REMOVAL OF CROSS SUBSIDIES

Rule 16: The Removal of Cross

Section 1

As per Section 74 , 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 NAPOCOR, TRANSCO or its Buyer or Concessionaire, DUs 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 NAPOCOR shall be calculated on a net basis for each Grid as the difference between: (c) (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. The cross subsidy within each Grid in the rates of NAPOCOR 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 Page 53 of 100of Rates and the rate filing requirements that ERC may issue pursuant to Rule 15, using the same historical test year. (d) 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) Pending the complete removal of cross subsidies, each subsidy rate level shall be shown as a separate item in customer billing statements. (b) 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) 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. (b) 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. (c) Together with their filings of unbundled rates reflecting the true costs of service, pursuant to Rule 15 on Unbundling of Rates, NAPOCOR and the DUs 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. (d) 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 Page 54 of 100immediate, irreparable, and adverse financial effect on a Distribution Utility. DUs 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.

• 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.