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(d) The ERC may adopt the Electric Power Industry Participant's BSUP,
recommend modifications to the BSUP, or reject the BSUP for revision
and direct the concerned Electric Power Industry Participant to file a
new BSUP based on its comments. In any case, ERC shall render its
decision within six (6) months from filing of the BSUP.

(e) Upon receipt of the ERC decision, the Electric Power Industry
Participant shall implement said decision fully and promptly.

(f) The ERC shall provide for appropriate fines and penalties for any
Electric Power Industry Participant that fails to comply with its
decision in full.

Section 4. Guiding Principles for Business Separation of Distribution
Utilities.

(a) Once a Distribution Utility has separated and unbundled its business
activities, the Distribution System portion of its business shall no
longer provide competitive energy services, i.e. generation and supply.
A Distribution Utility, which has not structurally and functionally
unbundled its business activities shall be prohibited from operating in
a Contestable Market.

(b) ECs shall follow the structural and functional unbundling procedures
set forth in these Rules except that such unbundling shall be
implemented no later than 26 June 2006, the start of Retail
Competition and Open Access in the Franchise Areas of ECs.

RULE 11. CROSS OWNERSHIP, MARKET ABUSE AND
ANTI-COMPETITIVE BEHAVIOR

Section 1. General Principle.

No Electric Power Industry Participant or any other Person may engage in
any anti-competitive behavior including, but not limited to, cross-
subsidization, price or market manipulation, false or deceptive marketing,
or other unfair trade practices detrimental to the encouragement and
protection of Contestable Markets or the WESM.

Section 2. Scope of Application.

This Rule shall apply to all Persons, including all Electric Power Industry
Participants, such as but not limited to Generation Companies, subsidiaries
and Affiliates of Generation Companies, stockholders and officials of
Generation Companies, IPP Administrators, Distribution Utilities, Suppliers,
NPC, and the TRANSCO or its Buyer or Concessionaire.

Section 3. Prohibition of Cross Ownership.
(a) Pursuant to Section 45 of the Act, no Generation Company, IPP

Administrators, Distribution Utility or Supplier, their respective
subsidiaries, Affiliates, stockholders, directors or officers or other

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(b)

(c)

(d)

entity engaged in generating and supplying electricity specified by
ERC, shall hold any interest, directly or indirectly, in the TRANSCO or
its Buyer or Concessionaire, or the Market Operator.

TRANSCO or its Buyer or Concessionaire and any of its stockholders,
directors or officers or any of their relatives within the fourth civil
degree of consanguinity or affinity, legitimate or common law, shall
not hold any interest, whether directly or indirectly, in any Generation
Company, IPP Administrators, Distribution Utility or Supplier.

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 Generation
Company, IPP Administrators, Distribution Utility or Supplier.

This Section shall not apply to PSALM in the course of its
Privatization of NPC assets pursuant to Sec. 47 of the Act.

Section 4. Limits on Concentration of Ownership, Operation or

(a)

(b)

Control of Installed Generating Capacity.

No company, Related Group or IPP Administrator, singly or in
combination, can own, operate or Control more than thirty percent
(30 %) of the installed generating capacity of a Grid and/or twenty-five
percent (25%) of the national installed generating capacity: Provided,
That such restrictions shall not apply to PSALM or NPC during the
time that its assets are being privatized pursuant to Section 47 of the
Act and isolated grids that are not connected to the high voltage
transmission system. The ERC shall determine the installed
generating capacity in a Grid and the national installed generating
capacity.

The capacity of such facility shall be credited to the entity controlling
the terms and conditions of the prices or quantities of the output of
such capacity sold in the market in cases where different entities own
the same Generation Facility.

In cases where different Persons own, operate or Control the same
Generation Facility, the capacity of such facility shall be credited to
the Person controlling the capacity of the Generation Facility.

Section 5. Limits on Bilateral Supply Contracts by a Distribution

(a)

(b)

Utility.

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.

No Distribution Utility shall be allowed to source from bilateral power
supply contracts more than fifty percent (50%) of its total demand
from an Affiliate engaged in generation, but such limitation shall not
prejudice contracts entered into prior to the effective date of the Act.

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This limitation shall apply regardless of whether demand is expressed
in terms of capacity or energy.

Section 6. Encouragement of Participation in the WESM.

For the first five (5) years from the establishment of the WESM, no
Distribution Utility shall source more than ninety percent (90%) of its total
demand from bilateral power supply contracts.

Section 7. ERC Responsibilities.

(a)

(b)

(c)

(d)

(e)

ERC shall enforce the competitive safeguards specified in this Rule in
order to promote true market competition and prevent harmful
monopoly and market power abuse. However, ERC shall not apply
the limitations specified in this Rule to isolated grids that are not
connected to the Grid.

ERC shall have the authority to determine the appropriate Grid or
Grids to use in the application of this Rule when two or more of the
three separate Grids become sufficiently interconnected to constitute
a single Grid or as conditions may otherwise permit.

ERC shall, within one (1) year from the effectivity of the Act,
promulgate Competition Rules to ensure and promote competition,
encourage market development and customer choice and discourage
or penalize abuse of market power, cartelization and any anti-
competitive or discriminatory behavior, or unfair trade practice that
distorts competition or harms consumers. Such Rules shall define
relevant markets for the purpose of establishing abuse or misuse of
market power, areas of isolated grids that are not connected to the
high voltage transmission system, and the reportorial requirements of
Electric Power Industry Participants as may be necessary to enforce
the provisions of Section 45 of the Act.

ERC shall, motu proprio, monitor and penalize any market power
abuse or anti-competitive or unduly discriminatory act or behavior, or
any unfair trade practice that distorts competition or harms
consumers, by any Electric Power Industry Participant. Upon a
finding of a prima facie case that an Electric Power Industry
Participant has engaged in such act or behavior, the ERC shall after
due notice and hearing, stop and redress the same. Such remedies
shall, without limitation, include the separation of the business
activities of an Electric Power Industry Participant into different
juridical entities, the imposition of bid or price controls, issuance of
injunctions in accordance with the Rules of Court, divestment or
disgorgement of excess profits, and imposition of fines and penalties
pursuant to Section 46 of the Act.

ERC shall, within one (1) year from the effectivity of the Act,
promulgate rules and regulations providing for a complaint procedure
that, without limitation, provides the accused party with its rights to
due process.

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Section 8. Anti-Competitive Behavior and Other Unfair Trade
Practices.

The ERC shall promulgate Competition Rules prohibiting, and specifying
appropriate penalties and other remedies for, any contract, combination or
conspiracy that unreasonably restricts competition in any market for
electricity, or any conduct that constitutes an abuse of market power or an
attempted monopolization of any market for electricity, including but not
limited to the following:

(a) Fixing prices of products or services: Electric Power Industry
Participants that are competitors shall not enter into any agreement
or understanding, tacit or explicit, to fix, peg or stabilize the price of
any product or service. Price fixing shall be deemed to include
agreements on bids, price floors, price ceilings, pricing formulas and
resale prices, and agreements on credit or any other terms of a
transaction between a buyer and a seller.

(b) Fixing output of products or services: Electric Power Industry
Participants that are competitors shall not enter into any agreement
or understanding, tacit or explicit, to fix, limit or otherwise determine
their output of any product or service.

(c) Customer, Product, Service or Territorial Divisions: Electric Power
Industry Participants that are competitors shall not enter into any
agreement or understanding, tacit or explicit, as to the customers or
the geographic territories they will serve, or the products or services
they will sell.

(d) Tying: Electric Power Industry Participants shall not use a position of
market power to condition the sale of one product or service on the
purchase of another product or service. No Distribution Utility shall
make access to its Distribution System contingent upon the purchase
of generation, metering, billing or other services.

(e) Physical or Economic Withholding: Electric Power Industry
Participants shall not use physical operating practices or bidding
strategies that limit the market participation of a generation unit
under conditions that will result in significant increases in market
prices.

(f) Discriminatory provision of regulated distribution or transmission
services: Regulated distribution and transmission services shall be
provided on a basis that is not unduly discriminatory. Examples of
unduly discriminatory behavior include, but not limited to the
following:

(i) A Distribution Utility or TRANSCO or its Buyer or
Concessionaire refuses to interconnect Generation Company,
IPP Administrator, or Supplier other than for reasons of system
security or reliability or reasonable financial or credit
considerations pursuant to the Grid or Distribution Codes or
commission of acts constituting grounds for suspension of the
service under any applicable rule and regulation.

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(g)

(h)

(ii) A Distribution Utility or TRANSCO or its Buyer or
Concessionaire gives a Generation Company, IPP Administrator,
or Supplier, including without limitation any of the Distribution
Utility’s Affiliates, any preference or advantage over any other
Generation Company, IPP Administrator, or Supplier in
processing a request for Transmission or Distribution of
Electricity.

(iii) A Distribution Utility or TRANSCO or its Buyer or
Concessionaire gives a Generation Company, IPP Administrator,
or Supplier, including without limitation any of the Distribution
Utility’s Affiliates, any preference or advantage in the
dissemination or disclosure of customer or transmission or
Distribution System information, and any such information that
has not been made available to all Electric Power Industry
Participants at the same time and in a non-discriminatory
manner.

(iv) A Distribution Utility or TRANSCO or its Buyer or
Concessionaire provides any preference or advantage to any
Supplier in the disclosure of information about operational
status and availability of the Distribution System and
transmission system.

(v) A Distribution Utility does not provide all regulated services,
and does not apply Distribution Wheeling Charges to any
Supplier that is not an Affiliate, in the same manner as it does
for itself or its Affiliates. TRANSCO or its Buyer or
Concessionaire shall provide all regulated services and shall
apply Transmission Charges to any Electric Power Industry
Participant in the same manner as it does for PSALM or NPC.

Misrepresentation or false advertising of a Distribution Utility: A
Distribution Utility or its Affiliate shall not state or imply that any
distribution service provided to an Affiliate is inherently superior,
solely on the basis of Affiliate’s relationship with the Distribution
Utility, to that provided to any other Supplier.

Cross-Subsidization: Consistent with Section 26 of the Act, a
Distribution Utility shall not use its revenues or resources from
regulated distribution services to reduce the cost or price of its
competitive services (generation or supply).

RULE 12. RETAIL COMPETITION AND OPEN ACCESS

Section 1. Guiding Principle.

Pursuant to Section 31 of the Act, Retail Competition and Open Access shall
be implemented no later than three (3) years from the effectivity of the Act.

Section 2. Scope of Application.

The provision of open and non-discriminatory access to the transmission
system and Distribution Systems shall apply to the following:

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(a)
(b)
(c)
(d)
(e)
(f)

(g)
(h)

WESM Participants;

TRANSCO or its Buyer or Concessionaire;
Distribution Utilities;

EZs;

Suppliers;

IPP Administrators;

Market Operator; and

End-users in Contestable Markets.

Section 3. Conditions for Declaring Initial Implementation of Open

Access.

The ERC shall, after due notice and public hearing, declare initial
implementation of Open Access not later than three (3) years from the
effectivity of the Act, subject to the following conditions:

(a)

(b)

(c)

(d)

(e)

Establishment of the WESM.

For this purpose, the “establishment” of the WESM shall be deemed to
have occurred upon the effectivity of the Market Rules by the DOE
and initial operation of the AGMO pursuant to Rule 9 on the
Wholesale Electricity Spot Market (WESM).

Approval of unbundled Transmission and Distribution Wheeling
Charges.

The ERC shall approve the unbundled rates of NPC and Distribution
Utilities, which shall include the transmission and wheeling charges,
within one (1) year from the effectivity of the Act.

Initial implementation of the Cross Subsidy Removal scheme.

For this purpose, initial implementation of the cross subsidy removal
scheme shall occur on the next billing period after the issuance of
ERC approval. The scheme for cross subsidy removal shall include
guidelines or a schedule for the removal of each type of cross subsidy
and may be altered, modified and/or amended by the ERC pursuant
to Rule 16 on Removal of Cross Subsidies.

Privatization of at least seventy (70%) percent of the total capacity of
generating assets of NPC in Luzon and Visayas.

Transfer of the management and control of at least seventy percent

(70%) of the total energy output of power plants under contract with
NPC to the IPP Administrators.

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

Upon the initial implementation of Open Access, the ERC 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.

RULE 13. MISSIONARY ELECTRIFICATION
Section 1. Guiding Principle.

(a) Pursuant to Section 70 of the Act, the SPUG shall be responsible for
providing power generation and its associated power delivery systems
in areas that are not connected to the transmission system.

(b) The Missionary Electrification function of SPUG shall be funded from
the revenues from sales in the missionary areas and from the
Universal Charge to be collected from all electricity End-users as
determined by the ERC.

(c) The DOE’s Missionary Electrification Development Plan (MEDP) shall
include capital investment and operations regarding capacity
additions in existing missionary areas and the facilities to be provided
in other areas not connected to the transmission system.

(d) The DOE shall, no later than ninety (90) days from the promulgation
of these Rules, issue specific guidelines on how to encourage the
inflow of private capital and the manner whereby other parties,
including Distribution Utilities and qualified third parties, as provided
for in Section 23 and Section 59 of the Act, can participate in the
Missionary Electrification projects set forth in the MEDP.

(e) The SPUG shall continue to endeavor to privatize its power generation
facilities and the necessary associated power delivery systems.

Section 2. Scope of Application.

This Rule shall apply to all entities and areas identified in the MEDP.

Section 3. Obligations of SPUG.

(a) SPUG shall be responsible for providing power generation and its
associated power delivery systems in areas that are not connected to
the Grid and cannot be serviced by Distribution Utilities and other

qualified third parties.

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(b)

(c)
(d)

(e)

(f)

SPUG shall periodically assess the requirements and prospects for
bringing its functions to commercial viability on an area-by-area basis
at the earliest possible time, including a program to encourage private
sector participation.

Whenever feasible, SPUG shall utilize Renewable Energy Resources.

SPUG shall file for review and approval its unbundled rates following
Rule 15 on Unbundling of Rates.

SPUG shall file a petition to the ERC with respect to the Missionary
Electrification portion of the Universal Charge as prescribed in Rule
18 on Universal Charge.

PSALM shall ensure that SPUG conducts proper monitoring,
accounting and control of expenditures, and efficient utilization of the
Missionary Electrification funds from the Universal Charge.

Section 4. Source of Funds.

(a)

(b)

(d)

The Missionary Electrification shall be funded from the revenues from
sales in missionary areas and from its appropriate share in the
Universal Charge.

SPUG may also draw on other funding sources including
appropriations from Congress, the utilization of private capital,
multilateral aids or grants, Official Development Assistance (ODA)
Funds and others.

SPUG shall source all the cost differentials between the sales
revenues and operating expense and capital expense for expansion,
rehabilitation and facilities for new areas of development based on the
approved MEDP from its share from the Universal Charge and/or
other sources as it may obtain.

In accordance with DOE’s MEDP, the proposed five- (5) year annual
budget for operating and capital expenditures of SPUG shall be
submitted to ERC.

Section 5. Reliability Improvement.

(a)

(b)

(c)

To improve systems reliability, the SPUG shall install transmission
systems in all qualified areas under the coverage of SPUG. Priority
will be given to areas showing big growth in its electricity demand.

SPUG shall also collect revenues in providing power delivery and
Ancillary Service to Generation Companies or Distribution Utilities at
a rate to be filed with and approved by ERC. In the absence of such
rate, SPUG shall use the applicable major Grids’ rate.

SPUG shall cease providing Missionary Electrification to areas
interconnected to the transmission system.

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RULE 14. PROVISION OF ELECTRICITY BY QUALIFIED THIRD
PARTIES

Section 1. Guiding Principle.

Pursuant to Section 59 of the Act, the provision of electric service in remote
and Unviable Areas that the Distribution Utility is unable to service for any
reason shall be opened to other qualified third parties. The provision of
electricity in Unviable Areas by qualified third parties shall be a regulated
business.

Section 2. Scope of Application.

This Rule shall apply to third parties qualified and authorized by ERC in
accordance with the Act to undertake the provision of electric service in
remote and Unviable Areas that a Distribution Utility is unable to serve.

Section 3. Determination of Remote and Unviable Areas.

Every September, the DOE shall issue a declaration of all the remote and
Unviable Areas that cannot be served by a Distribution Utility within the
following three (3) years. The declaration shall be consistent with the PDP
and made in consultation with the NEA and Distribution Utilities. The
remote and Unviable Areas specified in the declaration shall be open for
participation by qualified third parties.

Section 4. Determination of Qualified Third Parties.

The DOE shall set criteria for determining qualified third parties that may
participate in providing electricity to remote and Unviable Areas. These
criteria may include financial, technical, environmental, and other indices of
performance.

The criteria shall give preference to parties that would utilize least-cost new
Renewable Energy Resources in providing electricity.

Section 5. Rights and Obligations of Qualified Third Parties.

(a) Any Distribution Utility that fails to provide electricity to an Unviable
Area shall be required by the ERC to enter into a contract with a
qualified third party to provide electric service in such an Unviable
Area.

(b) A qualified third party shall comply with all applicable provisions of
the Distribution Code, including the requirement to obtain a COC for
its Generation Facilities and other permits the ERC may require.

(c) A qualified third party shall charge rates in Unviable Areas according
to ERC rules for cost recovery of Generation Facilities and associated

power delivery systems.

(d) A qualified third party shall submit annual financial statements to
ERC for determining the effectiveness of the approved rate.

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(e) A qualified third party shall report annually to DOE the rate of
electrification of its coverage areas.

Section 6. Obligations of the ERC.

(a) The ERC shall set guidelines for the issuance of permits to qualified
third parties that serve a remote or unserved and Unviable Area
within the Distribution Utility’s Franchise Area.

(b) The ERC shall set the rules in computing rates that allow full cost
recovery of the Generation Facilities and delivery systems built to
serve remote or unserved and Unviable Areas.

PART III - ELECTRICITY RATE AND CHARGES
RULE 15. UNBUNDLING OF RATES
Section 1. Guiding Principle.

Consistent with Section 36 of the Act and Rule 10 on Structural and
Functional Unbundling of Electric Power Industry Participants, this Rule on
the Unbundling of Rates shall result in the identification and separation of
the individual charge for providing a specific electric service to any End-user
for generation, transmission, distribution, and supply. [Consistent with Sec.
36]

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 business activities as
stated in Section 5 of the Act.

Section 3. Parameters for Unbundling Rates and Costs of Service.

(a) An Electric Power Industry Participant shall identify, separate and
unbundle its rates, charges, and costs in accordance with Rule 10 on
Structural and Functional Unbundling of Electric Power Industry
Participants.

(b) In the determination of eligible costs of service to be charged to the
End-users, the ERC shall establish the minimum efficiency standards
covering the technical, financial, and customer service performance
criteria including systems losses, and interruption frequency rates
parameters among others.

(c) The rate base of the TRANSCO or its Buyer or Concessionaire or any
Distribution Utility shall exclude management inefficiencies, such as
but not limited to cost of project delays not due to any force majeure,
and penalties and related interest during construction and other
disallowances to be determined by ERC.

(d) Interest expenses shall not be allowed as deductions from permissible
Return on Rate Base (RORB).

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(e)

TRANSCO or its Buyer or Concessionaire and Distribution Utilities
may directly or indirectly engage in any related business which
maximizes the utilization of their assets.

Section 4. Method of Rate Unbundling.

The ERC shall prescribe the methodology for rate unbundling.

Section 5. Ratemaking Design and Methodology.

(a)

The ERC shall, in the public interest, establish and enforce a
methodology for setting transmission and distribution wheeling rates
and Retail Rates for the Captive Market of a Distribution Utility,
taking into account all relevant considerations, including the
efficiency or inefficiency of the regulated entities, as well as the
expansion or improvement of the Transmission facilities pursuant to a
plan approved by the ERC under Section 10 of Rule 6 on
Transmission Sector, and the Distribution Utilities under Rule 7 on
Distribution Sector. The rates must be such as to allow the recovery
of just and reasonable costs and a reasonable RORB to enable the
entity to operate viably. The ERC may adopt alternative forms of
internationally-accepted rate-setting methodology as it may deem
appropriate. The rate-setting methodology so adopted and applied
must ensure a reasonable price of electricity. The rates prescribed
shall be non-discriminatory and shall take into consideration, among
others, the franchise tax. To achieve this objective and to ensure the
complete removal of cross subsidies, the cap on the recoverable rate of
system losses prescribed in Section 10 of Republic Act No. 7832, is
hereby amended and shall be replaced by caps which shall be
determined by the ERC based on load density, sales mix, cost of
service, delivery voltage and other technical considerations it may
promulgate. The ERC shall determine such form of rate-setting
methodology, which shall promote efficiency. In case the rate setting
methodology used is RORB, it shall be subject to the following
guidelines:

(i) For purposes of determining the rate base, the TRANSCO or its
Buyer or Concessionaire or any Distribution Utility may be
allowed to revalue its eligible assets not more than once every
three (3) years by an independent appraisal company: Provided,
however, That ERC may give an exemption in case of unusual
devaluation: Provided, further, That the ERC shall exert efforts
to minimize price shocks in order to protect the consumers;

(ii) | Interest expenses are not allowable deductions from permissible
RORB;

(iii) In determining eligible cost of services that will be passed on to
the End-users, the ERC shall establish minimum efficiency
performance standards for the TRANSCO or its Buyer or
Concessionaire and Distribution Utilities including systems
losses, interruption frequency rates, and collection efficiency;

(iv) Further, in determining rate base, the TRANSCO or its Buyer or
Concessionaire or any Distribution Utility shall not be allowed

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(b)

(c)

(d)

to include management inefficiencies like cost of project delays
not excused by force majeure, penalties and related interest
during construction applicable to these unexcused delays;

(v) Any significant operating costs or project investments of the
TRANSCO or its Buyer or Concessionaire and Distribution
Utilities which shall become part of the rate base shall be
subject to verification by the ERC to ensure that the contracting
and procurement of the equipment, assets and services have
been subjected to transparent and accepted industry
procurement and purchasing practices to protect the public
interest; and

(vi) The interest incurred during construction may be capitalized
and included in the rate base upon commissioning of the asset.

The Retail Rates charged by Distribution Utilities for the Supply of
Electricity in their Captive Market shall be subject to regulation by the
ERC based on the principle of full recovery of prudent and reasonable
economic costs incurred, or such other principles that will promote
efficiency as may be determined by the ERC.

Every Distribution Utility or Supplier to the Contestable Market,
whichever is applicable, shall identify and segregate in its bills to End-
users the components of the Retail Rate as follows: generation,
transmission, distribution, supply and other related charges for
electric service.

In the case of isolated, remote and Unviable Areas serviced by a
qualified third party as defined in Rule 14 on Provision of Electricity
by Qualified Third Parties, the ERC shall set the rules for rates
computation and determination.

The ERC shall recognize the different cost structures in serving
isolated areas.

Section 6. Unbundled Rate Filing Requirements.

(a)

(b)

(c)

As required by the Act, NPC and Distribution Utilities shall file within
six (6) months from the effectivity of the Act for revised rates with
costs and other relevant accounts unbundled by business activity.

The ERC shall within six (6) months from the date of submission of
revised rates by the Distribution Utility, notify the Distribution Utility
of the action taken on the application.

The rate filing petition shall commence with the unbundling the cost
components of the historical test year costs, from which the new
Retail Rates and unbundled rates or charges are to be developed. The
historical test year, for this purpose, shall be the twelve (12) months
ending 31 December 2000.

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(d) Each rate filing petition for unbundled cost of service shall contain
detailed schedules, data, and other relevant information deemed
necessary by the ERC.

RULE 16. REMOVAL OF CROSS SUBSIDIES
Section 1. Guiding Principle.

Pursuant to Section 74 of the Act, cross subsidies within a Grid, between
Grids, and/or classes of customers shall be phased out in a period not
exceeding three (3) years from the establishment by the ERC of a Universal
Charge which shall be collected from all electricity End-users. Such level of
cross subsidies shall be made transparent and identified separately in the
billing statements provided to End-users by the Suppliers.

Section 2. Scope of Application.

This Rule shall apply to NPC, TRANSCO or its Buyer or Concessionaire,
Distribution Utilities and PSALM.

Section 3. Calculation of Cross Subsidies.

(a) The ERC may extend the period for the removal of cross subsidies for
a maximum period of one (1) year upon finding that cessation of such
mechanism would have a material adverse effect upon the public
interest, particularly the residential End-user; or would have an
immediate, irreparable, and adverse financial effect on Distribution
Utility.

(b) The cross subsidy between Grids in the rates of NPC shall be
calculated on a net basis for each Grid as the difference between:

(i) The total revenues that would have been collected on the Grid
under the rates in effect during a historical test year that is
adjusted for differences between actual and _ forecast
consumption and other factors as ERC may specify; and

(ii) The total unbundled true cost of service on the Grid as
submitted in accordance with Rule 15 on Unbundling of Rates
and the rate filing requirements that the ERC may issue
pursuant to Rule 15, using the same historical test year.

(c) The cross subsidy within each Grid in the rates of NPC shall be
calculated on a net basis for each customer class within the Grid as
the difference between:

(i) The total revenues that would have been collected from a
customer class under the rates in effect during a historical test
year that is adjusted for differences between actual and forecast
consumption and other factors as ERC may specify; and

(ii) | The total unbundled true cost of service for the same customer
class as submitted in accordance with Rule 15 on Unbundling

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(d)

of Rates and the rate filing requirements that ERC may issue
pursuant to Rule 15, using the same historical test year.

The cross subsidy between customer classes within each Distribution
Utility shall be calculated on a net basis for each customer class as
the difference between:

(i) The total revenues that would have been collected from a
customer class under the rates in effect during a historical test
year that is adjusted for differences between actual and forecast
consumption and other factors as ERC may specify; and

(ii) | The total unbundled true cost of service for the customer class
as submitted in accordance with Rule 15 on Unbundling of
Rates and the rate filing requirements that ERC may issue
using the same test year.

Section 4. Procedures for Handling Cross Subsidies.

(a)

(b)

Pending the complete removal of cross subsidies, each subsidy rate
level shall be shown as a separate item in customer billing
statements.

The ERC shall establish a cross subsidy charge to account for all
forms of cross subsidies that remain during the phase out period as
described in Section 5 of this Rule, to be recovered from all electricity
End-users through the Universal Charge pursuant to Rule 18 on the
Universal Charge.

Section 5. Scheme for Phasing Out Cross Subsidies.

(a)

(b)

(c)

(d)

The ERC shall issue a scheme for phasing out all cross subsidies,
including subsidies within Grids, between Grids, and between classes
of customers. The phasing out period shall not exceed three (3) years
from the establishment of the Universal Charge pursuant to Rule 18
on Universal Charge. The initial implementation of the phase out
scheme shall occur on the next billing period after issuance of ERC
approval.

The phase out scheme shall be designed to mitigate the effects of the
removal of the cross subsidies. The ERC shall determine which End-
users shall continue to receive subsidies and the level of subsidies
such End-users shall receive during the phase out period.

Together with their filings of unbundled rates reflecting the true costs
of service, pursuant to Rule 15 on Unbundling of Rates, NPC and the
Distribution Utilities shall file with ERC their proposals for the
removal of cross subsidies among the End-users they serve to be
considered by ERC in the formulation of the phase out scheme.

The ERC may extend the period for the removal of cross subsidies for
a maximum period of one (1) year upon finding that cessation of such
mechanism would have a material adverse effect upon the public
interest, particularly the residential End-user; or would have an

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immediate, irreparable, and adverse financial effect on a Distribution
Utility. Distribution Utilities shall submit to ERC such information as
ERC may specify to help it determine if the cross subsidy removal
mechanism should be extended under this provision.

(e) If ERC does not extend the period for removal of cross subsidies, the
cross subsidies between regions, within regions, and between
customer classes shall cease to exist at the end of the three (3) year
period from the establishment of the Universal Charge.

Section 6. Exemption from Cross Subsidy Removal for Distribution
Utilities.

The threshold consumption levels and the Lifeline Rates determined by the
ERC shall be exempted from the prohibition on cross subsidies between
classes of customers of a Distribution Utility for a period of ten (10) years,
unless extended by law.

RULE 17. STRANDED DEBTS AND CONTRACT COSTS RECOVERY
Section 1. Guiding Principle.

Pursuant to Sections 32 and 33 of the Act, there are three (3) types of
stranded costs recoverable through the Universal Charge:

(a) Stranded Debts;

(b) Stranded Contract Costs of NPC; and

(c) Stranded Contract Costs of Eligible Contracts of Distribution Utilities.
Section 2. Scope of the Application.

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

Section 3. Procedures and Methodology for Stranded Cost
Determination.

(a) PSALM and any Distribution Utility that has an eligible contract shall
file with ERC their respective petitions for cost recovery under the
Universal Charge and include therewith the methodology in
determining stranded costs. The ERC shall review the methodology
submitted by PSALM and such Distribution Utility to determine, fix,
and approve the level of stranded costs.

(b) At the end of the first year of the implementation of stranded cost
recovery and every year thereafter, the ERC shall conduct a review to
determine whether there is an under- or over recovery and adjust
(true-up) the level of stranded cost recovery charge accordingly. In
determining whether there is an under- or over recovery and in
determining the stranded cost recovery portion of the Universal
Charge for the subsequent period, the ERC shall base the calculation

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Section 4.

(a)

(b)

on the following information submitted by the PSALM and the
Distribution Utility which has an eligible contract:

(i)

(ii)

a report of the amounts recovered for stranded costs during the
past year; and

revised stranded cost amounts based on current market
information.

NPC Stranded Debt and Stranded Contract Cost Recovery.

Consistent with Section 32 of the Act, the National Government shall
directly assume a portion of the financial obligations of NPC
transferred to PSALM in an amount not to exceed Two Hundred
Billion Pesos (P200,000,000,000.00).

The following guidelines shall govern the recovery by the PSALM of the
Stranded Debts and Stranded Contract Costs of NPC:

(i)

(ii)

(iii)

PSALM shall calculate the amount of the Stranded Debts and
Stranded Contract Costs of NPC that shall form part of the
Universal Charge to be determined, fixed, and approved by the
ERC and reviewed by the same body annually. In determining
the amount of Stranded Contract Costs of NPC, PSALM may
include in such calculation the principal amount and interest
expenses of any such debt raised by PSALM to finance the buy-
out or buy-down of any eligible IPP contract, i.e. contracts
approved by the ERB as of 31 December 2000 as well as any
other costs and expenses incurred in connection with such buy-
out or buy-down: Provided, That the amount recoverable by
PSALM from the Universal Charge fund shall not exceed the
estimated Stranded Contract Costs of such eligible IPP
Contract, assuming that such buy-out or buy-down never
occurred: Provided, further, That PSALM demonstrates to the
ERC’s satisfaction that such buy-out or buy-down will benefit
electricity consumers by reducing that component of the
Universal Charge attributable to such IPP contract.

The ERC shall verify the reasonable amounts of claims
petitioned by PSALM and determine the manner and duration
by which full recovery of Stranded Debt and Stranded Contract
Costs of NPC is attained: Provided, That the duration for such
recovery shall not be shorter than fifteen (15) years nor longer
than twenty-five (25) years.

Any amount to be included for stranded cost recovery shall be
reflected as a separate item in the consumer billing statement.
The ERC shall monitor and ensure that there is a separate item
in the consumer billing statement for stranded cost recovery.

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Section 5. Recovery of Stranded Contract Costs of Eligible Contracts of

(a)

(b)

(c)

(d)

(e)

Distribution Utilities.

Within one (1) year from the start of Retail Competition and Open
Access, a Distribution Utility that seeks to recover stranded contract
costs arising from its eligible contracts shall file with the ERC a notice
of such intent together with an estimated amount of such obligations.
The Distribution Utility shall provide all pertinent information as may
be required by the ERC. Failure of the Distribution Utility to file
within the date specified shall mean non-eligibility for such recovery.

A Distribution Utility shall recover stranded contract costs: Provided,
however, That such costs of the IPPs of Distribution Utilities are
subject to review by ERC in order to determine fairness and
reasonableness in relation to the average price of land-based IPP
projects entered into by NPC at the time they were contracted. The
ERC shall take into consideration all factors that affect the total cost
of NPC IPP generation projects, including direct or indirect subsidies
or incentives provided by the Government.

Any Distribution Utility which seeks to recover stranded costs shall
have the duty to mitigate its potential stranded costs by exerting
reasonable best efforts to:

(i) Reduce the costs of its existing eligible contracts with IPPs to a
level not exceeding the average buying price of other land-based
electric power generators; and

(ii) Submit to an annual earnings review by the ERC and use its
earnings above its authorized rate of return to reduce the book
value of contracts until the end of the stranded cost recovery
period.

The Distribution Utility shall submit to the ERC, during its filing for
stranded contract cost recovery, its detailed plan and strategy to
mitigate stranded contract costs.

Other mitigating measures that are reasonably known and generally
accepted within the electric power industry shall be utilized. The ERC
shall not require the Distribution Utility to take a loss to reduce
stranded contract costs or divest assets, unless the divestiture is
imposed as a penalty as provided herein.

Within three (3) months from the submission of the application for
stranded cost recovery by the relevant Distribution Utilities, the ERC
shall verify the reasonable amounts and determine the manner and
duration for the full recovery of the Stranded Contract Costs of
Eligible Contracts of Distribution Utilities: Provided, That the duration
for such recovery shall not be shorter than fifteen (15) years nor
longer than twenty-five (25) years. For this purpose, “full recovery of
Stranded Contract Costs of Eligible Contracts of Distribution Utilities”
shall mean recovery of Stranded Contract Costs of Eligible Contracts
of Distribution Utilities authorized by the ERC after its pertinent

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(f)

(g)

(h)

review. Any amount to be included for the recovery of Stranded
Contract Costs of Eligible Contracts of Distribution Utilities shall be
reflected as a separate item in the consumer billing statement.

In the case of an over-recovery, the ERC shall ensure that any excess
amount shall be remitted to the Special Trust Fund (STF) created
pursuant to Section 34 of the Act. A separate account shall be
created for this purpose that shall be held in trust for any future
claims of Distribution Utilities for the recovery of their respective
Stranded Contract Costs of Eligible Contracts of Distribution Utilities.
At the end of the stranded cost recovery period, any remaining
amount or balance in this account shall be used to reduce the
electricity rates to the End-users.

A Distribution Utility, which has an eligible contract, duly authorized
by the ERC, shall submit to ERC quarterly reports showing the
amount of stranded contract costs recovered and the balance
remaining to be recovered from the Universal Charge.

Quarterly shall mean the calendar quarters of January 1 to March 31
(first quarter), April 1 to June 30 (second quarter), July 1 to
September 30 (third quarter), and October 1 to December 31 (fourth
quarter). The relevant Distribution Utility shall submit to the ERC the
quarterly reports within thirty (30) days from the end of each calendar
quarter.

Upon a finding by the ERC that a Distribution Utility which seeks to
recover stranded contract costs has failed to comply with its
mitigation obligation under Section 33 of the Act, the ERC may not
allow the recovery of stranded contract costs: Provided, That if there is
any fraud or misrepresentation by the Distribution Utility, the ERC
may impose appropriate penalties in accordance with Section 46 of
the Act.

RULE 18. THE UNIVERSAL CHARGE

Section 1. Guiding Principle.

Within one (1) year from the effectivity of the Act, there shall be a Universal
Charge to be determined, fixed and approved by the ERC that shall be
imposed on all electricity End-users, including self-generation entities.

Section 2. Scope of Application.

This Rule shall apply to the following:

(a)

Petitioners for availments from the Universal Charge.

(i) PSALM for the Stranded Debts and Stranded Contract Costs of
NPC;

(ii) Distribution Utilities with respect to their Stranded Contract
Costs of Eligible Contracts;

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(b)

(iii) | Missionary Electrification;

(iv) Qualified Generation Companies with respect to _ the
equalization of taxes and royalties between indigenous or
Renewable Energy Resources and imported fuels;

(v) NPC, with respect to the environmental charge of PRO.0025 per
kilowatt-hour sales to be used for the rehabilitation and
management of watershed areas; and

(vi) NPC/PSALM and Distribution Utilities with respect to the
mitigation of the removal of cross subsidies.

Electricity End-users such as but not limited to:

(i) All End-users of Distribution Utilities such as _ residential,
commercial, and industrial including government and/or public
buildings, irrigation systems, and special lightings;

(ii) | Directly-connected End-users of NPC such as but not limited to
government agencies and _ institutions, and _ industrial
enterprises;

(iii) Persons using Self-Generation Facilities;

(iv) Locators, developers, operators and facilities operating in EZs;
and

(v) Other entities identified by the ERC pursuant to the intent of
the Act.

Section 3. Mitigation on the Removal of Cross Subsidies.

(a)

(b)

Unbundled rates of the NPC and the Distribution Utilities as approved
by the ERC in accordance with Section 36 of the Act, shall reflect the
respective costs of providing service to End-users without any type of
cross subsidy. The removal of cross subsidies to the End-users of
Distribution Utilities will however be mitigated and done gradually in
accordance with Section 74 of the Act. ERC shall issue a phase out
scheme to gradually remove the cross subsidies. Any amount of
subsidy provided to End-users during the phase out period shall be
recovered through the Universal Charge.

With respect to SPUG, rates for Missionary Electrification shall be in
accordance with Rule 15 on Unbundling of Rates.

Section 4. Procedures for Petitions Against the Universal Charge.

(a)

For the first year after the effectivity of the Act, the following rules
shall apply:

(i) The petitioners identified in Section 2 of this Rule shall file their
availments from the Universal Charge with the ERC on or before

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(b)

(c)

(d)

15 March 2002 and submit all pertinent documents in support
of such availments made and the basis for their computation.

(ii) |The ERC shall evaluate the petitions and thereafter issue the
corresponding order no later than 26 June 2002 which shall

prescribe the following:

(1) The Universal Charge on a per kWh basis to be included
in the billing statements to the End-users;

(2) Breakdown of the applicable Universal Charge for each of
the intended purposes:

(a) Stranded Debts and Stranded Contract Costs of

NPC;
(b) Missionary Electrification;
(c) Equalization of taxes and _ royalties between

indigenous or renewable sources of energy vis-a-vis
imported energy fuels;

(d) Environmental Charge of PO.0025 per kilowatt-hour
sales for the rehabilitation and maintenance of
watershed areas; and

(e) Mitigation Fund for the removal of cross-subsidies
of NPC and Distribution Utilities.

(3) Period of disbursement by each of the beneficiaries as
well as submission of reportorial requirements prescribed
by the ERC.

Petitions for availment under the Universal Charge for the succeeding
years shall be submitted to the ERC on or before March 15 of every
year.

A Distribution Utility that seeks to recover Stranded Contract Costs of
its Eligible Contracts shall submit a petition for availment under the
Universal Charge to the ERC within one (1) year from the start of
Open Access. Within three (3) months from the submission of the
petition by such Distribution Utility, the ERC shall verify the
reasonable amounts and determine the manner and duration for the
full recovery thereof, as approved by the ERC.

With respect to the equalization of taxes and royalties applied to
indigenous or renewable sources of energy, qualified Generation
Companies shall be entitled to make claims against STF created for
this purpose. The STF shall be constituted out of the proceeds from
the Universal Charge specified under Section 34 of the Act: Provided,
That said claims shall only be to the extent of the additional cost or
reduction in the cost of generating electricity.

For this purpose, qualified Generation Companies making said claims
shall submit a detailed statement of their sales and costs of operation,
including a breakdown of how their claims are estimated and the
impact thereof on generation rates, the corresponding assumptions

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