Privileged & confidential

Memo for: Dato Dr. Dennis Ganendra

Founder Director
Timeless Green, Inc.

From: Euney Marie J. Mata-Perez

Samantha L. Poblacion
Florian G. Salcedo

Re: Regulatory Framework, Procedure, and Challenges relating to the Solar

Rooftop Project

Date: June 9, 2017

This memorandum discusses the regulatory framework, issues, and challenges

relating to the business of leasing solar rooftop panels by Timeless Green, Inc. (the
Company) in the Philippines.

Background

The Company is a renewable energy company based in Malaysia desiring to expand

their portfolio through regional expansionprimarily in the Philippines. The
Company wishes to explore and enter into the business of leasing of solar panel
electricity systems, or solar photovoltaics (SPV), intended for the captive (non-
contestable) end-user market as the entry point to the renewable energy market in
the Philippines. We understand that there are already two (2) projects in the
pipeline, the details of which are as follows:

Project Details Project Details

Building Owner Manila Jockey Club Alloy MTD Philippines, Inc.
Building Location Nueva Ecija Government
Center and Central
Business Hub, Palayan City
Installation Capacity 300 kWp 200 kWp
Proposed Solar Rate 7.50 Php/kWh 8.00Php/kWh
Lease period 25 years with purchase 25 years with purchase
clause clause

We understand that the Company intends to set up either a branch or a subsidiary

for the above-stated purpose.
In this regard, you seek confirmation on the permitted ownership structure of the
Company taking into account the nationality restrictions under our current laws.
You also asked us to survey and examine applicable statutes, rules and regulations
and determine the acceptability and legality of the lease-to-own arrangement in the
Philippine jurisdiction. In view of the foregoing, we will also identify and advice on
issues that may arise on the above proposed projects of the Company.

Brief

The Company can enter into a direct supply agreement with customers which
belong to the contestable market, i.e., those who have monthly average usage of one
MW (1 MW) or 750kW by June 2017. However, the Company will not be allowed
to directly supply those customers which belong to the non-contestable or captive
market. In this regard, the Company may enter into a lease-to-own arrangement
with the captive market customers, who shall be the recognized RE Developers.
Our discussion in this memo is premised on the assumption that the Company will
service those who belong to the captive market. Thus, our advice herein is limited
to the legal and regulatory framework governing a lease-to-own arrangement
between the Company and a consumer which belongs to the captive market.
This arrangement though has certain challenges and issues, as discussed below.

Discussion

A. Solar Power Generation as a Nationalized Activity

The development, exploitation and utilization of solar energy within the Philippine
jurisdiction was governed primarily by Executive Order No. 462, otherwise known
as Enabling Private Sector Participation in the Exploration, Development, Utilization
and Commercialization of Ocean, Solar and Wind Energy Resources for Power
Generation and Other Energy Uses. This law was amended and expanded by the
enactment of Republic Act No. 9513, otherwise known as the Renewable Energy Act
of 2008 (RA 9513 or the RE Act). This law, in turn, is enabled by its
Implementing Rules and Regulations under Department of Energy (DOE) Circular
2009-05-0008 (RA 9513 IRR).

It is important to note that under the RA 9513 IRR, the development, exploitation
and utilization of solar energy in the Philippines can only be undertaken through a
joint venture or co-production sharing agreements between the State and Filipino
citizens or juridical entities whose capital is at least 60%-owned by Filipinos. This
restriction echoes Section 2 of Article XII of the 1987 Philippine Constitution on
National Economy and Patrimony, to wit:

SECTION 2. All lands of the public domain, waters, minerals, coal,

petroleum, and other mineral oils, all forces of potential energy, fisheries,
forests or timber, wildlife, flora and fauna, and other natural resources are
owned by the State. With the exception of agricultural lands, all other
natural resources shall not be alienated. The exploration, development, and
utilization of natural resources shall be under the full control and

2
 supervision of the State. The State may directly undertake such activities, or
it may enter into co-production, joint venture, or production-sharing
agreements with Filipino citizens, or corporations or associations at least
sixty per centum of whose capital is owned by such citizens. Such
agreements may be for a period not exceeding twenty-five years, renewable
for not more than twenty-five years, and under such terms and conditions as
may be provided by law. In cases of water rights for irrigation, water supply,
fisheries, or industrial uses other than the development of water power,
beneficial use may be the measure and limit of the grant. 1

xxx xxx xxx

xxx xxx xxx

The President may enter into agreements with foreign-owned corporations

involving either technical or financial assistance for large-scale exploration,
development, and utilization of minerals, petroleum, and other mineral oils
according to the general terms and conditions provided by law, based on
real contributions to the economic growth and general welfare of the
country. In such agreements, the State shall promote the development and
use of local scientific and technical resources.2

The phrase all forces of potential energy has been interpreted by the enabling
statutory laws, such as the RA 9513 IRR, to include all sources of energy which
include thermal energy generated through solar means. Thus, the development,
exploitation and utilization of solar energy is limited to Filipino citizens or entities
whose capital is at least 60%-owned by Filipino citizens. Pursuant to this
requirement, Renewable Energy (Systems) Developers or RE Developers3 should be
Filipino citizens or owned by Filipinos to the extent of 60% of its outstanding capital
stock. However, RE Developers For Own Use need not comply with this
requirement, if they do not supply energy to third parties.4

The exception to the nationality requirement though is large-scale exploration,

exploitation and utilization of geothermal energy sources.5

1
Emphasis supplied.
2
Emphasis supplied.
3
RE Developers refers to individuals or a group of individuals formed in accordance with existing
Philippines Laws engaged in the exploration, development and utilization of RE resources and actual
operation of RE systems/facilities. RE Act, sec. 4(pp).
4
This was conformed by Mr. Peter Sablay, Science and Research Specialist of the Wind ans Solar
Division of the Department of Energy.
5
Part 1 (Application Requirements), Section 6 of DC 09-07-0011 provides the qualification of those
who may apply for RE contracts, as follows:

a. Who may apply Any person, natural or juridical, local or foreign, may, subject to the
limits herein set, apply for RE contracts:
XXX
ii. In the case of the exploration, development or utilization of geothermal resources,
the applicant may either be a Filipino, natural or juridical, or a foreign corporation.

3
B. The Philippine Electric Power Industry

The main law governing the Philippine power industry is Republic Act No. 9136 6,
otherwise known as the Electric Power Industry Reform Act of 2001 (EPIRA).

The electric power industry in the Philippines is divided into four sectors, namely:
generation, transmission, distribution and supply. Generation and supply sectors are
not required to secure a national franchise because the law does not consider them
engaged in public utility operations.7 Transmission and distribution players on the
other hand are considered public utilities or common carrier business for public
service, and thus, are required to secure a national franchise.8

A Distribution Utility (DU), which can be electric cooperatives, private corporations,

government-owned utilities or existing local government units, is an entity granted
the exclusive license to distribute electricity over a designated franchise area. 9 It can
enter into bilateral agreements10 in the form of a Purchase Supply Agreement (PSA)
with a generation company for the purchase and supply of power, consistent with
the exclusive, legislative franchise which the DUs enjoy.

Although EPIRA contains provisions which preserve the exclusive nature of the DUs
legislative franchise over its franchise area, it allows and promotes open access11 and
retail competition.12 Thus, the EPIRA permits independent electricity generators,
retailers, and aggregators to deliver electricity to end-users without having to
construct and own the distribution infrastructure. 13 This is made possible by
allowing such entities to have open access to the DUs infrastructures subject to the
payment of wheeling and access charge to the DUs for the use of the distribution
network. The EPIRA likewise allows entities to generate electricity for own use,
subject to compliance with regulatory requirements.14

6
An Act Ordaining Reforms in the Electric Power Industry, Amending for the Purpose Certain Laws
and for Other Purposes.
7
Section 6 of the EPIRA; IDEALS, Inc. v. PSALM, 682 SCRA, October 9, 2012.
8
EPIRA, Sections 7 and 22.
9
Id., Section 4(q).
10
IRR of RA 9513, states:

Section 5. Limits on Bilateral Supply Contracts by a Distribution Utility.

(a) A Distribution Utility may enter into bilateral power supply contracts subject to the
provisions of Section 5 of Rule 30 on NPC Offer of Transition Supply Contracts and a
review by the ERC: Provided, That such review shall only be required for a Distribution
Utility whose level of Open Access has not reached household demand level.
11
EPIRA, Section 6.
12
Id., Section 2(c).
13
EPIRA, Section 4(hh) and Section 31.
14
ERC Resolution No. 16, series of 2014.

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C. Open-Access and Retail Competition

Open Access is defined in the EPIRA as a system of allowing any qualified person
the use of transmission, and/or distribution system, and associated facilities subject
to the payment of transmission and/or distribution retail wheeling rates duly
approved by the ERC.15

The EPIRAs Open Access and Retail Competition program divided the end-users
into two primary markets for the supply of electricity, namely, the non-contestable
or captive market and the contestable market. The initial implementation of Open
Access is limited to those which belong to the contestable market.

Under the EPIRA IRR, Open Access is implemented as follows:

Section 4. Specification of the Contestable Market for Open Access.

Upon the initial implementation of Open Access, the ERC [Energy Regulatory
Commission] shall allow all electricity End-users with a monthly average peak
demand of at least one megawatt (1 MW) for the preceding twelve (12)
months to be the Contestable Market. Two (2) years thereafter, the threshold
level for the Contestable Market shall be reduced to seven hundred fifty
kilowatts (750 kW). At this level, Aggregators shall be allowed to supply
electricity to End-users whose aggregate monthly average peak demand within
a Contiguous Area is at least seven hundred fifty kilowatts (750 kW).
Subsequently and every year thereafter, the ERC shall evaluate the
performance of the market. On the basis of such evaluation, it shall gradually
reduce the threshold level until it reaches the household demand level. In the
case of ECs, Retail Competition and Open Access shall be implemented not
earlier than five (5) years from the effectivity of the Act.16

Contestable Market

A contestable market, as opposed to a captive market, are electricity end-users

who have a choice of a supplier of electricity, as may be determined by the ERC or
the Energy Regulatory Commission17 in accordance with the EPIRA.18 These are
those who have monthly average peak usage of one MW (1 MW), initially (750kW
by June 2017 and subject to further review). 19 Those falling below these thresholds
belong non-contestable or captive market. 20 Ultimately, only the Energy Regulatory
Commission (ERC) has the power determine if an end-user qualifies as belonging to

15
EPIRA, Section 4(ll).
16
Bracket and words within brackets supplied.
17
Refers to the regulatory body created under Republic Act No. 9136 or the EPIRA, as an
independent, quasi-judicial regulatory body whose main function is to implement rules and regulations
under the EPIRA, enforce rules and regulations governing electricity spot market, establish and
enforce methodologies for setting transmission and distribution wheeling charges and retails rates for
the captive market of a DU, among others. EPIRA, Section 43.
18
EPIRA, Section 4(h).
19
Id., sec. 31.
20
Id., Section 4(c)

5
the contestable market.

Captive Market

The captive market end-users, on the other hand, cannot choose their supplier of
electricity. Pursuant to ERC Case No. 2005-10RM,21 otherwise known as the
Distribution Services and Open Access Rules, regular supply of electricity to the
captive market shall be provided by the DUs holding the legislative franchise over
the area. Thus:

3.1. GENERAL DESCRIPTION OF SERVICE. Service to the

captive market shall include all unbundled services necessary to maintain a
regular supply of alternating current of approximately 60 hertz. Supply to
the Captive Market shall be provided by the DU (distribution unit)
throughout its franchise service area.

Based on the foregoing, until the monthly average peak threshold for purposes of
defining who belongs to the contestable market is further reduced to what is called
household levels,22 end-users with average household level electricity usage
cannot participate in the open access and retail competition options of the EPIRA,
subject to the very narrow exception as an RE Developer for Own Use which will
be discussed further herein.

Migration to Open Access and Retail Competition

Pursuant to the EPIRA-mandated policy of open access and promoting retail

competition.23 In this regard, for the purpose of operationalizing the Open Access
provisions of the EPIRA, the ERC released Resolution No. 16 Series of 2012, 24 which
consist of the approved and adopted Transitory Rules for the Initial Implementation
of Open Access and Retail Competition (Transitory Rules). Under this Transitory
Rules, persons and entities may be authorized by the ERC to broker, sell, marker or
aggregate electricity to contestable consumers as Retail Electricity Suppliers (RES).
This is done through the execution of a Retail Supply Contract (RSC) between the
RES and the contestable end-user.

The Transitory Rules also mandated that contestable customers enter into an RSC
contract with an RES on or before May 20, 2013.25 This mandatory migration was
extended in ERC Resolution No. 10, Series of 2016 as amended by ERC Resolution
No. 28 Series of 2016 providing for a February 2017 timeline for mandatory
migration to an RSC system.

21
Dated January 18, 2006.
22
refers to end users with average monthly consumption below 500kW.
23
EPIRA, Section 2(c).
24
A Resolution Adopting the Transitory Rules for the Implementation of Open Access and Retail
Competition. December 17, 2012,
25
Section 6, Transitory Rules

6
However, on February 21, 2017,26 the Supreme Court issued a Temporary
Restraining Order (TRO) against the implementation of the following various rules
and regulations promulgated by the ERC for the implementation of Open Access to
the contestable market. 27

Although the issue is limited to the mandatory migration, the TRO was issued
against the body of rules. A TRO issued by the Supreme Court, unlike those issued
by the lower courts, shall be effective until further orders.28 As of date of writing,
the Supreme Court has not lifted the TRO hence the implementation of the
enumerated rules and regulations is effectively suspended.

We were advised that because of the TRO, the ERC in the meantime has withheld
the granting of authority or renewals of registrations of RES or Renewable Energy
Suppliers.

D. Regulatory Framework for the Development and Utilization of Renewable

Energy

The legal framework for the development and utilization of renewable energy is
further implemented by DC 2009-07-0011,29 which sets out the policy of the DOE30
to implement a transparent and competitive system of awarding Renewable Energy
Contracts (REC) or Operating Contracts. DC 09-07-0011 also provides for two
frameworks, namely (a) renewable energy generation through the application and

26
Upon petition of the Philippine Chamber of Commerce and Industry, San Beda College Alabang Inc.,
Ateneo De Manila University, and Riverbanks Development Corp.

27
Supreme Court issues TRO against contestable-customer power scheme, retrieved from
https://www.doe.gov.ph/energist/index.php/2-uncategorised/11846-supreme-court-issues-tro-against-
contestable-customer-power-scheme on May 24, 2017. The rules are as follows:

a. DOE Circular No. DC2015-06-0010 (Providing Policies to Facilitate the Full Implementation
of Retail Competition and Open Access in the Philippine Electric Power Industry);
b. ERC Resolution No. 05 (Series of 2016) (A Resolution Adopting the 2016 Rules Governing
the Issuances of the Licenses to Retail Electricity Suppliers (RES) and Prescribing the
Requirements and Conditions Therefore);
c. ERC Resolution No. 10 (Series of 2016) (Adopting the Revised Rules for Contestability);
d. ERC Resolution No. 11 (Series of 2016) (Imposing Restrictions on the Operations of
Distribution Utilities and Retail Electricity Suppliers in the Competitive Retail Electricity
Market); and
e. ERC Resolution No. 28 (Series of 2016) (Revised Timeframe for Mandatory Contestability,
Amending Resolution No. 10)

28
Rules of Court, Section 5, Rule 58.
29
Guidelines Governing a Transparent and Competitive System of Awarding Renewable Energy
Service/Operating Contracts and Providing for the Registration Process of Renewable Energy
Developers
30
The DOE refers to the government agency created pursuant to Republic Act No. 7638, which is
tasked to implement the Governments policies and empowered 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.

7
award of REC to renewable energy developers; and, (b) generation of renewable
energy for own use, which we discuss further below.

a. Renewable Energy Service or Operating Contract

An RE Developer can be granted the exclusive right to explore, develop or utilize a

particular RE area pursuant to an REC entered into between said developer and the
Government.31 Said RE contracts are awarded through an open and competitive
process of selection or by direct negotiation.

b. Renewable Energy Developer for Own Use

An RE Developer may also generate power for its own use and own self-generating
facilities (SGF), in which case it will be considered an RE Developer for Own Use.
Said developer will also be entitled to incentives under the RE Act, provided it
registers with the DOE. The users of the solar panels under a lease-to-own
arrangement structure fall under this category.
Commented [FS1]: EMP/SLP DC 09-07-0011 does not
define RE Developer for Own Use. Neither is such concept
defined under the EPIRA, the RE Law, and other similar
issuances. The closest definition I can get is that of a Self
Generation Facility (SGF) under ERC Resolution No. 16-
2014. Such concept is however already defined in the
discussion below.

An RE Developer for Own Use may either be part of the contestable or non-
contestable market. In any case, by becoming RE Developers for Own Use, small
and medium-sized enterprises, as well as residential houses forming part of the
captive market, have the option to choose their source of electricity supply.

E. Regulatory Compliance Applicable to RE Developers for Own Use

It is clear from the foregoing that the Company will not be permitted to supply
those who belong to the captive or non-contestable market. Thus, another
arrangement, such as a lease-to-own arrangement, can be explored with respect to
customers belonging to said market. However, under this arrangement the user or
lessee is the one required to register as an RE Developer for Own Use. It should be
noted that the DOE prescribes less stringent requirements for RE Developers for
Own Use as compared to an RE Developer applying for an REC.

We now discuss below the regulatory requirements applicable to an RE Developer

for Own Use, especially under a lease-to-own arrangement:

a. Certificate of Compliance with ERC

As a requisite to operate its chosen RE system, the RE Developer for Own Use,
regardless of whether it belongs to the contestable or non-contestable market, is
required to get a certificate of compliance (COC) from the ERC.

Under the EPIRA, no person may engage in the generation of electricity as a

generation company, whether as a generation company, qualified end-user or entity
with SGV, unless it has secured a COC from the ERC to operate facilities used in

31
Id., Section 4

8
the generation of electricity.32 ERC Resolution 16 series of 2014 issued on
September 15, 2014 (ERC Resolution No. 16-2014) also states as follows:

Section 1. In General. - All entities owning or if applicable,

operating Generation Facilities shall apply for the issuance of a COC with
the ERC. x x x

Section 2. Guiding Principles.

General

i. No Person may engage in the Generation of Electricity as a

Generation Company, Qualified End-user, or Entity with Self-
Generation Facilities unless it has secured a COC from the ERC to
operate Generation Facilities used in the Generation of
Electricity.33

Thus, the lessee in a lease-to-own agreement, which will be deemed to be the

generation company of the SGF, shall be required to obtain a COC.

The COC is valid for a period of five years, with the option to renew. ERC must be
notified of any transfer or change of ownership of the SGF within three days from
the date of change in ownership. 34

Pending the issuance of the COC, the ERC may issue provisional authority to
operate (PAO).35 Prior to the issuance of the COC, the ERC is also mandated to
inspect the SGF or SPV facilities.36

b. Certificate of Registration (COR)

32
EPIRA, Section 6; Section 1, Rule 5 of the EPIRA IRR; ERC Resolution No. 16, series of 2014,
September 15, 2014 also states:
33
ERC Resolution 16 series of 2014 issued on September 15, 2014 (ERC Resolution No. 16-2014),
Article III, Sections 1 and 2; underscoring supplied.
34
Attached as Annex A and B are the COC Form 1: Self-Generating Facilities and Checklist of
Requirements for SGF below 1MW, respectively.
35
ERC Resolution No. 16, Article VI, Section. 3 provides.

Article VI, Section 3. Provisional Authority to Operate (PAO). - Pending the approval
of the COC application, no Generation Company shall operate its Generation Facility
unless a PAO is issued by the ERC. The PAO shall be issued in the form of a
notification to the applicant and shall be valid for a period of six (6) months from
issuance thereof. The six (6)-month validity period shall be included in the five (5) year
term of the COC that may be issued by the ERC for such Generation Facility/ies
31
Id., Article III, Section 7. The conduct of the technical inspection may be waived by the ERC due to
force majeure, safety and security concerns of the ERC technical personnel, and other conditions as
the ERC may deem fit.

9
To avail of the incentives granted under the RE Act, owners, or even operators
thereof the SGFs must secure a Certificate of Registration (COR) from the DOE as
an RE Developer in order to avail of incentives under RE Act, such as the duty-free
importation.37 To avail of duty-free importation, the RE Developer has to apply for a
DOE endorsement which shall be submitted to the Board of Investments (BOI). Said
endorsement and clearance must be obtained prior to the purchase and importation
of the equipment for any importation made to be duty-free.38 The RE Act exempts
the importation of machinery and equipment, and materials and parts thereof,
including control and communication equipment, from import duties within the first
ten (10) years upon the issuance of a certification of an RE Developer.

It should be noted that one of the requirements is for the importation to be covered
by shipping documents in the name of the duly registered RE Developer or operator
to whom the shipment will be directly delivered by customs authorities.39 The
checklist of the requirements for the application and issuance of COR is attached
herein.40

c. Proof of Ownership

Ownership by the RE Developer of the generation facility appears to be an intrinsic

requirement under Philippine laws and regulation for the grant of compliance
certifications and incentives. ERC Resolution No. 16-2014, self-generation facilities
or SGF are defined as

a power Generation Facility owned and constructed by an end-user for such

end-user's own consumption or internal use excluding Generation Facilities for
use by households, clinics, hospitals and other medical facilities.41

Further, for purposes of obtaining a COR from the DOE, as a prerequisite to

37
DC 2009-07-2011, Section 26.
38
RE Act, Section 15.
39
DOE Department Circular No. DC2009-05-0008, May 25, 2009. The list of requirements is as
follows:

1. That the said machinery, equipment, materials and parts are directly and actually needed and
used exclusively in the RE facilities for transformation into energy and delivery of energy to
the point of use;
2. The importation of materials and spare parts shall be restricted only to component materials
and parts for the specific machinery and/or equipment authorized to be imported;
3. The kind of capital machinery and equipment to be imported must be in accordance with the
approved work and financial program of the RE facilities
4. Such importation shall be covered by shipping documents in the name of the duly registered
RE Developer/operator to whom the shipment will be directly delivered by customs
authorities; and
5. Covered by shipping documents in the name of the duly registered RE Developer/operator
to whom the shipment will be directly delivered by customs authorities.
40
Attached as Annex C is the Checklist for Certificate of Registration of Renewable Energy
Developer for Own Use.
41
ERC Resolution No. 16-2014, Section 4(ddd); underscoring supplied.

10
availment of incentives under the RE Act, Section 26 of DC2009-07-2011 requires
the submission of proof of ownership of the facilities, as follows:

Section 26. RE Projects for Own Use. RE Developers generating power

for own use shall register with the DOE to avail of any incentives under the
Act.42 The DOE Certificate of Registration shall be issued upon complete
submission of requirements which shall include, but not be limited to, the
following:

a. Letter of Intent;
b. Project Description; and
c. Proof of ownership of the RE facilities.43

From the foregoing, it can be gathered that an RE Developer for Own Use must
own the RE facilities, in this case, the SPVs. However, it is also recognized that if the
generation facility is operated by a person or entity other than the owner, to the
extent that the former controls the output of the facility, enters into supply
agreements with energy off-takers, or enters into such other similar arrangements,
the ERC reserves the authority to determine in whose name the application for the
issuance of a COC should be made. It thus follows that an operator of the SPVs,,
not an owner, can be the applicant and be the holder of a COC. In this regard, ERC
Resolution No. 16-2014 states:

Section 2. Guiding Principles.

General

xxx xxx xxx

ii. The application for a COC shall be in the name of the person or
entity owning the Generation Facilities used in the Generation of
Electricity. For purposes of this Section, the person or entity owning
the Generation Facility is understood to be the person or entity
having legal title to the same. In such case, the person or entity shall
apply for, and the COC shall be issued in its name, Provided: That, in
case the Generation Facility is operated by a person or entity other
than the owner, to the extent that the former controls the output of
the facility, enters into supply agreements with energy off-takers, or
enters into such other similar arrangements, the ERC reserves the
authority to determine in whose name the application for the
issuance of a COC should be made.44

Mr. Peter Sablay, Science Research Specialist of the Wind and Solar Division of the
DOE, confirmed to us that a lease-to-own agreement, wherein the RE Developer for
Own Use is granted the right to acquire the leased SPV, is sufficient to comply with
the ownership requirement. He mentioned that there has been several lease-to-
own arrangements which were allowed by DOE. Such arrangements involve at least

42
Referring to the Renewable Energy Act of 2008.
43
Underscoring supplied.
44
Underscoring supplied.

11
three schools in Metro Manila (and thus, within the MERALCO franchise area).45

Thus, it appears that it is sufficient for an RE Developer to have an inchoate or

expectant right of ownership over the SPVs in the meantime. However, he
mentioned that it is mandatory that ultimately the ownership transfers to the RE
Developer for Own Use at the end of the lease or cooperation period.
Therefore, a mere option to buy at the end of the lease period will not be sufficient.

d. Operation

We also note that in this project, the Company might have to undertake the
operation and management of the SPV system installed in the premises of the end
user.

There are no laws or regulations which prescribe as to who should operate and
maintain the SPV of an RE Developer for Own Use. We were advised by DOE that
they do not regulator operations and maintenance contracts of SGFs.

We also found no prohibition for such RE Developer to contract out of the

operation and maintenance of such facilities. In fact, as discussed above, Section 2(ii)
of ERC Resolution No. 16-2014 recognizes that the COC may be issued to the
operator of the facilityif such operator controls the output of the facility, enters
into supply agreements with energy off-takers, or enters into such other similar
arrangements. Thus, we believe that an RE Developer for Own Use can engage a
third party to operate and maintain the RE facilities.

Although the generation of solar power of subject to our nationality laws, we believe
that an operator of a solar-powered SGF will not have to be owned by Filipinos to
the extent of not less than 60% of its outstanding capital stock, provided it is not the
one to whom the COC or the COR is issued, or is not the recognized generator of
the facility.

e. Net Metering

Qualified end-users installing their own RE system, such as an RE Developer for

Own Use are permitted to enter into net-metering agreements with qualified
distribution utilities.46 Net-metering is a consumer-based renewable energy non-
monetary incentive scheme wherein electric power generated by an end-user from
an eligible on-site RE generating facility and delivered to the local distribution grid
may be used to offset electric energy provided by the DU to the end-user during the
applicable period.47

For net-metering purposes though, the DU shall only allow interconnection of RE

45
Mr. Sablay mentioned that lease-to-own arrangements have been allowed for St. Scholasticas
Academy and Manuel L. Quezon University (MLQU).
46
RE Act, Section 10.
47
IRR of the RE Act, Section 7.

12
facilities with a maximum capacity of 100 kWp to the DUs distribution system per
qualified end-user account.48 Thus, if the RE facilities have a higher maximum
capacity, net-metering will not be allowed.

f. DU Approval

The DU which has the exclusive franchise over the location of the RE Developer for
Own Use must approve the design, installations, operations and maintenance of the
solar panels, which at the minimum must be compliant with industry standard, as
well as the Philippine Distribution Code.49

If the Companys lease customers are part of the captive market, they are still
required to be connected to the local DU. Thus, any RE facility or SPV which such
customers may establish is subject to the standards, requirements and impact studies
promulgated and conducted by the local DU to ascertain that the installed SPV
adheres to safety standards for the protection of the DUs surrounding customers
and linesmen. In other words, while the SPV transmits power directly to the RE
Developer for Own Use without need of any interconnection to the DU, the DU
has a significant stake in ensuring that the proposed system is compliant and will not
affect any of its nearby distribution system assets.

The other importance of ensuring that the end-user owns or will own the SPV is to
prevent possible infringement on the exclusive nature of the local DUs franchise.
This will be discussed in a subsequent section.

In this regard, it is required that the DU conduct a Distribution Impact Study (DIS)
to gauge the impact of the proposed system and to evaluate significant incidents. A
DIS refers to a set of technical studies which are used to assess the possible effects
of a Distribution System or a User Development and to evaluate Significant
Incidents.50 While the requirement for the DIS is found in the Guidelines on the net-
metering system, we were advised by the DOE that both DIS (and Distribution
Asset Study (DAS) discussed below) are mandatorily conducted to all self-generating
facilities, regardless if they qualify for the net-metering system.

The DUs thus primarily determine the scope of the study, estimated time of
completion and fees payable of the DIS. The DIS must be conducted prior to the
actual construction of the facilities.51 The requirements for the DIS will also be
provided by the DU concerned.

48
ERC Resolution 09, Series of 2013 Under ERC Resolution 09, Series of 2013.
49
Section 4.3.1 of the Philippine Distribution Code, 2016 Edition.
50
Annex A-1 (Net Metering Interconnection Standards) of ERC Resolution No. 09, series of 2013.
51
This was confirmed by Mr. Peter Sablay, the Science Research Specialist of the Solar and Wind
Energy Management Division of the DOE.

13
 g. Distribution Assets Study (DAS)

After the completion of the DIS as discussed above, the DU forwards to the
applicant the results of the study and the DUs findings. Such findings would include
a determination on whether a subsequent stage of a DAS is necessary.

A DAS is a study to determine all distribution assets and costs necessary to

accommodate a proposed generation source and the necessary connection
agreement, if applicable. Specifically, DAS seeks to examine the assets of the
Company and determine the SPVs compliance with the standards set by relevant
laws and regulations, and ensure that any excess or unutilized power generated by
the SPV is not transmitted to the grid in violation of the net-metering rules which
only allow facilities with 100kWp or less to sell back its excess generated power.

h. Universal Charges

Under the EPIRA, universal charges are imposed for the recovery of the Stranded
Debts, Stranded Contract Costs of the National Power Corporation, and Stranded
Contract Costs of Eligible Contracts of Distribution Utilities and other mandated
purposes. It is a non-by passable charge, which shall be passed on and collected from
all end-users on a monthly basis by the distribution utilities.

The purposes for the universal charges are as follows:

Payment for the stranded debts and stranded contract costs of NPC as well
as qualified stranded contract cost of distribution utilities;
Missionary electrification;
Equalization of taxes and royalties between indigenous or renewable sources
of energy vis-a-vis imported energy fuels;
An environmental charge of PhP 0.0025 per kilowatt-hour, which shall accrue
to an environmental fund to be used solely for watershed rehabilitation and
management; and 5. A charge to account for all forms of cross-subsidies for a
period not exceeding three (3) years.

Under the Primer on Universal Charges52 the following persons shall bear the cost of
the Universal Charges:

All end-users of distribution utilities such as residential, commercial, and

industrial including government and/or public buildings, irrigation systems, and
special lightings;
Directly-connected end-users of NPC such as but no limited government
agencies and institutions, and industrial enterprises;
Persons using SGFs;
Locators, developers, operators and facilities operating in economic zones;
and 5. Other entities identified by the ERC pursuant to the intent of the
EPIRA.
52
Accessed at www.erc.gov.ph/Files/Render/media/Primer%20on%20Universal%20Charge.pdf on
25May2017.

14
The Universal Charges are collected by the DU, and in cases of SGFs not connected
to the DU, the same shall be collected by the Transmission Corporation
(TRANSCO).

For this purpose, the ERC is given the authority to look into the books of account of
the DU for purposes of monitoring, verifying and accounting of amounts collected
from the universal charge and remitted.

i. Electrical Permit with the Local Government Unit (LGU)

Generally, all LGUs require the application for electrical permits as part of the
procedure for application of a Building Permit with the Office of the Building Official
(OBO) of the LGU. The electrical permit is issued upon OBOs finding of compliance
with the standards and requirements on electrical safety in the Philippine Electrical
Code (PEC), the Electrical Engineering Law, and the concerned LGU.
Upon submission of the required administrative and technical documents/forms and
all the electrical systems have been installed, the applicant is usually required to
submit a request for inspection addressed to the Electrical Division of the concerned
LGU. If satisfied upon inspection, the Electrical Division thereafter issues a
Certificate of Final Electrical Inspection.
In this situation, where an existing building will host another electrical system, such
as the SPV, certain requirements53 have to be submitted.54

F. Procedure

We identify the following as the four major phases and milestones in the
development of solar panel projects in the Philippines:

1. Project Preparation

a. Execution of Lease-to-Own Agreement with End-User/Customer

53
As prescribed by the Local Government Unit of Makati City. Different LGUs prescribe different
requirements which can be obtained from the respective offices.
54
These requirements include the following: Land Title/Contract of Lease
1. Realty Tax Receipt
2. Duly Notarized Affidavit of the owner authorizing use of the property to separate,
reconnect, remodel, relocate the kWh meter and repair of service entrance.
3. Accomplished Application Form (DPWH Form No. 96-001-E) to be signed by a licensed
engineer/master electrician with PTR No. for the current year.
4. Floor Lay-out with lighting and power lay-out
5. Riser Diagram
6. For a load of 4kW or 20 outlets or more, 5 sets of plans, signed & sealed by a PEE with
PTR No. for the current year
7. Barangay Clearance

15
 b. Notification to the relevant DU over the area of the project and
intention to apply for DIS.

2. Pre-Development

a. Conduct of DIS by the DU

b. Application for COR with the DOE as RE Developer for purposes of
availing duty-free importation incentive

3. Development

a. Importation of equipment to be used for the SPV

b. Installation of SPV
c. Conduct of DAS by the DU

4. Registration and Connection

G. Risks and Challenges

Based on our research of applicable statutes, rules and regulations, in conjunction

with our consultation with the ERC and the DOE, we identify the following
challenges/risks in setting up the SPV lease-to-own project:

a. Contract Issue

We believe that there is always a risk that the lease-to-own arrangement may be
viewed as a power supply arrangement in disguise.

As mentioned above, the DOE officials we had discussions with opined that a lease-
to-own arrangement is permissible, and that even a purely variable rent based on
generation is acceptable. They said that they generally leave the commercial terms
of the arrangement to the parties of the contract.

However, certain BOI officials are of the took the view that such an arrangement
may be considered a supply arrangement in disguise especially if the rentals are
variable based on usage. The BOI officials acknowledge though that ultimately it is
the DOE and the ERC which have final say on this matter. Officers of the Philippine
Economic Zone Authorities (PEZA), on the other hand, believe that the rent should
be based on rental space and not usage.55

Unfortunately, the officials of the Wind and Solar Division of the DOE refused to give us
copies of existing lease-to-own contracts. However, based on our review of available
information on several solar power companies in the internet, we learned that a lease-
to-own arrangement has been adopted with the requisite approvals by an RE systems

55
As informally discussed with Mr. Tereso O. Panga, Deputy Director General for Policy and Planning
of the PEZA.

16
provider called Cebu Solar Incorporated (CSI) operating in Cebu, a metropolis located
in a province of the same name within the Visayas region. 56 We note the following
significant provisions in the arrangement:

(a) The first tranche of payment to cover the first four or five years is fixed and paid
upon the signing of the agreement;

(b) The remaining payments are based on the customers projected usage and not
the actual generated electricity; 57

56
http://www.cebusolar.com/solar-power-leasing accessed on June 6, 2017.
57The relevant provisions which we noted in said lease-to-own agreement are the
following:

The customer must purchase a 4 to 5-year block of energy in advance, depending

on the type of system, whether a grid-feed system, an off-grid system, or a grid-
connected hybrid system. After the 4 to 5-year block of energy is consumed,
customer will be then required to pay a yearly amount, (this can be paid in quarterly
installments upon approval by CSI) which will be equivalent to 80% of their current
monthly billing. After 8.4 to 10.5 years, CSI will reduce the rate to 60% of their
current billing. Thereafter, upon12 to 15 years of successful payments, CSI will turn
over the said SPV system to the customers. Failure to pay will result in the demand
for full payment of solar system retail cost, less the amount paid up front and any
subsequent payments made for energy produced.

Depending on type of system installed (sic) an initial payment of ( ) 4 years ( )

4.5 years ( ) (sic) 5 years of average power bill amount as computed on
customers utility bills, less P2 per Kw, is required at signing. This is the
payment for the initial power block contracted, which should last
approximately (sic) the period indicated. This is the sole payment required,
except as noted, until the contracted block of energy is consumed. If the
estimated quantity of power is not yet consumed at the end of the estimate
period, the period is extended until the power is used. If the block of power is
consumed prior to the end of the indicated period, a new block of power
must be purchased, as indicated below. The payment is based on customer
usage of power, not time or amount of power produced by system.57

After the initial period, a per Kw charge of p__ (sic) (identical to the initial
estimated amount- p2 less than initial utility billing amount) is the basis of
billing, never to increase. After initial block of energy is consumed a yearly
payment will be required in advance for the Kws expected to be consumed
that year, or a quarterly breakdown payment of the annual payment can be
made with prior notice from customer and written approval from CSI.

At the end of the lease/payment period (after the final required block of power is
used) the equipment is turned over to the homeowner, in good functioning
condition and with new batteries.

17
 (c) There is a guarantee for the turn-over of the system to the customer at the end
of the lease period; and

(d) CSI only made provisions for compliance with DOE and ERC requirements
should the customer decide to avail of the net-metering program.

In view of the foregoing, we have the following comments on the terms of the draft
lease-to-own arrangement:

1. Rental We suggest that the rent should not entirely be variable based on
energy output; thus, a fixed rental should be provided such that it can be
shown that even if the systems do not generate energy, the Lessee still has
obligations to the Lessor.

2. Security Deposit Preferably, there should be a security deposit or even

advance rental payments, which are common in lease arrangements.

3. Purchase Option Based on our discussions with the ERC and DOE officers,
the transfer of ownership to the lessee at the end of the lease is mandatory.
A pure purchase option may not satisfy the ownership requirement
discussed above. Thus, while there may be a purchase option which may be
exercised during the period of the lease, at the lessees choice, there should
be a mandatory transfer of the ownership of the system after the end of the
lease. In other words, there should be no possibility that the Lessee will not
own the system after the expiration of the lease.

In the end, the Company will have to submit a copy of the lease-to-own contract to
the DOE and ERC, for their approval and clearance.

b. Ownership Issue & Duty-Free Importation

The issuance of the COC, COR and entitlement to incentives as an RE developer

appears to accrue to the owner of the self-generating facility, as discussed above.
This can be gleaned from the requirements to apply for the COC and COR (see
Annexes A, B and C).

Also, both the application and issuance of the COR in order to avail of the duty-free
importation incentive occur at the beginning of the projects timeline. Yet, at this
point, the Company as lessor remains to be the owner of the SPV, and not the RE
Developer for Own Use. Based on discussions with the BOI, in granting the import
clearance, they require that all import documents be in the name of the RE
Developer, and they assume that such entity will be the owner of the facilities
imported.

We nonetheless believe that even if the import documents are in the name of the RE
Developer, the RE Developer for Own Use may be-considered the legal title
holder of the equipment. It can be proven that the Company is the beneficial
owner of the properties imported. Article 427 of the Civil Code provides that,

18
beneficial ownership is distinguished from naked ownership, which is the enjoyment
of all the benefits and privileges of ownership, as against possession of the bare title
to property.58 The Supreme Court defined beneficial ownership as the ownership
recognized by law and capable of being enforced in the courts at the suit of the
beneficial owner.59 Beneficial use, ownership or interest in property means right to
its enjoyment in one person where the legal title is in another.60 Legal title denotes
registered ownership, while equitable title means beneficial ownership.61 Thus, legal
title or ownership can be separate from beneficial ownership. In this regard, we
recommend that documents or agreements confirming the Companys beneficial
ownership be entered into to avoid questions. DOE officials also confirmed that the
beneficial ownership issue should be a matter that can be addressed in the
contract between the parties.
c. DU involvement

We have discussed in a previous section why the DU is allowed to interfere with the
structure of the project. From a legal standpoint, the average consumption of the
Companys prospective customers places them within the captive market range and
are thus required to source their energy requirement from the relevant DU. This is
pursuant to the exclusive franchise of the DU.

To be considered a RE Developer for Own Use, is, effectively, an exception

provided by the law to specifically accommodate the utilization of SPV technology
which has become available to end-users. And as discussed above, it appears that to
be considered an RE Developer for Own Use, the end-user must be the owner of
the system, or at the very least, as an inchoate right to own the system. If the
ownership remains vested with the Company, it would seem as if the Company is
the RE Developer generating and supplying power to a captive market end-user in
violation of the DUs franchise.

From the foregoing, we note two risks:

1. The DU may take the view the lease-to-own arrangement is a disguised supply
arrangement; or

2. The DU will accept the arrangement but require the payment of distribution or
wheeling charges during the life of the lease prior to the execution of the
purchase option.

58
Residents of Lower Atab & Teacher's Village, Barangay Sto. Tomas Proper, Baguio City vs. Sta.
Monica Industrial & Development Corporation, 738 SCRA 450, G.R. No. 198878 October 15, 2014
59
Ibid.
60
Id.
61
Mananquil v. Moico, G.R. No. 180076, November 21, 2012, 686 SCRA 123, 124.

19
We wish to mention though that MERALCO has issued a press release that it
supports the installation of SPVs by its end-users subject to the conformity of the
SPV with their distribution system.62

d. Timing Issue

With the present numerous regulatory requirements in place, we wish to advise the
Company to manage their expectations on the length of time that it will take for the
project to commence operation. The DOE advised that particularly with the DIS and
the DAS, the Company is expected to wait between one to two months for the
procedures to complete.

Note that after the completion of the DIS as discussed above, the DU forwards to
the applicant the results of the study and the DUs findings on whether a subsequent
stage of a DAS is necessary. At this point, the Company may commence the physical
construction of the facilities. Thus, simultaneous to the physical construction of the
facilities, we recommend that the Company notify and engage the DU again to
determine if a DAS is necessary.

Securing the Certificate of Endorsement and Duty-Free Importation Clearance, and

most especially, the COR, with the proper government entities will also pose some
delays in the operation of the project.

e. Technical Design

We were advised by the DOE that one requirement for securing the COR by an RE
Project for Own-Use is the technical design of the project. This is an important
requirement because the technical design will serve as the exclusive basis for the
items endorsed by DOE as necessary and material for the construction of the SGF.
Concomitantly, only the items endorsed can be subject of the duty-free importation.
The DOE strongly urges the accurate and thorough preparation of the technical
design to be submitted by the Company. We were informed that this is a common
issue encountered by many applicants and they are often asked to re-do the entire
technical design which will entail costs and time.

MATA-PEREZ & FRANCISCO

June 9, 2017

62
Meralco Shines the Light on Renewable Energy, retrieved from http://corporate-downloadables-
services-tools.s3.amazonaws.com/1436941603.5b4d36d72ef9633be2fead66f4e54fe8.pdf on May 25,
2017.

20