STRANDED DEBTS AND CONTRACT COSTS RECOVERY

Section 1.

As per Sections 32 and 33 , there are three (3) types of stranded costs recoverable through the Universal Charge: (a) Stranded Debts; (b) Stranded Contract Costs of NAPOCOR; and (c) Stranded Contract Costs of Eligible Contracts of DUs.

Section 2. Scope of the Application.

This Rule shall apply to NAPOCOR, PSALM and DUs with IPP contracts approved by the ERB as of 31 December 2000.

Section 3.

Procedures and Methodology for Stranded Cost Determination. (a) PSALM and any Distribution Utility that has an eligible contract shall file with ERC their respective petitions for cost recovery under the Universal Charge and include therewith the methodology in determining stranded costs. The ERC shall review the methodology submitted by PSALM and such Distribution Utility to determine, fix, and approve the level of stranded costs. (b) At the end of the first year of the implementation of stranded cost recovery and every year thereafter, the ERC shall conduct a review to determine whether there is an under- or over recovery and adjust (true-up) the level of stranded cost recovery charge accordingly. In determining whether there is an under- or over recovery and in determining the stranded cost recovery portion of the Universal Charge for the subsequent period, the ERC shall base the calculation Page 55 of 100on the following information submitted by the PSALM and the Distribution Utility which has an eligible contract: (i) a report of the amounts recovered for stranded costs during the past year; and (ii) revised stranded cost amounts based on current market information. Section 4. NAPOCOR Stranded Debt and Stranded Contract Cost Recovery. (a) Consistent with Section 32 , the National Government shall directly assume a portion of the financial obligations of NAPOCOR transferred to PSALM in an amount not to exceed Two Hundred Billion Pesos (P200,000,000,000.00). (b) The following guidelines shall govern the recovery by the PSALM of the Stranded Debts and Stranded Contract Costs of NAPOCOR: (i) PSALM shall calculate the amount of the Stranded Debts and Stranded Contract Costs of NAPOCOR that shall form part of the Universal Charge to be determined, fixed, and approved by the ERC and reviewed by the same body annually. In determining the amount of Stranded Contract Costs of NAPOCOR, PSALM may include in such calculation the principal amount and interest expenses of any such debt raised by PSALM to finance the buy- out or buy-down of any eligible IPP contract, i.e. contracts approved by the ERB as of 31 December 2000 as well as any other costs and expenses incurred in connection with such buy- out or buy-down: Provided, That the amount recoverable by PSALM from the Universal Charge fund shall not exceed the estimated Stranded Contract Costs of such eligible IPP Contract, assuming that such buy-out or buy-down never occurred: Provided, further, That PSALM demonstrates to the ERC’s satisfaction that such buy-out or buy-down will benefit electricity consumers by reducing that component of the Universal Charge attributable to such IPP contract. (ii) The ERC shall verify the reasonable amounts of claims petitioned by PSALM and determine the manner and duration by which full recovery of Stranded Debt and Stranded Contract Costs of NAPOCOR is attained: Provided, That the duration for such recovery shall not be shorter than fifteen (15) years nor longer than twenty-five (25) years. (iii) Any amount to be included for stranded cost recovery shall be reflected as a separate item in the consumer billing statement. The ERC shall monitor and ensure that there is a separate item in the consumer billing statement for stranded cost recovery. Page 56 of 100Section 5. Recovery of Stranded Contract Costs of Eligible Contracts of DUs. (a) Within one (1) year from the start of Retail Competition and Open Access, a Distribution Utility that seeks to recover stranded contract costs arising from its eligible contracts shall file with the ERC a notice of such intent together with an estimated amount of such obligations. The Distribution Utility shall provide all pertinent information as may be required by the ERC. Failure of the Distribution Utility to file within the date specified shall mean non-eligibility for such recovery. (b) A Distribution Utility shall recover stranded contract costs: Provided, however, That such costs of the IPPs of DUs are subject to review by ERC in order to determine fairness and reasonableness in relation to the average price of land-based IPP projects entered into by NAPOCOR at the time they were contracted. The ERC shall take into consideration all factors that affect the total cost of NAPOCOR IPP generation projects, including direct or indirect subsidies or incentives provided by the Government . (c) Any Distribution Utility which seeks to recover stranded costs shall have the duty to mitigate its potential stranded costs by exerting reasonable best efforts to: (d) (i) Reduce the costs of its existing eligible contracts with IPPs to a level not exceeding the average buying price of other land-based electric power generators; and (ii) Submit to an annual earnings review by the ERC and use its earnings above its authorized rate of return to reduce the book value of contracts until the end of the stranded cost recovery period. The Distribution Utility shall submit to the ERC, during its filing for stranded contract cost recovery, its detailed plan and strategy to mitigate stranded contract costs. Other mitigating measures that are reasonably known and generally accepted within the electric power industry shall be utilized. The ERC shall not require the Distribution Utility to take a loss to reduce stranded contract costs or divest assets, unless the divestiture is imposed as a penalty as provided herein. (e) Within three (3) months from the submission of the application for stranded cost recovery by the relevant DUs, the ERC shall verify the reasonable amounts and determine the manner and duration for the full recovery of the Stranded Contract Costs of Eligible Contracts of DUs: Provided, That the duration for such recovery shall not be shorter than fifteen (15) years nor longer than twenty-five (25) years. For this purpose, “full recovery of Stranded Contract Costs of Eligible Contracts of DUs” shall mean recovery of Stranded Contract Costs of Eligible Contracts of DUs authorized by the ERC after its pertinent Page 57 of 100review. Any amount to be included for the recovery of Stranded Contract Costs of Eligible Contracts of DUs shall be reflected as a separate item in the consumer billing statement. (f) In the case of an over-recovery, the ERC shall ensure that any excess amount shall be remitted to the Special Trust Fund (STF) created pursuant to Section 34 . A separate account shall be created for this purpose that shall be held in trust for any future claims of DUs for the recovery of their respective Stranded Contract Costs of Eligible Contracts of DUs. At the end of the stranded cost recovery period, any remaining amount or balance in this account shall be used to reduce the electricity rates to the End-users. (g) A Distribution Utility, which has an eligible contract, duly authorized by the ERC, shall submit to ERC quarterly reports showing the amount of stranded contract costs recovered and the balance remaining to be recovered from the Universal Charge. Quarterly shall mean the calendar quarters of January 1 to March 31 (first quarter), April 1 to June 30 (second quarter), July 1 to September 30 (third quarter), and October 1 to December 31 (fourth quarter). The relevant Distribution Utility shall submit to the ERC the quarterly reports within thirty (30) days from the end of each calendar quarter. (h) Upon a finding by the ERC that a Distribution Utility which seeks to recover stranded contract costs has failed to comply with its mitigation obligation under Section 33 , the ERC may not allow the recovery of stranded contract costs: Provided, That if there is any fraud or misrepresentation by the Distribution Utility, the ERC may impose appropriate penalties in accordance with Section 46 of the Act.