Republic of the Philippines

ENERGY REGULATORY COMMISSION

San Miguel Avenue, Pasig City

IN THE MATTER OF THE APPLICATION ERC CASE NO. 2002-11

FOR APPROVAL OF THE REVISED RATE (2001-896)
SCHEDULES IN COMPLIANCE WITH SEC.36
OF REPUBLIC ACT NO. 9136 AND ERC
ORDER DATED OCTOBER 30, 2001, WITH
PRAYER FOR PROVISIONAL AUTHORITY.

- and

APPLICATION FOR AUTHORITY TO ADJUST ERC CASE NO. 2001-482

ITS RATES TO ATTAIN THE ALLOWABLE (ERB CASE NO. 98-75)
RATE OF RETURN ON RATE BASE (RORB)
WITH PRAYER FOR PROVISIONAL AUTHORITY.

CABANATUAN ELECTRIC CORPORATION

(CELCOR),
Applicant.
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

D E C I S I O N

Before the Commission for resolution are the consolidated applications filed

by applicant Cabanatuan Electric Corporation (CELCOR) for: (a) authority to

adjust rates to attain the allowable Rate of Return on Rate Base with prayer for

provisional authority filed on October 26, 1998 and docketed as ERC Case No.

2001-482 (ERB Case No. 98-75); and (b) revision of rate schedules in compliance

with Section 36 of Republic Act No. 9136, with prayer for provisional authority filed

on December 26, 2001 and docketed as ERC Case No. 2001-896. A supplemental
application was filed on January 15, 2002 and docketed as ERC Case No. 2002-

11.

ERC CASE NO. 2001-482 (ERB Case No. 98-75)

On October 26, 1998, CELCOR filed an application for authority to adjust

its rates to attain the allowable Rate of Return on Rate Base (RORB) with prayer

for provisional authority.

Having found the said application sufficient in form and substance with the

required fees having been paid, an Order and a Notice of Public Hearing, both

dated November 4, 1998, were issued setting the application for hearing on

December 8 and 9, 1998.

In the same Order, CELCOR was directed to cause the publication of the

Notice of Public Hearing at its own expense, twice (2x) in two (2) newspapers of

general circulation in the Philippines, which should include one (1) newspaper of

local circulation within CELCORs franchise area, if there be any, the last day of

publication to be made not later than two (2) weeks before the scheduled date of

initial hearing.

The Office of the Solicitor General (OSG), the Commission on Audit (COA)

and the Committees on Energy of both Houses of Congress were furnished with

copies of the application, the Order and the Notice of Public Hearing and were

requested to have their respective duly authorized representatives present at the

aforesaid hearing.

Page 2 of 46
 Likewise, the Mayor of Cabanatuan City was furnished with copies of the

Order and the Notice of Public Hearing for the appropriate posting thereof on its

bulletin board.

At the December 8, 1998 initial hearing, only CELCOR appeared. No

oppositors appeared nor was there any opposition registered.

CELCOR then presented its compliance with the posting and publication of

notice requirements and had these marked as Exhibits A to C, inclusive.

Thereafter, CELCOR presented its witnesses, Ms. Adoracion Yatco, CELCORs

General Manager and Engr. Cesar Elmer V. Sta. Romana, CELCORs Assistant

General Manager for Operations, for direct examinations. Ms. Yatco testified on

the financial aspect of the application while Engr. Sta. Romana testified on the

technical aspect of the application. In the course thereof, documents were

presented and marked as Exhibits D to O, inclusive.

During the December 9, 1998 hearing of this case, CELCOR presented its

last witness, Mr. Dante C. Olmo, a Certified Public Accountant, for direct

examination. He testified on the audit he conducted on CELCORs books of

account. In the course thereof, documents were presented and marked as Exhibits

P to U-11, inclusive.

CELCOR then moved that it be given ten (10) days from said date of

hearing within which to submit its formal offer of exhibits. Said motion was granted.

Page 3 of 46
 On December 22, 1998, CELCOR filed its Formal Offer of Exhibits.

On September 6, 1999, CELCOR was granted a provisional authority to

make an upward adjustment in its rates by P0.20/kWh with a rate of return on rate

base of 8.67% effective with respect to its September 1999 billing cycle.

ERC CASE NOS. 2001-896 and 2002-11

On December 26, 2001, CELCOR filed an application for approval of its

revised rate schedules in compliance with Section 36 of Republic Act No. 9136,

with prayer for provisional authority. Subsequently, on January 15, 2002, it filed a

supplemental application.

Having found the said application sufficient in form and substance with the

required fees having been paid, an Order and a Notice of Public Hearing, both

dated April 9, 2002, were issued setting the application for hearing on May 13,

2002.

In the same Order, CELCOR was directed to cause the publication of the

Notice of Public Hearing at its own expense, twice (2x) for two (2) successive

weeks in two (2) newspapers of nationwide circulation in the country, the last day

of publication to be made not later than two (2) weeks before the scheduled date

of initial hearing.

The Office of the Solicitor General (OSG), the Commission on Audit (COA)

and the Committees on Energy of both Houses of Congress were furnished with

copies of the application, the Order and the Notice of Public Hearing and were

Page 4 of 46
requested to have their respective duly authorized representatives present at the

aforesaid hearing.

Likewise, the Mayor of Cabanatuan City was furnished with copies of the

Order and the Notice of Public Hearing for the appropriate posting thereof on its

bulletin board.

On May 10, 2002, the Honorable Cong. Aurelio M. Umali filed an Entry of

Appearance with Omnibus Motion praying for the suspension of the proceedings

until the Supreme Court has ruled on the case questioning the constitutionality of

Republic Act No. 9136 or the cancellation of the presentation of evidence to give

him time to study, review, examine and scrutinize the voluminous documents and

records submitted by CELCOR.

During the May 13, 2002 initial hearing, CELCOR presented its proofs of

compliance with the Commissions publication and posting of notice requirements

and had these marked as Exhibits A to C, inclusive. Thereafter, CELCORs

presentation of witnesses was deferred until after the lapse of the fifteen (15) days

granted to Cong. Umali to comment on the application. CELCOR was then

directed to furnish said oppositor with copies of its application together with its

attachments.

Relative to the omnibus motion filed by Cong. Umali, CELCOR moved that

it be given five (5) days from said date of hearing within which to submit its

comment thereon.

Page 5 of 46
 On May 20, 2002, CELCOR submitted its Answer/Comment to Omnibus

Motion stating among others that the provisions being questioned in the case

before the Supreme Court did not include Section 36 of R.A. 9136 which was the

basis of the instant application so that in the event that R.A. 9136 is declared

unconstitutional, said section would not be affected. It, thus, prayed for the denial

of the said motion.

During the May 31, 2002 hearing, Cong. Umali moved to have the case set

for pre-hearing as he had not yet filed his opposition. CELCOR objected to the

said motion and prayed that it be allowed to present its evidence subject to

whatever pleadings the Cong. Umali may wish to file. The Commission denied

said motion.

CELCOR presented its only witness, Ms. Pamona Sardillo, CELCORs

Internal Auditor, who testified on the procedure and methods used to come up with

the unbundling application and comply with the provision of Section 36 of R.A.

9136. In the course thereof, documents were presented and marked as Exhibits

D to M -1, inclusive. Cong. Umali reserved his right to cross-examine the said

witness and file his formal opposition. The Commission then propounded

clarificatory questions on the said witness. In the course thereof, CELCOR was

directed to submit various documents.

In the meantime, in the Order dated June 4, 2002, the Commission denied

the omnibus motion filed by Cong. Umali, for lack of merit.

Page 6 of 46
 During the July 16, 2002 hearing, CELCOR recalled its witness, Ms.

Sardillo, to testify on the submissions made pursuant to the Commissions

directive in its Order dated June 4, 2002. Thereafter, Cong. Umali, through

counsel, conducted his cross-examination of the said witness.

During the October 11, 2002 hearing, Cong. Umali, through counsel,

continued with his cross-examination of Ms. Sardillo. He then informed the

Commission that he would file a motion for reconsideration of the denial by the

Commission of the introduction of a document from the Securites and Exchange

Commission (SEC) which was not presented during the direct examination of the

said witness.

On October 29, 2002, the Commission directed Cong. Umali to submit the

aforementioned motion for reconsideration with a warning that his failure to file the

same would mean a waiver of his right to do so.

During the February 7, 2003 hearing, only CELCOR and its witness

appeared and manifested that Cong. Umalis right to cross-examine its witness

should be deemed waived. Said manifestation was duly noted. The Commission

then propounded clarificatory questions on CELCORs witness, Ms. Sardillo. In the

course thereof, CELCOR was directed to submit various documents. CELCOR

further manifested that it would file a copy of its Amended Articles of Incorporation

as approved by the SEC.

Page 7 of 46
 CELCOR then moved that it be given ten (10) days from said date of

hearing within which to submit its formal offer of exhibits. Said motion was granted.

On February 10, 2003, Cong. Umali was directed to present his evidence

on March 13, 2003 hearing with a warning that his failure would mean a waiver of

his right to do so.

On February 17, 2003, CELCOR filed its formal offer of exhibits.

On even date, an Order was issued by the Commission consolidating ERC

Case No. 2001-482 (ERB Case No. 98-75) with ERC Case No. 2002-11.

During the March 13, 2003 hearing, only CELCOR appeared and moved

that Cong. Umali be declared to have waived his right to present his evidence.

Said motion was granted. Thus, the case was deemed submitted for resolution.

I. SUMMARY OF CELCORs APPLICATION

I.A. REVENUE REQUIREMENTS

CELCOR proposes an adjusted revenue requirement of PhP630,459,144

based on the historical test year as evidenced by its submitted Overall Average

Tariff Adjustment (OATA) to increase its rates by PhP0.4661/kWh as shown

below, to wit:

Page 8 of 46
 TABLE 1
Adjusted Electric
Account Name (PhP)
Purchased Power1 434,036,293
Payroll 48,362,556
O & M (net of Purchased Power and
Payroll)2 75,615,639
Depreciation and Amortization3 19,215,628
Income Taxes4 4,138,426
Other Expenses
Return on Rate Base5 72,074,407
Revenue Requirement 653,442,949
Less: CELCORs Adjustment 22,983,805
Adjusted Revenue Requirement 630,459,144
Existing Revenue 574,382,893
Required Increase/(Decrease) 56,076,251
Required Increase/(Decrease) per kWh 0.4661

________________________
1
Gross of NPC discounts and inclusive of purchases from FCVC
2
General and Administrative expenses and Customer Information expenses including franchise tax.
3
Depreciation at Cost of P15,076,895 and at appraisal of P4,138,733
4
Actual Income Tax for the year 2000
5
Computed at a WACC of 12.34%

I.A.1. OPERATING REVENUES

CELCOR reported a total operating revenue of PhP574,382,893, for the

year 2000, computed as follows:

TABLE 2

Customer Type Revenue (PhP)

Residential Service 248,063,646
Small Commercial 62,947,936
Large Commercial 131,439,270
Very Large Commercial 80,835,877
Semi-Industrial 18,141,008
Small Industrial 3,282,176
Large Industrial 7,204,678
Streetlights-Metered 2,026,389
Streetlights-Unmetered 3,595,947
Hospital 16,845,966
TOTAL 574,382,893

Page 9 of 46
I.B. RATE BASE

CELCOR proposed that Schedule B (Restated Value of Assets) be used as

basis in the determination of its Rate Base. Thus, CELCOR utilized the appraised

value of its assets as of September 12, 1996 approved by the then Board and was

further adjusted to reflect additions, retirements and depreciation for the period

September 13, 1996 to December 31, 2000. The proposed rate base is as follows:

TABLE 3

Total Company
(Electric Only)
Distribution Plant PhP 515,799,388
General Plant 101,054,468
Total Plant in Service PhP 616,853,856
Unbundled CWIP 125,298
Total PhP 616,979,154
Accumulated Depr.
Distribution Plant PhP 102,677,269
General Plant 20,230,270
Total Accum. Depr. PhP 122,907,539
Net Plant in Service PhP 494,071,615
Other Rate Base Items:
Materials & Supplies PhP 5,295,797
Cash Working Capital 84,479,884
Sub-Total PhP 89,775,681
TOTAL RATE BASE PhP 583,847,296

I.B.1 Plant in Service

I.B.1.a Asset Valuation

CELCORs assets were last appraised by an independent appraiser, Asian

Appraisal, for assets in service as of September 12, 1996. Said appraisal was

approved by the then Energy Regulatory Board on March 26, 1998 in ERB Case

No. 97-17 at an adjusted Sound Value of PhP366,048,243.

Page 10 of 46
 I.B.2 Construction Work in Progress (CWIP)

CELCOR included in its Rate Base computation CWIP amounting to

PhP125,298.

I.C. WEIGHTED AVERAGE COST OF CAPITAL (WACC)

CELCOR proposed a Weighted Average Cost of Capital of 12.34% or

equivalent to a return of PhP72,074,407, computed as follows:

TABLE 4

Amount Component Component Weighted

As Of As % Of Cost of Cost of
Component 12/31/00 Total Capital Capital
(a) (c) (d) (e) (f)

Long term Debt 169,983,458 34.47% 13.00% 4.48%

Total Debt 169,983,458 34.47% 4.48%
Common Equity 323,099,564 65.53% 7.86%
Total 493,083,021 100.00% 12.00% 12.34%
Rate Base 583,847,296
Return on Rate Base 72,074,407

I.D. RATE STRUCTURE/DESIGN

CELCOR alleged that its unbundled rate proposal is consistent with the

Commissions Uniform Rate Filing Requirements (UFR), it therefore proposed to

adopt, and applies for the approval of the following rate schedules:

Rate Schedule Proposed Rates

Residential

Distribution Charge PhP 1.1791/kWh

Supply Charge - Retail 0.4936/kWh
Supply Charge - Metering 0.5380/kWh

Page 11 of 46
Small Commercial

Distribution Charge PhP 1.0570/kWh

Supply Charge - Retail 0.3260/kWh
Supply Charge - Metering 0.3565/kWh

Large Commercial

Distribution Charge PhP 0.9435/kWh

Supply Charge - Retail 0.0264/kWh
Supply Charge - Metering 0.0278/kWh

Very Large Commercial

Distribution Charge PhP 0.8455/kWh

Supply Charge - Retail 0.0125/kWh
Supply Charge - Metering 0.0051/kWh
Demand Charge 75.00/kW

Small Industrial

Distribution Charge PhP 2.7777/kWh

Supply Charge - Retail 0.0221/kWh
Supply Charge - Metering 0.0275/kWh
Demand Charge 75.00/kW

Semi Industrial

Distribution Charge PhP 0.6367/kWh

Supply Charge - Retail 0.0044/kWh
Supply Charge - Metering 0.0082/kWh
Demand Charge 75.00/kW

Large Industrial

Distribution Charge PhP 1.2897/kWh

Supply Charge - Retail 0.2695/kWh
Supply Charge - Metering 0.0059/kWh
Demand Charge 75.00/kW

Hospitals

Distribution Charge PhP 0.6006/kWh

Supply Charge - Retail 0.6329/kWh
Supply Charge - Metering 0.0089/kWh
Demand Charge 75.00/kW

Page 12 of 46
Streetlights - Unmetered

Distribution Charge PhP 0.9307/kWh

Supply Charge - Retail 0.0016/kWh
Supply Charge - Metering 0.0053/kWh

Streetlights-Metered

Distribution Charge PhP 1.2881/kWh

Supply Charge - Retail 0.3452/kWh
Supply Charge - Metering 0.3773/kWh

Residential Distribution Wheeling Service

Distribution PhP 1.1791/kWh

Metering Charge-Optional 0.5380/kWh

Small Commercial Distribution Wheeling Service (Less than or Equal to 15 kW)

Distribution PhP 1.0570/kWh

Metering Charge-Optional 0.3565/kWh

Large Commercial Distribution Wheeling Service

Distribution PhP 0.9435/kWh

Metering Charge-Optional 0.0278/kWh

Very Large Commercial Distribution Wheeling Service

Distribution PhP 0.8455/kWh

Metering Charge-Optional 0.0051/kWh

Small Industrial Distribution Wheeling Service

Distribution PhP 2.7777/kWh

Metering Charge-Optional 0.0275/kWh

Semi Industrial Distribution Wheeling Service

Distribution PhP 0.6367/kWh

Metering Charge-Optional 0.0082/kWh

Page 13 of 46
 Large Industrial Distribution Wheeling Service

Distribution PhP 1.2897/kWh

Metering Charge-Optional 0.0059/kWh

Hospitals Distribution Wheeling Service

Distribution PhP 0.6006/kWh

Metering Charge-Optional 0.0089/kWh

Streetlights-Metered Distribution Wheeling Service

Distribution PhP 1.2881/kWh

Metering Charge-Optional 0.3773/kWh

I.D.1. FUNCTIONALIZATION & ALLOCATION

The functionalization and allocation factors used by CELCOR were the

default factors provided for in the UFR prescribed by the Commission.

I.D.2. GENERATION and TRANSMISSION CHARGE

CELCOR proposed the adoption of a Generation and Transmission Charge

for the following customer classes in order to recover its power cost, franchise tax,
system losses and company use, as follows:

For Residential and Other Customer Classes without Demand Charge

A 1
Generation/Transmission = ------------------------- x ----------
Charge B ( C1 + C2 + C3) 1 FT

Where:

A = Cost of electricity purchased from NPC and other sources for the
previous month
B = Total kwh purchased for the previous month
C1 = Actual system loss for the previous month
C2 = Actual company use for the previous month
C3 = Kwh consumed by lifeline customers for the previous month
FT = Franchise tax rate

Page 14 of 46
 For Industrial and Other Customer Classes with Demand Charge

A-D 1
Generation/Transmission = ------------------------- x ----------
Charge B ( C1 + C2 + C3) 1 FT

Where:

A = Cost of electricity purchased from NPC and other sources for the
previous month
B = Total kwh purchased for the previous month
C1 = Actual system loss for the previous month
C2 = Actual company use for the previous month
C3 = Kwh consumed by lifeline customers for the previous month
D = Demand Charge for the previous month
FT = Franchise Tax rate (National Franchise Tax)

I.D.3. LINE LOSSES

CELCOR proposed to recover its 2000 actual system loss of 13.08%

through the proposed Generation and Transmission Charge formulas set forth in

Section I.D.2. above.

I.D.4. DISTRIBUTION CHARGE

CELCOR proposed to charge its customers with demand meters, i.e. Very

Large Commercial, Small Industrial, Semi- Industrial, Large Industrial and

Hospitals customers, a combination of a peso per kilowatt-hour P/kWh and a fixed

rate of P75.00/kW. Customers without demand meters i.e. Residential, Small

Commercial and Large Commercial customer classes are proposed to be billed on

a peso per kilowatt-hour.

Page 15 of 46
 I.D.5. SUPPLY AND METERING CHARGES

CELCOR proposed a Peso per kilowatt-hour charge for the supply and

metering services.

I.D.6. INTERCLASS CROSS SUBSIDY

CELCOR indicated the amount of cross subsidies for each type of

customers but did not proposed a scheme for the removal thereof.

TABLE 5

Customer Total Revenue Existing Inter-class

Classes Requirement Revenues Cross Subsidies

Residential 300,008,035 248,063,646 51,944,389

Small Commercial 69,284,950 62,947,936 6,337,014
Large Commercial 123,840,040 131,439,270 (7,599,230)
Very Large Commercial 74,047,575 80,835,877 (6,788,302)
Semi Industrial 16,596,678 18,141,008 (1,544,330)
Small Industrial 4,487,261 3,282,176 1,205,085
Large Industrial 8,910,936 7,204,678 1,706,258
Streetlights-Metered 2,342,953 2,026,389 316,564
Streetlights-Unmetered 14,192,244 3,595,947 10,596,297
Hospitals 16,748,472 16,845,966 (97,494)
PhP 630,459,144 PhP574,382,893 PhP56,076,251

I.D.7. LIFELINE RATE AND LEVEL

CELCOR proposed a maximum energy consumption of 15 kWh for

marginalized end-users which it determined as those using one 40 watts

incandescent bulb, one 40 watts electric fan and one 40 watts radio/t.v. operated

at an average of four (4) hours per day. The proposed lifeline rate is as follows:

Distribution PhP1.17913
Supply 0.49362
Metering 0.53797
Total PhP2.21072

Page 16 of 46
 I.D.8. OTHER CHARGES/NON-RECURRING RATES

CELCOR proposed the following revised Other Charges and/or non-

recurring charges (UFR Schedule F2), to wit:

TABLE 6

CHARGES PROPOSED FEE (PhP)

1 Disconnection Charge 150.00
2 Reconnection Charge 125.00
3 Line Reconnection Charge 50.00
4 Service Call Charge:
-Job Involving Transmission & Dist. Dept. 130.00
-Job Involving Customer Servicing Dept. 125.00
-Job Involving Eng'ng. Design Dept. 60.00
5 Requested Interruption Charge Variable
6 Facilities Relocation/Removal Charge Variable
7 Temporary Facilities Charge Variable
8 Streetlight Repair Charge 80.00 + cost of materials
9 Requested Meter Test Charge 110.00
10 Denial of Access to Meter Charge 75.00
11 Account Initiation Charge:
Customer Installation Expenses:
-Regular Customer 165.00 + deposits
-Power Meter Customer 200.00 + deposits
Transfer Meter Charge
-Regular Customer 165.00
-Power Meter Customer 200.00
12 Off-Cycle Meter Reading Charge 70.00
13 Pilferages/Penalties
-Penalty (R.A. 7832) charges based on R.A. 7832
-Differential Billing Variable
-Illegal Transfer charges based on R.A. 7832
-Broken Meter Seal Charge charges based on R.A. 7832
-Tampering Charge charges based on R.A. 7832
14 Transformer Rental (monthly)
-10 kva 1750.00
-15 kva 1900.00
-25 kva 2200.00
-37.5 kva 2500.00
-50 kva 2750.00
-75 kva 2900.00
-100 kva 3000.00
15 Accident Damages Variable
16 Pole Use Fee 5.00/pole/day
17 Joint Pole Rental Agreement 350.00/pole/year
18 Interest Charge After due date, 2% every month
or a fraction thereof that the bill
remains unpaid.

Page 17 of 46
II. COMMISSIONS DISCUSSIONS AND CONCLUSIONS:

In reaching the conclusion herein, the Commission took into consideration

the documents as well as the comments and issues presented by the applicant,

intervenor, oppositor and other interested parties who submitted their respective

positions on the instant application.

II.A. DETERMINATION OF THE TOTAL REVENUE REQUIREMENT

II.A.1. TEST YEAR

The Commission finds CELCORs proposal to use the test year 2000 in

its unbundled rate application acceptable since it is consistent with Rule 15

Section 6 (c) of the Implementing Rules and Regulations (IRR) of R.A. 9136.

Therefore, the discussions and conclusions that follow are based on Schedule B,

Revalued Cost by Function (Cost of Service by Function-Historical Test Year).

II.A.2. GENERATION and TRANSMISSION COSTS

Generation Cost

The Commission updated the generation cost based on the most recent

approved NPC rate, i.e. ERC Case No. 2003-291, (In the Matter of the Application

for the Approval of the Revised Unbundled Generation Tariffs, National Power

Corporation (NPC) and Power Sector Assets and Liabilities Management (PSALM)

Applicants) Order dated September 29, 2003. Notably, the Commission

approved the adoption of the Incremental Currency Exchange Rate Adjustment

Page 18 of 46
(ICERA) in ERC Case No. 2003-498, Order dated December 4, 2003 (NPC and

PSALM applicants). The Commission directed NPC and PSALM to refund to its

customers the Deferred Accounting Adjustment (DAA) and FOREX Correction for

Luzon amounting to (PhP0.0065) per kWh within a period of six months starting

December 2003 to May 2004.

Transmission Cost

The Commissions Decision in ERC Case No. 2001-901 dated June 26,

2002 and Order dated September 20, 2002 set the transmission charges for the

TRANSCO without any provision for an automatic adjustments thereof. Since the

transmission rates to be paid by CELCOR are fixed, it is the decision of the

Commission to likewise fix the unbundled transmission rates to be billed to end-

users. The transmission charges approved for billing by CELCOR have been

calculated based on the approved TRANSCO rates, which include cross subsidy

elements to be phased out over a three-year period.

Based on records, CELCOR buys 10.47% of its power requirements from

NPC and 89.53% from First Cabanatuan Ventures Corporation (FCVC), its directly

contracted IPP. As such, the generation cost as computed by the Commission

reflects the average cost of electric power supplied by NPC and FCVC. The Build,

Operate, and Transfer Agreement between CELCOR and FCVC was approved by

the previous Board in its Decision dated April 24, 1996 in ERB Case No. 95-41.

Page 19 of 46
 The total adjusted purchased power cost after considering the aforesaid

adjustments amounted to P506,410,432, computed as follows:

TABLE 7

Purchased Power Cost per UFR PhP434,036,293

Add/(Deduct) Adjustments due to:
Updating of Power Cost 73,871,033
Total PhP507,907,326
Less: System Loss in Excess of 9.5% 1,496,895
Adjusted Purchased Power Cost PhP506,410,432

System Loss

A separate charge to account for the allowable line losses shall be

provided. The Commission decides to retain the system loss cap prescribed under

Rule IX Section I of the Implementing Rules of Republic Act No. 7832 pending the

conduct of a comprehensive study on the matter. Hence, the Commission sets the

maximum allowable cap for system loss at 9.5% or actual, whichever is lower.

Based on the new generation and transmission charges, as well as the

allowable system loss, the Commission has determined CELCOR;s unbundled

generation, transmission and recoverable system losses, as follows:

TABLE 8
Generation Charge PhP423,976,835
Transmission Charge 31,083,579
Recoverable System Losses 51,350,018
Total PhP506,410,432

CELCORs approved generation charge shall remain fixed until changes in

NPCs generation rate are approved and authorized by the Commission pursuant

to its order dated February 24, 2003, ERC Case No. 2003-44 (GRAM) and ERC

Case No. 2003-498 (ICERA), Order dated December 4, 2003. In view thereof, the

Commission does not foresee the need for CELCOR to continue to implement its

Page 20 of 46
Purchased Power Adjustment (PPA) clause. Towards this end, the Commission

hereby directs CELCOR to discontinue the implementation of its Purchased Power

Adjustment Clause (PPA) upon the effectivity of the herein approved unbundled

rates.

II.A.3. OPERATIONS AND MAINTENANCE (Less Power Cost and Payroll)

The general criteria in the evaluation of operating expenses to be allowed

for recovery are: 1) that the expense is needed in the operation of the utility; 2) it

is recurring; and 3) it redounds to the benefit of the utilitys customers (Public

Service Commission [PSC] Decision in Case Nos. 85889,85890 and 89893). The

Commission enjoins CELCOR to incur only prudent and reasonable costs for

inclusion in the determination of retail rates. While a distribution utility enjoys the

benefit of passing its costs of purchased power and other reasonable costs to the

consumer, it is obligated as a public utility to ensure that its costs of operations

including payroll are kept at a minimum. The distribution utility must bear in mind

as a service-oriented company, its mandate is to advocate and transact judiciously

for and in behalf of its consumers.

Reasonable costs refers to the cost of those goods and services which,

while may not be the lowest in price, need to be incurred with consideration of

quality, efficiency, reliability and security, which are characteristics of the service

delivered by the distribution utility. Prudent costs demand that the utility ensures

that its purchases of goods and services are at their minimum, without sacrificing

the foregoing characteristics. When making a purchase or executing a contract, a

utility cannot simply rely on its right to pass on its costs to its consumers. As such,

Page 21 of 46
the Commission, in fulfilment of the policy of the EPIRA to establish a regime of

free and fair competition and full public accountability to achieve greater

operational and economic efficiency, enjoins CELCOR to institute and report to the

Commission their respective policies and procedures for cost-cutting and the

transparent and competitive procurement of goods and services.

CELCORs customers have a right to receive safe, reliable, and adequate

service at a reasonable rate. To this end, CELCOR should view a petition for an

increase in rates to be the last recourse. In future filings, CELCOR should be

reminded that it has the burden of proving that all reasonable and appropriate

cost cutting measures have been taken before resorting to a petition to increase

rates.

Operations and Maintenance account was adjusted to PhP41,195,808 after

considering adjustment totalling to PhP34,419,301 computed as follows:

TABLE 9

Total O & M per CELCOR PhP 75,615,639

Less: Adjustments
CELCORs Adjustment PhP 22,983,805
A & G Expenses (refer to Table 10) 4,185,594
T & D Miscellaneous 161,368
Franchise Tax shown as separate item 7,088,534 34,419,301
Adjusted O & M PhP 41,196,338

Adjustments

The Commission finds some expenses to be unnecessary in the provision

of applicants electric service and therefore excluded the same for ratemaking

purposes, as follows:

Page 22 of 46
 TABLE 10

Particulars Amount
Fines & Penalties PhP 1,300,399
Outside Services 417,500
Prior Years Pensions & Benefits 587,155
Miscellaneous 1,880,540
TOTAL PhP 4,185,594

Franchise tax shall appear as a separate line item on the customers bills

as percentage of the total monthly electricity charges. Given this rate design, it is

appropriate to remove the amount of PhP7,088,534 associated with franchise

taxes from the revenue requirement as this is just a pass through item.

For future rate cases, CELCOR will continue to be required to make full

disclosures of all its O & M expenses in order for the Commission to determine the

prudence of its expenditures. Unless otherwise justified by CELCOR, expenses

found to be unreasonably incurred shall not be allowed by the Commission as part

of its recoverable costs to be passed on to CELCORs end-users.

II.A.4. DEPRECIATION AND AMORTIZATION

The Commission made an upward adjustment of PhP1,892,440 on the

Depreciation Expense to consider unrecorded depreciation of Poles and Fixtures.

The adjusted Depreciation Expense amounted to PhP21,108,068, computed as

follows:

TABLE 11

Depreciation per UFR PhP19,215,628

Adjustment :
Depreciation Expense 1,892,440
Adjusted Depreciation to be included
in revenue requirement PhP21,108,068

Page 23 of 46
 CELCOR is required to set up a depreciation fund each year corresponding

to the whole amount of depreciation that it has recorded on its books. The setting

up of this fund should be done on a monthly basis corresponding to the monthly

depreciation. CELCOR will be required to strictly account for the expenditures out

of this fund which should be used strictly for investment in electric plant. The utility

is free to withdraw funds from this account at any time but all withdrawals should

be reported to the Commission within 30 days specifying the use of the funds. This

report should be consolidated with the monthly reportorial requirements (M-001 &

M-002).

II.A.5. INCOME TAXES

The finality of the Supreme Court Decision in G.R. Nos. 141314 and

141369 dated April 9, 2003 affirms that for ratemaking purposes under the RORB

methodology, income tax payment should not be recovered from the customers

as operating cost.

In view of the above, income tax payments in the amount PhP 4,138,426

were excluded from CELCORs revenue requirement.

CELCOR has an existing Tax Recovery Adjustment Clause, which was

approved under ERB Case No. 94-14, wherein the formula was designed to

recover income tax and franchise tax (in excess of the 2% paid to the national and

local government). Although CELCOR did not actually implement the aforesaid

Tax Recovery Adjustment Clause since its approval, CELCOR, upon the effectivity

of this Decision, is hereby directed to no longer implement the same.

Page 24 of 46
II.B.1. OTHER REVENUES

The Commission considered Other Revenues as items to be deducted from

the revenue requirement used to calculate the rates for the end-users. Since all

the expenses associated with the provision of the services that gave rise to these

items of revenue are included in the revenue requirement, the income generated

must also be considered, to wit:

TABLE 12
Pole Rental PhP1,714,036
Transformer Rental 292,570
Jobbing & Contract Work 2,903,900
Engineering Design on Special Projects 816,473
NPC - Prompt Payment Discount
(532,738.78 @ 50%) 266,369
TOTAL PhP5,993,348

The Commission believes that the utility and end-users should share the

benefits of the Prompt Payment Discount (PPD) received by CELCOR from NPC

amounting to PhP532,738.78 Fifty percent (50%) of the discount equivalent to

PhP266,369 should be deducted from the revenue requirement used to calculate

the rates for the end-users and fifty (50%) retained by the utility to serve as

incentive to improve efficiency in the payments of its purchased power cost.

II.C. RATE BASE

II.C.1. Plant In Service

The Commission adjusted CELCORs plant in service downward by

PhP7,090,858 to consider properties which were found as not in service by the

Commission On Audit (COA) based in its Special Audit Report No. 2001-024, as

follows:

Page 25 of 46
 TABLE 13

ASSETS AMOUNT

Land-Mayapyap PhP5,602,000
Land-Villaluz Subdivision 700,000
Land Improvement 22,704
Building 54,641
Office Equipment 44,213
Substation Equipment 597,300
Radio Comm. Equipt. 70,000
TOTAL PhP7,090,858

The Commission likewise made a net upward adjustment on the

Accumulated Depreciation by PhP5,661,159 corresponding to depreciation on

disallowed assets amounting to PhP(152,655) and unrecorded depreciation of

Poles and Fixtures amounting to PhP5,813,814. Thus, the adjusted net plant in

service amounted to PhP481,194,299, computed as follows:

TABLE 14

Net Plant in Service proposed by CELCOR

(exclusive of CWIP) PhP493,946,316
Less:
Disallowed Assets (not in service) 7,090,858
Adjustment on Accum. Depreciation 5,661,159
Total PhP12,752,017
Adjusted Net Plant in Service PhP481,194,299

II.C.2. Allowance for Cash Working Capital

Working capital is money a business must have available to meet payroll

and expenses until customers have paid for the service or product. Utilities are

usually allowed, as part of their rate base, an amount for working capital to cover

expenses during the time it takes for the customers to use the service, be billed for

it and collect payments.

Page 26 of 46
 CELCOR included an amount equal to two (2) months cash operating and

maintenance expenses including purchased power costs as the estimated

allowance for cash working capital.

The cash working capital allowance included in rate base should

approximate the cash requirements based on an estimate of the net lag in cash

flow. In order to refine the application of the formula used in past proceedings, a

more detailed review of the actual lag in cash flow associated with the payments

for purchased power and the inflow of cash from customers was undertaken.

With respect to the outflow of cash associated with the payments for purchased

power, it was determined that the time from the provision of service to the outflow

of cash can be calculated as follows:

15 days One-half of the billing cycle

5 days Meter reading and bill preparations
10 days Approximate time before payment is due
30 days Total

Therefore, CELCOR has an average of approximately thirty (30) days from

the time service is recieved until payment is made.

With respect to the collection of payments from its customers, the time

from the provision of service to the inflow of funds can be calculated as follows:

15 days One-half of the billing cycle

10 days Meter reading and bill preparation
10 days Required time to collect the customers bill
without penalty based on the service contract
5 days Processing time
40 days Total

Page 27 of 46
 Therefore, CELCOR waits for an average of approximately 40 days before

it receives payment for the services provided. With respect to purchased power, it

appears that the actual net lag days is approximately 10 days only (40 less 30)

and not the 60 days assumed in the application of the formula. CELCORs

customers who do pay on time should not be penalized because other customers

fail to comply with CELCORs payment schedule. If additional finance cost are

incurred because of late payment of bills, these costs should be recovered in the

form of penalties to the late paying customers and not as additional cash working

capital to be paid by all customers.

The adjusted Cash Working Capital allowed by the Commission was

computed as follows:

TABLE 15

Adjusted O & M PhP 617,077,393

Less: Taxes & Non Cash Items
Taxes 16,636
Provision For Bad Debt 1,834,162
Depreciation Expense 21,108,068
Power Cost 506,410,432
Total Taxes & Non-Cash Items PhP 529,369,298
Net O & M PhP 87,708,096
Cash Working Capital - O & M (2 months) PhP 14,618,016
Adjusted Power Cost PhP 506,410,432
Cash Working Capital - Power Cost (10/360 days) PhP 14,066,956
CASH WORKING CAPITAL PhP 28,684,972

II.C.3.2. Materials and Supplies

Reported materials and supplies per book in the amount of PhP5,295,797

were adjusted downward to PhP5,052,605 to exclude the amount of PhP243,192
pertaining to office supplies. The same will form part of the operating expenses
which are entitled to two (2) months allowance for cash working capital.

Page 28 of 46
 II.C.3. Summary of Rate Base

The following tabulates the adjustments made by the Commission in the

components of CELCORs rate base:

TABLE 16

Per Per
CELCOR Adjustment ERC
Net Plant in Service 493,946,316 (12,752,017) 481,194,299
CWIP 125,298 0 125,298
Materials & Supplies 5,295,797 (243,192) 5,052,605
Cash Working Capital 84,479,885 (55,794,913) 28,684,972
Total Rate Base 583,847,296 (68,790,122) 515,057,174

II.D. Rate of Return

The current form of regulation practiced for the privately-owned electric

utilities is a cost based method known as the rate of return on rate base (RORB)

methodology. Power rates are set to recover cost of service prudently incurred

plus a reasonable rate of return on rate base. The rates of return pertains to the

percentage which when multiplied by the authorized Rate Base, provides a return

that will fairly compensate the company for the risk inherent to the investment of

capital. This simply means that a regulated utility is allowed to set rates which will

cover operating costs and provide an opportunity to earn a reasonable rate of

return on the assets utilized in the business.

On the basis of current jurisprudence, the Commission has determined that

the 12% rate of return will be maintained in this case but the income tax thereon

will not be allowed as operating expense. Thus, the 12% rate of return is a pre-tax

rate of return which is equivalent to PhP 61,806,861, computed as follows:

Page 29 of 46
 TABLE 17

Adjusted Rate Base PhP515,057,174

Rate of Return 12%
Return on Rate Base PhP61,806,861

The Commission intends to adopt a new internationally accepted method of

rate regulation known as Performance-Based Regulation. The treatment of income

tax in this new method may be different from the present RORB method.

II.E. REVENUE REQUIREMENT SUMMARY

On the basis of the foregoing discussion, the Commission after considering

adjustment of PhP19,447,957 approved a total revenue requirement of

PhP672,890,906 equivalent to an OATA of PhP0.1863.

TABLE 18

REVENUE REQUIREMENT
Per CELCOR Adjustments Per ERC
(PhP) (PhP) (PhP)
Purchased Power 434,036,293 72,374,139 506,410,432
Payroll 48,362,556 0 48,362,556
Operation & Maintenance 75,615,639 (34,419,301) 41,196,338
Depreciation & Amortization 19,215,628 1,892,440 21,108,068
Income Taxes 4,138,426 (4,138,426) 0
Other Expenses 0 0
Return on Rate Base 72,074,407 (10,267,546) 61,806,861
Revenue Requirements 653,442,949 25,441,305 678,884,254
Add/(Deduct): Other Rev. Item 0 5,993,348 5,993,348
Total Revenue Requirement 653,442,949 19,447,957 672,890,906
Adjusted Revenue (2000) 650,026,939
Increase(Decrease) PhP 22,863,967
Annualized kWh Sales 122,744,348
Required Increase P/kWh 0.1863

The Overall Average Tariff Adjustment (OATA) is a measurement tool

based on the formula: (Total Revenue Requirement less Existing Revenue

divided by kilowatt-hours sales). This measurement is not meant to refer to any

Page 30 of 46
 specific customer class. CELCOR proposed for an OATA of P0.4661 per kilowatt-

hour.

II.B. Adjusted Operating Revenue

The Commission adjusted CELCORs actual operating revenue to

PhP650,026,939 computed as follows:

TABLE 19

CELCORs actual operating revenue PhP574,382,893

Adjustments:
Addtl. Revenue due to increase in Power Cost 72,374,139
Addtl. Revenue due to increase in sales 10,358,441
Franchise Tax (7,088,534)
Total Adjusted Operating Revenue PhP650,026,939

II.E. RATE STRUCTURE/DESIGN DETERMINATION

II.E.1. FUNCTIONALIZATION FACTORS

The Commission agrees to the functionalization and allocation factors used

by CELCOR. Other Revenue Items which was not considered by CELCOR in the

calculation of the revenue requirement was functionalized to Distribution function

and was allocated based on the total revenue functionalization factors.

TABLE 20

Factor COMMERCIAL INDUSTRIAL STREETLIGHTS

Very
Name Total Residential Small Large Large Semi Small Large Metered Unmetered Hospital
TOTREV 1.0000 0.7992 0.1352 0.0393 0.0125 0.0032 0.0010 0.0000 0.0046 0.0023 0.0027

II.E.2. Billing Determinants and Customer Class Allocation

The Commission concurs with CELCORs billing determinants and

allocation factors except for the billing determinant and allocation factor used for

Page 31 of 46
energy related costs. The Commission believes that any energy related cost

should be allocated based on annualized sales.

Annualized sales were derived by multiplying year-end number of

customers with average annual kWh usage for each customer class. This was

performed to project for the future kWh sales for the development of a more

appropriate allocation factors and billing determinants for each customer class.

With the annualized sales per customer class, the computed adjusted kilowatt-

hour sold was 122,744,348.

The Commission opines that in theory, the most appropriate way to allocate

costs among customer classes is based on cost causation principle. Thus, the

Commission intends, through future proceedings to move even further towards

uniform definitions of customer classes based on cost causation characteristics.

However, the Commission believes that such a change would best be

accomplished through the issuance of guidelines of general applicability to all

utilities. Furthermore, R.A. 9136 requires identification and removal of inter class

cross-subsidies. Substantive change in customer classes at this time prevents

precise calculation of cross-subsidy in existing rates. Therefore, no changes in

customer class allocations are ordered for CELCOR at this time.

II.E.3. DESIGN AND CALCULATION OF CHARGES

II.E.3.a. GENERATION CHARGE

The Commission updated the generation cost based on the most recent

approved NPC rate, i.e., ERC Case No. 2003-291, Order dated September 29,

Page 32 of 46
2003. Notably, the Commission approved the adoption of the Incremental

Currency Exchange Rate Adjustment (ICERA) in ERC Case No. 2003-498, Order

dated December 4, 2003 (NPC and PSALM applicants). The Commission

directed NPC and PSALM to refund to its customers the Deferred Accounting

Adjustment (DAA) and FOREX Correction for Luzon amounting to (PhP0.0065)

per kWh within a period of six months starting December 2003 to May 2004.

The NPCs approved rate will remain fixed until changes are authorized by

the Commission. This eliminates the use for future Purchased Power Adjustment.

The Commission has developed a new recovery mechanism designed to

replace the purchased power adjustment clauses being used by the power utilities.

The Commission has promulgated the Implementing Guidelines on the Generation

Rate Adjustment Mechanism (GRAM) effective February 24, 2003. In view thereof,

the Commission does not foresee the need for the Purchase Power Adjustment

(PPA) clause. Towards this end, the Commission hereby directs CELCOR to

discontinue the implementation of its Purchased Power Adjustment Clause (PPA)

upon effectivity of the approved unbundled rates.

II.E.3.b. TRANSMISSION CHARGE

The Commissions decision in ERC Case No. 2001-901 and the

Commissions Order dated September 20, 2002 fixed the transmission charges

for the National Transmission Corporation (TRANSCO) without any provision for

automatic adjustment thereof. Since the transmission rates to be paid by

Page 33 of 46
 CELCOR are fixed, it is the decision of the Commission to likewise fix the

unbundled transmission rates billed to its end-use customers.

The transmission charge shall be billed on a fixed rate per kilowatt-hour for

Residential, Small Commercial, Large Commercial, Metered and Unmetered

Streetlights customers. In the case of Very Large Commercial, Semi Industrial,

Small Industrial, Large Industrial and Hospitals customers with demand meters,

the transmission charge shall be billed using a combination of a fixed rate per

kilowatt (kW) and a rate per kilowatt-hour (kWh).

In consonance with the gradual phase-out of the intra-grid subsidies being

billed by TRANSCO, the Commission hereby sets the transmission charges for

the succeeding years, as follows:

TABLE 21

Commercial Industrial Streetlight

Very
Residential Small Large Large Semi Small Large Metered Unmetered Hospitals
October 2003 - September 2004
Demand Charge P/kW 43.68 39.47 31.01 37.30 36.26
Trans. System Charge PhP/kWh 0.2103 0.2390 0.3027 0.1661 0.0927 0.1898 0.1561 0.2444 0.2117 0.1055
October 2004 - September 2005
Demand Charge P/kW 58.91 53.22 41.82 50.30 48.90
Trans. System Charge PhP/kWh 0.2836 0.3223 0.4082 0.2239 0.1250 0.2559 0.2105 0.3296 0.2855 0.1422
October 2005 - September 2006
Demand Charge P/kW 74.13 66.97 52.62 63.30 61.54
Trans. System Charge PhP/kWh 0.3569 0.4056 0.5136 0.2818 0.1574 0.3221 0.2649 0.4148 0.3593 0.1790

II.E.3.c. SYSTEM LOSS CHARGE

The Commission defines Line Losses for utilities to include technical loss,

non-technical loss and administrative loss or the utilitys use of power for its own

operations.

Page 34 of 46
 The Commission approves the recovery of allowed system loss through the

establishment of a separate Line Loss Charge. The system loss charge shall vary

from one customer to another depending on their respective contributions to the

system loss.

CELCOR proposed to recover its actual System Loss of 13.08%.

The allowed system loss for this case is equal to the actual system loss for

the test year or the existing system loss cap prescribed in R.A. 7832 whichever is

lower.

The Commission believes that the present cap on System Loss of 9.5%

should be used in the calculation of revenue requirements at this time. This would

however be subject to change upon the approval of a new policy by the

Commission. The actual system loss or cap of 9.5% plus 1% of company use or

actual whichever is lower shall be deducted from total power cost and to be billed

separately as System Loss Charge.

II.E.3.d DISTRIBUTION CHARGE

The distribution charge shall be billed using a fixed rate per kilowatt-hour for

Residential, Small Commercial, Large Commercial, and Streetlights end-users. In

the case of Very Large Commercial, Small Industrial, Semi-Industrial, Large

Industrial and Hospitals with demand meters, the distribution charge shall be

billed using a combination of a fixed rate per kilowatt (kW) and a rate per kilowatt-

hour (kWh).

Page 35 of 46
 Relevant to distribution charge, CELCOR proposed distribution wheeling

rates comprised of its proposed distribution and supply charges. The Commission

believes that wheeling rates are parallel to the cost of service functionalized under

Distribution. Thus, the Commission orders that the Distribution Charge provided in

the Rate Schedules be likewise utilized as Distribution Wheeling Charges

available to the future contestable market.

The Commissions decision to allow a distribution utility to avail of the

Distribution Wheeling Charges of another distribution utility is based on general

intent of R.A. 9136 to promote a competitive generation market. Distribution

utilities that currently or in the near future rely in full or in part on the distribution

facilities of another distribution utility should not be held captive by the other

distribution utility in the purchase of unbundled generation. Distribution utilities are,

therefore, prohibited from bundling or tying the sale of generation or purchased

power with the sale of unbundled distribution wheeling service.

II.E.3.d METERING AND SUPPLY CHARGES

The Commission acknowledges that cost-causation rate design principles

suggest the recovery of customer-related costs associated with the metering and

supply functions through fixed monthly charges. In addition to this cost of service

principle, however, the Commission must also consider rate design impacts across

the spectrum of customers within each rate class. Although RA 9136 requires the

removal of inter-class cross subsidies, the law does not require removal of intra-

class cross-subsidies. The Commission has the flexibility to consider other factors

Page 36 of 46
in determining rate design for a particular class of customers. Therefore to mitigate

the impact on below-average consumption of residential end-users, the

Commission orders CELCOR to use a combination of peso per customer per

month and peso per kilowatt-hour for the metering function. On the other hand, the

Commission orders CELCOR to use peso per kilowatt-hour rate for the supply

function. All other end-users shall be charged fixed monthly customer charge for

both metering and supply functions. Street Lighting Service will be charged fixed

monthly customer charge for supply function only.

II.F. FRANCHISE TAXES

Franchise taxes shall appear as a separate line item on the customers bills.

Given this rate design, it is appropriate to remove test year amounts associated

with franchise taxes from the revenue requirement used to calculate other

recurring electricity rates.

Pending issuance of guidelines on this issue by the Department of Finance

(DOF), CELCOR is in the meantime directed to use the formula below in

calculating franchise taxes.

Franchise Tax:

Total Power Bill x FTx,y

Where: FTx = National franchise tax of 2%

FTy = Applicable local franchise tax

Page 37 of 46
 II.G. Cross Subsidy Removal

The inter-class cross subsidies in existing rates are as follows:

TABLE 22

Normalized Cross Class Billing Cross

Customer Revenue Existing Total Change Existing Subsidy Determinant Subsidy
Class Requirement Revenue in Revenue Revenue (Pesos) (kWh) (PhP/kWh)

Residential 301,158,986 275,280,096 25,878,889 284,962,764 (16,196,222) 51,170,016 (0.3165)

Small Comm'l. 74,235,730 70,312,695 3,923,035 72,785,864 (1,449,865) 13,026,705 (0.1113)

Large Comm'l. 153,025,119 156,509,351 (3,484,232) 162,014,392 8,989,272 28,804,214 0.3121

Very Large Comm'l. 79,966,104 89,618,191 (9,652,087) 92,770,410 12,804,306 16,511,747 0.7755

Semi Industrial 17,427,156 20,194,679 (2,767,523) 20,905,004 3,477,848 3,861,134 0.9007

Small Industrial 4,394,996 3,842,844 552,152 3,978,012 (416,984) 729,337 (0.5717)

Large Industrial 8,639,349 8,113,644 525,705 8,399,033 (240,317) 1,708,960 (0.1406)

St. Lights - Metered 2,434,984 2,246,574 188,410 2,325,595 (109,389) 413,973 (0.2642)

St. Lights - Unmetered 15,598,337 5,241,737 10,356,600 5,426,109 (10,172,228) 3,094,272 (3.2874)

Hospital 16,010,144 18,667,127 (2,656,984) 19,323,723 3,313,579 3,423,990 0.9678

672,890,904 650,026,939 22,863,966 672,890,904 0.0000 122,744,348 0.0000

Section 74 of R.A. 9136 and Rule 16, Section 5 of the Implementing Rules

and Regulations thereof provide that ERC shall issue a scheme for phasing out all

cross subsidies including subsidies within Grids, between Grids, and between

classes of end-users. The phasing out period shall not exceed three (3) years from

the establishment of the Universal Charge which may be extendible for a

maximum period of one (1) year subject to certain conditions.

The Commission approved the cross subsidy removal scheme for the

TRANSCO in its Decision dated June 26, 2002, ERC Case No. 2001-901 which

Page 38 of 46
impacts the unbundled transmission rates for CELCORs end-users. This impact is

reflected in the three-year schedule for unbundled transmission charges provided

in Section II.E.3.b above.

II.H. LIFELINE RATE AND LEVEL

Section 4(hh) of R.A. 9136 defines Lifeline Rate as the subsidized rate

given to low-income captive market end-users who cannot afford to pay at full

cost. Pursuant to Section 73 of R.A. 9136, the Commission hereby sets the level

of lifeline consumption and rate applicable to CELCOR.

In determining the Lifeline Level of consumption to be provided to the

marginalized consumers, the Commission calculated the probable load

requirement of typical low-income consumers by considering one (1) Incandescent

Bulb at 40 watts, one (1) electric fan at 40 watts, and one (1) radio/t.v. at 40 watts

that are being used at reasonable number of hours. Thus, the Commission sets

the lifeline consumption maximum level of 75 kilowatt-hours for CELCOR. The

Commission considers the impact that the subsidized Lifeline Rates will have on

other end-users who must carry the cost associated with such subsidy. This fact

combined with the desire to maximize the benefit to as many marginalized end-

users as possible has led the Commission to adopt the following graduated scale

for lifeline discount for CELCOR. The graduated scale is also based on the

recognition that individual end-user consumption may likely vary from month to

month.

Page 39 of 46
 TABLE 23

kWh Consumption % Lifeline Discount

0-30 kWh and below 40%
31 40 kWh 30%
41 50 kWh 20%
51 60 kWh 10%
61 75 kWh 5%

CELCOR shall apply these discounts to the following residential charges:

Generation, Transmission, Distribution, Supply, Metering and Line Loss. In a given

period, an end-user at any of the above-consumption levels shall be given the

specified corresponding discount on each of these rate components. An end-user

with a level of consumption exceeding 75 kWh in a particular billing period shall

not be entitled to any discount lifeline rate for said period.

The cost of subsidy to lifeline end-users shall be passed on to all non-

lifeline end-users. For CELCOR, the lifeline discounts result in a subsidy on

Lifeline by other end-users equal to PhP 0.0770/kWh.

II.I. OTHER CHARGES

CELCORs existing other charges were considered in the determination of

the revenue requirement. The corresponding revenues out of these charges were

appropriately deducted from the determination of the revenue requirement allowed

to CELCOR.

The other charges of CELCOR are hereby pegged at their existing levels

until such time that the Commission sets new rates on the same. Further,

Page 40 of 46
CELCOR is ordered to make a compliance filing on its Other Charges a year from

date of this Decision using a format to be prescribed by the Commission.

The compliance filing for approval of Other Charges shall include rates that

are cost-based as well as all supporting cost justification for the rates, including

but not limited to the amount of actual time and wages of employees performing

each task encompassed by each type of Other Charges.

II.J. Estimated Impact On Average Residential Consumer

A comparison of the estimated impact of all adjustments on the revenue

requirement on the monthly bill of a residential end-user consuming above 140

kWh a month using rates based on CELCORs actual existing rates as of

September 2003 against the unbundled rates approved by the Commission is

shown below.

(this space is left intentionally blank)

Page 41 of 46
 TABLE 24

RESIDENTIAL
CONSUMING 140 kwh

Based on Existing
Rates Based on ERC Approved Unbundled Rates

Peso/kWh Amount Peso/kWh Amount

Basic Charge: Generation Charge 3.4541 483.58

3.4313 480.382 Transmission Charge 0.2103 29.45
System Loss Charge 0.5791 81.07
PPA 2.3634 330.88 Distribution Charge 0.9380 131.32
Supply Charge 0.3611 50.55
Power Act
Reduction (0.30) (42.00) Metering Charge
Retail Customer Charge/Mo. 5.00
Universal Charge Metering System Charge 0.2988 41.84
Missionary 0.0373 5.22 Inter-Class Cross Subsidy Charge (0.3165) (44.31)
Environmental 0.0025 0.35 Subsidy on Lifeline 0.0770 10.78
Power Act Reduction (0.30) (42.00)
sub-total 747.27
Discount on Lifeline Customer
Franchise Tax 2.50% 18.68
Universal Charge
Missionary 0.0373 5.22
Environmental 0.0025 0.35
TOTAL BILL (PhP) 774.83 TOTAL BILL (PhP) 771.53
Peso/kWh 5.5345 Peso/kWh 5.5109
Inc./(Dec.) In Rates P/kWh (0.0236)
Inc./(Dec.) In Bill P/kWh (3.30)

II.K. PROVISIONAL AUTHORITY GRANTED BY ERB

The Commission takes note of CELCORs provisional rate increase of

PhP0.20/kWh which the previous Board granted on September 6, 1999 in ERC
Case No. 2001-482. The provisional increase has already been addressed in this
Decision considering that the test year period used under ERC Case No. 2001-
482 and ERC Case No. 2002-11 was the same.

Page 42 of 46
 DISPOSITION

WHEREFORE, the foregoing premises considered, it is hereby decided as

follows:

1. To approve the unbundled schedule of rates of CELCOR, to be

effective the first billing cycle thirty (30) days after receipt of this
Decision, to wit:
CABANATUAN ELECTRIC CORPORATION
ERC CASE NO. 2002-11 (2001-896)
RATE SCHEDULE

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 2. To direct CELCOR to comply with the following:

a) Discontinue charging the PPA upon effectivity of the approved unbundled

rates; any change in the cost of power purchased shall be reflected as
deferred charges or credits which shall be recovered in accordance with a
recovery mechanism to be prescribed by the Commission;

b) Bill its respective end-users using a billing format which contains at least the
rate elements provided in Annex A (Rate Schedule) of this Decision upon
effectivity of the approved unbundled rates;

c) Bill its respective end-users using a billing format which contains at least the
rate elements provided in Annex B of this Decision upon effectivity of the
approved unbundled rates. The rate elements provided in Annex B should
appear on the end-users bill even if the rate elements currently have a rate
of zero (0) or have not yet been determined by the Commission;

d) Make a formal application to continue the use of Other Charges within one
(1) year from date of this Order using a format to be prescribed by the
Commission;

e) Bill the amount of PhP0.0373/kWh representing the missionary electrification

portion of the Universal Charge in accordance with the Decision of the
Commission in ERC Case No. 2001-165 (In the Matter of the Petition for the
Availments from the Universal Charge the Share for Missionary
Electrification, NPC-SPUG, Applicant);

f) Bill the amount of PhP P0.0025/kWh representing the environmental portion

of the Universal Charge in accordance with the Commissions Decision in
ERC Case No. 2002-194 (In the Matter of the Petition for the Availment from
the Universal Charge the Environmental Share/Charge for the Rehabilitation
and Management of Watershed Areas, NPC, Applicant);

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 g) To set up a depreciation fund each year corresponding to the whole amount
of depreciation that it has recorded on its books. The setting up of this fund
should be done on a monthly basis corresponding to the monthly
depreciation. CELCOR is required to strictly account for the expenditures
out of this fund which should be used strictly for investment in electric plant
and all withdrawals from this fund should be reported to the Commission
within thirty (30) days from withdrawal;

h) To inform the end-users within its franchise area of the approved unbundled
rates not later than thirty (30) days after receipt of this Decision;

i) To submit for verification and confirmation purposes on or before the

twentieth (20th) day of the month following the effectivity of the approved
unbundled rates and every month thereafter : a) five (5) sample bills for
each customer class; b) copy of bills from the generation and transmission
companies ; and c) M001 and M002 with all related schedules;

SO ORDERED.

Pasig City, January 21 , 2004.

LETICIA V. IBAY
Officer-In-Charge

OLIVER B. BUTALID CARLOS R. ALINDADA

Commissioner Commissioner

JESUS N. ALCORDO
Commissioner

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Copy furnished:

1. Atty. Norberto F. Manjares, Jr.

Atty. Norberto F. Manjares, III
Counsels for the Applicant
Law Firm of Manjares & Manjares
Suite 211 Jiao Building
No. 2 Timog Avenue
Quezon City 1100

2. Cabanatuan Electric Corporation

Cabanatuan City, Nueva Ecija

3. Office of the Solicitor General

134 Amorsolo Street, Legaspi Village
City of Makati 1229

4. Commission on Audit
Commonwealth Avenue
Quezon City 0880

5. Senate Committee on Energy

GSIS Building, Roxas Boulevard
Pasay City 1307

6. House Committee on Energy

Batasan Hills, Quezon City 1126

7. The City Mayor

Cabanatuan City, Nueva Ecija 3100

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