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and justification therefor and such other information as may be
required by the PSALM.

Only those claims that meet the foregoing documentation
requirements shall be evaluated and acted upon by PSALM.

Failure by any petitioner to submit its petition within the periods
specified above shall result in a forfeiture of such petition for the
period in question.

In case of over- or wunder-recovery by beneficiaries, true-up
adjustments shall follow the rules and regulations to be prescribed by
the ERC, except as otherwise provided in these Rules.

Section 5. Collection of the Universal Charge.

(a)

(b)

The Universal Charge shall be a non-by passable charge that shall be
collected from all End-users on a monthly basis by the Distribution
Utilities or Suppliers in case of Contestable Markets. Any End-user or
self-generation entity not connected to a Distribution Utility shall
remit its corresponding Universal Charge directly to the TRANSCO.
Collections by the Distribution Utilities shall be remitted to the
PSALM on or before the fifteenth (15th) day of the succeeding month,
net of any amount due to the Distribution Utility.

Separate books of accounts shall be maintained by the Distribution
Utility and made available to the ERC for purposes of monitoring,
verifying and accounting of amounts collected from the Universal
Charge and remitted to the PSALM.

Section 6. Administration of the Universal Charge.

(a)

(b)

(c)

(d)

Pursuant to the last paragraph of Section 34 of the Act, PSALM shall
act as the administrator of the funds generated from the Universal
Charge. For this purpose, the PSALM shall create a STF to be
established in the Bureau of Treasury (BTr) or in a Government
Financing Institution (GFI) that is acceptable to the DOF. Separate
STFs shall be established for each of the intended purposes of the
Universal Charge. Funds shall be disbursed in an open and
transparent manner and shall only be used for the intended purposes
specified in Section 3 of this Rule.

All qualified availments shall be approved and certified by the ERC.
In this regard, PSALM, in consultation with the DOF, shall
promulgate, within one (1) year from the effectivity of the Act and
subject to the approval of the ERC, procedures and guidelines that
shall govern all remittances to and disbursements from the STF.

The PSALM shall transfer funds from the STF and shall distribute to
the beneficiaries on or before the twentieth (206) day of each month.

The PSALM shall submit to the DOF and ERC a report on the
remittances and disbursements against the fund on a quarterly basis.

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(e)

(f)

(g)

Separate Books of accounts shall be maintained by the PSALM for
over-recovery of the Distribution Utility stranded cost component and
made available to the ERC for purposes of monitoring and accounting
for sums collected from the Universal Charge.

In the event that the total amount collected for the Universal Charge
is greater than the actual availments against the Universal Charge,
the PSALM shall retain the balance within the STF to pay for periods
where a shortfall occurs.

In determining the amount which a Distribution Utility can net off
from its remittance of the Universal Charge to PSALM, the
Distribution Utility shall not discriminate in its own favor at the
expense of other beneficiaries in the event that actual collections differ
from expected collections based on the level of kilowatt-hour sales
used by ERC in setting the Universal Charge per kilowatt-hour (kwh).
In such cases, the Distribution Utility shall only retain its
proportionate share in the actual collection.

Section 7. Deferment.

All Self-Generation Facilities whether new, existing or under construction
shall not be covered by the imposition of Universal Charge for a period of
four (4) years from its imposition: Provided, That, such Self-Generation
Facilities shall register with the ERC and PSALM.

Section 8. Fines and Penalties.

(a)

(b)

(a)

(b)

In cases where the TRANSCO or its Buyer or Concessionaire or a
Distribution Utility collects funds earmarked for the Universal Charge

but fails to remit the same to PSALM on or before the fifteenth (15th)
day of the succeeding month, the ERC may impose the appropriate
fines and penalties prescribed in Section 46 of the Act including, but
not limited to, assessed interest charges.

In cases where a Self-Generation Facility refuses to pay the Universal
Charge, the ERC may impose the appropriate fines and penalties
prescribed in Section 46 of the Act, including but not limited to,
assessed interest charges.

RULE 19. MANDATED RESIDENTIAL REBATE
The ERC shall monitor and ensure the implementation of its
Resolution No. 2001-04 issued on 26 July 2001 and any amendments
thereto. The ERC shall impose fines and penalties on parties who fail

to comply with said Resolution.

The reduction shall be reflected as a separate item in the consumer
billing statement.

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RULE 20. LIFELINE RATE
Section 1. Guiding Principle.

Pursuant to Section 73 of the Act, a socialized pricing mechanism called a
Lifeline Rate for the Marginalized End-users shall be set by the ERC.

Section 2. Scope of Application.

The provision of Lifeline Rate shall be applied to all Marginalized End-users
of all Distribution Utilities pursuant to the Act. It is the responsibility of the
ERC to monitor compliance to specific guidelines it shall issue pursuant to
the implementation of Lifeline Rate.

Section 3. Application.

(a) The Lifeline Rate shall be exempted from the cross subsidy removal
under the Act for a period of ten (10) years, unless extended by law.

(b) Each Distribution Utility shall file a petition with the ERC
recommending the level of consumption (kWh per month) to be
qualified for the Lifeline Rate.

(c) The ERC shall determine and approve different levels of consumption
and cross-subsidy support for each Distribution Utility or
classification of Distribution Utilities.

PART IV - PRIVATIZATION OF NATIONAL POWER CORPORATION

RULE 21. POWER SECTOR ASSETS AND LIABILITIES
MANAGEMENT CORPORATION (PSALM)

Section 1. Creation of PSALM.

Pursuant to Section 49 of the Act, a government-owned and -controlled
corporation known as the “Power Sector Assets and Liabilities Management
Corporation”, hereinafter referred to as the “PSALM Corp.” or “PSALM,” was
created to take ownership of all existing NPC generation assets, liabilities,
IPP contracts, real estate and all other disposable assets. All outstanding
obligations of the NPC arising from loans, issuances of bonds, securities and
other instruments of indebtedness shall be assumed by the PSALM, within
one hundred eighty (180) days from the approval of the Act.

NPC and PSALM shall take such measures and execute such documents to
effect the transfer of the ownership and possession of all the assets, rights,
privileges, and liabilities required by the Act to be transferred by NPC to
PSALM.

Section 2. Purpose and Objective.

The principal purpose of the PSALM is to manage the orderly sale,
disposition, and Privatization of NPC generation assets, real estate and other

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disposable assets, and IPP contracts with the objective of managing and
liquidating all NPC financial obligations and stranded contract costs in an
optimal manner.

Section 3. Domicile.

The PSALM shall have its principal office and place of business within Metro
Manila.

Section 4. Term of Existence.

Unless otherwise provided by law, PSALM shall exist for a period of twenty-
five (25) years from the effectivity of the Act, and all assets held by it, all
moneys and properties belonging to it, and all its liabilities outstanding
upon the expiration of its term of existence shall revert to and be assumed
by the National Government. Upon expiration of the term of PSALM, the
administration of the STF shall be transferred to the DOF or any of the DOF
attached agencies as designated by the DOF Secretary.

Section 5. Powers.

PSALM shall, in the performance of its functions and for the attainment of
its objectives, have the following powers:

(a) To formulate and implement a program for the sale and Privatization
of the NPC assets and IPP contracts and the management and
liquidation of Stranded Debts and Stranded Contract Costs of NPC,
such liquidation to be completed within the term of existence of the
PSALM;

(b) To take title to and possession of, administer and conserve the assets
transferred to it, including the execution of bilateral contracts to sell
power from undisposed assets and contracts transferred by NPC;

(c) To sell or dispose the transferred assets at such price and under such
terms and conditions as it may deem necessary or proper, subject to
applicable laws, rules and regulations;

(d) To take title to and possession of, and assume all rights and
obligations of NPC under IPP contracts, and to appoint, after public
bidding in a transparent and open manner, qualified independent
entities who shall act as IPP Administrators in accordance with the
Act;

(e) To calculate the amount of the Stranded Debts and Stranded Contract
Costs of NPC which shall form part of the basis of the ERC in the
determination of the Universal Charge;

(f) To liquidate Stranded Contract Costs of NPC utilizing proceeds from
appropriations, sales and other property contributed to it, including

the proceeds from the Universal Charge;

(g) To adopt rules and regulations as may be necessary or proper for the
orderly conduct of its business or operations;

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(h)

(i)

()

(k)

(1)

(m)

(n)

(0)

(p)

(q)

(r)

(s)

(t)

To sue and be sued in its name;

To appoint or hire, transfer, remove and fix the compensation of its
personnel and such advisors or other Persons as may be necessary in
the sale, Privatization and disposition of NPC assets and IPP
contracts: Provided, however, That PSALM shall hire its own
personnel only if absolutely necessary, and as far as practicable, shall
avail itself of the services of personnel detailed from other government
agencies;

To own, hold, acquire, or lease real and personal properties as may be
necessary or required in the discharge of its functions;

To borrow money and incur such liabilities, as may be required to
service all obligations transferred from NPC and loans from ECs
assumed from NEA in accordance with the relevant sections of these
Rules, including the issuance of bonds, securities or other evidence of
indebtedness utilizing its assets as collateral and/or through the
guarantees of the National Government: Provided, That all such debts
or borrowings shall have been paid off or settled before the end of its
corporate life;

To restructure existing loans of the NPC;

To collect, administer, and apply NPC’s portion of the Universal
Charge;

To issue other forms of financial instruments such as warrants,
options, convertibles and to create Special Purpose Vehicles (SPVs) to
maximize proceeds and value, as well as efficiently manage its
liabilities;

To structure the sale, Privatization or disposition of NPC assets and
IPP Contracts and/or their energy output based on terms and
conditions which shall optimize the value and sale prices of said
assets;

To create and administer STFs under Section 34 of the Act and these
Rules;

To operate the generation assets, directly or through NPC, prior to
Privatization of such assets. Towards this end, while PSALM operates
the generation assets, it shall be considered a Generation Company;

To mitigate its potential stranded costs by making reasonable best
efforts to reduce the cost of existing contracts with IPPs;

To ensure that SPUG conduct proper monitoring, accounting and
control of expenditures, and efficient utilization of the missionary

electrification funds from the Universal Charge; and

To do any act necessary or proper to carry out the purpose for which
it was created, including the formation of one or more subsidiaries to

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maximize Privatization proceeds, enter into compromise agreements,
or take such other acts as may be determined by the PSALM Board to
be necessary, useful, incidental or auxiliary to accomplish its
purposes and objectives as specified in the Act.

Section 6. PSALM Board of Directors.

PSALM shall be administered, and its powers and functions exercised, by a
Board of Directors which shall be composed of the Secretary of the DOF as
the Chairman, and the Secretary of the DOE, the Secretary of the DBM, the
Director-General of the NEDA, the Secretary of the DOJ, the Secretary of the
DTI and the President of the PSALM as ex-officio members thereof.

Section '7. Powers of PSALM Board.

All the powers and functions of PSALM shall be vested in and exercised by
its Board of Directors.

Section 8. PSALM Board Meetings and Quorum.

The Board of Directors shall meet regularly and as frequently as may be
necessary to enable it to discharge its functions and responsibilities. The
presence at a meeting of four (4) members shall constitute a quorum, and
the decision of the majority of three (3) members present at a meeting where
there is quorum shall be the decision of the Board of Directors.

Section 9. Powers of the PSALM President.

(a) The President of PSALM shall be appointed by the President of the
Philippines. In the absence of the Chairman and the Vice-Chairman,
the PSALM President shall preside over Board meetings.

(b) The PSALM President shall be the Chief Executive Officer of PSALM
and shall have the following powers and duties:

(i) To execute and administer the policies and measures approved
by the Board, and take responsibility for the efficient discharge
of management functions;

(ii) | To oversee the preparation of the budget of PSALM;

(iii) To direct and supervise the operation and_ internal
administration of PSALM and, for this purpose, may delegate
some or any of his administrative responsibilities and duties to
other officers of the PSALM;

(iv) Subject to the guidelines and policies set up by the Board, to
appoint and fix the number and compensation of subordinate
officials and employees of the PSALM; and for cause, to remove,
suspend, or otherwise discipline any subordinate employee of
PSALM;

(v) To submit an annual report to the Board on the activities and
achievements of PSALM at the close of each fiscal year and

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upon approval thereof, submit a copy to the President of the
Philippines and to such other agencies as may be required by
law and under these Rules;

(vi) To represent PSALM in all dealings and transactions with other
offices, agencies and instrumentalities of the National
Government and with all Persons and other entities, private or
public, domestic or foreign; and

(vii) To exercise such other powers and duties as may be vested in
him by the Board from time to time.

Section 10. Exemption from the Salary Standardization Law.

The salaries and benefits of employees in the PSALM shall be exempt from
Republic Act No. 6758 and shall be fixed by the PSALM Board.

Section 11. Property of PSALM.

The following funds, assets, contributions and other properties shall
constitute the property of the PSALM:

(a)

(b)

(c)

(d)

(e)

The generation assets, real estate, IPP Contracts, other disposable
assets of NPC, proceeds from the operation or disposition of such
assets and the residual assets from BOT, ROT, and other variations
thereof. The proceeds from the operation and disposition of NPC
assets shall include:

(i) Net profit of NPC;

(ii) Earning before interest, taxes, depreciation and amortization of
the Pulangui and Agus Complexes;

(iii) Net profit of TRANSCO;

(iv) Proceeds from the disposition and Privatization of PSALM’s
generation, other disposable assets, and TRANSCO, net of all
transaction costs and fees associated with such disposition and
Privatization; and

(v) Net profit arising from the administration of IPPs.

Transfers from the National Government;

Proceeds from loans incurred to restructure or refinance NPC’s

transferred liabilities: Provided, That all borrowings shall be fully paid

for or settled by the end of the life of the PSALM;

Proceeds from the Universal Charge allocated for Stranded Debts and
Stranded Contract Costs of NPC;

Official assistance, grants and donations from external sources;

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(f) Repayment by ECs of such ECs loans assumed by PSALM. Such
repayments must be made within five (5) years from such assumption
of loans by PSALM by ECs who have transferred ownership or Control
of its assets, franchise or operations pursuant to Section 60 of the
Act;

(g) Proceeds from insurance claims corresponding to assets transferred to
PSALM by NPC; and

(h) Other sources of funds as may be determined by PSALM necessary for
the above-mentioned purposes.

Section 12. Claims Against PSALM.
The following shall constitute the claims against PSALM:

(a) NPC liabilities transferred to PSALM;

(b) Transfers from the National Government;

(c) New loans, such as, but not limited to those in the form of bonds,
convertible instruments, warrants, leases and similar structures;

(d) Obligations under IPP contracts transferred by NPC to PSALM;

(e) Loans of ECs that are to be assumed by PSALM under Section 60 of
the Act; and

(f) Expenses for rehabilitation and maintenance of Agus and Pulangi
Complexes.

RULE 22. NATIONAL TRANSMISSION CORPORATION (TRANSCO)
Section 1. Creation of TRANSCO.

Pursuant to Section 8 of the Act, TRANSCO, which shall be wholly owned by
PSALM, has been created to assume the transmission facilities of NPC, all
other assets related to transmission operations, including nationwide
franchise of NPC for the operation of the transmission system and the Grid,
and to assume the electrical transmission functions of the NPC, including
among others, the planning, construction and centralized Grid operation
and maintenance of high voltage transmission facilities, Grid
interconnections, ancillary and other allied facilities.

Pursuant to and in accordance with the requirements of the Act, NPC,
PSALM and TRANSCO shall take such measures and execute such
documents to effect the transfer of the ownership and possession of the
transmission and subtransmission facilities of NPC and all other assets
related to transmission operations. Upon such transfer, the nationwide
franchise of NPC for the operation of the transmission system and the Grid
shall transfer from NPC to TRANSCO.

Section 2. Transmission Ownership and Management.
(a) For the purpose of Section 1 of this Rule, “all other assets” related to

transmission and subtransmission facilities shall include, but not be
limited, to the following:

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(b)

(c)

(i) System operations facilities such as telecommunications and
Supervisory Control and Data Acquisition (SCADA) systems
including offices and laboratory buildings housing these
equipment; and

(ii) | TRANSCO offices and real estate properties, vehicles, laboratory
and test equipment, spare parts and other physical structures.

The assets of NPC related to the transmission/subtransmission
function shall be transferred by NPC directly to TRANSCO on or
before 26 December 2001.

Subtransmission Assets transferred to TRANSCO shall be operated
and maintained by TRANSCO or its Buyer or Concessionaire, until
their disposal to Qualified Distribution Utilities.

Section 3. Corporate Powers of the TRANSCO.

As a corporate entity, TRANSCO shall have the following corporate powers:

(a)

(b)

(c)
(d)

(e)

(f)

(g)

(h)

(i)

To have continuous succession under its corporate name until
otherwise provided by law;

To adopt and use a corporate seal and to change, alter or modify the
same, if necessary;

To sue and be sued;

To enter into contracts, leases and execute any instrument necessary
or convenient for the purpose for which it is created;

To borrow funds from any source, whether private or public, foreign
or domestic, and issue bonds and other evidence of indebtedness:
Provided, That in the case of the bond issues, it shall be subject to the
approval of the President of the Philippines upon recommendation of
the Secretary of Finance: Provided, further, That foreign loans shall be
obtained in accordance with existing laws, rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);

To pledge, grant a security interest in or otherwise encumber its
assets;

To maintain a provident fund which consists of contributions made by
both the TRANSCO and its officials and employees and their earnings
for the payment of benefits to such officials and employees or their
heirs under such terms and conditions as it may prescribe;

To create subsidiaries for purposes such as the disposition of
Subtransmission Assets to Qualified Distribution Utilities and the

operation thereof prior to disposal;

To do any act necessary or proper to carry out the purpose for which
it is created, or any act which, from time to time, may be declared by

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the TRANSCO Board as necessary, useful, incidental or auxiliary to
accomplish its purposes and objectives;

(j) Generally, to exercise all the powers of a corporation under the
Corporation Code insofar as they are not inconsistent with the Act;
and

(k) The TRANSCO may exercise the power of eminent domain on behalf of
itself, the Buyer or Concessionaire or any successor-in-interest
thereto, subject to the requirements of the Constitution and other
laws. Except as provided in the Act, no Person, company or entity
other than TRANSCO shall own any transmission facilities.

Section 4. TRANSCO Board of Directors.

All the powers of the TRANSCO shall be vested in and exercised by a Board
of Directors. The Board shall be composed of a Chairman and six (6)
members. The Secretary of the DOF shall be the ex-officio Chairman of the
Board. The other members of the TRANSCO Board shall include the
Secretary of the DOE, the Secretary of the DENR, the President of
TRANSCO, and three (3) members to be appointed by the President of the
Philippines, each representing Luzon, Visayas and Mindanao, one of whom
shall be the President of PSALM.

The members of the Board so appointed by the President of the Philippines
shall serve for a term of six (6) years, except that any Person appointed to
fill-in a vacancy shall serve only the unexpired term of his/her predecessor
in office. All members of the Board shall be professionals of recognized
competence and expertise in the fields of engineering, finance, economics,
law or business management. No member of the Board or any of his
relatives within the fourth civil degree of consanguinity or affinity, legitimate
or common law, shall have any interest, either as investor, officer or
director, in any Generation Company or Distribution Utility or other entity
engaged in transmitting, generating and supplying electricity specified by
ERC.

Section 5. Powers and Duties of the Board.
The following are the powers of the Board:

(a) To provide strategic direction for TRANSCO, and formulate medium
and long-term strategies pursuant to the vision, mission and
objectives of TRANSCO;

(b) To develop and adopt policies and measures for the efficient and
effective management and operation of TRANSCO, including the
formation of one or more subsidiaries;

(c) To organize, re-organize, and determine the organizational structure
and staffing pattern of TRANSCO; abolish and create offices and
positions; fix the number of its officers and employees; transfer and
re-align such officers and personnel; and fix their compensation,
allowance, and benefits;

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(d) To fix the compensation of the President of TRANSCO and to appoint
and fix the compensation of other corporate officers;

(e) For cause, to suspend or remove any corporate officer appointed by
the Board;
(f) To adopt and set guidelines for the employment of personnel on the

basis of merit, technical competence and moral character;

(g) Any provision of the law to the contrary notwithstanding, to write-off
bad debts; and

(h) Other powers not inconsistent with the Act.
Section 6. Board Meetings.

The Board shall meet as often as may be necessary upon the call of the
Chairman of the Board, or in his absence, the Vice-Chairman, or in the
latter’s absence, by a majority of the Board members.

Section 7. Board Per Diems and Allowances.

The members of the Board shall receive a per diem for each regular or
special meeting of the Board actually attended by them and, upon approval
of the Secretary of the DOF, such other allowances as the Board may
prescribe.

Section 8. Quorum.

The presence of at least four (4) members of the Board shall constitute a
quorum, which shall be necessary for the transaction of any business. The
affirmative vote of a majority of the members present in a quorum shall be
adequate for the approval of any resolution, decision or order, except when
the Board shall otherwise agree that a greater vote is required.

Section 9. Powers of the President of TRANSCO.

(a) So long as TRANSCO remains wholly owned by PSALM, the President
of TRANSCO shall be appointed by the President of the Philippines.
In the absence of the Chairman and Vice-Chairman, the President of
TRANSCO shall preside over Board meetings.

(b) The President of TRANSCO shall be the Chief Executive Officer of
TRANSCO and shall have the following powers and duties:

(i) To execute and administer the policies and measures approved
by the Board, and take responsibility for the efficient discharge
of management functions;

(ii) | To oversee the preparation of the budget of TRANSCO;

(iii) To direct and supervise the operation and _ internal
administration of TRANSCO and, for this purpose, may delegate
some or any of his administrative responsibilities and duties to
other officers of TRANSCO;

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(iv) Subject to the guidelines and policies set up by the Board, to
appoint and fix the number and compensation of subordinate
officials and employees of TRANSCO; and for cause, to remove,
suspend or otherwise discipline any subordinate employee of
TRANSCO;

(v) To submit an annual report to the Board on the activities and
achievements of TRANSCO at the close of each fiscal year and
upon approval thereof, submit a copy to the President of the
Philippines and to such other agencies as may be required by
law;

(vi) To represent TRANSCO in all dealings and transactions with
other offices, agencies, and instrumentalities of the National
Government and with all Persons and other entities, private or
public, domestic or foreign; and

(vii) To exercise such other powers and duties as may be vested in
him by the Board from time to time.

Section 10. Exemption from the Salary Standardization Law.

The salaries and benefits of employees in the TRANSCO shall be exempt
from Republic Act No. 6758 and shall be fixed by the TRANSCO Board.

Section 11. TRANSCO Privatization.

(a)

(b)

Within six (6) months from the effectivity of the Act, the PSALM shall
submit a Privatization plan for endorsement by the Power Commission
and the approval of the President of the Philippines. The President of
the Philippines thereafter shall direct PSALM to award, in open
competitive bidding, the transmission facilities, including grid
interconnections and Ancillary Services to a qualified party either
through an outright sale, a Concession Contract or any other means
not inconsistent with the objectives of the Act. The Buyer or
Concessionaire or any other successor-in-interest to TRANSCO shall
be responsible for the improvement, expansion, operation or
maintenance of the transmission assets and the operation of any
related businesses. PSALM and TRANSCO shall secure a nationwide
franchise for and in behalf of the Buyer or Concessionaire. The award
shall result in maximum present value of proceeds to the National
Government. In case a Concession Contract is awarded, the
Concessionaire shall have a contract period of twenty-five (25) years,
subject to review and renewal for a maximum period of another
twenty-five (25) years. Upon the expiration or termination of the
Concession Contract, the transmission facilities and assets, including
the nationwide franchise for the operation of the transmission system
and Grid shall revert to TRANSCO.

In any case, the Buyer or Concessionaire or any other successor-in-
interest to TRANSCO shall comply with the Grid Code and the TDP as
approved. The sale agreement/Concession Contract shall include,
but not be limited to, the provision for performance and financial

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(c)

guarantees or any other covenants that the National Government may
require. Failure to comply with such obligations shall result in the
imposition of appropriate sanctions or penalties by the ERC.

In case of joint venture/consortium with foreign
members/participants of the Buyer or Concessionaire or any other
successor-in-interest to TRANSCO, a foreign participant shall be
financially and technically capable, with proven domestic and/or
international experience and expertise as a leading transmission
system operator. Such experience must be in a transmission system
of comparable capacity and coverage as the Philippines.

Section 12. Responsibilities of Buyer or Concessionaire.

(a)

(b)

(c)

This Rule shall apply to TRANSCO or its Buyer or Concessionaire or
any successor-in-interest thereto.

The Buyer or Concessionaire or any successor-in-interest thereto,
shall:

(i) Be responsible for the improvement, expansion, operation
and/or maintenance of the Grid;

(ii) Comply with the Grid Code and the TDP as approved; and

(iii) _ Comply with the key performance targets and standards set by
ERC, in terms of physical transmission system and _ the
management of the transmission activity.

The performance indicators for reliability, security, adequacy, integrity
and stability shall include, but 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 ckt-km;

(vii) Average Forced Outage Duration;

(viii) Accumulated Time Error;

(ix) Frequency Limit Violation; and

(x) Voltage Limit Violations.

Section 13. Privatization of Subtransmission.

(a)

The subtransmission functions and assets of TRANSCO shall be
segregated from the transmission functions, assets and liabilities for
transparency and disposal: Provided, That the Subtransmission
Assets shall be operated and maintained by TRANSCO or its Buyer or
Concessionaire until their disposal to Qualified Distribution Utilities
which are in a position to take over the responsibility for operating,
maintaining, upgrading, and expanding said assets. All transmission
and subtransmission related liabilities of NPC shall be transferred to
and assumed by the PSALM.

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(b) |©TRANSCO shall negotiate with and thereafter transfer such functions,
assets, and associated liabilities to the Qualified Distribution Utility or
utilities connected to such subtransmission facilities not later than
two (2) years from the effectivity of the Act or the start of Open Access,
whichever comes earlier: Provided, That in the case of ECs, the
TRANSCO shall grant concessional financing over a period of twenty
(20) years: Provided, however, That the installment payments to
TRANSCO for the acquisition of subtransmission facilities shall be
given first priority by the ECs out of the net income derived from such
facilities. The TRANSCO shall determine the disposal value of the
Subtransmission Assets based on the revenue potential of such
assets. In case of disagreement in valuation, procedures, ownership
participation and other issues, the ERC shall resolve such issues.

(c) The take over by a Distribution Utility of any Subtransmission Asset
shall not cause a diminution of service and quality to the End-users.
Where there are two (2) or more connected Distribution Utilities, the
consortium or juridical entity shall be formed by and composed of all
of them and thereafter shall be granted a franchise to operate the
Subtransmission Assets by the ERC.

The subscription rights of each Distribution Utility involved shall be
proportionate to its load requirements unless otherwise agreed by
such Distribution Utilities.

Aside from the PSALM, TRANSCO and connected Distribution
Utilities, no third party shall be allowed ownership or management
participation, in whole or in part, in such subtransmission entity.

RULE 23. PRIVATIZATION OF THE ASSETS OF NPC
Section 1. Guiding Principle.

Consistent with Section 47 of the Act, the PSALM shall privatize the assets
transferred to it from NPC in accordance with these Rules. Within one
hundred eighty (180) days from the effectivity of the Act, PSALM shall
submit a Privatization plan for the endorsement by the Power Commission
and the approval of the President of the Philippines. This plan shall cover
the total Privatization of the transmission and generation assets, real estate,
and other disposable assets as well as the existing IPP contracts of NPC,
except for assets of SPUG. Upon approval of the Privatization plan, PSALM
shall implement the same.

The participation by Filipino citizens and corporations in the purchase of
NPC assets shall be encouraged.

Section 2. Scope of Privatization.

(a) NPC Generation, Generation-Related, and Other Assets.

Except for the assets of SPUG, NPC assets to be privatized shall
include:

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(b)

(c)

(i) all generation assets and all generation-related machineries and
equipment;

(ii) all real estate and the improvements made thereto; and

(iii) disposable assets such as facilities, properties, equipment and
other assets not essential to the operation of NPC.

To provide for an orderly disposition of these assets, NPC shall provide
PSALM an inventory of all these assets within one hundred and twenty
(120) days from the effectivity of the Act.

NPC Transmission, Subtransmission, Interconnection and Ancillary
Assets.

The transmission, subtransmission, interconnection and ancillary
assets of NPC, as defined in Section 8 of the Act and further detailed
in Rule 6 on Transmission Sector and Rule 22 on TRANSCO, shall be
transferred by NPC directly to TRANSCO. For this purpose, NPC shall
submit a list of these assets to PSALM and TRANSCO within one
hundred and twenty (120) days from the effectivity of the Act.

IPP Contracts of NPC.

Consistent with Section 8 of this Rule, IPP Contracts of NPC shall
refer to generation capacities developed pursuant to Republic Act No.
6957 (BOT Law), as amended by Republic Act No. 7718, and any such
generation asset whose construction was not financed by NPC but
whose output is bought by NPC under Purchase Power Agreements
(PPAs), Energy Conversion Agreements (ECAs) or any other similar
contractual relationship.

Section 3. Privatization Objectives.

The Privatization of the NPC assets intends to achieve the following
objectives:

(a)
(b)

(c)

(e)

(f)

To ensure and accelerate the total electrification of the country;

To ensure the quality, reliability, security and affordability of the
supply of electric power;

To ensure transparent and reasonable prices of electricity in a regime
of free and fair competition and full public accountability to achieve
greater operational and economic efficiency and enhance the
competitiveness of Philippine products in the global market;

To enhance the inflow of private capital and broaden the ownership
base of the power generation, transmission and distribution sectors;

To ensure fair and non-discriminatory treatment of public and private
sector entities in the process of Restructuring the electric power

industry;

To protect the public interest as it is affected by the rates and services
of electric utilities and other providers of electric power;

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(i)

To assure socially and environmentally compatible energy sources
and infrastructure;

To promote the utilization of indigenous and new and Renewable
Energy Resources in power generation in order to reduce dependence
on imported energy; and

To ensure consumer protection and enhance the competitive
operation of the electricity market.

Section 4. Privatization Guidelines.

(a)

(b)

(c)

(d)

The Privatization value to the National Government of the NPC
generation assets, real estate, other disposable assets as well as IPP
contracts shall be optimized.

The participation by Filipino citizens and corporations in the purchase
of NPC assets shall be encouraged. Equity or similar instruments of
participation by End-users or consumers must be explored
exhaustively.

In the case of foreign investors, at least seventy-five percent (75%) of
the funds used to acquire NPC-generation assets and IPP contracts
shall be inwardly remitted and registered with the (BSP).

The NPC plants and/or its IPP contracts assigned to IPP
Administrators, its related assets and assigned liabilities, if any, shall
be grouped in a manner which shall promote the viability of the
resulting Generation Companies, ensure economic. efficiency,
encourage competition, foster reasonable electricity rates and create
market appeal to optimize returns to the government from the sale
and disposition of such assets in a manner consistent with the
objectives of the Act. In the grouping of the generation assets and IPP
contracts of NPC, the following criteria shall be considered:

(i) A sufficient scale of operation and balance sheet strength to
promote the financial viability of the restructured units;

(ii) | Broad geographical groupings to ensure efficiency of operations
but without the formation of regional companies’ or
consolidation of market power;

(iii) | Portfolio of plants and IPP contracts to achieve management
and operational synergy without dominating any part of the
market or of the load curve; and

(iv) Such other factors as may be deemed beneficial to the best
interest of the National Government while ensuring
attractiveness to potential investors.

All assets of NPC shall be sold in an open and transparent manner

through public bidding, and the same shall apply to the disposition of
IPP contracts;

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(e)

(f)

(g)

(h)

(i)

()

(k)

(1)

In cases of transfer of possession, Control, operation or Privatization
of multi-purpose hydro facilities, safeguards shall be prescribed to
ensure that the National Government may direct water usage in cases
of shortage to protect potable water, irrigation, and all other
requirements imbued with public interest. The rights of NPC over
such multi-purpose hydro facilities shall be transferred to PSALM;

The Agus and the Pulangui complexes in Mindanao shall be excluded
from among the Generation Companies that will be initially privatized.
Their ownership shall be transferred to the PSALM and both shall
continue to be operated by the NPC. Said complexes may be
privatized not earlier than ten (10) years from the effectivity of the Act,
and, except for Agus UI, shall not be subject to BOT, Build-
Rehabilitate-Operate-Transfer (BROT) and other variations thereof
pursuant to Republic Act. No. 6957 (BOT Law), as amended by
Republic Act No. 7718. The Privatization of Agus and Pulangui
complexes shall be left to the discretion of PSALM in consultation with
Congress. PSALM, out of the earnings in the operation of Agus and
Pulangui complexes, shall ensure the availability of adequate funds
intended for the upkeep of facilities to include funds for repairs,
maintenance and expansion of existing facilities;

The steamfield assets and generation plants of each geothermal
complex shall not be sold separately. They shall be combined and
each geothermal complex shall be sold as one package through public
bidding. The geothermal complexes covered by this requirement
include, but not limited to, Tiwi-Makban, Leyte A and B, Tongonan,
Palinpinon, and Mt. Apo.

The ownership of the Caliraya-Botokan-Kalayaan (CBK) pump storage
complex shall be transferred to PSALM and operated by NPC on behalf
of PSALM for a period of ten (10) years.

Not later than three (3) years from the effectivity of the Act, and in no
case later than the initial implementation of Open Access, at least
seventy percent (70%) of the total capacity of generation assets of NPC
and of the total capacity of the power plants under contract with NPC
located in Luzon and Visayas shall have been privatized: Provided,
That any unsold capacity shall be privatized not later than eight (8)
years from the effectivity of the Act;

Except as otherwise provided in these Rules, all appropriate existing
authorizations, licenses and permits issued by the National
Government, including its departments, bureaus and agencies, and
LGUs to NPC shall automatically transfer to PSALM;

NPC may generate and sell electricity only from the undisposed
generation assets and IPP contracts of PSALM and shall not incur any
new obligations to purchase power through bilateral contracts with
Generation Companies or other Suppliers; and

The sale, transfer or disposition of NPC assets shall not affect existing
NPC contractual obligations.

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Section 5. Elements of the Privatization Plan.

The Privatization plan for NPC assets shall contain, among others, the
following principal elements:

(a)
(b)
(c)
(d)

(e)
(f)

Structure, sequence, timing and terms of asset disposition;

Employee issues;

Management of debt obligations;

Management of IPP obligations, including appointment of IPP
Administrators in accordance with Section 51(c) of the Act;

Options for the sale of other assets; and

Overall timetable and progress milestones.

Section 6. Privatization of Hydroelectric Generation Plants.

(a)

(b)

(c)

(d)

Consistent with Section 47(e) of the Act and Section 4(f) of this Rule,
the Privatization of hydro facilities of NPC shall cover the power
component including assignable long-term water rights agreements
for the use of water, which shall be passed onto and respected by the
buyers of the hydroelectric power plants.

The National Water Resources Board (NWRB) shall ensure that the
allocation for irrigation, as indicated by the NIA and requirements for
domestic water supply as provided for by the appropriate Local Water
District(s) are recognized and provided for in the water rights
agreements. NPC or PSALM may also impose additional conditions in
the shareholding agreement with the winning bidders to ensure
national security, including, but not limited to, the use of water
during drought or calamity.

Consistent with Section 34(d) of the Act, the NPC shall continue to be
responsible for watershed rehabilitation and management and shall
be entitled to the environmental charge equivalent to one-fourth of
one centavo per kilowatt-hour sales (PO.0025/kWh), which shall form
part of the Universal Charge. This environmental fund shall be used
solely for watershed rehabilitation and management and shall be
managed by NPC under existing arrangements. NPC shall submit an
annual report to the DOE detailing the progress of the watershed
rehabilitation program.

The NPC and PSALM or NIA, as the case may be, shall continue to be
responsible for the dam _ structure and all other appurtenant
structures necessary for the safe and reliable operation of the
hydropower plants. The NPC and PSALM or NIA, as the case may be,
shall enter into an operations and maintenance agreement with the
private operator of the power plant to cover the dam structure and all
other appurtenant facilities.

Section 7. Undisposed Generation Assets and IPP Contracts of NPC.

(a)

NPC may generate and sell electricity only from the undisposed
generation assets and IPP contracts of PSALM; and

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(b) NPC shall not incur any new obligations to purchase power through
bilateral contracts with Generation Companies or other Suppliers.

Section 8. Privatization of IPP Contracts Assumed by PSALM.

(a) The IPP contracts assumed by PSALM shall be privatized taking into
consideration buy out provisions, Government performance
undertakings and possible bilateral renegotiations to minimize the
liabilities of NPC and the National Government.

(b) Consistent with Section 75 of the Act, with respect to IPP-related
contracts, nothing in these Rules shall be construed as:

(i) an implied waiver of any right, action or claim, against any
Person or entity, of NPC or the National Government arising
from or relating to any such contracts; or

(ii) a conferment of new or better rights to creditors and IPP
contractors in addition to subsisting rights granted by the NPC
or the National Government under existing contracts.

(c) PSALM shall ensure that the Privatization of IPP contracts assumed
by it shall not cause an increase in the stranded costs to be absorbed
by the National Government and End-users.

Section 9. Management and Operation of Agus and Pulangui
Complexes.

The Agus and Pulangui complexes shall be managed and operated by NPC
for PSALM as a separate business unit, and shall have its own organization
and book of accounts.

PART V - OTHER PROVISIONS
RULE 24. ELECTRIC POWER CRISIS PROVISION

Upon the determination by the President of the Philippines of an imminent
shortage of the Supply of Electricity, Congress may authorize, through a
joint resolution, the establishment of additional generation capacity under
such terms and conditions as it may approve.

RULE 25. REVIEW OF IPP CONTRACTS

An inter-agency committee chaired by the Secretary of DOF, with the
Secretary of the DOJ and the Director General of the NEDA as members
thereof is hereby created upon the effectivity of the Act. The Committee
shall immediately undertake a thorough review of all IPP Contracts. In
cases where such contracts are found to have provisions which are grossly
disadvantageous, or onerous to the Government, the Committee shall, cause
the appropriate government agency to file an action under the arbitration
clauses provided in said contracts or initiate any appropriate action under
Philippine laws. The PSALM shall diligently seek to reduce stranded costs,
if any.

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RULE 26. RENEGOTIATION OF POWER PURCHASE AND ENERGY
CONVERSION AGREEMENTS BETWEEN NPC AND PNOC-EDC

(a) Pursuant to Section 69 of the Act, all power purchase and energy
conversion agreements between the PNOC-EDC and NPC, including,
but not limited to, the Palinpinon, Tongonan and Mt. Apo Geothermal
complexes, shall be reviewed by the ERC within three (3) months from
the effectivity of the Act.

(b) The ERC shall amend the terms of the agreements to remove any
hidden costs or extraordinary mark-ups in the cost of power or steam
above their true costs.

(c) The ERC shall ensure that all savings realized from the reduction of
said mark-ups shall be passed on to all End-users.

(d) All amended contracts shall be submitted to the Power Commission
for approval.

RULE 27. ROYALTIES, RETURNS [RENTALS] AND TAX RATES FOR
INDIGENOUS ENERGY RESOURCES

The provisions of Section 79 of Commonwealth Act No. 137 (C.A. No. 137)
and any law to the contrary notwithstanding, the President of the
Philippines shall reduce the royalties, returns [rentals] and taxes collected
for the exploitation of all indigenous sources of energy, including but not
limited to, natural gas and geothermal steam, so as to effect parity of tax
treatment with the existing rates for imported coal, crude oil, bunker fuel
and other imported fuels.

To this end, the DOF shall recommend to the President of the Philippines
the issuance of an Executive Order within thirty (30) calendar days from the
effectivity of these Rules.

To ensure lower rates for End-users, the ERC shall forthwith reduce the
rates of power from all indigenous sources of energy.
RULE 28. ENVIRONMENTAL PROTECTION

Pursuant to Section 65 of the Act, Electric Power Industry Participants in
the generation, distribution and transmission sub-sectors of the industry
shall comply with all environmental laws, rules, regulations and standards
promulgated by the DENR including, in appropriate cases, the
establishment of an environmental guarantee fund.

RULE 29. BENEFITS TO HOST COMMUNITIES

Pursuant to Section 66 of the Act, the obligations of Generation Companies
and energy resource developers to communities hosting the Generation

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