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4 m™ Republic of the Philippines
ed DEPARTMENT OF ENERGY

DEPARTMENT CIRCULAR NO. 2006-06-0009

DESIGNATING THE NATIONAL POWER CORPORATION
AND THE POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION
AS THE DEFAULT WHOLESALE SUPPLIERS
FOR THE PHILIPPINE WHOLESALE ELECTRICITY SPOT MARKET (WESM) ~

WHEREAS, the Department of Energy (the “DOE”) is mandated under Section 30 of
Republic Act No. 9136, otherwise known as the “Electric Power Industry Reform Act of 2001”
or “EPIRA”, to establish the Wholesale Electricity Spot Market (the “WESM’) that would
facilitate a transparent, competitive and reliable market for electricity;

WHEREAS, pursuant to its mandate, the DOE, jointly with the electric power industry
participants, is tasked to formulate the detailed rules for the WESM, and to organize the
autonomous market group operator (the “AGMOQ’);

WHEREAS, on 28 June 2002, the DOE, upon the joint endorsement of the electric
industry participants, promulgated the Wholesale Electricity Spot Market Rules (the "WESM
Rules” through Department Circular No. 2002- 06-003;

WHEREAS, on 18 November 2003, on the initiative of the DOE, the Philippine
Electricity Market Corporation (the “PEMC”), was incorporated as a non-profit, non-stock
corporation with membership comprising of an equitable representation of electricity industry
participants and chaired by the DOE, to be the AGMO as well as governing arm of the
WESM;

WHEREAS, the PEMC, as the AGMO, has been tasked to undertake the preparatory
work for the establishment of the WESM as well as the initial operations of the WESM;

WHEREAS, the EPIRA envisions that there shail be central dispatch of ail generation
facilities connected, directly or indirectly, to the transmission system, and such central
dispatch is to be implemented by the National Transmission Corporation in accordance.with
the dispatch schedule submitted by the Market Operator of the WESM, as provided for in
Section 9 in relation to Section 30 of the EPIRA;

_ WHEREAS, Section 30 of the EPIRA mandates the DOE, jointly with the industry
_Participants,.to formulate the detailed rules of the WESM, which shall include, among other
matters, the procedures for establishing the merit order dispatch instructions for each time

period;

WHEREAS, consistent with the legal mandate to implement central dispatch, the
WESM Rules implement a gross pool market whereby alt energy transactions are scheduled .
through the market by the Market Operator and, for this purpose, all persons or entities that
inject or withdraw electricity into the national grid must become members of the WESM;

WHEREAS, trading in the WESM requires compliance with certain technical and
commercial requirements including the requirements for creditworthiness or prudential
requirements, communication facilities to facilitate the exchange of information between the
Market Operator and the trading participant, revenue metering facilities to enable

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measurement of energy withdrawn or injected into the grid, and remote telemetering facilities
to enable real time monitoring of their demand, connection and generation status. -

WHEREAS, at the start of the WESM not all electric industry participants would be
able to meet these technical and commercial requirements, and, as such, would not be able
to meet the qualifications to trade directly in the WESM;

WHEREAS, the WESM Rules allow qualified entities to become indirect WESM
members and to trade in the WESM through direct WESM members;

WHEREAS, the entities eligible to become customers in the WESM but which may
not be able to meet the qualifications for WESM membership are distribution utilities and
other entities directly connected to the national grid which are currently being supplied
electricity by the National Power Corporation (the “NPC”) and that their bilateral power
supply contracts will not be superseded by the implementation of the WESM;

WHEREAS, the NPC and the Power Sector Assets and Liabilities Management
Corporation (the “PSALM”) have separately registered to become direct WESM members
and wiil allocate between themselves the bilateral power supply contracts of NPC;

NOW THEREFORE, premises considered the DOE hereby declares -

Section 1. Default Wholesale Supply, Definition. Default wholesale supply in
the WESM refers to the supply of electricity to cover the supply imbalances (the “supply
imbalances”) of customers in the WESM. Supply imbalances may either be contractual or
schedule imbalances.

Section 1.01. Contractual imbalances refer to the difference between the
quantity of electricity covered by the bilateral power supply contract/s of a customer
and its actual metered quantity.

Section 1.02. Schedule imbalances cccur in cases where the customer has
fully contracted for its requirements but its actual metered withdrawal of electricity is
greater or !esser than its contracted quantity. The difference is the schedule
imbalance.

Section 2. Coverage. The default wholesale supply arrangement will apply to the
following customers in the Luzon and the Visayas grid - ,

_ Section 2.01. Distribution utilities, including electric cooperatives, private
distribution utilities, and local government utilities: and

- Section 2.02. End users of electricity, other than distribution utilities, which
have been permitted by the NPC or such other competent government agency to
connect directly to the national grid.

- Section 3. Period of Effectivity. The default wholesale supply arrangement
shall be implemented for a period not longer than one (1) year from the start of commercial
operations of the WESM in Luzon for Luzon customers and from the start of commercial
operations of the WESM in Visayas for Visayas customers.

Section 4. Designation of the WESM Default Wholesale Supplier. As an
interim measure to ensure the smooth transition from the current supply arrangements to the
implementation of the WESM, the NPC and the PSALM shall be designated as the default
wholesale suppliers upon commencement of WESM commercial operations.

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This designation shall not preclude the subsequent designation of other default
wholesale suppliers.

Section 5. Guidelines and Procedure. The NPC, PSALM and PEMC are
hereby directed to develop pertinent arrangements and procedures to carry out the default
wholesale supply arrangement, consistent with applicable laws, rules and regulations.

Section 6. No amendment or repeal of existing laws. Nothing in this Circular
shall be construed as to amend, supplant, or repeal any of the mechanisms or institutions
already existing or responsibilities already allocated and provided for under any existing law,
‘ rule or contract.

Section 7. Effectivity and Publication. This Circular shall be effective
immediately upon its publication in a newspaper of general circulation. The PEMC | is hereby
directed to publish this Circular in the Market Information website.

This Circular shall remain in effect until otherwise revoked.

Taguig, Metro Manila, 22 June 2006.

RAPHAEL P. M. LOTILLA
Secretary
Department of Energy