energy regulatorycommission in the …...the province of davao del norte, namely: asuncion,...

Republic of the PhilippinesENERGY REGULATORYCOMMISSION

San Miguel Avenue, Pasig City

THEFOR.THEOF

IN THE MATTER OFAPPLICATIONAPPROVALCONSORTIUMAGREEMENT BETWEENDAVAO DEL NORTECOOPERATIVE, INC.(DANECO) AND DAVAOORIENTAL ELECTRICCOOPERATIVE, INC.(DORECO) AND THEISSUANCE OF AFRANCHISE ANDCERTIFICATE OF PUBLICCONVENIENCE ANDNECESSITY FOR THEOPERATION OF A PORTIONOF THE MACO-PINTATAGAN 69KV ANDMACO SIS TAP MACO-MATI691(\1 SUBTRANSMISSIONASSETS IN FAVOR OF THECONSORTIUM OF DANECOAND DORECO, WITHPRAYER FOR PROVISIONALAUTHORITY

DAVAO DEL NORTECOOPERATIVE, INC..(DANECO) AND DAVAOORIENTAL ELECTRICCOOPERATIVE, INC.(DORECO),

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

ERC CASE NO. 2015-111 MC

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NOTICE OF PUBLIC HEARING

•TO ALL INTERESTED PARTIES:

Notice is hereby given that on 29 December 2015, Davao delNorte Cooperative, Inc. (DANECO) and Davao Oriental Electric

ERC CASE NO. 2015-111 MCNOTICE OF PUBLIC HEARINGI 27 JUNE 2016PAGE20F13

Cooperative, Inc. (DORECO) filed an Application seeking theCommission's approval of the Consortium Agreement between bothDistribution Utilities (DDs), and the issuance of a franchise andCertificate of Public Convenience and Necessity (CPCN) for theoperation by the said DDs' Consortium of a portion of the Maco-Pintatagan 69kv and Maco SIS tap Maco-Mati 69kv SubtransmissionAssets which included a prayer for provisional authority.

The Application alleged the following:

THE APPLICANTS

1. DANECO is a non-stock, non-profit electriccooperative duly organized and existing under the laws of theRepublic of the Philippines, with principal office address atKIn. 100 National Highway, Montevista, Compostela Valley. Itholds an exclusive franchise from the National ElectrificationCommission to operate an electric light and power distributionservice in all municipalities of the Province of CompostelaValley, namely: Monkayo, Montevista, Nabunturan, Mawab,Compostela, New Bataan, Maragusan, Maco, Mabini,Pantukan and Laak, and in the City of Tagum and IslandGarden City of Samal (IGACOS) and certain municipalities ofthe Province of Davao del Norte, namely: Asuncion,Kap'along, Talaingod, New Corella and San Isidro.

2. DORECO is likewise a non-stock, non-profitelectric cooperative, duly organized and existing under thelaws of the Republic of the Philippines, with principal officeaddress at National Highway, Madang, Mati City, DavaoOriental. It likewise holds an exclusive franchise from theNational Electrification Commission to operate an electriclight and power distribution service in all municipalities in theProvince of Davao Oriental, namely: San Isidro, GovernorGeneroso, Lupon, Banaybanay, Tarragona, Manay, Caraga,Banganga, Cateel and Boston, and in the City of Mati.

3. DANECO and DORECO may be served with theorders, notices and other legal processes of the HonorableCommission through their counsel at the address indicatedbelow.

LEGAL BASIS FOR THE APPLICATION

4. This Application is being filed by the Applicantspursuant to Section 8 of Republic Act No. 9136, otherwiseknown as the "Electric Power Industry Reform Act of 2001"(EPIRA), which provides in part, that:

ERC CASE NO. 2015-111 MCNOTICE OF PUBLIC HEARING/ 27 JUNE 2016PAGE 3 OF 13

The takeover by a distribution utility of anysubtransmission asset shall not cause a diminution ofservice and quality to the end-users. Where there aretwo or more connected distribution utilities, theconsortium or juridical entity shall be formed by andcomposed of all of them and thereafter shall be grantedafranchise to operate the subtransmission asset by theERC.

CAUSE OF ACTION

5. On 05 August 2015, DANECO and DORECO(hereinafter, collectively referred to as the "Consortium")entered into a Consortium Agreement without a separatejuridical entity, for the joint acquisition and operation of aPortion of the Maco-Pintatagan 69kVand Maco SIS tap Maco-Mati 69kV Subtransmission Assets (the "SubtransmissionAssets") of the National Transmission Corporation(TRANSCO), being the distribution utilities directly connectedthereto.

6. The Subtransmission Assets will be purchased bythe Consortium from TRANSCO through a Lease PurchaseAgreement ("LPA").

7. In the Consortium Agreement, DANECO andDORECO have set out each of their rights and obligations withrespect to the operation, maintenance, repair andimprovement of the asset, as well as each of theirproportionate interest in the Subtransmission Assets.

SALIENT PROVISIONSOF THE CONSORTIUM AGREEMENT

8. The salient provisions of the ConsortiumAgreement are as follows:

"SECTION 1. PURPOSE

1.1 The Parties hereby agree to form a consortium("Consortium") solely for the purpose of jointlyacquiring, operating and maintaining theSubtransmission Assets, and establishing anarrangement to govern their rights and obligationsas between themselves and in relation to thirdparties in connection therewith.

1.2 The Subtransmission Assets shall be for theexclusive use of the Parties in serving theirrespective customers within their respectivefranchise areas. The Parties agree to respect eachother's franchise area.


SECTION .1. PURCHASE OF THESUBTRANSMISSION ASSETSAND COMPUTATION OFPROPORTIONATE INTEREST

3.1The Parties shall jointly enter into a contract withTRANSCO for the purchase of the Portion of theSub transmission Assets in the amount ofPHILIPPINE PESOS: TWENTY SIX MILLION TWOHUNDRED FORTY ONE THOUSAND SEVENTYPESOS and EIGHTY FOUR CENTAVOS(PhP26,241,070.84). The purchase price is subject toadjustment in case there will be additionalimprovements that will be introduced while theApplication for the Approval of this ConsortiumAgreement is being heard by the Energy RegulatoryCommission.

The Parties agree that the Sub transmission Assetsshall be owned by them in equal parts, asfollows:

% Ownership InterestIn theSubtransmission Assets

DANECO 50%DORECO 50%TOTAL 100%

The Parties further agree that the Purchase Price ofthe Subtransmission Assets shall be borne by themin equal shares asfollows:

Amount to be paid toTRANSCO

DANECO PhP 13,120,535.42DORECO PhP13,120,535.42TOTAL PhP 26,241,070.84

3.2The Parties shall be considered co-owners of theSTAs in equal parts pursuant to their acquisitionshares in the said assets.

The subscription amount that is paid by the Parties,which corresponds to their acquisition share in theSTA's, shall be fixed and shall not be subject tochange notwithstanding any change in the Parties'load requirements in the future, unless otherwiseagreed upon by the Parties in writing.


3.4 Revenues derived from Customers who will directlyconnect to the Substansmission Assets subject of thisAgreement shall be shared equally by the parties.Specific details as to shares of revenues shall begoverned by a separate agreement.

SECTION 4. CONSORTIUM GOVERNANCE

4.1 Immediately upon effectivity of this Agreement;the Parties shall set up a steering Committeeconsisting of eight (8) members. Each Party shalldesignate four (4) persons to serve on the SteeringCommittee who will be authorized to act on behalfof such Party (each a "Representative/s") (or analternate Representative/s to serve in the absenceof such Representative) in connection with allmatters arising under this agreement. A partymay at any time and from time to time change itsRepresentative/s (or alternate Representative/s)by written notice to the other Party. Each Partyshall appoint an alternate representative/s to actin the absence of its representative/s and shallinform the other Party by written notice of suchalternative representative/so

The position of Chairman of the SteeringCommittee shall be alternately occupied betweenthe two parties on an annual basis exceptotherwise if the other party expressly waives itsright to occupy said position for a give year.

The members of the Steering Committee are asfollows:

BENEDICTOD. ONGKINGMARILOU R. IMPUESTOGLADYSANNE. O. ADANZAROBERT A. IMPUESTOJOSEPH ROY F. LEMENTENARCELIA Q. SAMPIRIIRMA F. TEOXONFATIMA L. MACARONA

ChairmanMemberMemberMemberMemberMemberMemberMember

4.2 The role of the Steering Committee shall be to keepeach Party fully informed, and make all decisionsrelative to the ownership, operation andmaintenance of the Subtransmission Assets.

4.3 The Steering Committee shall have meetings fromtime to time during the term of this Agreement as

ERC CASE NO. 2015-111 MCNOTICE OF PUBLIC HEARING/ 27 JUNE 2016PAGE60F13

necessary. Such meetings may be called by theSteering Committee representatives upon five (5)calendar days written notice to the other Party.However, if a Steering Committee Representativedetermines that a condition exists which requiresan immediate meeting, that Representative maycall an immediate meeting through telephone,email orfacsimile notice to the other Party.

4.4 The notice shall specify the matters to be decidedat the meeting. A Steering CommitteeRepresentative may add matters to be decided atsuch meeting by written notice to the other Party,at least two days prior to the meeting.

4.5 No Steering Committee meeting may be held orcontinued unless a Representative (or alternateRepresentative) of each Party ispresent.

4.6 Each Steering Committee Representative shallhave one vote in deciding matters brought beforethe Steering Committee. The affirmative vote ofboth Representatives shall be necessary to decideany matter that may come before any meeting ofthe Steering Committee, In case of a deadlock, thematter shall be subject to the provisions of Section10.3 hereof

SECTION 5. OPERATION ANDMAINTENANCE OF THESUBTRANSMISSION ASSETS

5.1 Upon signing by the Parties of the Contract of Salewith Transco, the Parties shall conduct a jointsurvey of the Sub transmission Assets at their owncost, to assess the situation of the structures aswell as the status of the vegetation surroundingthe Sub transmission Assets. The result of the jointsurvey may be used by the Steering Committeeand the Board of Directors of the Parties forMaintenance projection and rehabilitationprogram of the Sub transmission Assets.

5.2 The Parties' share in the operation andmaintenance cost of the Subtransmission Assetsshall be proportionate to their respective demand.For this purpose, the Parties shall jointly requestthe National Grid Corporation of the Philippines.(NGCP) in writing for data on their recordedaverage demand for the immediately precedingyear relative to the Subtransmission Assets.


5.3 In the event that a Party determines the need forregular maintenance repairs, a SteeringCommittee representative of such Party shallnotify the other Party and call a meeting of theSteering Committee in accordance with Section 4.3above. In case of emergency repairs, a Party maymake repairs on such portion of theSubtransmission Assets within its franchise area,upon immediate notice to the other Party prior tothe execution of repairs, provided that a SteeringCommittee meeting shall be held immediately afterthe execution of such repairs to assess and reviewthe repairs done.

5.4 To facilitate proper coordination and quickresponse time during emergencies and switchingprocedures, the Parties hereby agree to submit thenames of the persons in charge, their telephoneand mobile numbers as well as hotline numbers.

5.5 However,jor expediency, the expenses that may beincurred in relation to the maintenance andrepairs of Sub transmission Assets shall be initiallyborne by the Parties conducting the maintenanceand repairs pursuant to 5.3. The SteeringCommittee shall determine the total expensesincurred for the repairs. Thereafter, the Partyincurring the expenses in excess of the sharereferred to in 5.2shall deliver a billing statement tothe other Party setting out the amount due onaccount thereof within fifteen (15) days from thedetermination of the Steering Committee of theamount incurred for the expenses, and the otherParty shall pay its share in the expenses withoutneed of any demand within fifteen (15) days fromreceipt of the billing statement. All payments shallbe made in lawful currency in the Philippines.

5.6 Major rehabilitation, expansion and upgrading ofthe Subtransmission Assets shall be approved bythe Steering Committee, subject to final approvalby the Parties' respective Board of Directors.

5.7 Expenses incurred to replace malfunctioning,ageing or obsolete assets forming part of theConsortium Subtransmission Assets shall beshared by the Parties, proportionate to each one'slatest demand.


5.8 The Parties agree to maintain their loads to theextent that the Subtransmission Assets are keptreliable and viable. A technical study and analysisshall be made annually to consider the possibilityof line overloading. Should the Parties increasetheir loads temporarily due to NGCP shutdowns asa result of maintenance and repairs, the Partieshereby agree to coordinate with NGCPfor possibletransfer of loads to adjacent facilities to avoidoverloading and ensure compliance with powerquality and reliability standards of the system.statement by the other Party.

5.9 Each Party shall be solely liable for any and alltaxes, duties, charges and other levies payable inrespect of its ownership and use of theSubtransmission Assets.

5.10 The Parties shall obtain and maintain an all-riskinsurance coverage for the Subtransmission Assetsthroughout the effectivity of this Agreement, froma reputable insurance company acceptable to bothParties. The cost of obtaining and maintaining theinsurance coverage, and proceeds from suchinsurance coverage, shall be shared by the Partiesequally pursuant to their ownership interest in theSubtransmission Assets, as indicated in Section3.1."

A copy of the Consortium Agreement is attached heretoas Annex "A" and made as an integral part of thisApplication.

9. For the purpose of operating the SubtransmissionAssets following the approval of the Honorable Commission ofthe Lease Purchase Agreement, the Consortium, by way of theinstant Application, respectfully prays for the issuance of afranchise and Certificate of Public Convenience and Necessity(CPCN). Each of DANECO and DORECO possesses thequalifications for the issuance of a CPCN, as prescribed inResolution NO.5, Series of 2008 (the "CPCN Resolution"),'thus:

a. Filipino citizenship or corporations, co-partnerships,associations or joint-stock companies constituted andorganized under the laws of the Philippines: Provided,that sixty (60) per centum of the stock or paid up

"A Resolution Adopting the Rules to Govern the Issuance of Certificate ofPublic Convenience and Necessity (CPCN) to Entities Engaged in theTransmission and Distribution of Electricity".


capital of any such corporation, co-partnership,association or joint stock company must belongentirely to citizens of the Philippines;

b. Technical capability;

c. Financial capability; and

d. Franchise for operating and maintaining atransmission or distribution system issued by theCongress of the Philippines, or the ERC pursuant toSection 8 of the Act.

Citizenship and Franchise

10. Both DANECO and DORECO are grantees of anexclusive franchise issued by the National ElectrificationCommission (NEC). Copies of their respective Certificate ofFranchise are attached hereto as Annexes "B" and "C" andmade as integral parts of this Application.

Technical Capability

11. The Consortium possesses the following technicalcapabilities, as measured against the criteria set out inResolution No. 15, Series of 20112 (the "STA Guidelines") ofthe Honorable Commission:

a. it has experience in the operation andmaintenance of subtransmission assets similar to theSubtransmission Assets being acquired;

b. it has existing inventory of materials forimmediate replacement during emergency repair andmaintenance of the lines;

c. it has experience in the operation andmaintenance of substation facilities and has qualifiedpersonnel for metering, protection and instrumentation,transformer testing and evaluation;

d. it has an annual SAIFI of not more than 20times and SAID! of not more than 45 hours; and

e. each of DANECO and DORECO hassubmitted a Statement of Compliance with the

2 "A Resolution Adopting the Amended Rules for the Approval of the Saleand Transfer of TRANSCQ'sSubtransmission Assets and the Acquisitionby Qualified Consortiums".


Philippine Grid Code and the Philippine DistributionCode.3

Copies of the result of the evaluation of TRANSCO ofthetechnical capability of the DANECO and DORECO to operatethe Subtransmission Asset are attached hereto as Annexes"D" and "D-l" and made as integral parts of this Application.

Financial Capability

12. The Consortium is financially capable ofsustaining the operation of the Subtransmission Assets. Eachof DANECO and DORECO is not delinquent on all financialobligations related to all contracts with suppliers of inputsnecessary for the provision of electricity service to end-usersand on all financial obligations related to outstanding debt. Itscurrent ratio, debt ratio, average collection period, net profitmargin and return on assets are within the range prescribed inArticle IV, Section 2 of the STAGuidelines.

Copies of the result of the evaluation by TRANSCO of thefinancial capability of DANECO and DORECO to operate theSubtransmission Asset are attached hereto as Annexes "E"and "E-l" and made as integral parts of this Application.

Policy on Existing and Future End-User Connections

13. The Consortium shall adhere to the provisions ofapplicable laws, rules and regulations with respect to end-userconnections. Currently, there are no end-users connected tothe Subtransmission Asset.

Applicable Charges and Rates

14. The value of the Subtransmission Assets, in theproportionate amount of ownership, shall be included inDANECO and DORECO's respective plant in service andutilization of Reinvestment Fund for Sustainable CapitalExpenditures (RFSC) in accordance with the Rules for Settingthe Electric Cooperatives' Wheeling Rates (RSEC-WR).Notwithstanding, DANECO and DORECO shall ensurecompliance with the relevant provisions of the STA guidelines,as applicable, for directly connected end-users.

15. Based on the foregoing, the Consortium submitsthat it has established its expertise and resources toadequately and reliably serve the present and future electricityrequirements of the respective customers of DANECO andDORECO with the operation of the Subtransmission Assets.

3 Article IV, Section 1 of the STAGuidelines.

ERC CASE NO. 2015-111 MCNOTICE OF PUBLIC HEARING/ 27 JUNE 2016PAGE 11OF 13

Hence, having complied with the requirements of applicablerules including the STA Guidelines and the CPCN Resolution,the issuance of the CPCN to the Consortium is warrantedunder the circumstances. Such issuance will ultimatelyredound to the benefit of the end-users in terms of continuous,reliable and efficient services.

16. Further, the Consortium submits the followingdocuments as part of this Application and in compliance withResolution NO.5, Series of 2008:

Annex Nature of Document

"F" Board Resolutions of DANECO and DORECOand authorizing the execution of the Consortium"F-l" Agreement and the acquisition of the

Subtransmission Assets"G" List of Management Officers of DANECO andand DORECO"G-l""H" List of Technical Officers/Employees ofand DANECO and DORECO who are responsible for"H-l" the design, installation, maintenance and repair of

equipment of the Subtransmission Assets"I" Supply-Demand Profiles/Scenarios of DANECOand and DORECO containing information on the"I-1" power supply m the franchise area and the

contracted demand and energy"J" DANECO and DORECO Franchise Areaand Description"J-l"

ALLEGATIONS IN SUPPORT OF THEPRAYER FOR PROVISIONAL AUTHORITY

17. The Consortium IS acqmrmg the subjectSubtransmission Assets from TRANSCO. The provisionalapproval of the instant Application is required in order thatthe Consortium, as such, can legally purchase and operate theSubtransmission Assets. Also, the provisional approval of theinstant Application will enable the Consortium and TRANSCOto file with the Honorable Commission the correspondingapplication for approval of the sale or the LPA. Being so, theConsortium respectfully prays of the Honorable Commissionthat upon initial review hereof, a provisional authority beissued approving the Consortium Agreement.

Copy of Judicial Affidavit in support of the prayer forissuance of provisional authority is attached hereto as Annex"K" and made as integral part of this Application.

ERCCASENO. 2015-111MCNOTICEOF PUBLICHEARING/ 27 JUNE 2016PAGE12OF 13

PRAYER

WHEREFORE, foregoing premises considered, it isrespectfully prayed of the Honorable Commission that afterdue notice and hearing, judgment be rendered approving theConsortium Agreement between Davao del Norte ElectricCooperative, Inc. (DANECO) and Davao Oriental ElectricCooperative, Inc. (DORECO) and granting a Franchise and aCertificate of Public Convenience and Necessity in favor of theConsortium to operate, maintain, upgrade, or expand aPortion of the Maco-Pintatagan 6gkV and Maco SIS TapMaco-Mati 6gkV Subtransmission Assets subject of theConsortium Agreement.

Pending hearing, it is likewise prayed that a provisionalauthority be issued to the Applicants.

Other reliefs just and equitable under the premises arelikewise being prayed for.

The Commission has set the said Application for determinationof compliance with the jurisdictional requirements, expositorypresentation, Pre-Trial Conference, and presentation of evidence on01 August 2016, Monday, at three thirty in the afternoon(3:30 P.M.), at the ERC Hearing Room, 15th Floor, PacificCenter Building, San Miguel Avenue, Pasig City.

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 Application or comment thereon at anystage 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 shouldcontain the name and address of such person and a concise statementof the opposition or comment and the grounds relied upon.


All such persons who wish to have a copy of the Applicationmay request the Applicants, prior to the date of the initial hearing,that they be furnished with a copy of the Application. The Applicantsare hereby directed to furnish all those making a request with copiesof the Application and its attachments, subject to reimbursement ofreasonable photocopying costs. Any such person may likewiseexamine the Application and other pertinent records filed with theCommission during the standard officehours.

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 2'1h day of June 2016 in Pasig City.

ATTY. NAT ~ MARASIGAN~JStaff

Officeof the Chairman and CEO

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