Palawan Chamber

RESOLUTION No. 02, SERIES OF 2009

A RESOLUTION REQUESTING THE ENERGY REGULATORY COMMISSION FOR ACCREDITATION OF THE PALAWAN CHAMBER OF COMMERCE AND INDUSTRY

Whereas, be it resolved that the Palawan Chamber of Commerce and Industry (Palawan CCI), being the recognized representative of the business, commerce, and industry sectors of Palawan Province, shall organize itself and make official representations with the Energy Regulatory Commission (ERC), Joint Congressional Power Commission (JCPC) and the Department of Energy (DOE), as appropriate, to be accredited as an official private sector representative for the Province of Palawan and the City of Puerto Princesa in all hearings and public discussions regarding electric power systems, programs and policies  affecting the Province and the City.

Whereas, for this purpose, the Palawan CCI shall send its formal letter of notice and request for representation to all the above agencies for proper accreditation.

Whereas, as an accredited representative, the Palawan CCI shall be entitled to prompt notification and receipt of any and all notices affecting the subjects mentioned above.

Whereas, the official representatives of the Palawan CCI shall be the following:   Pacifico Lumauag, Jr.(President), Vicente Tan (Past President), Armando Lustre, Jr.(Chairman the Board), Edgardo Antonio (Chair of Energy Committee), Eric John Yayen (Executive Vice President) and Bart Duff (External Vice President).

Therefore, BE IT RESOLVED, that the Palawan Chamber of Commerce and Industry be designated  by the Energy Regulatory Commission as an accredited private sector representative from Puerto Princesa City and the Province of Palawan.

Resolved at Puerto Princesa on the 13^th day of May 2009.

Palawan Chamber of Commerce and Industry

May 25, 2009

PETITION

ERC Case No. 2009 – 025 RC

Topic: Consumer concerns: Energy Regulatory Commission Case No. 2009-025 RC-- Petition and Proposed PSA between Palawan Electric Cooperative (PALECO) and Delta P for approval of a power generation tariff.

Goal: To protect Palawan consumers from high electric power costs and seek increased efficiency, reliability, diversity and sustainability in current and future electric power systems.

Premise: The Energy Regulatory Commission(ERC) has the mandate to insure that power rates are “just and reasonable”.  PALECO as a distribution utility has an obligation to supply power “in the least cost manner” to its captive customers under Sec 23 of the EPIRA law.

The issues are:

I. Components of the Proposed Tariff (see attached Table 1 & Fig.1)

a. Fixed Rate or Capital Recovery Fee of P1.4686 per kwh

1) This fixed fee is to recover the project cost of P412 million. According to the executive summary (Attachment 6) on page 5 item b.2, the P1.4686 per kwh fee will result in a capital recovery expressed in terms of an equity internal rate of return (IRR) of 11.6%. This is also referred to as the Weighted Average Cost of Capital or (WACC).

The PSA defines Fixed Fee on page 5 as “such portion of the total fee to recover capital, investment, expected profit, and associated income taxes”

2) Project Cost of P412 Million

The project cost consists of P180 million as the “estimated book value” of the power plant as of April 3, 2009 and P232 million as the estimated rehabilitation costs.

Questions and Clarification:

1. Does the P180 million “estimated book value” mean the acquisition cost of the power plant by the new Delta P is P180 million?
2. Are applicants allowed under ERC rules to recover estimated book values and not the actual cost of capital investment?
3. (c)     Based on the “Details of Rehabilitation Cost Estimates” on page 8 of the Executive Summary, the P232 million will be invested in:

1) P122 million for Parts required for Engine rehabilitation. It will replace 48 of the 64 Pistons of the four engines (16 ea), all of the cylinder liners and connecting rods, a whole new crankshaft, and etc.

2) P110 million for the rehabilitation of the plant and auxiliary equipment.

When will these major rehabilitation activities commence and when will they be completed?

3)Based on the Power Supply Agreement submitted as Annex G, the “Target commercial operations date” means 03 April 2009, the date when supplier (Delta P) targets commencing operation of the Power Station (Page 8).

(a) Does this mean Delta P would already be earning capital recovery from consumers based on the P412 million investment even if, as of 03 April 2009, it had only invested P180 million to acquire the plant and has not yet made any investment for rehabilitation?

(b) To protect consumers, should Delta P not be required to wait until it completes the P412 million capital investment before being allowed to recover the whole Fixed Fee?

b. Forex O&M Base Rate of P1.1683 per kwh

It is assumed that this is the portion of cost for operating and maintaining the power plant that is composed of imported components and therefore is subject to Forex changes. Mainly these are spare parts. This would also be the equivalent to “Variable Costs” for other plants.

Questions and Clarification:

1. At 55 million kwh a year, the Forex O&M totals P64,256,500 per year. At the maximum Deliverable Energy of 72 million kwh, this would total P84,117,600 per year.
   1. (a) Is this charge the equivalent of “variable costs” as used by other power plants?
   2. (b) The Forex O&M of other IPP’s are in the range of P0.40 to P0.80 per kwh. Why is the cost of Forex O&M spare parts for the Wartsila Engines of Delta P higher by 46% to 290%?
   3. (c) Isn’t the Forex O&M charge of P84 million per year for imported parts not excessive and unreasonable considering that the Petitioner proposes to undertake an extensive P232 million rehabilitation of the plant? Is it reasonable to charge 36% per year of the plant’s full rehabilitation costs?

c. Peso O&M Base Rate of P1.6036 per kwh

This is defined on Page 7 of the PSA as the total fee to recover Peso indexed costs such as general administration, labor and other non-fuel costs, adjusted for changes in the Philippine Consumer Price Index”.

1) Based on energy delivery of 55 million kwh per year, this would total P88,198,000 per year. At the Maximum deliverable energy of 72 million kwh per year, the total would be P115,459,200 per year.

2) Questions and Clarification:

1. Does the Peso O&M rate refer to the fixed administrative and manpower costs to operate the power plant?
2. Do these fixed costs increase if output is increased from 55 million kwh to 72 million kwh a year amounting to P27.26 million in additional charges?
3. (c) Should not this follow the formula of the capital recovery fee where there is no additional Peso 0&M charge beyond 55 million kwh? Otherwise there would be excessive recovery of costs from the electric consumers or from the missionary subsidy.
4. Should PALECO and Delta P not be required to change or specify O&M charges as Fixed and Variable Costs?

d. Lube Oil Charge

Based on the application, Delta P is recovering lube oil consumption at 0.0035 liter per kwh of output. Other power plants are only recovering 0.0015 and 0.00168 liter per kwh? Should this not be validated?

If the engines are rebuilt under the proposed P232 million rehabilitiation program, is it unreasonable to expect lubrication oil consumption to decline?

e. Fuel and Lube Fee -        P9.7053 per kwh on contract date with bunker c price of P33.5175. (heat rate=.28408?)

P4.4685 per kwh updated as of Jan 09 with bunker c price of P14.2113 per liter

Fuel consumption is declared as 10,000 btu/kwh in the petition or 0.27 liter per kwh. This applies to both bunker c and regular diesel.

1) Questions and Clarification:

1. Using the formula and the base rates in the Petition (page 11) and the Power Supply Agreement between PALECO and Delta P, the fuel consumption rate appears to be 0.28408 liter per kwh and not 0.27 liter per kwh. This was computed by dividing the declared cost of bunker c of P9.5218 per kwh (94.38% of fuel charge of P10.088) by the actual bunker c price used which was P33.5175 per liter.

Kindly clarify this computation. The difference between 0.28408 and 0.27 liter per kwh is 0.0141 liter excess per kwh or P0.4726 per kwh over recovery of fuel. This amounts to nearly P26 million per year.

1. Why is Delta P’s fuel consumption guarantee rate of 0.284 or 0.27 liter per kwh, so much higher than other bunker c fired power plants which range from 0.23 to 0.268 liter per kwh?
2. (c)     This seems not reasonable to consumers since Delta P will have undertaken a major engine and auxiliary systems rehabilitation at a cost of P232 million which should make the power plant much more fuel efficient and reliable.
3. In the petitioners executive summary – Attachment 6 page 4 it is declared that “the historical fuel consumption rates of the power plant since Gigawatt power took over in May 2007, as ranging from 0.2603 to 0.2718 per kwh.” This however was before the extensive P232 million rehabilitation program which is to occur in 2009.

Should not consumers benefit from increased power plant efficiency and hence lower fuel consumption? The P232 million that is to be spent on rehabilitation is being recovered from electric consumers as part of the Fixed Charge for capital recovery.

II. “Least Cost Power Options” for the Future

PALECO as a regulated distribution utility has the obligation to supply electricity in the least-cost manner to its captive consumers. This is provided for under Section 23 of the EPIRA law.

PALECO also has an obligation to its customers to keep all options open for “least cost” expansion and diversification in sourcing its future power requirements.

a) We petition PALECO to continue to seek options that are consistent with its obligation to supply reliable electricity at least cost for the long term. The government has made it increasingly clear that the missionary subsidies will eventually be reduced at which time Palawan consumers will begin to pay the true cost of generation (TCGR). Long term obligations for power production should consider the impact which reduction or elimination of the Missionary subsidies will have on consumer rates (Fig. 2).

b) For future needs, PALECO must pursue cheaper and cleaner solutions and reconsider the following provisions in the present Power Supply Contract which pre-empt the rights of Palawan consumers to better future options.

1. (1) 10 year term of the contract

It takes only 5 years or less to bid and build new power plants. Although it is justifiable to sign a contract with Delta P for an existing 16MW supply, PALECO should not bind its captive consumers to 10 years because of Delta P’s high rate. It serves consumer’s interests better to sign for 5 years and promptly submit a request for proposals which ensures a sustainable, least-cost, environmentally friendly power supply in the future.

1. (2) “Phase II” for Expansion

Under provision H, page 2 of the power supply agreement, PALECO is apparently committing to Delta P its future requirements for 15 more years through a Phase II expansion of the existing Delta P plant.

This action denies Palawan consumers access to more competitive options and is detrimental to the interest of the province, particularly when it is evident that Delta P’s price for the current plant is significantly higher than other power supply contracts.

We propose that PALECO retain its options to consider holding competitive bids in the future.

1. (3) Replacement of Generating Unit

In Schedule A Section 1.2 of the power supply agreement, the supplier, Delta P is allowed to replace its generating units as long as the 13.5MW dependable capacity is maintained.

This looks innocent. However, under the N-1 rule of the Philippine Grid Code, in the event of failure, there must be adequate reserves available to replace the largest generator serving the grid. We request PALECO to specify that each unit replacement generator be approximately the same capacity as those being replaced to avoid disrupting the capacity and demand balance for Puerto Princesa. Delta P had earlier proposed installation of an 11MW engine. If installed there would be a mismatch for back-up and spinning reserve purposes.  Existing engines in Palawan range from 3.5 to 5.5MW including the 4MW units of Delta P. Installation of a significantly larger generating unit would increase the costs for backup and spinning reserves.

1. (4) Wheeling of Renewable Energy
   1. Kindly clarify Section 5.3 of the PSA. It appears future suppliers of renewable energy will be required to sell power to Delta P instead of PALECO. Although the provision says Delta P will pass-through to PALECO such renewable energy, it is not clear what the total cost to PALECO and its consumers will be.
   2. Under this provision, Delta P, the supplier, shall be allowed to continue to charge a portion of its total fee for each kwh of wheeled energy, as to enable the supplier (Delta P) to recover its investment and all fixed fees on the equivalent amount of replaced energy.

To protect consumers, the level of fixed fees that will be recovered by Delta P should be clearly stated and also duly evaluated for fairness and reasonableness by the ERC.

1. As an example of the impact of this provision on costs, what would be the total cost of electricity to consumers from the following renewable projects (which are VAT free):
   1. A Biomass Project of Happy Link with a TCGR rate of P7.30 per kwh?
   2. A Mini-Hydro Project with a TCGR rate of P5.00 per kwh?
   3. (5) Power Interruption due to delays in payments of bills and subsidies
      1. Kindly clarify the rights of the supplier Delta P to discontinue power supply in the event of:
         1. Delayed payments of monthly power bill by PALECO?
         2. Delayed payment of subsidy payments by NPC?
         3. Can there be reasonable time for a curing period?