UNBUNDLING OF Rates

Section 1. Referencing Section 36 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.

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 .

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). Page 50 of 100(e) TRANSCO or its Buyer or Concessionaire and DUs 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. (a) Ratemaking Design and Methodology. 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 DUs 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 DUs including systems losses, interruption frequency rates, and collection efficiency; Further, in determining rate base, the TRANSCO or its Buyer or Concessionaire or any Distribution Utility shall not be allowed (iv) Page 51 of 100to include management inefficiencies like cost of project delays not excused by force majeure, penalties and related interest during construction applicable to these unexcused delays; (b) (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 DUs 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. (c) 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. (d) The ERC shall recognize the different cost structures in serving isolated areas.

Section 6. Unbundled Rate Filing Requirements.

(a) As required by the Act, NAPOCOR and DUs shall file within six (6) months from the effectivity for revised rates with costs and other relevant accounts unbundled by business activity. (b) 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. (c) 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. Page 52 of 100(d) Each rate filing petition for unbundled cost of service shall contain detailed schedules, data, and other relevant information deemed necessary by the ERC.