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Republic of the Philippines
DEPARTMENT OF ENERGY

Department Circular No. DC2018 - 9) - COC

ADOPTING POLICIES FOR THE EFFECTIVE AND EFFICIENT TRANSITION TO THE
INDEPENDENT MARKET OPERATOR FOR THE WHOLESALE ELECTRICITY SPOT

WHEREAS.

MARKET

Section 2 of the Republic Act No. 9136, otherwise known as the “Electric Power

Industry Reform Act of 2001 (EPIRA)" declared the Policy of the State among others the

following:
a)

b)

)
qd)

e)

WHEREAS,

a)

b)

c)

qd)

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

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:

Protect the public interest as it is affected by the rates and services of electric
utilities and other providers of electric power: and

To establish a strong and purely independent regulatory body and system to
ensure consumer protection and enhance the competitive operation of the
electricity market.

Section 30 of the EPIRA provides that:

Within one (1) year from the effectivity of the Act, the Department of Energy
(DOE) shall establish the wholesale electricity spot market (WESM) composed
of the wholesale electricity spot market participants:

The WESM shall be implemented by a market operator (MO) in accordance with
the Wholesale Electricity Spot Market Rules:

The market operator shall be an autonomous group, to be constituted by DOE,
with equitable representation from electric power industry participants, initially
under the administrative supervision of the TRANSCO;

The market operator shall undertake the preparatory work and initial operation
of the wholesale electricity spot market., an autonomous group constituted by
the DOE with equitable representation from electric power industry participants
under the administrative supervision of the National Transmission Corporation
(TRANSCO);

Not later than one (1) year after the implementation of the wholesale electricity
spot market, an independent entity shall be formed and the functions, assets
and liabilities of the market operator shall be transferred to such entity with the
joint endorsement of the DOE and the electric power industry participants; and
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f) Thereafter, the administrative supervision of the TRANSCO over such entity
shall cease.

WHEREAS, Section 37 of the EPIRA further mandates the DOE to supervise the
restructuring of the electricity industry, endeavor to provide for an environment conducive to
free and active private sector participation and investment in all energy activities, and to
exercise such other powers as may be necessary or incidental to attain the objectives of the
EPIRA;

WHEREAS, in compliance with its mandate, the DOE promulgated the Implementing Rules
and Regulations (IRR) of the EPIRA, Rule 4 of which defines the “Independent Market
Operator” (IMO) as “a person who is financially and technically capable, with proven
experience and expertise of not less than two (2) years as a leading independent market
operator of similar or larger size electricity markets endorsed jointly by the DOE and Electric
Power Industry Participants to assume the functions, assets and liabilities from the
Autonomous Group Market Operator (AGMO), pursuant to Section 30 of the Act;"

WHEREAS, pursuant to the aforementioned mandates, the DOE issued on 9 June 2003,
Department Order No. 2003-06-006 entitled “Designating the TRANSCO-MO to Operate the
Wholesale Electricity Spot Market’, directing the TRANSCO-MO to operate the WESM under
the direction of the DOE until substituted by the IMO which shall take over its functions,
assets and liabilities in accordance with the EPIRA:

WHEREAS, on 18 November 2003, through the initiative of the DOE, the Philippine Electricity
Market Corporation (PEMC) was incorporated under the Securities and Exchange
Commission (SEC) with Company Registration No. CN200323988 as a non-stock, non-profit
corporation with the primary purpose of managing, governing, and administering an efficient,
competitive, transparent, and reliable market for the wholesale and purchase of electricity and
ancillary services in the Philippines, in accordance with the EPIRA:

WHEREAS, in April 2004, the DOE, TRANSCO, and PEMC entered into an Operating
Agreement which provided for the delineation of functions between PEMC and TRANSCO-
MO in the preparations for establishment of the WESM:

WHEREAS, on 22 October 2004, TRANSCO and PEMC entered into a Memorandum of
Agreement providing for transfer of personnel, assets, contracts, and liabilities from
TRANSCO-MO to PEMC;

WHEREAS, the PEMC, as the AGMO, governed by its board of directors (PEM Board),
constituted with equitable representation from the electric power industry participants and
chaired by the Secretary of the DOE, is tasked to undertake the preparatory work and initial
operation of the WESM pursuant to the EPIRA;

WHEREAS, the WESM started commercial operations in Luzon on 26 June 2006 and in the
Visayas on 26 December 2010;

WHEREAS, in February 2010, the Asian Development Bank (ADB) provided technical
assistance to DOE to study the IMO; and in December 2011 and July 2014 the DOE
conducted public consultations on the structure of the IMO:

WHEREAS, on 8 December 2015 and 26 January 2016, hearings were held by the Senate
Committee on Energy to discuss, among others, the transition of the AGMO to the IMO and
the formation of a Technical Working Group (TWG) to propose the structure of, and the

Department Circular No. DC2018 - ol - 0002 “ADOPTING POLICIES FOR THE EFFECTIVE AND
EFFICIENT TRANSITION TO THE INDEPENDENT MARKET OPERATOR FOR THE WHOLESALE
ELECTRICITY SPOT MARKET”

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manner of transition to, the IMO;
WHEREAS, the recommendations of the TWG were submitted to the DOE;

WHEREAS, on 28 July 2017, the DOE issued Department Order No. DO2017-07-0010
creating the Transition Committee for PEMC, which was tasked among others, to propose a
way forward for the WESM to adapt to the current environment and prepare it to meet the
challenges of the future:

WHEREAS, after due study, the Transition Committee formulated an IMO transition proposal
that provides for the formation of an independent entity separate from PEMC to become the
IMO, while PEMC shall remain to be the governance arm of the WESM;

WHEREAS, in meetings duly called for the purpose, the DOE Secretary as the Chairman of
the PEM Board instructed PEMC to present and subject to public consultation “Plan for
Transition to the Independent Market Operator of the Philippine Wholesale Electricity Spot
Market” (IMO Transition Plan);

NOW, THEREFORE, for and in consideration of the foregoing, the DOE issues, adopts and
promulgates the following policies for the efficient transition of the WESM to the Independent
Market Operator as embodied in the EPIRA and full attainment of the objectives of the Act:

Section 1. Mandates of the DOE. Pursuant to Section 37 and Section 30 of the EPIRA,
jointly with the electric power industry participants, the DOE shall formulate the detailed rules
for the wholesale electricity spot market. Said rules shall provide the mechanism for
determining the price of electricity not covered by bilateral contracts between sellers and
purchasers of electricity users. The price determination methodology contained in said rules
shall be subject to the approval of ERC. Said rules shall also reflect accepted economic
principles and provide a level playing field to all electric power industry participants. The
rules shall provide, among others, procedures for:

1.1. Establishing the merit order dispatch instructions for each time period;

1.2. Determining the market-clearing price for each time period;

1.3. Administering the market, including criteria for admission to and termination from the
market which includes security or performance bond requirements, voting rights of
the participants, surveillance and assurance of compliance of the participants with
the rules and the formation of the wholesale electricity spot market governing body:

1.4. Prescribing guidelines for the market operation in system emergencies; and

1.5. Amending the rules.

Section 2. Mandates of the Policymaker and Regulator to Ensure Independence of the
IMO. The DOE as policymaker and the ERC as regulator shall ensure that the principles of
fair competition and the promotion of the public interest shall govern all policies and rules
during the transition and full operation of the IMO.

Section 3. Joint Endorsement of the DOE and the Electric Power Industry Participants.
Upon the endorsement by the electric power industry participants, represented by the PEM
Board and the WESM Members, the DOE shall promulgate and adopt the IMO Transition
Plan that sets out the formation and structure of the IMO, the resulting WESM governance
structure, and the manner by which transition to the IMO shall be accomplished.

Section 4. Guiding Principles. The formation of the IMO shall be subject to the following
guiding principles:

Department Circular No. DC2018 -ot - go02 “ADOPTING POLICIES FOR THE EFFECTIVE AND
EFFICIENT TRANSITION TO THE INDEPENDENT MARKET OPERATOR FOR THE WHOLESALE
ELECTRICITY SPOT MARKET”

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4.1 The objectives of the WESM are to establish a competitive, efficient, transparent and
reliable market, where a level playing field exists, prices are governed as far as
practicable by commercial and market forces, and efficiency is encouraged. These
objectives are to be achieved consistent with the policies declared in the EPIRA to
ensure the quality, reliability, security and affordability of the supply of electric power,
and to ensure transparent and reasonable prices of electricity in a regime of free and
fair competition and full public accountability to achieve greater operational efficiency
and enhance the competitiveness of Philippine products in the global market;

4.2 The WESM shall be operated by the IMO, which shall be independent from electric
power industry participants and from the government;

4.3 The IMO shall operate the WESM on a non-profit basis.

4.4 The continued provision of service for the trading of electricity in the integrated
WESM and retail market shall be ensured during the transition to the IMO; and

4.5 A governing board with equitable representation from the electric power industry
participants shall ensure balanced decision making with respect to governance
functions over the WESM.

Section 5. Formation of the IMO.

5.1 Nature of the IMO. The IMO shall be an independent entity, formed separate from
PEMC, and incorporated as a private corporation under the Corporation Code of the
Philippines. No electric power industry participant, nor any of their subsidiaries,
affiliates, stockholders, directors, officers or their relatives within the fourth degree of
consanguinity or affinity shall hold any interest, whether directly or indirectly, in the
IMO. In performing its functions as the Market Operator, the IMO shall allocate
resources to enable it to operate the integrated WESM and retail market on a non-
profit basis, consistent with the Guiding Principles stated in Section 3 of this Circular
and the relevant provisions of the WESM Rules.

5.2 Functions. The IMO shall assume all the functions of the Market Operator as
provided for under Section 30 of the EPIRA, Section 6, Rule 9 of the EPIRA IRR, the
WESM Rules and Market Manuals, and other relevant rules, regulations and
issuances.

5.3 Assets and Personnel. The necessary personnel with experience in market
operations shall be transferred from PEMC to the IMO, in accordance with relevant
laws. PEMC shall likewise execute the necessary operating agreements with the IMO
for, among other things, the use of the Market Management System and other
related infrastructure that support the operations of the WESM.

5.4 Fiscal Autonomy. The IMO hall have fiscal autonomy from the PEMC.

5.5 Budget Application. The budget that shall be sourced from the market fees shall be
applied by the IMO to the ERC. The ERC shall approve the rates: Provided that it
shall have minimal impact to the consumers.

Section 6. The IMO Board.

6.1 Composition. The IMO Board shall be composed of at least five (5) members whose

Department Circular No. DC2018 -e! - ¢c002 “ADOPTING POLICIES FOR THE EFFECTIVE AND
EFFICIENT TRANSITION TO THE INDEPENDENT MARKET OPERATOR FOR THE WHOLESALE

ELECTRICITY SPOT MARKET”
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composition and specific qualifications are approved by the DOE.

6.2 Independence. The directors of the IMO Board shall be independent from the
electric power industry participants and from government. A member of the IMO
Board shall be deemed independent, if that person:

a) is not a director, officer, employee, contractor, consultant, agent, adviser, legal
counsel, manager, or shareholder of a WESM Member or of the System
Operator;

b) is not a spouse or relative of a person, within the fourth civil degree of
consanguinity or affinity, of a director, officer, manager, or shareholder of a
WESM Member or System Operator;

c) is not an officer, manager, director, shareholder, agent, employee, consultant,
adviser, legal counsel, or contractor of, or is not a person directly or indirectly,
through one or more intermediaries controls, is controlled by a company,
affiliate, or any other entity related to or associated with a WESM Member or
System Operator, where:

i. A related company or body, is a parent, holding company, subsidiary
or affiliate of the WWESM Member or System Operator; and

ii. An associate is a person who is director, officer, manager or
shareholder of that related company or entity or a relative of such a
person within the fourth civil degree of affinity or consanguinity; and

iii. An affiliate is any person that, alone or together with any other person,
directly or indirectly, through one or more intermediaries, controls or is
controlled by, or is under the common control with another person;

Provided, that the term shareholder shall exclude a member of an electric
cooperative who is not involved in its operation and management and an end-
user required to subscribe to or purchase a share in a distribution utility as an
incident to the provision of service by the same distribution utility, and provided
the interest of the end-user is not more than the minimum required to avail of
the distribution utility's service;

d) is not an official or employee of the Philippine government, or its agencies or
instrumentalities, but this will not apply to members of the academe in public
schools and universities;

e) has not been employed as an officer, or in a supervisory or managerial
capacity, by any electric power industry participant, or a company or body
related to or associated with a WESM Member or the government within one
(1) year prior to the nomination date; and

f) agrees not to be employed by and does not accept any employment with a
company, affiliate, or any other entity related to or associated with a WESM
Member or the System Operator within one (1) year after the person ceases to
be a member of the IMO Board.

6.3 General Qualifications. Each member of the IMO Board shall be independent in
accordance with Section 4.2, and shall possess the following qualifications:

Department Circular No. DC2018 - 0! - o002 “ADOPTING POLICIES FOR THE EFFECTIVE AND
EFFICIENT TRANSITION TO THE INDEPENDENT MARKET OPERATOR FOR THE WHOLESALE

ELECTRICITY SPOT MARKET”
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a) the member must have a proven track record for sound strategic thinking and
judgment;

b) the member must be an independent thinker with an objective perspective:

c) the member must have an exemplary professional background and meaningful
experience in the relevant skill-set sought;

d) the member must possess the specific qualifications as may be identified by
the PEM Board under the IMO Transition Plan; and

e) the member must be committed to representing the long-term interests of the
WESM and the general public.

6.4 Selection Process. Subject to DOE approval, the PEM Board shall provide for a
detailed nomination and selection process for the election of the initial and
subsequent members of the Board of Directors of the IMO. The selection process
shall include details on the tenure and composition of the IMO Board with necessary
expertise and/or qualifications to ensure that the operations of the IMO are entrusted
to highly capable individuals.

Section 7. WESM Governing Board and Governance Structure

7.1 PEMC shall remain to be the governance arm of the WESM. Its board of directors,
the PEM Board, shall perform its functions as set out in the WESM Rules and its
Market Manuals.

7.2 The members of the PEM Board shall be appointed in accordance with the WESM
Rules and its Market Manuals as may be amended pursuant to this Circular. Towards
this end, the DOE shall revisit the composition and responsibilities of the PEM Board
as set out in the WESM Rules and its Market Manuals, in such manner that it
achieves a level of independence necessary for the protection of public interest in
accordance with the EPIRA.

7.3 The PEM Board and its governance committees shall perform its functions as set out
in the WESM Rules and its Market Manuals.

7.4 The PEM Board shall have the primary obligation to protect the public interest and
ensure the transparency and efficiency of the WESM.

7.5 The PEM Board shall be supported by WESM governance committees in accordance
with the WESM Rules and Market Manuals. For this purpose, PEMC is directed to
review the WESM Rules and relevant market manuals as regards the functions and
duties of the governance committees to ensure that such functions and duties
enhance and complement the changes in the WESM governance structure. As the
overall supervisor of the WESM, the DOE shall continue to have representation in the
governance committees to observe and as necessary, to provide guidance in so far
as consistency with the EPIRA and related DOE policies are concerned.

7.6 Pursuant to the WESM Rules, the PEM Board shall monitor and supervise the
Independent Market Operator, and, for this purpose, shall adopt and enforce market
operator performance standards approved by the DOE. The performance standards
shall include both operational and financial performance standards. Among other \

Department Circular No, DC2018 - og! - 0002 “ADOPTING POLICIES FOR THE EFFECTIVE AND
EFFICIENT TRANSITION TO THE INDEPENDENT MARKET OPERATOR FOR THE WHOLESALE
ELECTRICITY SPOT MARKET”

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things, the financial performance standards shall provide for an executive
compensation policy that outlines the process and procedures that will be applied by
the PEM Board in reviewing and approving the total compensation paid to senior
executives and key employees of PEMC and the IMO.

7.7 The budget and revenue requirements of PEMC and the IMO for the operation and
administration of the WESM shall be recovered from the market fees. Upon approval
of the PEM Board, the IMO shall file the same with the Energy Regulatory
Commission (ERC) for approval.

Section 8. Conditions for Transition. The transition to the IMO is deemed to have realized
upon fulfilment of the following:

8.1 Approval by the PEM Board and the DOE Secretary of the IMO Transition Plan, and
ratification thereof by a majority of the PEMC Membership in accordance with the
PEMC By-Laws;

8.2 Amendment of the WESM Rules and Market Manuals in accordance with this
Circular. Towards this end, PEMC is hereby directed to submit the necessary
amendments to the Rules Change Committee within 30 calendar days from effectivity
of this Circular;

8.3 Amendment of the Articles of Incorporation and By-Laws of PEMC in accordance
with this Circular and the amended WESM Rules and Market Manuals. Towards this
end, PEMC is hereby directed to secure the necessary approval of its amended
Articles of Incorporation and By-Laws in accordance with the relevant laws; and

8.4 Incorporation of the IMO company, assumption of the members of the IMO Board,
and transfer of functions, assets and personnel from PEMC to the IMO through
execution of a relevant agreement between PEMC and the IMO company.

Section 9. Separability. If for any reason, any section or provision of this Circular is
declared unconstitutional or invalid, the other parts or provisions hereof which are not
affected thereby shall continue to be in full force and effect.

Section 10. Repealing Clause. Except insofar as may be manifestly inconsistent herewith,
nothing in this Circular shall be construed as to repeal any of the mechanisms already
existing or responsibilities already provided for under existing rules.

Section 11. Effectivity and Publication. This Circular shall take effect immediately upon its
publication in at least two (2) newspapers of general circulation, and shall remain in effect
until otherwise revoked.

Issued on 2018 at the Energy Center, Rizal Drive, Bonifacio Global City, Taguig City.

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Department Circular No. DC2018 - 0! - 0002 “ADOPTING POLICIES FOR THE EFFECTIVE AND
EFFICIENT TRANSITION TO THE INDEPENDENT MARKET OPERATOR FOR THE WHOLESALE
ELECTRICITY SPOT MARKET”
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