NATIONAL TRANSMISSION CORPORATION (TRANSCO)

Section 1. Creation of TRANSCO

As per Section 8 , TRANSCO, which shall be wholly owned by PSALM, has been created to assume the transmission facilities of NAPOCOR, all other assets related to transmission operations, including nationwide franchise of NAPOCOR for the operation of the transmission system and the Grid, and to assume the electrical transmission functions of the NAPOCOR, including among others, the planning, construction and centralized Grid operation and maintenance of high voltage transmission facilities, Grid interconnections, ancillary and other allied facilities. As per and in accordance with the requirements , NAPOCOR, 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 NAPOCOR and all other assets related to transmission operations. Upon such transfer, the nationwide franchise of NAPOCOR for the operation of the transmission system and the Grid shall transfer from NAPOCOR 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: Page 68 of 100(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. (b) The assets of NAPOCOR related to the transmission/subtransmission function shall be transferred by NAPOCOR directly to TRANSCO on or before 26 December 2001. (c) Subtransmission Assets transferred to TRANSCO shall be operated and maintained by TRANSCO or its Buyer or Concessionaire, until their disposal to Qualified DUs. Section 3. Corporate Powers of the TRANSCO. As a corporate entity, TRANSCO shall have the following corporate powers: (a) To have continuous succession under its corporate name until otherwise provided by law; (b) To adopt and use a corporate seal and to change, alter or modify the same, if necessary; (c) To sue and be sued; (d) To enter into contracts, leases and execute any instrument necessary or convenient for the purpose for which it is created; (e) 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); (f) To pledge, grant a security interest in or otherwise encumber its assets; (g) 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; (h) To create subsidiaries for purposes such as the disposition of Subtransmission Assets to Qualified DUs and the operation thereof prior to disposal; (i) 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 Page 69 of 100the 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 and staffing pattern of TRANSCO; abolish positions; fix the number of its officers and re-align such officers and personnel; and allowance, and benefits; organizational structure and create offices and employees; transfer and fix their compensation, Page 70 of 100(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;

(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) Within six (6) months from the effectivity , 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 . 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. (b) 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 Page 72 of 100guarantees 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. (c) 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) This Rule shall apply to TRANSCO or its Buyer or Concessionaire or any successor-in-interest thereto. (b) The Buyer or Concessionaire or any successor-in-interest thereto, shall: (c) (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) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) Number of Interruption Events; Sustained Average Interruption Frequency Index; Momentary Average Interruption Frequency Index; Sustained Average Interruption Duration Index; System Interruption Severity Index; Frequency of tripping per 100 ckt-km; Average Forced Outage Duration; Accumulated Time Error; Frequency Limit Violation; and 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 DUs 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 NAPOCOR shall be transferred to and assumed by the PSALM. Page 73 of 100(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 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 DUs, 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 DUs. 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.