAverage Rate; and (B) Translation of the Interim AverageRate Into Distribution Rates for its Various CustomerClasses, With Prayer for the Issuance of a ProvisionalAuthority"]. Similarly, ERC CASE NO. 2014-029 RC entitled"In the Matter of the Application for Approval of: (A)Maximum Average Price (MAP)for the Regulatory Year 2015(RY 2015); and (B) Translation of the MAP for RY 2015 IntoDistribution Rates for its Various Customer Classes, WithPrayer for Provisional Authority", on which the distributionwheeling rates from March 2015 to June 2015 were based,were likewise provisional only.

ERC CASE NO. 2016-002 DRNOTICE OF PUBLIC HEARINGJ26 May 2016Page 170f20

7.05. Moreover, one of the problems that MEI/MGTPP has,with its connection with Meralco distribution grid is theprevalent order of dispatches which were paid with lowermarket price than its offered prices due to issuance of PricingError Notice (PEN), or Price Substitution Methodology (PSM)or Market Re Run (MRR) by the WESM. Usually, theissuances of PEN, or PSM, and MRR are attributed to artificialcongestions/ constraints in the Meralco grid which are notincluded or integrated. in the market dispatch optimizationmodel of WESM. Upon calculating the unconstrained oruncongested network the market price was corrected orsubstituted and resulted to lower market price compared tothe operating costs of MGTPP. For example, on May 26,2015interval 1l00H, the MGTPP was dispatched at 11.57MW but itwas tagged as Pricing Error Notice (PEN) with the priceP/MWh 800,000.00 but after correction in the FinalSettlement Data the nodal price was P/MWh 5,593.12.Likewise another example for the delivery day of June 26,2015 at interval 1000H, the MGTPP was dispatched at 67.97MW and it was tagged again as PEN at the price of P/MWh712,783.13 and later corrected after issuance of FinalSettlement, the nodal price was P/MWh 5,925.04.

7.06. These price corrections result from congestion inMERALCO franchise area wherein there is a localizedcontingency constraint on Zapote transformer & Balintawaktransformer. This congestion is invisible from the SO (SystemOperator) and because the SO does not see the congestion atthe bottom of the transmission substation down the line to thedistribution network of Meralco franchise area, it makescorresponding dispatches that in reality were unnecessary.

7.07. Therefore, there is a need to revisit the Market NetworkModel integrating the whole Meralco Network model in theWESM system in order to reflect the correct constraint orcongestion in the market and eventually the correspondingmarket price.

EndNote: Leveling the playing-field-hence, the call for the ERe'sintervention.

8.01. MEl does not deny signing the DWSA -- which was necessaryfor it to heed the government's urgent plea for more energy -mindful as it was to prevent a repeat of the November and December2013 price hike debacle.

8.02. The emergency passed, MEl was not used that much duringthe so-called emergency yet it remained stuck with the DWSA and allthe financial burdens that it entailed.

ERC CASE NO. 2016-002 DRNOTICE OF PUBLIC HEARING/26 May 2016Page 18 Of20

8.03. Thus, the call for the Honorable Commission's intervention inorder to achieve a level playing field - one that takes into account theconsumer gets the best possible service at the cheapest cost possiblebut without driving the generators into bankruptcy - it cannot bedenied they have to make money to continue operating, and as theylook forward likewise to be of better service and earn a little morefor projected capital expense for continuity and to maintain itsrelevance in the energy sector.

v.APPLICATION FOR INTERIM RELIEF

9.01. MEl's Navotas plant or MGTTP is a certified Fast-StartCapable Unit.s However, MEl is not financially able to deliverits embedded plant capacity to the WESM throughMERALCO's distribution system, with all the concomitantfinancial impositions that this entails.

9.02. MEl, therefore, most respectfully applies and moves forinterim relief preventing Meralco from cutting off MEl'sNavotas plant or MGTPP from its system and allowing the saidplant to export its energy using MERALCO's distributionsystem pending resolution of this dispute in the event theMGTPP is called upon to run or be dispatched to help addressor resolve any shortage in the supply of electricity. However,to make MEl viable, it must not be charged distributionwheeling fees because even if dispatched it cannot afford thewheeling charges, much so if not dispatched at all.

9.03. Indeed, MERALCO has said that it has not cut off theMGTPP from its distribution system but there is nothing finalthere - as it could do so at any time, especially consideringthat the parties had not been able to resolve their dispute onthe subject distribution wheeling charges.

9.04. In applying for this, MEl is not thinking of self-interest.The core interest here is the public's. With MEl's connectionto MERALCO's system intact, this will allow the MGTPP to beon standby and be available to supply when the public demandrequires it or when needed to augment power supply, suchas, or especially, in instances of national significance orduring critical periods.

9.05. This is demonstrated in DOE Department Circular No.DC 2016-01-0001 entitled "Creating A Power Task ForceElection 2016 to Ensure Adequate and Reliable Electric PowerSupply Before, During and After the May 9, 2016 National andLocal Elections" which provides in its Whereas Clauses thatthe DOE, as part of its mandate "deems it necessary to adopt

sAnnex"F".

ERCCASENO. 2016-002 DRNOTICEOF PUBLICHEARING/26 May 2016Page 19Of20

measure to ensure provision of stable and continuous supplyof power during the national and local elections startingfrom May 2,2016 until the termination or conclusion of thecanvassing of votes and the proclamation of the winningcandidates". The DOE specifically tasked DistributionUtilities to "ensure availability and reliability ofembedded generators within their franchise area, ifany" (Section 3, DUs, par. 6). A copy of the said DOECircular is hereto attached and made an integral part hereofasAnnex "KK".

9.06. Attached hereto and made an integral part hereof asAnnex "LL" is the supporting Affidavit of Antonio O.Mercado, the Tariff and Regulatory Manager of MEL

PRAYER

WHEREFORE, petitioner, MILLENNIUM ENERGY INC.,respectfully prays that the Honorable Commission renderjudgment:

A. Granting MEl's application for interim reliefpreventing Meralco from cutting off MEl'sMillennium Gas Turbine Power Plant (MGTPP)from its distribution system and allowing the saidPlant to export its energy using MERALCO'sdistribution system pending resolution of thisdispute in the event the MGTPP is called upon torun or dispatched to help address or resolve anyshortage in the supply of electricity, without beingcharged distribution wheeling fees;

B. Declaring MEl not liable for the unpaid billingsamounting to P34,501,920.04 and orderingMERALCO to make the proper refunds to MEl asmay be justified by the circumstances.

C. Fixing distribution wheeling charges that take intoaccount the peculiarities of the embeddedgenerators, grouping them together as may bewarranted by circumstances.Other relief just and equitable under the premisesare likewise prayed for.

TheCommissionhas set the Petitionfor evidentiaryhearing onthe Applicationfor Interim Reliefon 1 July 2016 (Friday) at teno'clock in the morning (10:00 a.m.) at the ERC HearingRoom, 15th Floor, Pacific Center Building, San MiguelAvenue, Pasig City.

ERC CASE NO. 2016-002 DRNOTICE OF PUBLIC HEARING/26 May 2016Page 20 Of20

All persons who have an interest in the subject matter of theproceeding may become a party by filing, at least five (5) days prior tothe initial hearing and subject to the requirements in the ERC's Rulesof Practice and Procedure, a verified petition with the Commissiongiving the docket number and title of the proceeding and stating: (1)the petitioner's name and address; (2) the nature of petitioner'sinterest in the subject matter of the proceeding, and the way andmanner in which such interest is affected by the issues involved in theproceeding; and (3) a statement of the relief desired.

All other persons who may want their views known to theCommission with respect to the subject matter of the proceeding mayfile their opposition to the Petition or comment thereon at any stageof the proceeding before the conclusion of the Parties' presentation ofevidence. No particular form of opposition or comment is required,but the document, letter or writing should contain the name andaddress of such person and a concise statement of the opposition orcomment and the grounds relied upon.

WITNESS, the Honorable Chairman JOSE VICENTE B.SALAZAR and the Honorable Commissioners ALFREDO J. NON,GLORIA VICTORIA C. YAP-TARUC, JOSEFINA PATRICIAA. MAGPALE-ASIRIT, and GERONIMO D. STA. ANA, EnergyRegulatory Commission, this 26th day of May 2016 in Pasig City.

ATTY. NAT J. MARASIGANC wf of Staff

Officeof the Chairman and CEO

}L.NLS/GLS/APV