Petitioners,

POWERCORP.

CENTRALPOWER

INC.

,.G\lLATORy A

'/-V CO.& ~~'" '<P

. Republic of the Philippines .1 Approved for ~Energy Regulatory Commissiorl . Posting

.Pasig City wl'lw.erc. .ph

ENERGREENINTER-ISLAND(ENERGREEN) /NEGROSRELIABILITY,(CENPRI),

-versus- ERCCASENO. 2016-oo8DR

CENTRAL NEGROSELECTRIC COOPERATIVE,INC. (CENECO),

Respondent.x-------------------------------------x

NOTICE OF PUBLIC HEARING

TO ALLINTERESTEDPARTIES:

Notice is hereby given that On 22 December 2016, Petitioners,Energreen Power Inter-Island Corp. ("ENERGREEN") and CentralNegros Power Reliability, Inc. ("CENPRI"),filed a petition for disputeresolution on its Amended Memorandum of Agreement (MOA) andSupplemental Agreement ,(SA) with Central Negros ElectricCooperative, Inc. (CENECO)and alleged the following:

PARTIES TOTHE CASE

Petitioner ENERGREEN POWER INTER-ISLAND CORP. lf6nnerly ENERGREEN POWERDEVELOPMENT AND MANAGEMENT INC.(ENERGREEN) (hereinafter ENERGREEN forbrevity), is a domestic corporation duly organized andexisting under and by virtue ofthe laws ofthe Republic ofthe Philippines to provide power generation andelectricity supply services to distribution utilities, withprincipal office address at Suite 809, Richmonde Plaza,Lourdes St. cor. San Miguel Ave., Ortigas Center, PasigCity. Acopyofthe Board's Secretary Certificate regardingthe pass~ge of a Resolution authorizing its President.to

•ERC Case No. 2016-008DRNotice of Public Hearing /13 February 2017Page 2 of25

file/initiate the instant Petition is hereto attached andmarked as Annex "A").

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Petitioner CENTRAL NEGROS POWERRELIABILITY, INC. (hereinafter CENPRI forbrevity), is a' domestic corporation duly organized andexisting under and by virtue of the laws of the Republic ofthe Philippines, with principal address at #88 CornerRizal-Mabini Sts., Bacolod, City, Negros Occidental. It is apower generation company organized to engage in thedevelopment, engineering, financing, construction,operation and maintenance of an 18.9MW Peaking andReserve Diesel Power Plant located in Brgy. Calumangan,Bago City, Negros Occidental, in accordance with Clause16 Accession Undertaking of the Amended Memorandumof Agreement (Amended MOA) between ENERGREENand CENECO. CENECO was duly informed of theformation of CENPRI on 27 June 2014. An Assignmentand Assumption Agreement was entered into by andbetween ENERGREEN and CENPRI. A copy of theBoard's Secretary Certificate regarding the passage of aResolution authorizing its President to file/initiate theinstant Petition is hereto attached and marked as Annex"B'').

Petitioners may be served with orders, notices andother legal processes of the Honorable Commissionthrough the address of the undersigned Firm.

Respondent Central Negros ElectricCooperative, Inc. (hereinafter CENECO forbrevity) is a non-stock, non-profit electric cooperative,duly organized and existing under the laws of theRepublic of the Philippines, with principal address at , .Corner Gonzaga-Mabini Sts., Brgy. 26, Bacolod City,Negros Occidental .• , It has an exclusive franchise todistribute electric service in the Cities of Bacolod, Bago,SHayand Talisay, and in the Municipalities of Murcia andDon Salvador Benedicto, all in the province of Negros •Occidental (Franchise Area).

STATEMENT OF FACTS AND OF THE CASE

1. On 15 December 2010 CENECO and ENERGREENexecuted a Memorandum of Agreement (MOA) forthe supply of power from .a peaking and reserve

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Minimum Energy•

The salient features of the Amended MOA and SAare indicated below: ' ••

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,. ~. ,.,, diesel plant and a biomass (a copy of the MOA ishereto attached and marked as Annex "C").

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, .On OS August 2013, the ENERGREEN and -,CENECO executed the Amended MOA to make for a ' .•separate contract specifically for the services and

, supply~ from the - Peak and Reserve 18.9MWCalumangan Diesel Power Plant (a copy of theAmended MOA is hereto attached and marked as ,

. ~'~.Annex "D"). :: .•. 1 .••.~ .Ii .•

The Amended MOA incorporated cost mitigationprovisions. and the Parties, ENERGREEN andCENECO agreed to further explore other technicallyand economically feasible - options to reduce thepower cost for peaking and reserve energy. Thus', "

I'on 22 July 2014, after a series of negotiations, theENERGREEN i and. CENECO executed - theSupplemental "Agreement (SA) containing the, •additional tenus .for the benefit of CENECOconsumers (a copy of the SA is hereto attached and 'marked asAnnex "E"). ., . .

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"" .2. To prevent del~y ~and immediately address the

continued increase in consumer demand for power,ENERGREEN and CENECO later agreed to executeseparate agreements for the diesel and biomass

" plants' to allow for a separate regulatory applicationand evaluation to determine the reasonableness of

.' the rates of the two plants. '"

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. ",- ' --,6. ENERGREEN 'ANDCENECO agreed on a tariff •

~. broken.do~ into five (s) charge components:, •, .

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ERC Case No. 2016-oo8DR ~Notice of Public Hearing /13 February 2017Page30f25 • "', '

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e of Planta eration Mode'Installed Ca aClCoo eration Period

, Completion Date '

• GuaranteedOff-take

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ERC Case No. 2016-oo8DRNotice of Public Hearing /13 February 2017Page 4 of25 I

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. ., ..a) CAPACITYCHARGEs Consisting ofthe

Capital Recovery Fee and the Fixed Fee,b) ENERGY FEES consisting of the following:

1) Variable O&M Fee per kWh;2) Lube Oil Charge per kWh; and3) Fuel Charge per kWh .. "

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"WHEREFORE: the foregoing premlsesconsidered" the . Commission hereby

, -PROVISIONALLY APPROVES the AmendedMemorandum of Agreement (MOA) and theSupplemental Agreement (SA) betweenCentral Negros Electric Cooperative,Incorporated (CENECO), and EnergreenPower 'Development and Management,Incorporated (ENERGREEN), subject to the'following conditions: .

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~"SO ORDERED." (a cOpy of the Order

dated 10 November 2014 is hereto attachedI and marked !isAnnex "F").

The Amended' MOA' and 'SA were eventuallyPROVISIONALLY approved by the Energy'Regulatory Commission (ERC) through its Order "dated 10November 2014. The dispositive portion ofthe Order states: '" '. .,.- .• ~l

The provisional authority granted III the Orderdated 10 November 2014 was extended untilrevoked or made permanent by the Commission perERC Order dated 22 October 2015. (a copy of theOrder dated 22 October 2015 is. hereto attached

• ' and marked as Annex ,"G"). ", . ,•••..'

, For the impleinimtation oithe 18.9MW net Peakingand Reserve Agreement, ENERGREEN had formedits project company, CENPRI, in accordance with' ,

~ Clause 16 Accession Undertaking of the AmendedMemorandum .of' Agreement (Amended MOA)between' ,ENERGREEN. and CENECO.ENERGREEN formally informed CENECO of theformation of CENPRI on 27 June 2014. An ,

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• Assignment 'and Assumption Agreement wasentered into. by and between ENERGREEN and

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ERCCase No. 2016-008DRNotice of Public Hearing /13 February 2017Page 5 Of25

CENPRI (a copy of this Agreement (AAA) is heretoattached asAnnex "H").

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9. CENPRI will provide 18.9MW of peaking andreserve power from an embedded location toenhance the power reliability in CENECO's servicearea of Bacolod City and environs with priority tothe Reclamation Area where there is a concentrationof critical loads like the government center, themain public hospitals, schools, four (4) majorshopping malls, call centers, hotels and inter-islandparts, among others.

CENPRI has three deliverables to CENECO, to wit:

a) to provide ready peaking and reservecapacity on the agreed hours;

b) to provide the energy when that capacity isactually needed by CENECO; and

c) to provide CENECO with the guaranteedcontracted price and protect it and itsconsumers from the volatile WholesaleElectricity Spot Market (WESM) supplyand prices that can range from P18 to P32per kWh.

10. The plant was subsequently made commerciallyavailable progressively, and certified for commercialoperation per unit under WESM rules:

and operated by CENPRI starting on 05 April 2016.CENECO however started nominating power fromCENPRI only in May 26, 2016 based on its BoardResolution 11536dated 23 May 2016.

II

Unit 2Units 1& 3

S.oMW (gross capacity) Aprils, 2016S.oMW each (gross capacity) June 14, 2016

11. The Amended MOA and SA betweenENERGREEN and CENECO are unique andinnovative such that the same not onlyprovided for the protection of CENECO and itsmember consumers from the volatility of the WESMmarket at a maximum Bilateral Contract Quantity(BCQ) rate; but, it also provided formechanisms to further reduce power costs

ERC Case No. 2016-008Dll -Notice of Public Hearing /13 February 2017Page 6 of 25 '

to the consumers called Power CostReduction Schemes (PCllS) under Section7.11 of the Amended MOA and Section 4 ofthe SA. -

12. Both CENECOand CENPRI under Section 4.3 areallowed to -substitute energy from WESM to takeadvantage of lower prices of WESM to reduce costto the consumers.

12.1When _CENECO assesses that theWESM 'prices are low it will thensubstitute and not nominate CENPRI-and instead buy from the WESM. In thiscase it pays CENPRI only for the CapacityFees and pays WESMfor the Energy Feeson the power it bought from the market.-Presumably the two payments togetherwill total less than the contracted BCQprice had it run the CENPRIplant.

12.2When it is CENPRI who elected to-Substitute, it is doing so as a WESMparticipant ana under its obligationsunder-the above-mentionedPCRS underSection 7.11:

."The . SUPPLIER is obligated toexplore -o'ther technically andeconomically feasible options toreduce the cost of peaking andreserve power. Whenever such viable_and beneficial options are available,SUPPLIER shall submit to CENECOits substitution plan, the descriptionof the changes. the cost reduction andsavings to CENECOand its customersand/or environmental benefits to thecommunity, the dispatching s"Cheduleandthe duration in which the substitutionwill beexecuted."(Emphasissupplied.)

_13. To -further update and clarify the - variousimplementation aspects of the MOA between theparties, Respondent CENECO and PetitionerENERGREENfinalized additional agreements on 13May 2016 and was consequently approved by theRespondent CENECOBoard of Directors on 23 May

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. ERCCase No. 2016-008DRNotice of Public Hearing / 13 February 2017Page70f25 . •

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2016 under Resolution No. 11536, among theagreements that was agreed upon were theallocation of the 78 million kWh a year betweenPeaking Energy at 64,260,000 kWh and ReserveEnergy at 13,740,000 kWh. • . ••

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In the meantime, on 28 August 2016, PetitionerCENPRI was able to identify three (3) variable PCRS .and sent a letter to CENECO with the Subject,Notice of Substitution Strategy for Power CostReduction Plan (PCRP), to propose the so-calledsubstitution plan for power cost production, and the

• proposal was stated as follows:

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•, -"Consistent with CENPRI'scommitment ,to continue exploringother technically and economicallyfeasible options to reduce the cost of

. -peaking and reserve power, CENPRIafter a trend analysis of three billingsmonths from June, July, and August, ,-had determined so far three (3) such"technically and economically feasibleoptions". And as required under thecontract, we had duly notified CENECO

. of such schemes last August 28, 2016,as follows: - . -_.

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. .2). Offering to the WESM market the

. CENPRIsavailable capacity that is notnominated by CENECO.We offer this

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1).• Substituting lower cost averageWESM price for the nominationsduring off-peak band.

.This became economically andtechnically feasible because we havedetermined that in general the averagerates for this off-peak is low enoughthat the total ofCENPRI'sfixed chargesand the average WESMprice for this .period would be lower than the .contracted BCQprice that CENPRIhad

.guaranteed .to protect CENECO.Additionally, it was observed that thePricing Errors of WESM do not occurin these low demand periods .

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•'. ERCCase No. 2016-oo8DR ,'Notice of Public Hearing /13 February 2017, Page8 of2S' ; "

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at BCQ. If taken by the market,CENECO saves the fixed capacitycharges that it otherwise would owe toCENPRI. ' ':' "

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- - ,.... " ...3). Where feasible substituting powerfrom CENPRI to WESM energy which.already has twofold benefit.'. ,

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(1)Reduced VATcost to CENECOdue to',the Generation Mix Ratio of WESMwhere' a portion of energy drawn from l

them is exempted from VAT Taxes. On •those energy, we estimated CENECO'consumers' will save about PO.1Sper.KWH in avoided VAT taxes.

(2) Additionally, there is' anenvironmental benefit to the CENTRALNEGROSarea when power is producedoutside its territory. (Emphasis supplied.)

:: .,;.~ " . 'The letter further elaborated on the "technical andeconomic feasibility" of the PCRS, to wit:

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'"'A.s required in Section 7.11 of the .'- •• ,"

contract, CENPRI is continuing to j,eiplore other' technically and

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.." economically feasible options . Under • • I;~current study on market behavior trend • •, ,,

is afeasible methodology of computing •• 0', • ' ,, the WESM • for the • 'l, • average pnce• • peaking band. WESM price has been. • "oJ

•• •• volatile in these peaking hours and the "• ,..• risky Pricing Errors and Price ., "

• very •.. • J ' },I • ' 'corrections is observed to occur more in " ~ ~...., this, period. There periods •• , are In, ji • • ••

August when' pricing errors reached ... •P18per kWhfor extended periods of 12 •

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certain whether CENPRI can assure that ~,,'.. "

. . , the average price for the peaking band "• • . J4• will not result to the total delivered cost ' '• "

• • • , • ,"of be higher than ' ' •energy to our" •• • •.. contracted, BCQ• approved by the• as •

• •~, \ ERC.' Such high probability of loss •• • rrtakes the averaging of peaking power , ,

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, not yet .economically viable forCENPRI." (Emphasis supplied.)••

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. ...-Just recently, on 17 October 2016, RespondentCENECO thru its Utility Economics Section Head of ,Corporate Planning (Engr. Christian John AVillena), sent im email to Petitioner CENPRI'sManager, advising of Respondent CENECO's desireto avail of the reserve capacity of the plant Inconnection with KEPCO's Preventive MaintenanceSchedule (PMS) from 17 October 2016 to 15November 2016. Petitioner CENPRI duly tenderedthe delivery of reserve capacity for the indicatedperiod in compliance with CENECO's letter request.. ,However, to the' ~urprise of Petitioners, on 15

December 2016, despite the request of RespondentCeneco (Engr. Villena's email) and the

• corresponding tender made by Petitioner CENPRI,Respondent CENECO only settled the charges forpeaking window and other adjustment based onprior month and excluded the reserve (un~nominated) charge in the amount of P3,981,75540net of VAT, ; ,

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In doing so, Respondent CENECO reasoned thatbased on the conference meeting on 16 November2016, both parties allegedly agreed to evaluateand validate first the proposed scheme and its legalimplication prior, to its implementation. In thisregard, therefore, Respondent CENECO said that -"it is prudent to implement only based on the actualnominations on the lO-hour peaking window and.not pass on the burden to its member-consumersthe charges for the un-nominated portion",

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proposed to Respondent CENECO that the partiessubmit, or include as an Issue, the recentdisagreement, to ERC for resolution as provided forin the agreement of the palties, Petitioner CENPRI •then decided to include the matter as one of the

.: issues in the instant Petition for Dispute to finally'• resolve the matter.' .

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.:DISCUSSIONS

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ERCCase No. 2016-008DRNotice of Public Hearing /13 February 2017Page 10 of 25 .

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Since Petitioner CENPRI started providing thepower reliability service in May 2016, RespondentCENECO's servIce area had been spared frommanual load dropping (area power interruptions). -,even during the PMS of the 64MW KEPCO coal .

• plant in Cebu. It also reduced peaking power loadthat is congesting the Cebu Negros Grid and hencereducing the '1ine rental charges" III favor of• Respondent CENECOconsumers .

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21. During the study period, when an additional PCRSscheme has not yet been adopted for the peaking

• band hours, Petitioner CENPRI had, just like other• WESM participants,' substituted in certain marketinterval hours, by buying power from WESMinstead of running its power plant - part as aWESM member; and, part to explore how themarket is providing cost saving opportunities. In'other words, it supplied part of the energynominated by Respondent CENECO from the

• WESM; and; it also took the market risks and in fact,had absorbed, pricing error adjustments thatresulted to losses with some frequency in August2016.

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20.1Petitioner CENPRI estimated thatfor the month of August,Respondent CENECO had savedP4,387,872.21 and for SeptemberPl,067,468.51. As a gesture ofgoodwill, Petitioner CENPRI, hadimplemented this in the month ofAugust even ifwe have notified you

" only onAugust 28. ",-,'

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• •The energy. supplied is valued at the .contracted Energy Fee as approved by theERC and invoiced by Petitioner CENPRIaccordingly for the months of August,September, and October. ,~,

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, CENECO'sDispute, - • •

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22. Respondent CENECO had initially communicatedtheir disagreement to the billing of the substituteenc;rgy and had paid the monthly billing "under

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ERC Case No. 2016-008DRNotice of Public Hearing /13 February 2017Page 11of 25 .

protest" as provided for under Clause 8 Section 8.5.Their corporate planning people interpret that whenCENPRI's plant does not run, it should onlycharge CENECO the capacity fees, notrecognizing that Energy was still delivered to itas evidenced by the WESM. .,

CENPRI is concerned that with all its innovativeintention to reduce costs to the consumers, amember of the CENECO CORPLAN team isaccusing it of charging for "fuel it did not use"without considering that the energy delivered to itin substitution" had energy value and must beinvoiced accordingly. •

It further appears CENECO wants to apply thePCRS retroactively when a WESM market priceaveraging methodology was yet being explored byCENPRI and an economically viable methodology isnot yet agreed upon.

CENPRI's Position and PCRS Proposal forPeaking Band

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Consistent with its "commitment under the AmendedMOA and SA to continuously seek Power CostReduction Schemes, CENPRI had proposed, on 10November 2016, a prospective application scheme(moving forward) vis-a.-vis a technically andeconomically viable 4th PCRS for the peaking bandwhere CENPRI will pass on the lower costs ofsubstituted energy; BUT, in instances of theaverage peaking price of WESM exceeding thecontracted energy fee agreed by the parties andapproved by the ERC, CENPRI will only charge".CENECOthe BCQrate approved by the ERC. In theexpected rare cases of its occurence, theunrecovered portion shall be included in computingthe average WESM price in the succeeding billingperiods.

Under this methodology, in computing the averageprice of the substituted energy, CENPRI will use theaverage of the peaking hours for the billing month .And in turn, in computing the average, CENPRIwill include the actual WESM prices including thepricing errors that may have resulted to unusuallyhigh prices up to the limit of P32 per KWH.

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For the substituted energy supplied toCENECO during the peaking band hours,CENPRI will bill CENECO the CapacityRecovery Fee and Fixed charges plus theaverage WESMpeaking price for the month.If, however, the total is HIGHER than the BilateralContract Quantity (BCQ) price, CENECO will bebilled at the BCQ price for that month. Theunrecovered market costs will be rolled over to thenext month and included in computing the averageofWESM Peaking prices for the month.

In the rare event that the rolled over market costs isstill not recovered in the following month it willcontinue to be rolled over to the succeeding monthsuntil fully recovered. This way, CENECOand itsconsumers will never be charged higher thanthe ERC approved BCQ but still have theopportunity to benefit when the WESMprices are lower, which we believe would beabout 80% ofthe time.

The adoption of any PCRSto achieve further savingsis purely for the benefit of CENECO and itsconsumers. It should be underscored that CENPRIwas the one who introduced this innovative idea, forthe record. Be that as it may, the agreement alsoprovides that any PCRS to be adopted must bedetermined by CENPRI to be technically andeconomically feasible.

Feasibility in terms of technical requirementstherefore would mean, compliant in accordancewith the rules of the Visayan grid, the WESM, andthe ERC "approval". In any instance, CENECO isgiven a chance to determine that any scheme mustbe in compliance with the grid and regulatory rulesthat apply to CENECO.

Economically feasible, on the other hand wouldmean that Petitioner CENPRI cannot be made toabsorb losses in a program purely intended toreduce costs to Respondent CENECO; who,similarly, could not be made to absorb losses toprotect its consumers.

ERCCase No. 2016-oo8DRNotice of Public Hearing /13 February 2017Page 13 of25

It could be told that, as implemented so far,Petitioner CENPRI has been implementing three (3)PCRS that are proven to technically andeconomically feasible. This 4th PCRS would be an"additional" on Peaking interval hours nominatedbyCENECO.

CENECO had promised to study the additionalPCRS for peaking hours and CENPRI is waiting fortheir board approved concurrence to implement theadditional power cost reduction methodologyproposed by CENPRI for the peaking band.

Meanwhile, while a PCRS is still being explored;and, an economically feasible methodology has notyet agreed upon on the peaking intervals, themonthly energy billing shall be in accordance withthe current structure as approved by the ERC.

Dispute Resolution

24. The Parties actually have agreed to mutually submitthis matter to the ERC for interpretation andresolution. The Board of Directors of CENECO, as amatter of fact, had passed a resolution approvingthe submission to the ERCfor dispute resolution.

May it be emphasized that, there already is anunderstanding that CENECOwill also file with theERC a similar Petition within the time frame thatwill coincide with that of CENPRI's period of time offiling of the same.

It should be understood that the instant casecontains a preliminary explanation and allegationsconcerning the issues discussed above; and, theseare being submitted without prejudice to the filingof any amendment or supplement once CENPRI isable to review CENECO's similar complaint (or itsAnswer) containing therein the basis of thecomputation of the disputed amounts as allegedherein.

25. It should be noted that the proposed plan was basedon the provisions of the Amended MOA executed bythe Parties particularly Section 7.11, thereof, whichstates:

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b) Selling to' the' market," the un-nominatedportions of the BCQ contracted intervals tosave CENECO form payment' of theCapacity Fee for' un-nominated availableenergy; :nd " . - . 1

.c) Explore a' Power Cost Reduction Plan tofurther mitigate CENECO's costs. I

., 1. In furtheranc~ of the discussion above, may it be .emphasized also, that Petitioner/s charging of thebilateral rate was arrived at due to ,the option

" exercised by Petitioner/s to source its "nominated" .energy from the spot market instead of, the energy.produced from Petitioner's plant, because despitethat, Petitioner was exposed to the "risk" specially,the unpredictable pricing errors :and priceadjustments after the fact in such an eventuality." . I

27.1 It should be viewed that there wereinstances in the past that Petitionerssourced .(its power from WESM and •charged Respondent with a ''lesser cost"(average WESM price), however, alongthe way, r- Petitioner suffered losses

Jincluding those supplied during the 10-'hour peaking interval) when: "Pricing!

, ."The Off-taker CENECO desires to continue c '.

exploring cheaper and cleaner options for all itspower needs. The SUPPLIER is obligated to exploreother technically and economically feasible options

, to reduce the cost of peaking and reserve power_, ,Whenever such viable and beneficial options areI available, SUPPLIER shall submit to CENECO its• substitution plan, the description of the changes,

the cost reduction and savings to CENECO and its, • consumers and/or environmental benefits to the" community, the'"dispatching schedule, and the

duration in which the substitution will be executed,

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Errors Notice" were issued by thePhilippine Electricity Stock Corporation(PEMC). Hence, to avoid any such loss tobe recurring every time Petitioner wouldsource its energy from WESM, Petitionerwould charge Respondent the' fullbilateral rate, including other chargessuch as charge for fuel.

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"3.3 Replacement Power- without prejudiceto the provisions of paragraph 3.5 of clause 3,the SUPPLIER shall be responsible forsecuring replacement power if available from ,the Visayan Grid and if needed to assure itscompliance with its capacity and energycommitment to CENECO. Provided that thecost of such replacement power shall not behigher than the tariff in the Agreement andas approved by the ERe. In the event that therate as provided for in this contract and therate of the replacement energy are at avarlQnce,' then the difference will bechargeable to the SUPPLIER. However, if thetotal delivered cost of replacement energy islower, the savings, which is the differencebetween the rate as provided in this contractand the lower cost of the replacement energysecured shall be passed on and inure to thebenefit of CENECO and its consumers.Supplier shall duly notify Off-taker wheneversuch replacement power shall be dispatchedby the SUPPLIER." ,•~ ~

"7.1, Supply "of. Electricity- the SUPPLIERagrees to supply electricity generated by thePower Station to CENECO in accordancewith the Fourth Schedule, and CENECOagrees to take and pay for all such electricity,delivered by the SUPPLIER. CENECO agreesthat the SUPPLIER generated power shall beaccorded priority dispatch and its plantscapacity as must-run generation plants,

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ERCCase No. 2016-008DRNotice of Public Hearing /13 February 2017Page 16 of 25 .

energy quantity with existing IPP as of thesigning of this Agreement on 15 December2010."

29. Aside from the foregoing, Respondent CENECO'stake on the matter was also anchored on Clause3.3.3. of said Amended MOA, plus the provisions ofClause 7.11 of the same Amended MOA. Again forready reference, the pertinent provisions mentionedherein are quoted hereunder, to wit:

"3.3.3 Cost of Replacement Power. Inaccordance with the MOA, the generationcost to CENECO of such replacement powershall not be higher than its agreed tariff onembedded basis and including VAT.Replacement power supplied before thecontracted plant completion time of 26 April2014 shall be subject to transmission linecharges if applicable. Replacement power ifneeded to be supplied by Energreen after 26April 2014 shall be on (sic) delivered toCENECOsubstation basis and will include thetransmission charges. The need forreplacement power shall be in accordancewith the system needs of CENECO andsubject to the downtime allowances providedfor in the MOA."

"7.11Power Cost Reduction. The parties agreeto continue seeking power cost reductionoptions:

The Off-taker CENECO desires to continueexploring cheaper and cleaner options for allits power needs. The SUPPLIER is obligatedto explore other technically and economicallyfeasible options to reduce the cost of peakingand reserve power. Whenever such viableand beneficial options are available,SUPPLIER shall submit to CENECO itssubstitution plan, the description of thechanges, the cost reduction and savings toCENECO and its consumers and/orenvironmental benefits to the community, thedispatching schedule, and the duration inwhich the substitution will be executed.

ERC Case No. 2016-008DRNotice of Public Hearing /13 February 2017Page 170f25

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30. Petitioner/ s, on the contrary, view the matteron a rather different light, treating the AmendedMOA as well as the SA in their totality.

31. May it be emphasized, that also contrary tothe view of Respondent, which is so delimited,Petitioners' dispatch of energy must be readconsidering the framework of the overallVisayan Power Grid and the WESM in which,both the Petitioners and Respondent areparticipants.

32. In other words, the implementation of theAgreement (all agreements with Respondent] andthe dispatching of power shall have to be done inconsonance with the rules governing the VisayanGrid as administered by the National Grid.Corporation of the Philippines (NGCP) SystemsOperator (SO), the Grid Connection Agreementswith NGCP, and he WESM Trading Market rulesunderPEMC.

32.1 To give proper interpretation to theAmended MOA, the SA and otheragreements between the Petitioner andRespondent, may it further emphasizedthat Petitioner and Respondent,agreed to change the connection of the. Petitioner's plant from an embeddedfacility delivering power only toCENECO then, and now, to theNGCP Visayan Grid through the69kV San Enrique Line.

32.2 It could not be more described in detailrather than by stating that the Plant, byvirtue of Petitioners' and Respondent'sagreement, undeniably became part ofthe VisayanGrid and subject to the rulesand mandatory pool, being observed allthrough the region.

32.3 Any ambiguity that would arise fromthese changes in contractual obligationscould only be interpreted logically from. how Respondent would treat its other

ERCCase No. 2016-008DRNotice of Public Hearing /13 February 2017Page 18 of25

bilateral contracts"undispatched energy"contracted energy".

charge foror "unilateral

32.4 On the part of the Petitioners, thefollowing still holds true anent itscontractual obligations to Respondent,viz: [to provide power reliabilitythorough three deliverables: a)assured and verifiable generatingcapacity in an embedded location (notnecessarily embedded connection) andhence insulates Respondent fromproblems on the Visayan Grid; b)energy when Respondent needs it forpower reliability; c) price protectionfrom the volatile WESM market at theBCQprice.

33. In addition, the parties herein are both requiredunder Section 30 of the Electric Power IndustryReform Act (EPIRA) to comply with WESM rules,which provides: "[a]All generating companies,distribution utilities, suppliers, bulkconsumers/end-users and other similarentities authorized by the ERC, whetherdirect or indirect members of the of thewholesale electricity spot market, shall bebound by the wholesale electricity spotmarket rules with respect to transactions inthat market".

33.1 Of course, the mandatory nature of thestatute includes "obeying its mandatorypool, must offer rule, merit order anddispatch stacking".

The WESM market is intended to allowthe efficient and economic use of thecountry's installed generating capacitiesand provide for a ready market forcapacity and energy imbalances both insupply and demand.

This legal requirement and marketframework guide us to recognize that thephysical and economic dispatching ofenergy, and Petitioners are dictated by

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ERC Case No. 2016-008DRNotice of Public Hearing /13 February 2017Page 19 of25

the rules on the mandatory pool.. Participationis not optional.

34. 'In doing so, the Parties are presumed to know andrespect the trend of the market such as the riskaccompanyingin the compliance of the mandatoryprovision of the law. This risk surely encompassesthe risks from arbitrary "Pricing Error" andarbitrary re-pricing of energy that indubitablyresults to significant losses when Petitioner's plant

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Confronted with the factual backdrop discussedabove, there are instances where Petitioners' plant,despite its declared contractual capacity,at the timewhen Respondent had nominated Petitioner, wouldnot operate. Ergo, when confronted by thisparticular circumstance, though is a rareoccurrence, Petitioners then automaticallysecure replacement supplies from the Gridand WESM "to. assure its compliance with itscapacity and energy commitment toCENECO". It is at this point that the importanceof the function of the WESMbecomes operative -which is to provide a source and market for theimbalances in powersupply.

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.' nominal engmes, WESM automatically suppliesfrom the Market Pool to assure the synchronizednormal operations of supply and demand on theGrid and charges Petitioners for the cost atwhatever is the market price (price taker).

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Furthermore, the Amended MOA and SA alsoprovided certain measures for PCRS.To be able totake advantage of this scheme, Petitioners andRespondent have agreed that in the process ofdispatching the mutually contracted 18.9MWpeaking and reserve capacity of Petitioner's plant,parties can take advantage of low WESMprices by substituting and optimizing powerfrom the WESM. In such a case, all energyproduced fromWESMshall be counted as reduction •to or part of Respondent's annual mInImumcontracted energy, provided, Respondent shall

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(c)Petitioners' substitution andoptimization from WESM.

In case of Petitioner's substitutionand optimization from WESM, onthe other hand, it should be notedthat the same is instead covered bythe Power Cost Reductionprovision of the Agreement underParagraph 7.11.

37.3 Despite the glaring differences in thetreatment of energy taken from WESMwhen the same is either exercised byPetitioner or Respondent, it is theposition of Petitioner that technicaland economic feasibility or powercost reduction schemes is a keycondition for Petitioner to startimplementing a PCRS.As told above,economic feasibility means Petitionerscan reasonably assure consistently thatits rate charge to Respondent shall notbe higher than its BCQ (contracted fullcost of capacity and energy) and thatthe charging of the same will not resultto significant market losses. Otherwiseit would not be feasible and sustainable.

37.4 Technical feasibility should consider thelimit of BCQ price guaranteed byPetitioners to Respondent as approvedby the ERC and the conditions set forthin Resolution 16 of 2016 issued by theERC on Electric Cooperatives likeRespondent. Under this Resolution,ERCprohibits Respondent from passingon to the consumer any market lossesthat it may incur in attempting to tradein the WESM market. The Resolutioncovers the trades of the ElectricCooperatives like the respondent andnot to the trades of CENPRI as agenerator.

38. Petitioner CENPRI IS scheduled tocommiSSIOnthe 4th unit with a net capacity of6.3MW to complete its 18.9MW net capacity

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. contract just In time' for the summer of 2017.Petitioners, seek 'the Honorable Commission's'assistance to resolve' interpretation of certainprovisions of the PartiesAmended MOAand SAand

- such other agreements, covering the contractual,'obligations of; the Parties herein, particularlyinvolving' situations when Respondent nominated, " •Petitioner but the latter did not dispatch its energy ;-or power from its plant, but instead sourcedRespondent's, nominated requirement from the, "WESM, ' ' ", " ' •• ••

, • Differing interpretations have been offered'but always, these interpretations would not bring

~ about closure"to the Issues involving the same, •particularly the rate of charges being by forwardedby Petitioners !o Respondent,

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• of the issues raised herein, RespondentCENECO'should have recognized the , i,fact that there should have been no real.'issue' as ,to the "payment" schemebetween the parties for the reason that,there already exists an agreementbetween the parties to the effect that,even in case of disputed billing,Respondent CENECOwould still pay .••Petitioners the latter's billing in full

, amount" albeit' "under protest" while "the matter is being discussed; and, later •.• •

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ERCCase No. 2016-o08DRNotice of Public Hearing /13 February 2017Page 23 of25

39.3 The Amended MOA unequivocallyprovided under Section 8.5 that "ifany element of the SUPPLIER's invoiceis disputed, off-taker shall not withholdpayment of the whole invoice but paythe full amount "under protest". This isintended to assure the sustainableviability of the power service providerCENPRI whose revenue to supportoperations, buy fuel, and service capitaldebt, cannot be denied by an off-takerby just raising various areas of dispute.

39.4 It should be pointed out that PetitionerCENPRI's billing for the reserve capacitytendered and provided for in November2016 was very much in compliance withCENECO email-request dated 17October 2016 and therefore should bedeemed appropriate and fair.

39.5 As part of the instant case, therefore,Petitioners therefore incorporate hereinthe issue on the non-payment of theremaining balance amounting toP3,981,755-40, which should haveaccrued to Petitioners' in the spirit offairness to the professional personnel atPetitioners' plant and the varioussuppliers who have provided servicesand supplies to Petitioner's CENPRI insupport of the reserve capacityspecifically requested by CENECO.

40. Given the obvious disagreement on the variousissues or grounds raised or discussed above,Petitioners, ENERGREEN/CENPRI, now comebefore the Honorable Commission to intervene ormediate in the dispute created by said disagreementor differing methodology or interpretations beingused by the Parties in the existingAgreements/Contracts, among others, with the endview of arriving at a reasonable, fair and justresolution of the aforesaid issues.

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ERC Case No. 2016-008DRNotice of Public Hearing /13 February 2017Page 24 of25

SUMMARY OF ISSUES TO RESOLVE

1. Do Petitioners have the right under the AmendedMOA and SA and as a grid WESM member andparticipant to buy energy from WESM and deliver itto its customers like Respondent CENECO?

2. Do Petitioners have the right to invoice the energysubstituted at the contracted rate (BCQ) asapproved by the ERC?

3. Do Petitioners have the obligation apply the PCRSrate or methodology in its billing before it is able toassure its technical and economic feasibility andbefore Respondent CENECO had approved theproposed methodology for averaging the WESMmarket for peaking hours?

4. Does Respondent have a right to withhold paymentfor disputed billings despite the clear provision inthe contract that such should be paid in full "underprotest"?

5. To resolve such others issues relevant, but notlimited, to the foregoing issues including the issueof non-payment of the reserve (un-nominated)charge in the amount ofP3,981,755-40 net ofVAT.

PRAYER

WHEREFORE, in view of the foregoing, it isrespectfully prayed that the Honorable Commissionintervene, mediate, and/or direct the Parties to resolvethe dispute, and approve the proposed Power CostReduction Scbeme (PCRS)for Peaking Band of Petitioner.

Petitioner likewise respectfully prays forconsolidation of cases and claims filed by the respondent,relating to or arising out ofthe same dispute or disputes.

Such other relief and remedies deemed just andequitable under the foregoing premises are likewiserespectfully prayed for.

Finding the said Complaint to be sufficient in form andsubstance, with the required fees having been paid, pursuant toSection 4, Rule 13 of the Commission's 2006 Rules of Practice and

ERC Case No. 2016-008DRNotice of Public Hearing /13 February 2017

, Page25 of25 'j ,

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Procedure (2006 RPP), the same is hereby set for determination ofcompliance with the jurisdictional requirements, expositorypresentation, pre-trial conference,and presentation of evidenceon 13 ' >

March 2017 (Monday) at two o'clock in the afternoon (2:00P.M.) at the ERC Hearing Room, 15th Floor, Pacific CenterBuilding, San Miguel Avenue, Pasig City. -,

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, All persons who have an interest in the subject matter of the'proceeding may become a party by filing, at least five (5) days prior tothe initial hearing and subject to the requirements in the ERe'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's • ,..interest in the subject matter of the proceeding, and the way and •

, .manner in which such interest is affectedby the issues involvedin the .proceeding; and (3) a statement of the reliefdesired.

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All other persons who may want their views known to the• COmmissionwith respect to the subject matter of the proceedingmay

• " file their opposition to the Complaint or comment thereon at any'stage of the proceeding before the Applicants conclude thepresentation of their evidence.'No particular form of opposition orcomment is required, but the document, letter or writing should•contain the name and address of such person and a concise statement .

" . of the opposition or comment and the grounds relied upon. •• • •

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" .WITNESS, the Honorable Chairman JOSE VICENTE B. •

SALAZAR and the Honorable CommissionersALFREDO J. NON,GLORIA VICTORIA C. YAP-TARUC, JOSEFINA PATRICIAA.MAGPALE-ASIRIT, and GERONIMO D. STA. ANA, EnergyRegulatoryCommission,this 13th dayof February 2017in PasigCity.•t

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