=== ra-9136-irr-pages-021.ppm === (c) (d) (e) (f) criteria of the Grid Code and Distribution Code promulgated by ERC, Philippine Electrical Code, and the TRANSCO or its Buyer or Concessionaire including, among others, standards for voltage fluctuation, frequency, harmonics, security, reliability, unplanned outages and provision of Ancillary Services and shall operate in accordance with such operational criteria. (ii) Financial Standards. A Generation Company with facilities connected to the Grid shall conform to the financial standards provided in the Grid Code. These standards shall take into consideration the nature and function of a Generation Facility. Furthermore, such standards are set to ensure that the Generation Company meets the minimum financial standards to protect the public interest and any customer procuring services from the said Generation Company. (iii) | Environmental Standards. A Generation Company shall ensure that its facilities comply with applicable environmental laws, rules and regulations. A Generation Company operating a Generation Facility in isolated areas shall meet the technical and financial standards to be issued by the ERC using applicable and practicable criteria within two (2) years, or such other period as may be specified by the ERC, from the issuance of such technical and financial standards. A Generation Company shall structurally and functionally unbundle its generation business activities and rates from its distribution and supply businesses as provided in Rule 10 on Structural and Functional Unbundling of Electric Power Industry Participants and Rule 15 on Unbundling of Rates. Prior to the implementation of Open Access and Retail Competition, the prices charged by a Generation Company for the Supply of Electricity shall be subject to ERC regulation on the Retail Rates charged by Distribution Utilities and transition supply contracts (TSCs) as specified in Section 67 of the Act. Upon introduction of Open Access and Retail Competition or establishment of WESM, whichever comes first, the rates of a Generation Company shall not be subject to regulation by the ERC except as otherwise provided by the Act. However, for a Generation Company operating a facility in SPUG areas and isolated areas, the generation rates for such facility shall be fixed and determined by ERC as set forth in Rule 13 on Missionary Electrification. A self-generation company not connected to a Distribution Utility, unless otherwise provided under these Rules, shall remit directly to TRANSCO the corresponding Universal Charge set by ERC. In Page 21 of 100 === ra-9136-irr-pages-022.ppm === (g) (h) (i) () (k) (1) (m) relation to this, TRANSCO or its Buyer or Concessionaire or the appropriate Distribution Utility, when connected to the self-generation company, shall have access to the customer side of the meter in order to determine the utilization of such Generation Facility for the purpose of assessing the corresponding Universal Charge as provided in Rule 18 on Universal Charge. A Generation Company shall comply with Rule 29 on Benefits to Host Communities. Upon the establishment of the WESM by the DOE, jointly with Electric Power Industry Participants, a Generation Company shall comply with the membership criteria as prescribed under the WESM Rules as set forth in Rule 9 on WESM. Pursuant to Section 9(e) of the Act, a Generation Company with facilities connected to a Grid shall make information available to the Market Operator to enable the Market Operator to implement the appropriate dispatch scheduling and shall comply with the said scheduling in accordance with the WESM Rules. A Generation Company shall likewise make information available to the grid operator to facilitate Central Dispatch by the grid operator. Subject to Technical Constraints, the grid operator of the TRANSCO or its Buyer or Concessionaire shall provide Central Dispatch to a Generation Facility connected, directly or indirectly, to the transmission system in accordance with the dispatch schedule submitted by the Market Operator, which schedule shall take into account outstanding bilateral contracts. A Generation Company shall comply with Rule 11 on Cross Ownership, Market Abuse and Anti-Competitive Behavior. A Generation Company that owns a dedicated point-to-point limited transmission facility shall transfer ownership of such facility to the TRANSCO at a fair market price in the event that such facility is required for competitive purposes as prescribed in Section 5 (b) of this Rule. A Generation Company shall submit to DOE any information as may be required by the DOE for the preparation of the PDP, subject to appropriate measures to preserve the confidentiality of proprietary or commercially sensitive information. A Generation Company that fails to comply with any of these obligations, including compliance with technical standards, shall be subject to fines and penalties as may be imposed by the ERC. Section 5. Dedicated Point-to-Point Limited Transmission Facility of a (a) Generation Company. Subject to prior authorization from ERC, TRANSCO or its Buyer or Concessionaire may allow a Generation Company to develop, own and/or operate dedicated point-to-point limited transmission facilities: Provided, That: Page 22 of 100 === ra-9136-irr-pages-023.ppm === (i) Such dedicated point-to-point limited transmission facilities are required only for the purpose of connecting to the Grid which will be used solely by the Generation Facility, and are not used to serve End-users or Suppliers directly; (ii) The facilities are included and consistent with the TDP as certified by TRANSCO or its Buyer or Concessionaire; and (iii) | Any other documents that may be required by the ERC. (b) In the event that such assets are required for competitive purposes, ownership of the same shall be transferred to the TRANSCO at a fair market price. In case of disagreement on the fair market price, the ERC shall determine the fair market value of such asset, either directly or through such dispute resolution mechanisms as ERC may specify. Section 6. Generation Charges and VAT. (a) Within ninety (90) days from the effectivity of these Rules, the ERC shall issue guidelines for the regulation of power sales by Generation Companies applicable prior to the implementation of Retail Competition and Open Access or establishment of WESM, whichever comes first. (b) Pursuant to the policy of reducing electricity rates to End-users, sales of generated power by a Generation Company shall, from the effectivity of the Act, be zero-rated for the purpose of imposition of value-added tax. Towards this end, the imposition of zero percent (0%) VAT shall apply to the sale of generated power by a Generation Company through all stages of sale until it reaches the End-user. The DOF, through the BIR, shall issue the necessary revenue regulation within sixty (60) calendar days from effectivity of these Rules. RULE 6. TRANSMISSION SECTOR Section 1. Guiding Principle. The transmission of electric power is affected with public interest and shall be a regulated common electricity carrier business, subject to the ratemaking powers of the ERC. Section 2. Scope of Application. This Rule shall apply to TRANSCO or its Buyer or Concessionaire and any other successor-in-interest thereto. Section 3. Ownership Limitation. The TRANSCO or its Buyer or Concessionaire or any of its stockholders, directors, officers or any of their relatives within the fourth civil degree of consanguinity or affinity, legitimate or common law, shall not hold any Page 23 of 100 === ra-9136-irr-pages-024.ppm === interest, whether directly or indirectly, in any Generation Company, Distribution Utility, IPP Administrator and Supplier. Section 4. Separation Between Transmission and Subtransmission. The ERC shall set the standards of the transmission voltages and other factors that shall distinguish transmission assets from Subtransmission Assets. Towards this end, ERC shall issue appropriate guidelines to distinguish between these categories of assets according to voltage level and function. The ERC shall take into account the objective of allowing non- discriminatory Open Access to the transmission and Subtransmission Systems. The technical and functional criteria to be considered in distinguishing transmission assets from Subtransmission Assets shall include, but not limited to: (a) Subtransmission Assets are normally in close proximity to retail customers; (b) | Subtransmission Assets are primarily radial in character; (c) Power flows into Subtransmission Assets; it rarely, if ever, flows out; (d) When power enters Subtransmission Assets, it is not reconsigned or transported on to some other market; (e) Power entering Subtransmission Assets is consumed in a comparatively restricted geographic area; (f) Meters are based at the interface of transmission and Subtransmission Assets to measure flows into the Subtransmission Assets; and (g) Subtransmission Assets will be of reduced voltage. Section 5. Initial Classification of Transmission Assets. Pending the issuance of the new standards for classification of transmission assets by ERC, transmission assets shall be defined as follows: (a) For the Luzon Grid, transmission facilities rated 230 kV and above shall generally be considered transmission assets; (b) For the Visayas Grid, transmission facilities rated 69 kV and above shall generally be considered transmission assets; (c) For the Mindanao Grid, transmission facilities rated 138 kV and above shall generally be considered transmission assets; and (d) Notwithstanding the foregoing provisions, any line at the specified level for each Grid that serves an End-user or customer shall be considered a subtransmission line, and any line below the specified Page 24 of 100 === ra-9136-irr-pages-025.ppm === level for each Grid that serves a transmission function shall be considered a transmission line. Section 6. Initial Classification of Subtransmission Assets. Step-down transformers used solely by load customers are considered Subtransmission Assets. . In the case of step-down transformer banks serving a single Distribution Utility, the Distribution Utility or Distribution Utilities shall have the option to purchase said facility, provided, it will guarantee the reliable Supply of Electricity to grid control equipment. Section 7. Functions and Responsibilities of TRANSCO or its Buyer or Concessionaire. The TRANSCO or its Buyer or Concessionaire shall have, among others, the following functions and responsibilities: (a) Act as the system operator of the nationwide electrical transmission and Subtransmission System, transferred to it by NPC; (b) Provide open and non-discriminatory access to its system to all electricity users; (c) Ensure and maintain the reliability, adequacy, security, stability and integrity of the Grid in accordance with the performance standards for the operation and maintenance of the Grid, as set forth in the Grid Code and the Distribution Code. The performance indicators for reliability, security, adequacy, integrity and stability shall include but are not limited to the following: (i) Number of Interruption Events; (ii) Sustained Average Interruption Frequency Index; (iii) _ Momentary Average Interruption Frequency Index; (iv) Sustained Average Interruption Duration Index; (v) System Interruption Severity Index; (vi) Frequency of tripping per 100 c-km; (vii) Average Forced Outage Duration; (viii) Accumulated Time Error; (ix) Frequency Limit Violation; and (x) Voltage limit Violations. (d) Improve and expand its transmission facilities, consistent with the TDP and the Grid Code, to adequately serve Generation Companies, Distribution Utilities and Suppliers requiring transmission service and/or Ancillary Services through the transmission system. TRANSCO or its Buyer or Concessionaire shall submit any plan for expansion or improvement of its facilities for approval by the ERC; and (e) Provide Central Dispatch, through its grid operator, to all Generation Facilities and loads connected, directly or indirectly, to the Page 25 of 100 === ra-9136-irr-pages-026.ppm === transmission system in accordance with the dispatch schedule submitted by the Market Operator, taking into account outstanding bilateral contracts and subject to Technical Constraints. Section 8. Obligations of TRANSCO. The TRANSCO shall have, among others, the following obligations: (a) Prepare the TDP in consultation with Electric Power Industry Participants. (b) Submit an updated TDP for approval to the DOE on a timely basis each year for integration with the PDP and PEP. (c) Remit its net profit, if any, to the PSALM not later than ninety (90) days after the immediately preceding quarter subject to annual reconciliation when the audited and certified annual financial statements are finally made available. Net profit is defined as: Net Profit = Total Utility Revenue — (Total Operating Expenses - Other Income + Interest & Other Charges) Net proceeds from the Privatization of TRANSCO shall be immediately remitted to PSALM. (d) | TRANSCO shall secure approval of its Transmission Charges from the ERC pursuant to Section 43(f) of the Act. (e) TRANSCO shall sell its Subtransmission Assets to qualified Distribution Utilities pursuant to the Act and, Part IV, Section 13 of Rule 22 on National Transmission Corporation. In the event that a Distribution Utility is not qualified or a qualified Distribution Utility refuses to acquire such assets, then TRANSCO shall be deemed in compliance with this obligation. The Buyer or Concessionaire shall be responsible for the obligations under Subsections (a), (b), and (d) hereof. Section 9. Compliance with Grid Code. TRANSCO or its Buyer or Concessionaire shall comply with the provisions of the Grid Code in the process of improving and expanding its transmission facilities in order to ensure and maintain the reliability, adequacy, security, stability and integrity of the Grid and adequately serve Electric Power Industry Participants requiring transmission service or Ancillary Services through the Grid. Section 10. Transmission Development Plan. (a) The TDP refers to a plan for managing the transmission system through efficient planning for expansion, upgrading, rehabilitation, repair and maintenance, to be prepared and implemented by TRANSCO or its Buyer or Concessionaire. Page 26 of 100 === ra-9136-irr-pages-027.ppm === (b) (c) TRANSCO or its Buyer or Concessionaire shall be responsible for the preparation of the TDP, in consultation with the Electric Power Industry Participants. TRANSCO or its Buyer or Concessionaire shall submit the TDP for approval by DOE for integration into the PDP and PEP. Any plan for expansion or improvement of transmission facilities shall be approved by the ERC: Provided, That such approval shall not be unreasonably withheld. Section 11. TRANSCO Related Businesses. The TRANSCO or its Buyer or Concessionaire shall be primarily responsible for maintaining and operating the Grid pursuant to this Rule. (a) (b) (c) TRANSCO or its Buyer or Concessionaire may engage in any related business which maximizes utilization of its assets; A portion of the annual net income of not more than fifty percent (50%) derived from such undertaking utilizing assets which form part of the rate base shall be used to reduce the transmission wheeling charges as determined by ERC; and Separate audited accounts shall be maintained for each business undertaking to ensure that the transmission business shall neither subsidize in any way such business undertaking nor encumber its transmission assets in any way to support such business. Section 12. Transmission Charges. (a) (b) Transmission Charges shall be paid to TRANSCO or its Buyer or Concessionaire for the use of the transmission system. Transmission users shall also pay charges for the use of Ancillary Services. The WESM Rules shall provide for the methodology for the price and cost recovery of Ancillary Services that are to be provided by the Generation Company. Transmission Charges and fees for Ancillary Services shall be fixed by the ERC. RULE 7. DISTRIBUTION SECTOR Section 1. Guiding Principles. (a) (b) Pursuant to Section 22 of the Act, the Distribution of Electricity to End-users shall be a regulated common carrier business, requiring a national franchise. For purposes of these Rules, distribution franchise shall mean the privilege of a Distribution Utility to convey electric power through its Distribution System in a given geographical area granted by the Congress of the Republic of the Philippines. The Distribution of Electricity is a business affected with public interest. The following rules shall apply to the Distribution of Electricity. Page 27 of 100 === ra-9136-irr-pages-028.ppm === Section 2. Scope of Application. This Rule shall apply to an entity that owns, operates, or Controls one or more Distribution Systems such as but not limited to: (a) (b) (c) (d) (e) ECs; Privately-Owned Distribution Utilities; Local Government Unit Owned-and-Operated Distribution Systems; Entities duly authorized to operate within the EZs; and Other duly authorized entities engaged in the Distribution of Electricity. Section 3. Ownership Limitation. (a) (b) (c) A Distribution Utility and any of its subsidiaries, Affiliates, stockholders, directors, officers or their relatives within the fourth civil degree of consanguinity or affinity, legitimate or common law, shall not hold any interest, directly or indirectly, in the TRANSCO or its Buyer or Concessionaire, or the IMO. The holdings of any Person, natural or juridical, including its directors, officers, stockholders, and their related interests in a Distribution Utility and their respective holding companies shall not exceed twenty-five percent (25%) of the total voting shares of stock. This shall not apply to a Distribution Utility or the company holding the shares or its controlling stockholders whose shares are listed in the PSE. Implementation of this provision shall be in accordance with the rules and regulations issued by ERC. This section shall not apply to ECs in accordance with Section 28 of the Act. A Distribution Utility shall be required to sell to the public a portion of not less than fifteen percent (15%) of its common shares of stock not later than five (5) years from the effectivity of the Act, except those Distribution Utilities or its respective holding companies listed in the PSE, subject to the rules and regulations of the ERC to be issued for this purpose. Section 4. Obligations of a Distribution Utility. (a) A Distribution Utility shall provide distribution services and connections to its systems for any End-user within its Franchise Area consistent with the Distribution Code. Any existing End-user within the Franchise Area of a Distribution Utility that is connected to TRANSCO facilities shall be served by the franchised Distribution Utility upon acquisition of the subtransmission facilities: Provided, however, That the Distribution Utility which acquired the subtransmission facilities shall be paid by the End-user the corresponding subtransmission rates or wheeling charge imposed by Page 28 of 100 === ra-9136-irr-pages-029.ppm === (b) (c) (d) (e) (f) NPC in accordance with its contract to the End-user as approved by ERC. A Distribution Utility shall structurally and functionally unbundle its distribution business activities and rates from its wires, generation and supply businesses. A Distribution Utility shall comply with Rule 10 on Structural and Functional Unbundling of Electric Power Industry Participants. A Distribution Utility shall provide open and non-discriminatory access to its Distribution System to all End-users, including Suppliers and Aggregators. A Distribution Utility shall comply with the technical specifications and financial standards prescribed in the Distribution Code and the performance standards prescribed in these Rules. To this end, ERC shall issue submission requirements for Distribution Utilities to comply with the technical specifications, financial and _ the performance standards after the effectivity of these Rules and the Distribution Code. (i) A Distribution Utility shall submit to ERC a statement of compliance. (ii) A Distribution Utility that does not comply with the technical specifications, performance standards and financial capability standards as prescribed in the Distribution Code shall submit to ERC a plan to comply within three (3) years therewith. The ERC shall, within sixty (60) days from receipt of such plan, evaluate the same and notify the Distribution Utility concerned of its action. (iii) A Distribution Utility is required to implement the ERC- approved plan to comply with the said technical specifications prescribed in the Distribution Code and the performance standards of these Rules within three (3) years from the approval of said plan. (iv) Failure by the Distribution Utility to submit a feasible and credible plan or failure to implement the same shall serve as ground for the imposition of appropriate sanctions, fines or penalties as may be prescribed by ERC. A Distribution Utility shall comply with the requirements in the Grid Code, WESM Rules and all applicable laws. A Distribution Utility shall provide universal service within its Franchise Area, over a reasonable time, including Unviable Areas, as part of its social obligations. This obligation shall be performed in a manner that shall allow such Distribution Utilities to collect different rates in Unviable Areas to sustain its economic viability, subject to approval by the ERC. Page 29 of 100 === ra-9136-irr-pages-030.ppm === (g) (h) (i) () (k) (1) (m) (n) (0) (p) (q) (r) A Distribution Utility shall file with the ERC its petition to allow another Distribution Utility to provide electricity to areas that it does not find viable, pursuant to Section 6 of this Rule. A Distribution Utility shall supply electricity in the least cost manner to the Captive Market within its Franchise Area, subject to the collection of Retail Rates duly approved by ERC. A Distribution Utility shall file for review and approval by the ERC its unbundled rates reflecting the true costs of service pursuant to Rule 15 on Unbundling of Rates, and the proposal for the removal of cross subsidies among the customers it serves pursuant to Rule 16 on Removal of Cross Subsidies. A Distribution Utility shall file with the ERC its petition on the Lifeline Rate to be applied to its Marginalized End-users, pursuant to Rule 20 on Lifeline Rate. A Distribution Utility shall recover Stranded Contract Costs under eligible contracts approved by ERB as of 31 December 2000, subject to review by ERC pursuant to Rule 17 on Stranded Debts and Contract Costs Recovery. A Distribution Utility shall collect on a monthly basis from all End- users a Universal Charge set by ERC, to be remitted to PSALM on or before the fifteenth (15) of the succeeding month, net of any amount due to the Distribution Utility. A Distribution Utility shall identify and segregate in its customer billing statements the components of the Retail Rate. A Distribution Utility shall comply with Rule 11 on Cross Ownership, Market Abuse and Anti-Competitive Behavior. A Distribution Utility shall file for review and approval by the ERC any changes in the terms and conditions of services to its Franchise Areas. A Distribution Utility shall prepare and submit to the DOE an annual 5-year distribution development plan not later than the fifteenth (15t) of March of every year, for integration with the PDP and PEP. In the case of the ECs, such plans shall be submitted through NEA for review and consolidation. To this end, NEA shall submit to the DOE the National Electric Cooperatives Distribution Development Plan not later than the 15 of March of every year. A Distribution Utility shall pay a franchise tax only on its distribution wheeling and Captive Market supply revenues. To this end, the DOF shall issue the necessary guidelines. A Distribution Utility shall comply with the reportorial requirements as may be prescribed by the ERC and the DOE. Page 30 of 100 === ra-9136-irr-pages-031.ppm === (s) A Distribution Utility that fails to comply with any of these obligations shall be subject to fines and penalties as imposed by the ERC. Section 5. Privileges of a Distribution Utility. (a) (b) (c) A Distribution Utility shall be entitled to impose and _ collect Distribution Wheeling Charges and connection fees, Retail Rates and other charges as approved by the ERC from the End-user and other qualified customers. A Distribution Utility may exercise the power of eminent domain subject to the requirements of the Constitution and existing laws. A Distribution Utility may, directly or indirectly, engage in any related business undertaking that maximizes the utilization of its assets: Provided, That quality of service shall not deteriorate pursuant to the standards provided in the Grid Code and Distribution Code and Rule 10 on Structural and Functional Unbundling of Electric Power Industry Participants. To this end, the Distribution Utility shall submit to the ERC the appropriate documents to effect the following: (i) A portion of the net annual income derived from such undertaking utilizing assets which form part of the rate base shall be used to reduce its Distribution Wheeling Charges: Provided, That, such portion shall not exceed fifty percent (50%) of the net income derived from such undertaking. (ii) Separate accounts shall be maintained for each business undertaking to ensure that the distribution business shall neither subsidize in any way such business undertaking nor encumber its distribution assets in any way to support such business. Section 6. Provision of Service in Unviable Areas. (a) (b) Unenergized areas that a Distribution Utility does not find viable may be transferred to another Distribution Utility, if any is available, which will provide the service, subject to approval by ERC. In cases where a Distribution Utility failed or refused to service any area within its Franchise Area and allows another utility to service the same, the arrangements between the Distribution Utilities shall not affect their respective Franchise Areas. The ERC shall issue the appropriate guidelines to implement this provision. In remote and Unviable Areas where the Distribution Utility is unable to serve for any reason as authorized by ERC in accordance with the Act, the areas shall be opened to other qualified third parties that may provide the service pursuant to Rule 14 on Provision of Electricity by Qualified Third Parties. Page 31 of 100 === ra-9136-irr-pages-032.ppm === Section 7. Structural and Operational Reforms Between and Among (a) (b) (c) Distribution Utilities. Pursuant to Section 23 of the Act, the ERC shall issue the appropriate guidelines for the structural and operational reforms of a Distribution Utility. Such reforms shall include, but not limited, to merger, consolidation, integration, bulk procurement and joint ventures. With respect to ECs, the DOE through NEA shall facilitate and encourage reforms in the structure and operations of a Distribution Utility for greater efficiency and lower costs. Pursuant to Section 57 of the Act, ECs are given the option to convert into Stock Cooperatives under the CDA or Stock Corporations under the Corporation Code. Nothing contained in the Act shall deprive ECs of any privilege or right granted to them under Section 39 of Presidential Decree No. 269, as amended, and other existing laws. The conversion and registration of ECs shall be implemented in the following manner: (i) ECs shall, upon approval of a simple majority of the required number of turnout of voters as provided in the Guidelines in the Conduct of Referendum (Guidelines), in a _ referendum conducted for such purpose, be converted into a Stock Cooperative or Stock Corporation and thereafter shall be governed by the Cooperative Code of the Philippines or the Corporation Code, as the case may be. The NEA, within six (6) months from the effectivity of these Rules, shall promulgate the guidelines in accordance with Section 5 of Presidential Decree No. 1645. (ii) | ECs converted into Stock Corporations shall be registered with the SEC in accordance with the Corporation Code, while those converted into Stock Cooperatives, shall be registered with the CDA: Provided, however, That the ECs which opt to remain as non-Stock Cooperatives shall continue to be registered with the NEA and shall be governed by the provisions of Presidential Decree No. 269, as amended. (iii) An EC heretofore converted, regardless of the corporate form, or its successor entity, shall retain its franchise rights: Provided, further, That its operations shall be regulated by the ERC and other Government instrumentalities insofar as practicable and consistent with the Act. Section 8. Franchise for a Distribution Utility. (a) (b) Pursuant to Section 27 of the Act, a franchise to a Person intending to engage in Distribution of Electricity shall be granted exclusively by the Congress of the Philippines. All existing franchises shall be allowed to their full term. Page 32 of 100 === ra-9136-irr-pages-033.ppm === (c) In the case of ECs, renewals and cancellations of franchise shall remain with the National Electrification Commission (NEC) under the NEA for five (5) more years after the effectivity of the Act. RULE 8. SUPPLY SECTOR Section 1. Guiding Principles. (a) (b) Pursuant to Section 29 of the Act, the Supply of Electricity to End- users is a business affected with public interest. The Supply of Electricity to End-users in Contestable Market requires a license from the ERC except for the Supply of Electricity by Distribution Utilities within their Franchise Areas and Persons authorized to supply electricity within their respective EZs. Section 2. Scope of Application. (a) (b) This Rule shall apply to all Suppliers. Subject to the qualifications set by the ERC, any of the following may obtain a license to become a Supplier: (i) A Generation Company or Affiliate thereof; (ii) An Affiliate of a Distribution Utility with respect to the latter’s Contestable Market within or outside its Franchise Area; (iii) Aggregators; (iv) An IPP Administrator; and (v) Any other Person authorized by the ERC to engage in the selling, brokering or marketing of electricity to the Contestable Market, consistent with the Act and these Rules. Section 3. Ownership Limitation and Restrictions. (a) (b) A Supplier or Affiliate thereof or any stockholder, director or officer or any of their relatives within the fourth civil degree of consanguinity or affinity, legitimate or common law, shall not own any interest, directly or indirectly, in TRANSCO or its Buyer or Concessionaire, or IMO. Except for ex-officio government-appointed representatives, no Person who is an officer or director of the TRANSCO or its Buyer or Concessionaire shall be an officer or director of any Supplier. Section 4. Obligations of a Supplier. (a) (b) A Supplier shall secure a license from the ERC prior to engaging in the Supply of Electricity to End-users in any Contestable Market. A Supplier, where applicable, shall functionally and _ structurally unbundle its supply business activities and rates from its generation and distribution businesses, if any, as presented in Rule 10 on Structural and Functional Unbundling of Electric Power Industry Participants. Page 33 of 100 === ra-9136-irr-pages-034.ppm === (c) (d) (e) (f) (g) A Supplier shall identify and segregate the components of its Supplier’s Charge, as required by the Act and further provided in Rule 15 on Unbundling of Rates. A Supplier shall comply with the WESM Rules. A Supplier shall comply with any reportorial requirements prescribed by the ERC for monitoring purposes. A Supplier shall comply with the Competition Rules to be prescribed by the ERC concerning abuse of market power, cartelization, and any other anti-competitive or discriminatory behavior. A Supplier that fails to comply with any of these obligations shall be subject to fines and penalties imposed by the ERC and, as so required to protect the public interest, may have its license suspended, revised or revoked. Section 5. Licensing of Suppliers. The ERC shall issue the appropriate licensing rules, guidelines and procedures for the issuance of licenses to Suppliers, which shall include but not limited to the following: (a) (b) General Procedures for License Applications and Monitoring. (i) The applicant shall submit all pertinent information and documents required by ERC for purposes of evaluating the application for a license to supply electricity to End-users in a Contestable Market. (ii) Upon receipt of all the information required to evaluate compliance with the requirements applicable to obtaining a license to supply electricity to End-users in a Contestable Market, and upon demonstration of compliance with such requirements, the ERC shall issue the necessary resolution, order, and/or the appropriate license as a Supplier. (iii) The ERC shall monitor the compliance of Suppliers with the requirements of their respective licenses and the rules and regulations applicable to Suppliers. Qualification Criteria (i) Compliance with Section 3 of this Rule 8. (ii) Technical and Financial Standards, Creditworthiness Criteria and such financial security to secure proper performance as a Supplier as may be determined by the ERC to protect the interests of End-users in Contestable Markets. (iii) | Such other qualification or criteria as may be determined by the ERC to protect the public interest. Page 34 of 100 === ra-9136-irr-pages-035.ppm === RULE 9. WHOLESALE ELECTRICITY SPOT MARKET (WESM) Section 1. Guiding Principle. Pursuant to Section 30 of the Act, all WESM Participants shall comply with the WESM Rules. Section 2. Scope of Application. This Rule shall apply to the Market Operator and all WESM Participants. Section 3. Organization. Within one (1) year from the effectivity of the Act, the DOE shall establish a WESM composed of the WESM Participants. For this purpose, the DOE shall, jointly with Electric Power Industry Participants, promulgate the WESM Rules, and undertake actions including but not limited to the following: (a) Organize and establish the appropriate market design and governance structure of the WESM; (b) Pursuant to Section 30 of the Act, constitute the AGMO, which shall undertake the preparatory work and initial operation of the WESM; (c) Oversee the development of the WESM organization and necessary supporting infrastructure, including the funding requirements. Section 4. Membership. Subject to compliance with the membership criteria specified in the WESM Rules, the following Persons shall be eligible to become members of the WESM: (a) Generation Companies; (b) Distribution Utilities; (c) Suppliers; (d) IPP Administrators; (e) End-users; and (f) Other similar Persons authorized by the ERC eligible to become members of the WESM. Section 5. The WESM Rules. (a) The WESM Rules shall provide the mechanism for identifying and setting the price of actual variations from the quantities transacted under contracts between sellers and purchasers of electricity. The Page 35 of 100 === ra-9136-irr-pages-036.ppm === (b) (c) WESM Rules shall include rules governing the central scheduling and dispatch, and settlement of quantities sold and purchased under bilateral contracts in order to identify variations therefrom. The WESM Rules shall also reflect accepted economic principles and provide an open, competitive market for all WESM Participants. Jointly with the Electric Power Industry Participants, the DOE shall formulate the detailed rules for the WESM, in accordance with the following principles: (i) (ii) (iii) (iv) (v) Provide an efficient, competitive, transparent and reliable spot market; Ensure efficient operation of the WESM by the Market Operator in coordination with the system operator in a way which: (1) Minimizes adverse impacts on system security; (2) Encourages market participation; and (3) Enables access to the market. Subject to the provisions of Section 43(u) of the Act, provide a cost-effective framework for resolution of disputes among WESM Participants, and between WESM Participants and the Market Operator; Provide for adequate sanctions in cases of breaches of the WESM Rules; and Provide efficient, transparent and fair processes for amending the WESM Rules. The WESM Rules shall provide, among others, procedures for: (i) (ii) (iii) (iv) (v) (vi) Establishing the Merit Order Dispatch Instructions for each time period for Central Dispatch; Determining the market-clearing price for each time period; Administering the market, including criteria for admission to and termination from the market which includes security or performance bond requirements, voting rights of the participants, surveillance and assurance of compliance of the participants with the rules and the formation of the WESM governing body; Prescribing guidelines for the market operation in system emergencies; Amending the WESM Rules; and Establishing the transition to full implementation of the WESM. Page 36 of 100 === ra-9136-irr-pages-037.ppm === (d) Methodology for Price Determination. The WESM Rules shall provide the mechanism for determining the price of electricity not covered by bilateral contracts between sellers and purchasers of electricity. The price determination methodology contained in the WESM Rules shall be subject to the approval of the ERC. Section 6. The Market Operator. (a) A Market Operator in accordance with the WESM Rules shall implement the WESM. Not later than one (1) year after the implementation of the WESM, an independent entity, the IMO, shall be formed and the functions, assets and liabilities of the AGMO shall be transferred to such entity with the joint endorsement of the DOE and the Electric Power Industry Participants: Provided, That the IMO shall be financially and technically capable, with proven experience and expertise of not less than two (2) years as a leading independent market operator of similar or larger size electricity market. (b) Subject to Technical Constraints, the grid operator of the TRANSCO or its Buyer or Concessionaire shall provide Central Dispatch of all Generation Facilities connected, directly or indirectly, to the transmission system in accordance with the dispatch schedule submitted by the Market Operator, which schedule shall take into account outstanding bilateral contracts. (c) The Market Operator shall have the following functions and responsibilities: (i) Operate and administer the WESM and allocate resources to enable it to operate and administer the market, in accordance with the WESM Rules; (ii) Determine the dispatch schedule of all facilities in accordance with the WESM Rules. Such schedule shall be submitted to the grid operator of the TRANSCO or its Buyer or Concessionaire; (iii) | Monitor daily trading activities in the market; (iv) Oversee transaction billing and settlement procedures; and (v) Maintain and publish a register of all WESM Participants and must update and publish the register whenever a Person becomes or ceases to be a WESM Participant. Section 7. Constitution of the AGMO. The DOE shall, within one (1) year from the effectivity of the Act, constitute the AGMO which shall undertake the preparatory work and initial operation of the WESM. Page 37 of 100 === ra-9136-irr-pages-038.ppm === (a) AGMO Governing Board. The AGMO shall be governed, and its powers and functions exercised, by a governing body with equitable representation from Electric Power Industry Participants. The representatives of the AGMO governing body shall be selected, in accordance with the WESM Rules. The DOE Secretary shall chair the AGMO. (b) Composition. Any sectoral representation on the AGMO governing body should as far as possible meet the following criteria: (i) Representatives of each sector of the Philippine electric power industry on the governing body should be reflective of that sector’s size in relation to the electric industry as a whole; (ii) | The number of representatives of each sector of the Philippine electric power industry should be such that no one sector of the industry can dominate proceedings or decision-making by the governing body; and be selected in such a way that deadlocks in decision making will be avoided; and (iii) There should be independent members on the governing body. (d) Powers and Duties. The following are the powers and duties of the AGMO governing body: (i) Govern the operation of the WESM until the formation or the selection of an IMO; (ii) Develop and adopt guidelines for the efficient, competitive, transparent and reliable management and operation of the market in accordance with WESM Rules; (iii) _ Adopt and set internal procedures for the conduct of meetings and determination of a quorum; and (iv) Perform the preparatory work (information technology system development, testing, and trial operation) and initial operation of the WESM with support from the DOE. (e) Not later than one (1) year after the implementation of the WESM, the AGMO shall transfer its functions, assets and liabilities to the IMO. Section 8. Functions and Responsibilities of TRANSCO with respect to the WESM. The TRANSCO shall provide administrative supervision to AGMO. Page 38 of 100 === ra-9136-irr-pages-039.ppm === Section 9. Market Fees. (a) The cost of administering and operating the WESM shall be recovered by the IMO through a charge imposed on all WESM Participants or WESM transactions, provided such charge shall be filed with and approved by the ERC, consistent with the WESM Rules. (b) The structure of Market Fees should be transparent and should not discriminate against a category or categories of WESM Participants. (c) Upon the approval of ERC, the Market Operator shall publish the structure of Market Fees, the methods used in determining the structure and an assessment of the extent to which the structure complies with the principles specified above, at least three (3) months prior to the implementation of WESM. Section 10. Market Suspension. In cases of national or international security emergencies or natural calamities, the ERC is empowered to suspend the operation of the WESM or declare a temporary WESM failure in accordance with the procedures set out in the WESM Rules. RULE 10. STRUCTURAL AND FUNCTIONAL UNBUNDLING OF ELECTRIC POWER INDUSTRY PARTICIPANTS Section 1. Guiding Principle. Consistent with the last paragraph of Section 36 of the Act, any Electric Power Industry Participant shall structurally and functionally unbundle its business activities in accordance with Section 5 of the Act, namely: generation, transmission, distribution and supply. Structural unbundling shall mean the separation of different activities through the creation of separate divisions or departments within a single company or, at the option of any Electric Power Industry Participant, a separation into different juridical entities, with a clear separation of accounts between regulated and non-regulated business activities. Functional unbundling shall mean the separation of functions into different components. For this purpose, business activities resulting from the initial unbundling process may be further unbundled to widen the scope for competitive activities. The ERC shall formulate the appropriate guidelines and shall ensure full compliance with this provision. Section 2. Scope of Application. This Rule shall apply to all Electric Power Industry Participants that are currently engaged or will be engaged in any of the following business activities: (a) Power generation; (b) Transmission; Page 39 of 100 === ra-9136-irr-pages-040.ppm === (c) Distribution; (d) Supply of Electricity including collection and metering; (e) Related businesses which utilize the generation, transmission, distribution or supply assets for non-electricity related services; and (f) Other electricity related services that may be identified and authorized by the ERC. The ERC may relax or eliminate the unbundling requirements for specified business activities if such activity operates in a competitive market. Section 3. Procedures for the Structural and Functional Unbundling of Business Activities. The following shall govern all Electric Power Industry Participants in undertaking the structural and functional unbundling of its business activities: (a) An Electric Power Industry Participant shall identify its business activities according to each major business function as defined in Section 2 of this Rule. (b) An Electric Power Industry Participant shall prepare and submit for approval by the ERC its Business Separation and Unbundling Plan (BSUP) on or before 31 December 2002. (c) The BSUP shall contain among others, the following information: (i) A complete description of the separation of books and records, including but not limited to, sources of revenues, costs as allocated, asset transferred, and information systems separation; (ii) A comprehensive description of the functional, structural or juridical separation of generation, distribution and supply as provided for in the BSUP; (iii) Milestones and highlights of the planned structural and functional unbundling of the business activities in which the Electric Power Industry Participant is currently engaged: Provided, That in any case, no Electric Power Industry Participant that has not completed structural and functional unbundling of the business shall be eligible to participate in Retail Competition and Open Access; (iv) A plan for complying with all Code of Conduct provisions specified by ERC, including training or developmental programs for its employees to help ensure compliance; and (v) Other documents or information as may be required by the ERC. 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