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Republic of the Philippines
DEPARTMENT OF ENERGY
(Kagawaran ng Enerhiya)

DEPARTMENT CIRCULAR NO. DC 20/8-08- OORS pe

PRESCRIBING THE RULES GOVERNING THE REVIEW AND EVALUATION OF
DIRECT CONNECTION APPLICATIONS OF INDUSTRIAL, COMMERCIAL AND
OTHER ELECTRICITY END-USERS

WHEREAS, Republic Act No. 7638, otherwise known as the “Department of Energy
Act of 1992”, mandates the DOE to prepare, integrate, coordinate, supervise and
control all plans, programs, projects and activities of the Government relative to
energy exploration, development, utilization, distribution and conservation, among
others;

WHEREAS, Republic Act No. 9136, otherwise known as the “Electric Power Industry
Reform Act of 20010r EPIRA”, states that it is the policy of the State to: i) ensure the
quality, reliability, security, and affordability of the supply of electric power; ii) ensure
transparent and reasonable prices of electricity in a regime of free and fair
competition and full public accountability to achieve greater operational and
economic efficiency and enhance the competitiveness of Philippine products in the
global market; iii) protect the public interest as it is affected by the rates and services
of electric utilities and other providers of electric power; and, iv) encourage the
efficient use of energy and other modalities of demand side management;

WHEREAS, Section 37 of the EPIRA mandates the DOE, among others, to:

(a) supervise the restructuring of the electric power industry;

(6) formulate rules and regulations as may be necessary to implement the
objectives of the EPIRA; and

(c) exercise such other powers as may be necessary or incidental to attain
the objectives of the EPIRA;

WHEREAS, Section 9 of the EPIRA states that the National Transmission
Corporation (TransCo) or its Buyer/Concessionaire shall provide open and non-
discriminatory access to its transmission system to all electricity users;

WHEREAS, Section 23 of the EPIRA states that Distribution Utilities (DU) shall
provide universal service within their franchise, over a reasonable time from the
requirement thereof, in a manner that shall sustain the economic viability of the utility,
subject to the approval by the Energy Regulatory Commission (ERC) in the case of
private or government-owned utilities;

WHEREAS, on 08 May 2014, the ERC endorsed to the DOE all direct connection
applications in compliance with the Supreme Court (SC) ruling in the Mactan Electric
Company, Inc. (MECO) vs. NPC, et al. (G.R. No. 172960);

WHEREAS, in the above-cited case, the SC ruled that the subject matter of the
dispute between MECO and NPC involved the distribution of energy resource,

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specifically direct supply of electricity which was not within the authority of ERC to
resolve nor the Regional Trial Court (RTC) as the jurisdiction over the said dispute
belonged to the DOE;

WHEREAS, in compliance with the above-cited SC ruling, the Direct Connection
Review and Evaluation Committee (D-REC) was created under Department Order
No. 2014-11-019;

WHEREAS, in order to have an orderly, transparent and timely review and
evaluation of applications for direct connection, the D-REC has formulated and
adopted the House Rules Governing the Review and Evaluation of Direct
Connection Applications of Industrial, Commercial and Other Qualified Electricity
End-Users, Economic Zones and Economic Zone Enterprises for such purpose;

WHEREAS, in the course of D-REC’s evaluation of applications for direct connection,
it noted concerns and the need to improve on the above-cited Rules and deem it
necessary to promulgate the revised Rules:

WHEREAS, the DOE conducted Public Consultations on the proposed Department
Circular on the following dates and venues:

DATE

NOW THEREFORE, for and in consideration of the foregoing, the Department
hereby adopts and promulgates the Rules to govern the orderly, transparent and
timely review and evaluation by the D-REC of the applications for direct connection
of industrial, commercial and other Electricity End-Users.

Section 1. Definition of Terms. For the purpose of this Circular, the following terms
are defined, as follows:

a. Applicant refers to an End-User or its duly authorized representative which
submitted application for renewal or approval of new direct connection;

b. Contestable Customer refers to an End-User that belongs to the
Contestable Market;

c. Directly Connected Customer (DCC) refers to an industrial or bulk electricity
End-User, which are supplied through the Grid or sub-transmission assets
that are still owned by the TransCo;

d. Direct Connection refers to an arrangement for the supply of energy to an

End-User directly connecting to the Grid or sub-transmission assets that are
still owned by the TransCo;

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e. Direct Connection Review and Evaluation Committee (D-REC) refers to
the Committee created by the DOE to undertake evaluation, processing and
approval of applications for direct connection;

f. End-User refers to any person or entity requiring the supply and delivery of
electricity for its own use;

g. Grid refers to the high voltage backbone system of interconnected
transmission lines, substations and related facilities, located in each of
Luzon, Visayas and Mindanao, or as may otherwise be determined by the
ERC in accordance with Section 45 of the EPIRA;

h. Sub-transmission Assets refer to the facilities related to the power delivery
service below the transmission voltages and based on the functional
assignments of assets including but not limited to the step-down transformers
used solely by load customers, associated switchyard/substation, control and
protective equipment, reactive compensation equipment to improve customer
power factor, overhead lines and the land such facilities/equipment are
located. For this purpose, this includes the National Transmission Corporation
(TransCo) or its Buyer/Concessionaire assets linking the transmission system
and the distribution system which are neither classified as generation nor
transmission;

i. Transmission Service Provider refers to the party that is responsible for
maintaining adequate Grid Capacity in accordance with the provisions of the
Philippine Grid Code (PGC).

Section 2. Coverage. The evaluation of applications for direct connection by the D-
REC shall only cover the following:

a. Any existing DCC intending to renew its direct connection arrangements either
with a Generation Company or Supplier, including its Service Agreement with
the Transmission Service Provider (TSP); and

b. Any New End-User intending to secure supply of electricity with a Generation
Company or Supplier. Provided, that the Applicant should have at least
corresponding monthly average peak demand for the past 12 month period/
forecasted monthly peak demand; and delivery voltage:

1) 10MW; 69 kV for Luzon Grid;
2) 5MW; and 69 kV for Visayas Grid;
3) 5MW; and 69 kV for Mindanao Grid.

Section 3. General Principles for Direct Connection. The following principles
shall be adopted by the D-REC in the review and evaluation of applications for Direct
Connections:

a. The privilege of direct connection shall only be afforded to high demand,
energy intensive electricity End-Users which investments are critical to propel
economic activities that significantly benefit the locality in terms of investment,
job creation, tax generation among others.

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b. The franchised DU serving the area within which the End-User applying for
direct connection is located, shall be afforded the opportunity to prove
whether or not it is capable to provide the technical and power supply
requirements of the End-User applying for direct connection which may
include among others, voltage level and availability of associated facilities for
the connection of the End-User. A DU’s technical capability to provide reliable
service to the End-User Applicant shall be based on qualifications set forth
hereunder these guidelines.

c. End-Users including Contestable Customers which are already being
provided with distribution wheeling service by a DU shall not be afforded the
privilege of direct connection except in cases where the DOE has determined
that the DU concerned is not capable of reliably serving the End-User and has
not complied with operational and technical reliability standards as required by
the Philippine Distribution Code (PDC) and other applicable rules and
regulations.

d. Prior to its filing of application for direct connection, the Applicant shall
formally inform the franchised DU of its connection requirements and the
location of its facilities, and must have reasonably determined that the latter
cannot adequately serve the Applicant’s connection requirements.

e. The DOE shall continue to recognize all existing and valid direct connection in
force at the time of the Effectivity of these rules until the expiration of their
supply contracts with the generation company or supplier.

f. The term of direct connection shall correspond to the period indicated in the
Power Supply Agreement (PSA) and Transmission Supply Agreement (TSA)
entered into by an End-User which has been granted the privilege of direct
connection without prejudice to the acquisition by the franchised DU of the
connection or sub-transmission facilities.

g. In the implementation of Retail Competition and Open Access (RCOA),
regardless of the threshold level, the DCC having the privilege of direct
connection may continue to source its power supply from the generation
company or supplier, subject to payment of applicable wheeling charges, as
determined by the ERC, until the expiration of their supply contracts. Provided,
however, if at the time of the expiration of its contract with its counterparty, the
End-User has a load demand falling within the RCOA threshold level as
indicated in the timeline provided by ERC and DOE for that particular
expiration year, the same shall be subject to the RCOA rules.

Section 4. Application for Direct Connection. An Applicant or a DCC seeking
approval to avail of or to renew a direct connection arrangement, may file an
application to the DOE as follows:

a. The DOE shall accept the application for direct connection together with the
following documents :

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Proof of application for connection by the Applicant with the DU and
supporting documents; and

ii. any of the following:

1. Communication/waiver from the DU that it cannot provide the
services and facilities required by the Applicant;

2. Affidavit that the DU failed to process the application for
distribution wheeling services within thirty (30) days from the
submission of the completed application form in accordance
with Section 4.3.5.2 of the PDC;

3. Manifestation from the Applicant that the franchised DU is not
capable to meet the supply and technical requirements of the
Applicant.

b. Upon the Applicant's determination that the franchised DU serving the area
within which the Applicant's facilities requiring connection for electricity
service is or will be located, has failed or waived its privilege to provide
distribution service, the Applicant may file with the DOE through the D-REC a
written application containing and/or enclosing thereto the following
information/documents:

iii.
iV.

Vv

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Corporate/business profile of the Applicant;

Secretary's Certificate designating the Applicant's authorized
representative;

Brief description of the proposal;

Location map of Applicant’s/DCC’s installation, plant, or factory for
which direct supply is sought, including the nearest TSP /DU
substation;

Power demand, delivery voltage, timeline for connection requirement,
load forecast, and other relevant technical information;

Certification from the TSP that the current demand including the five (5)
years projected demand can be accommodated by existing
transmission facilities and the same shall not adversely compromise
the operation of the Grid. At its cost, the Applicant shall coordinate with
the TSP the conduct of grid impact study concerning its requested
connection and submit to the D-REC a report on the results thereof for
the latter's consideration in its evaluation of the application for direct
connection.

The Applicant shall fund the required infrastructure to serve its
connection requirements. Provided, however, that the Applicant shall
retain ownership of such dedicated facilities until such time that a
portion of such facilities are required for competitive purposes and its
ownership shall be transferred to the TransCo or Buyer/Concessionaire
or the franchised DU, as applicable, at a fair market price, in
accordance with the provisions of the EPIRA. Relative thereto, the
Applicant shall submit to the D-REC a Certification of willingness to
shoulder the cost of needed connection assets and sub-transmission
facilities.

. Feasibility Study. Proof that the direct connection status will give rise to

the continued growth and/or survival of its business and shall result to

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positive economic impact to the community where the Applicant is
located. The analysis shall include among others:

1. Cost Benefit Analysis;

2. Capital infusion;

3. Other measures as applicable (e.g. improvement in power
quality, service delivery, etc.); and

viii. Such other documents which the D-REC may deem necessary in
support of the application.

The application should be addressed to:

The DOE Secretary

Attention: The Chairperson
Direct Connection-Review and Evaluation Committee
c/o Electric Power Industry Management Bureau
Department of Energy
Energy Center, Rizal Drive
Bonifacio Global City, Taguig City, Metro Manila
Telephone No. 840-2120

c. The Applicant shall pay processing fee in accordance with the Schedule of
Fees and Charges in compliance with Administrative Order No. 31. Dated 1
October 2012 and its Implementing Rules and Regulations.

d. The concerned DU shall inform the DOE of its action on the application for
direct connection within fifteen (15) working days from receipt of the copy of
the application. Otherwise, the D-REC shall consider that the DU has waived
its right to file any action on the application.

e. Upon receipt of copy of the application, the D-REC Chairperson shall refer the
application to the D-REC TWG, within two (2) days from receipt:

i. |The D-REC TWG shall determine the completeness and authenticity of
the application documents submitted by the Applicant, and issue notice
to the Applicant on the result within three (3) working days from receipt
of the application.

ii. Upon determination of the completeness and authenticity of the
application documents, the D-REC TWG shall commence its technical
and financial evaluation of the franchised DU in accordance with
Section 7 of these rules.

ii. The D-REC TWG shall complete its evaluation within thirty (30)
working days excluding conduct of site inspection or field verifications
as may be directed by the D-REC.

f. In the conduct of consultations, focus group discussions/and or meetings, as

deemed necessary by the D-REC in order to validate all facts relating to the
direct connection application, the D-REC Secretariat shall inform the Applicant,

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the concerned DU and other affected entities of the details of the conduct of
consultations including the date, time, venue, invited participants and
resource persons and other pertinent information relating to the consultations.

g. In all instances, the D-REC shall approve or deny any application for direct
connection based on the affected franchised DU’s meeting the technical,
operational and financial capability standards as prescribed in these rules.

h. Provided that all information and documentary requirements shall have been
complied with and the specific periods for the DU to contest the application
have been observed, the D-REC shall decide on the application within thirty
(30) working days from the date of complete submission of documentary
requirements, unless otherwise the situation warrants a thorough evaluation
and consultation.

Upon approval by the DOE of the application for direct connection, the Applicant
shall submit copies of its PSA with a generation company or Retail Supply Contract
(RSC) with a supplier and TSA. The Applicant shall ensure that the TSA shall have
an expiration term similar to the PSA, but not later than the expiration of the
franchise of the TSP.

Section 5. Renewal of Direct Connection Status. The following shall govern the
process for the renewal of Direct Connection:

a. The Applicant shall advise the D-REC in writing, copy furnished the
franchised DU, of such intention to renew its direct connection at least three
(3) months before its PSA and TSA expire.

b. Provided that all required information under Section 4 of this Rule shall have
been complied with, the D-REC shall complete the evaluation and inform the
Applicant and concerned DU of its decision to approve or deny any renewal
of contract within thirty (30) working days from the date of complete
submission.

Any DCC which has been granted authority by the D-REC to renew its Direct
Connection status but need to upgrade its dedicated facilities due to expansion shall
shoulder all costs of putting up, and maintaining the new/upgraded dedicated
facilities.

Section 6. Disapproval/ Termination of Application. The D-REC shall
disapprove or terminate the application in the following cases:

a. Failure of the Applicant or DCC to submit the pertinent documents as
required in Section 5 of this Circular;

b. The Applicant or DCC expressly withdraw in writing its application for
whatever reason;

c. Application for direct connection where the concerned DU is deemed

technically and financially capable to serve the Applicant. The D-REC shall
advise the franchised DU to serve the End-User.

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d. The Applicant load requirement cannot be accommodated by the current
load capacity of transmission facilities (lines, transformers and other high
voltage devices) unless said End-User is willing to fund the upgrading works
at its initial cost subject to the usual regulatory processes and approvals.

Section 7. Evaluation of Franchised Distribution Utility. The following guidelines
and procedures shall apply in determining the capability of the franchised DU to
satisfy the requirement of the Applicant:

a. New Applications

For the D-REC’s evaluation if the franchised DU is capable to meet the
requirements of the Applicant, the franchised DU shall submit within ten (10)
working days from the receipt of written advice by the D-REC TWG, the
following operational data requirements pertaining to the past three (3) years
immediately preceding the year of the application for direct connection:

TECHNICAL/OPERATIONAL

Single line diagram of the DU’s proposed interconnection point up to the
sub-transmission substation, indicating the voltage level and load carried
at each nodes;

Proposed interconnection plan for the Applicant showing all related
equipment and connection point;

Details of PSA with Generation Companies, list of embedded generators,
load forecast, contracted capacity, duration, other terms such as outage
allowances, replacement power supply provision, Distribution facility's
expansion plan and copies of application to ERC for capital cost
recovery (medium-and/or long term), as provided on Distribution
Development Plan (DDP);

iv. Rates per supply agreement and rate schedule per customer class;

v. Distribution Reliability Reports and Performance Targets; Technical and
Non-Technical System Loss against applicable System Loss Cap;
Distribution Utility Use against Approved Distribution Utility Use
Allowance; and Copy of Target vs. evaluated Customer Service
Performance, in compliance with the distribution code;

vi. Cost benefit analysis showing the advantages to the DU of having the
Applicant as customer, which may include improvement in_ the
distribution costs, load profile and other benefits that will result to lower
electricity rates in the DU’s franchise area;

FINANCIAL

vii. Copy of audited Financial Statements for the two (2) most recent 12

month period and Projected Cash Flow Statements for 5 years

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viii. Certification of good credit standing with power supplier and
transmission service provider;

ix. To measure liquidity: (ability to meet financial obligations as they
become due).

a. Current ratio. This ratio should be higher than 1, or
b. Quick Ratio. This ratio should not be less than 1.

x. To measure solvency. (Ability to pay long-term obligations or the ability
to sustain operations indefinitely by comparing the debt levels with equity,
assets and earnings).

a. Debt Ratio: This ratio should be less than 50%.
b. Debt-to-Equity Ratio: This ratio should be less than 1.

xi. Other documents and records relevant to support its compliance to
financial capability criteria set herein.

b. Applications for Renewal

lf the franchised DU opts to contest the renewal of direct connection
application of the End-User within its franchise area, it shall submit the
operational data requirements pertaining to the past three (3) years
immediately preceding the year of application as provided in this Section.

The DU may request additional time within which to submit the above requirements
which in no case be more than five (5) working days from its receipt of the D-REC’s
written approval of said request.

Section 8. Transfer of Subtransmission Facilities. Upon the franchised DU's
acquisition from the TransCo of the concerned sub-transmission facilities to which
the DCC is connected, the DU shall assume the responsibility to continuously serve
the DCC and shall impose and collect the corresponding wheeling rates as duly
approved by the ERC. Provided, however, that the supply arrangement of DCCs
should be respected until its expiration, after which, the DCC will then be free to
source its supply from any Generation Company or the WESM, and if qualified as a
Contestable Customer (CC), to enter into a Retail Supply Contract (RSC) pursuant
to the RCOA policies.

Section 9. Request for Reconsideration on the Decision. A party adversely
affected by the decision or Resolution of the D-REC may, within seven (7) days from
receipt of the copy thereof, file a Motion for Reconsideration (MR). Otherwise, the
decision shall become final and executory. The D-REC shall resolve the MR within
fifteen (15) working days from receipt thereof.

Section 10. Other Provisions. These rules shall be amended, replaced or repealed

in due time as may be deemed necessary by the DOE to rationalize availment by
End-User of direct connection and as an electric power industry move toward an

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increasingly competitive industry structure subject to consultation with stakeholders,
including distribution utilities and the transmission service provider.

Section 11. Separability. If for any reason, any section or provision of this Circular
is declared invalid or unconstitutional, the other provisions not affected thereby shall
remain valid and subsisting.

Section 11. Repealing. All issuances inconsistent with the provisions of this Circular
are hereby repealed or amended accordingly.

Section 12. Effectivity. This Circular shall take effect after fifteen (15) days upon
its publication in two (2) newspapers of general circulation.

Let copy of this Circular be furnished the University of the Philippines Law Center-
Office of National Administrative Register (UPLC-ONAR).

Issued at Energy Center, Rizal Drive, Bonifacio Global City, Taguig City on
2018.

E . CUSI
shed ant

Republic of the Phi ilippiInGs
Fe. DEPARTMENT OF ENERGY
Fe. iN st PLS. CITE:

mu mi MAT it
AUG 24 2018

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