energy regulatory commission sanmiguelavenue, …

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Republic of the PhilippinesENERGY REGULATORY COMMISSION

San Miguel Avenue, Pasig City

IN THE MATTER OF THEAPPLICATION FOR APPROVAL'OF THE ANCILLARY SERVICESPROCUREMENT AGREEMENT(ASPA) BETWEEN THENATIONAL GRID CORPORATIONOF THE PHILIPPINES (NGCP)AND SPC ISLAND POWERCORPORATION (SIPC), WITHPRAYER FOR THE ISSUANCEOF PROVISIONAL AUTHORITY

ERC CASE NO. 2013-181 RC

NATIONAL GRID CORPORATIONOF THE PHILIPPINES (NGCP)AND SPC ISLAND POWERCORPORATION (SIPC),

Applicants ..)(- - - - - - - - - - - - - - - - - - - - - - - - )(

ORDER

On September 4, 2013, the National Grid Corporation of thePhilippines (NGCP) and SPC Island Power Corporation (SIPC) filed anapplication for the approval of their Ancillary Services ProcurementAgreement (ASPA), with prayer for the issuance of provisional authority.

In the said application, NGCP and SIPC alleged, among others, that:

1. It is a declared policy of the State to ensure the quality,-reliability, security and affordability of the supply of electricpower [(Section 2b, Electric Power Industry Reform Act of 2001(EPIRA)]. With this end in view, there is a need to comply withthe system requirements for Ancillary Services to ensure gridsystem reliability. NGCP has the mandate to procure therequired Ancillary Services;

ERC CASE NO. 2013-181 RCORDER/November 11, 2013 of 13

2. The current levels of available contracted Ancillary Services inthe Visayas Grid have not yet reached the desired levelsnecessary for the system reliability. Thus, they executed thesubject ASPA;

3. As the demand for power in the Visayas increases, therequirements of the system to ensure stability, reliability andsecurity, likewise, increases. Ensuring the integrity of thesystem is essential to protect the interests of the public andparticularly, key to small and large-scale businesses. Theabsence of system reliability and stability will certainlydiscourage investments and growth;

4. They submit that the immediate approval of the ASPA willgreatly improve the reliability and security of the Grid; and

5. They prayed that a provisional authority be issued authorizingthem to implement the subject ASPA and that after notice andhearing, the subject ASPA be approved.

Relative to the prayer for the issuance of a provisional authority, theCommission initially reviewed the instant application.

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Under the EPIRA, the National Transmission Corporation(TRANSCO), now NGCP, is mandated to ensure and maintain the'reliability, adequacy, security, stability and integrity of the nationwidelelectrical grid and to adequately serve generation companies, distributionutilities and suppliers requiring transmission service and/or ancillaryservices through the transmission system.

Ancillary Services are necessary to support the transmission ofcapacity and energy from resources to loads while maintaining reliableoperation of the transmission system in accordance with good utilitypractice and the Grid Code [Section 4 (b), EPIRAj. Such services ensurethe reliability in the operation of the transmission system and the electricitysupply in the Luzon, Visayas, and Mindanao Grids.

On March 29, 2006, TRANSCO's proposed Ancillary ServicesProcurement Plan (ASPP) was approved. Thus, it was directed to file aseparate application for the approval of the Ancillary Services CostRecovery Mechanism (AS-CRM).

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In a Decision dated October 3, 2007 in ERC Case No. 2006-049 RC,the Commission approved with finality the AS-CRM, subject to certainconditions, such as the following:

a) The cost of procuring the Ancillary Services under the ASPPshall be recovered 100% from load customers but only untilsuch time that such Ancillary Services are already traded in theWholesale Electricity Spot Market (WESM); and

b) All contracts for the procurement of Ancillary Services shall besubmitted to the Commission for approval.

Ancillary Services are essential in maintaining the power quality,reliability, and security of the national grid. These are classified asfollows:

a) Load Following and Frequency Regulation, which refers tothe generating capacity necessary to adjust total systemgeneration over short periods of time to match system loadchanges that result from random fluctuations in totalTransmission System Load. The Frequency Regulationresponds to rapid load/generation fluctuations on the order offew seconds to one minute while load following responds toslower changes on the order of five (5) to thirty (30) minutes.

b) Contingency Reserve, which refers to the generating capacityintended to take care of sudden and unexpected loss of thelarge synchronized generating unit or the power import from asingle Grid interconnection. Contingency reserves are dividedinto two components, as follows:

i. Spinning Reserve, which refers to the ability of agenerating unit to provide generating capacity necessaryto respond immediately to infrequent but usually largefailures of generating units and/or transmission tie lines;

ii. Backup Power Supply (or Cold Reserve orSupplemental Reserve), which refers to the fast startcapability of a generating unit. Generating units providingsuch reserve should be able to synchronize within fifteen(15) minutes upon the advice of the relevant controlcenter and provide additional energy to the systemrapidly;

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c) Reactive Power Support, which refers to the capability of agenerating unit to supply reactive power to or absorb reactivepower from the transmission network in order to maintain thebus voltage within five percent (5%) of its nominal voltage; and

d) Black Start Service, which refers to the ability of a generatingunit without assistance from the Grid or other external powersupply to recover from a shutdown condition to an operatingcondition in order to energize the Grid and assist othergenerating units to start.

In compliance with the provisions of the EPIRA, NGCP invited andnegotiated with all prospective generation companies capable of providingAncillary Services.

Upon conducting several tests on the Panay Diesel Power Plant andBohol Diesel Power Plant of SIPC, NGCP determined that it is capable ofproviding Ancillary Services. Thus, they executed an ASPA for the supplyof the following Ancillary Services:

a) Contingency Reserve;b) Dispatchable Reserve;c) Reactive Power Support; andd) Black Start Service.

NGCP and SIPC executed the subject ASPA for the supply ofContingency Reserve, Dispatchable Reserve, Reactive Power Supportand Black Start Service for a period of five (5) years under a non-firmarrangement. In the application, they prayed for the issuance ofprovisional authority considering that the current levels of availablecontracted Ancillary Services in the Visayas Grid have not yet reachedthe desired levels necessary to ensure grid system reliability.

Below is the actual data from May to August 2013 showing therequired and available levels of Ancillary Services in the Visayas Grid:

May 26 to June 26 to July 26 toAncilla Service June 25 July 25 Aug 25

Re ulatin ReserveActual 0 0 0Required (4% VisayasTotal Demand 1,157 1,149 1,111

ERC CASE NO. 2013-181 RCORDER/November 11,2013 of 13

Total Demand)Actual % Available 0% 0% 0%

Contingency ReserveActual 0 0 360Required 2,232 2,232 2,232Actual % Available 0% 0% 16%

Distpatchable ReserveActual 172 271 976Required 1,972 2,232 2,183Actual % Available 9% 12% 450/0

As the demand for power in the Visayas increases, the requirementsof the system to ensure stability, reliability and security, likewise, increases.Ensuring the integrity of the system is essential to protect the interests ofthe public and, particularly, key to small and large-scale businesses. Theabsence of system reliability and stability will certainly discourageinvestments and growth. Thus, NGCP and SIPC prayed for the immediateapproval of the ASPA which will greatly improve the reliability and securityof the Grid.

NGCP and SIPC proposed the following tariffs and rate structure:

Ancillary Service

Contin enc ReserveDis atchable ReserveReactive Power Sup ort

Black Start Service

Applicable Rate(Maximum Houri Rate

PhP2.00/ kWPhP1.25/ kWPhP4.00/kVAR

Rate = PhP + VOM + Actual Fuel Cost

RatepDPp= PhP1.5154/kWh + PhPO.8280/kWh +Actual Fuel Cost

RatesDPp= PhP1.7570/kWh + PhPO.9855/kWh +Actual Fuel Cost

The ASPA rates represent a reasonable recovery of SIPC'sopportunity cost for making available its generation capacity to provideNGCP the needed Ancillary Services.

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A. Methodology

Negotiations played a very important, role in obtaining a lowerAncillary Services cost. NGCP used various methodologies to arrive at theproposed ASPA rates:

1. Top-Down Approach - New Build

The new build assumption considers the co st which NGCPwould have to incur to build one plant that could service all AncillaryServices. It considered the build cost of a new hydro-electric plant(dam-type) because of its capability to provide all Ancillary Services(Regulating, Contingency and Dispatchable Reserves) and of its lowfuel cost operation. It considers the build cost of San Roque as themost appropriate benchmark due to the following reasons: (a) it wasbuilt fairly recently (2003) compared to Magat (1983) or CBK (1950-1982); (b) it has a fairly large size (411 MW); and (c) the plant wascertified to be capable of providing Regulating, Contingency andDispatchable Reserves.

San Roque Build Cost: US$ 1.17 bn1

Installed Capacity: 411 MWActual Build Cost: US$2.89/MWRange: +/- 15%New Build Cost Range: US$ 2.17-3.33mn per MWWACC: 15%Plant Life: 25 yearsEstimated Capital Cost: PhP1.57 - PhP2.41/kWh

Based on the actual build cost to construct a significant hydro-power plant and applying a range of +/- 15% and a Return on Capitalof fifteen percent (15%) with a project life of twenty-five (25) years,NGCP estimated the cost range to be between PhP1.57 -PhP2.41/kWh.

2. Opportunity Cost

NGCP believes that the operating profit is the true OpportunityCost for generators. It refers to the amount the generator would earnafter taking out the Fuel Cost and Variable O&M costs which it would

1 http://www.eca-watch.org/problems/asia _pacific/ph ilippines/san roqueproject. html

http://www.eca-watch.org/problems/asia


incur in operating the plant. It believes that the operating profit andnot revenue was the appropriate benchmark for determining theplant's opportunity cost.

3. Comparative Revenue

NGCP also considered and made simulations on the effect ofAncillary Services to a generator's top-line. Such analysis was madeusing publicly available data and was used as part of its negotiationstrategy with generators.

Comparative Revenue is also a proxy for opportunity costalthough it is applied to a "whole year" instead of "per hour". Agenerator can earn money either from selling in the WholesaleElectricity Spot Market (WESM), from bilateral contracts or fromAncillary Services.

4. Effect to the Consumer

The impact of the rates to the consumer was the primaryconcern of NGCP. The proposed rates are lower than the currentstructure. NGCP's analysis indicates that for the same amount ofreserves (same quantity), the new rates can be thirty percent to fortypercent (30% to 40%) lower.

NGCP simulated the impact of the contracted rates for theContingency Reserve and Dispatchable Reserve. It intends to use oneplant per type of Ancillary Service and interval and proposed that therecovery of the Ancillary Service cost be charged only to the Cebu-Negros-Panay (CNP) Grid customers for the Ancillary Service provided by thePanay Diesel Power Plant and to the Leyte-Samar-Bohol (LSB) Gridcustomers for the Ancillary Service provided by the Bohol Diesel PowerPlant.


Cebu-Negros-Panay Estimated Cost, PhPWithout Dispatch With Dispatch*

Contingency Reserve 1,140,000.00 478,000.00

Dispatchable Reserve 27,900,000.00 54,080,000.00* Monthly Estimated Cost, Net of Incidental Energy Cost

Billing Determinant Demand 1,025 MWBilling Determinant Energy 462 GWhAverage Billing Determinants for CNP from May 2012 to April 2013

Impact to Without Dispatch With DispatchCebu-Negros-Panay PhP/kW PhP/kWh PhP/kW PhP/kWhContingency Reserve 1.1122 0.0025 0.4663 0.0010Dispatchable Reserve 27.2201 0.0604 52.7620 0.1172

Leyte-Samar-Bohol Estimated Cost, PhPWithout Dis atch With Dis atch*

340,000.00

Dis atchable Reserve 9,068,000.00* Monthly Estimated Cost, Net of Incidental Energy Cost

Billin Determinant Demand 292Billin Determinant Ener 130Average Billing Determinants for CNP from May 2012 to April2013

475,000.00

11,809,000.00

MWGWh

Without Dis atchPhP/kW PhP/kWh1.1630 0.002631.0169 0.0696

With Dis atchPhP/kW PhP/kWh1.6249 0.003640.3961 0.0906

SIPC shall provide Ancillary Services from its Panay and BoholDiesel Power Plants. The Panay Diesel Power Plant consists of the Panay1 and Panay 3 Power Plants with capacities of 15 MW and 52 MW,respectively, while the Bohol Diesel Power Plant has a capacity of 13.7MW. Both plants are certified and accredited by NGCP to be capable ofproviding Contingency and Disptachable Reserves as mandated underSection 7.10.1 of the PGC. It further certified that the standard Ancillary

'ERC CASE NO. 2013-181 RCORDER/November 11, 2013 of 13

Services technical requirements of the System Operator were met andcomplied with during the actual testing of the said plant.

SIPC has existing bilateral contracts to serve the peakingrequirements of several distribution utilities. It commits to supply a totalcapacity of about 23 MW from its Panay Diesel Power Plant during peakhours and trades its available capacity in the WESM.

SIPC may only nominate the available capacity of the said plants forAncillary Services. However, since the contract is on a non-firm basis, ithas the right or option not to nominate any capacity for Ancillary Serviceseven if it is available. On the other hand, NGCP mayor may not schedulethe capacity nominated without any corresponding penalty or payment.This allows NGCP the flexibility to evaluate or decide for optimum AncillaryServices considering the prevailing economic and technical circumstances.

In view of the foregoing, the available reserve in the Visayas Grid isnot sufficient to comply with the required levels for all types of AncillaryServices.

The Commission believes that the contracted Ancillary Servicescapacity is needed to augment the deficiency in the Ancillary Servicesreserve capacity. This will ensure reliability in the operation of thetransmission system and the electricity supply in the Visayas Grid.

An initial evaluation of the instant application discloses that theASPA entered into by and between NGCP and SIPC will redound to thebenefit of the consumers in terms of continuous, reliable, efficient andaffordable power supply as mandated by the EPIRA [Section 2. Declarationof Policy - (b) "to ensure the quality, reliability, security and affordability ofthe supply of electric power].

WHEREFORE, the foregoing premises considered, the Commissionhereby PROVISIONALLY APPROVES the application filed by the NationalGrid Corporation of the Philippines (NGCP) and SPC Island PowerCorporation (SIPC) for the approval of their Ancillary Services ProcurementAgreement (ASPA), subject to the following conditions:


1. Applicable Rates:

The Commission provisionally approves the proposed rates forContingency Reserve, Dispatchable Reserve, Reactive PowerSupport but not the proposed rate for Black Start Service.

For Black Start Service Rate, the Commission, instead, adoptsthe Total Fixed Fee of PhP1.5668/kWh and Variable Fee ofPhPO.6705/kWh, which were the rates provisionally approved bythe Commission for the Panay Diesel Power Plant under SIPC'sPSAs with other distribution utilities, such as Iloilo I ElectricCooperative, Inc. (ILECO I), Iloilo II Electric Cooperative, Inc.(ILECO II), Aklan Electric Cooperative, Inc. (AKELCO) andNegros Occidental Electric Cooperative, Inc. (NOCECO).

For Contingency and Dispatchable Reserve

SIPC shall nominate a corresponding price (in per kW capacityper hour) for each Ancillary Service capacity to NGCP. In theevent that said nominated capacity is scheduled for AncillaryService, the pricing shall be as follows:

a. Scheduled Capacity Without Energy Dispatched

NGCP shall pay SIPC the corresponding nominated priceof that scheduled capacity. Provided, however, that thenominated price shall in no case exceed the followingproposed Fixed Fee Rates, without, however, any minimumcost:

Ancillary Service

Contin enc ReserveDis atchable Reserve

Applicable Rate(Maximum Houri Rate

PhP2.00/ kWPhP1.25/ kW

"ERCCASE NO. 2013-181 RCORDERlNovem ber 11, 2013 of 13

b. Scheduled Capacity With Energy Dispatched

The ASPA rate shall be recovered through settlement on theMarket. Thus, in this case, the ancillary capacity is free ofcharges as the cost is recovered thru the market.

Provided that SIPC shall be entitled to a Monthly Minimumcost based on actual dispatch and the cost of generation,computed using the formula provided under Schedule 4 ofthe ASPA.

Provided further that, in the event that the revenue fromWESM exceeds the calculated monthly minimum, theexcess shall be used to off-set any positive amountdetermined within the relevant period or to immediatesucceeding billing month.

For Reactive Power Support

The pricing mechanism for Reactive Power Support should bepriced separately from the supply of energy service at a rate ofPhP4.00/kVAR/hour. However, the payment of the Reactive PowerSupport shall be made only if the SIPC Power Plant operates at apower factor beyond the normal range (0.85 lagging and 0.90leading).

For Black Start Service

The Black Start Service Rate shall be charged per occurrence atthe rate provided below:

Ancillary Applicable RateService (Maximum Hourly Rate)

Rate = PhP + VOM + Actual Fuel Cost

Black Start RatepDPp= PhP1.5668/kWh + PhPO.6705/kWh +

Service Actual Fuel Cost

RatesDPp= PhP1.5668/kWh + PhPO.6705/kWh +Actual Fuel Cost

~...ERC CASE NO. 2013-181 RCORDER/November 11, 2013 of 13

2. NGCP is enjoined to optimize economic and technical dispatch ofthe available Ancillary Services capacity wherein it shall schedule amix of hourly Ancillary Services capacity at least cost for a reserveneeded to maintain power quality, security, reliability and integrity ofthe grid;

3. The rate to be paid by NGCP as Ancillary Services Cost shouldbe passed on to its customers in accordance with the approved"Ancillary Services-Cost Recovery Mechanism" (AS-CRM).

Relative thereto, NGCP is hereby directed to submit its monthlycomputation of Ancillary Services rates that it passed on to itscustomers, with supporting documents, within the 5th day of themonth; and

4. The provisionally approved rates shall be effective on the nextbilling cycle of NGCP from receipt of this Order. In the event thatthe final rate is higher than the provisionally approved rate, theresulting additional charge shall be collected by SIPC from NGCPand the latter shall pass it on to its customers. On the other hand,if the final rate is lower than the provisionally approved rate, theamount corresponding to the reduction shall be refunded by SIPCto NGCP and the latter shall pass it on to. its customers.

SO ORDERED.

Pasig City, November 11, 2013 .

.~ /2. (~~IDA G. CRUZ-DUCUT

Chairperson rOr.. rr.~ ~/

GLb~J"CTORI~. YAP- TARUCCommissioner

JOSEFINA PATRICIA .Commi si

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Copy Furnished:

1. National Grid Corporation of the Philippines (NGCP)NGCP Building, Quezon Avenue corner BIR Road,Diliman, Quezon City

2. Office of the Solicitor General (OSG)134 Amorsolo Street, Legaspi Village,City of Makati 1229

3. Commission on Audit (COA)Commonwealth Avenue,Quezon City 1121

4. Senate Committee on EnergyGSIS Building, Roxas Boulevard,Pasay City 1300

. 5. House of Representatives Committee on EnergyBatasan Hills, Quezon City 1126

6. The Office of the City MayorCebu City

7. The Office of the City MayorQuezon City

8. PresidentPhilippine Chamber of Commerce and Industry (PCCI)3rd Floor, ECC Building,355 Sen.Gil Puyat Ave., Makati City

9. SPC Island Power Corporation (SIPC)ih Floor, Citibank Center, 8741 Paseo de Roxas, Makati City

10. Atty. Russel S. AlabadoALABADO & PARTNERS LAW OFFICESCounsel for SIPC3rd Floor, Builder's Center Building,170 Salcedo Street, Legaspi Village, Makati, City

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