TERMINATING THE DEFAULT WHOLESALE SUPPLIER ARRANGEMENT FOR THE PHILIPPINE WHOLESALE ELECTRICITY SPOT MARKET (WESM) AND DECLARING A DISCONNECTION POLICY

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 (WESM) that will
facilitate a transparent, competitive, and reliable electricity market
in the country;

WHEREAS, on 21 June 2006, the DOE issued Department
Circular No. 2006-06-008 declaring the launching of the WESM in the
Luzon Grid and the terms and conditions for the commencement of the full
commercial operations of the WESM;

WHEREAS, at the start of the commercial operation of
WESM, not all electric industry participants, particularly the
Distribution Utilities (DUs), were able to meet the technical and
commercial requirements to directly trade in the WESM;

WHEREAS, on 22 June 2006, the DOE issued Department
Circular No. 2006-06-0009 designating the National Power Corporation
(NPC) and Power Sector Assets and Liabilities Management Corporation
(PSALM) as the Default Wholesale Suppliers (DWS) to supply the electric
power supply imbalances of customers in the WESM;

WHEREAS, Section 3 of Department Circular No.
2006-06-0009 states that the DWS Arrangement shall be implemented for a
period not longer than one (1) year from the start of commercial
operations of the WESM in Luzon;

WHEREAS, Section 4 of Department Circular No.
2006-06-0009 states that the designation of NPC and PSALM as the DWS is
an interim measure to ensure the smooth transition from the current
supply arrangements to the implementation of the WESM;

WHEREAS, commercial operations of the WESM commenced
on 26 June 2006;

WHEREAS, as of 28 April 2010, PSALM has successfully
bid out an aggregate rated capacity of 3,318.23 MW which accounts for
the 87.82% of the total 3,778.23 MW rated capacity of PSALM/NPC owned
generating assets in the Luzon and Visayas grids; also, PSALM has bid
out 68.22% or 3,345.75 MW of the total 4,904.55 MW capacity of NPC-IPP
contracts in the Luzon and Visayas grids;

WHEREAS, the privatization of the significant
portion of NPC generating plants and other power assets of PSALM, since
the effectivity of the DWS, has significantly affected the ability of
PSALM and NPC to supply the energy requirements of its customers;

WHEREAS, there is a need to terminate the DWS since
NPC and PSALM can no longer economically and effectively perform their
duties as the default wholesale supplier;

WHEREAS, the termination of the DWS arrangement will
cause distribution utilities (DUs) to have no default supplier of
electricity for the imbalances of their contract and shall likewise
leave them without any supplier, in case they fail to enter into a
supply contract with a generator or other service providers;

WHEREAS, to ensure continuous supply of electricity
within its franchise area, a DU is encouraged to enter into a bilateral
contract with a generator or other service provider, in a least cost
manner, to cover its energy requirements;

WHEREAS, DUs can withdraw electricity from the grid,
provided they are WESM Members, either as a Direct or Indirect,
pursuant to WESM Rules Section 2.2.4.2, which states that “no person or
entity shall be allowed to inject or withdraw electricity from the grid
unless that person or entity is a registered member of the WESM”;

WHEREAS, it therefore necessarily follows that DUs
who are not WESM members do not have the right to withdraw electricity
from the grid and should therefore be disconnected from the grid;

WHEREAS, the Open Access and Transmission Services
(OATS) Rules provides that the Transmission Provider shall not be held
liable for failure to deliver the services described in Modules B, C,
and D of the OATS Rules in case the Transmission Customer fails to
comply with its obligations under the OATS Rules, the Grid Code, and the
WESM Rules;

NOW THEREFORE, premises considered the DOE hereby
declares the following:

SECTION 1. Termination of the DWS Arrangement. In view of
the inability of NPC and PSALM to economically and effectively perform
their duties as DWS considering the privatization level to-date, the DWS
arrangement provided in DOE Circular No. 2006-06-009 is hereby
terminated. Accordingly, NPC and PSALM are thereby relieved from their
designation as the DWS. All other rules, resolutions, or circulars
issued in relation to the DWS are hereby declared repealed.

In accordance with Section 2 of DOE Circular No. 2006-06-009, the
termination of the DWS arrangement shall apply to the grid where WESM is
operational.

SECTION 2. Disconnection Policy.

2.1 Disconnection of Non-WESM Members. Pursuant to Section 2.2.4.2 of
the WESM Rules, all persons or entities who fail to register with the
WESM within ninety (90) days from the effectivity of this Circular shall
be disconnected from the grid. This condition shall initially apply to
the Luzon grid where there is WESM operation.

2.2 Other grounds for disconnection. The DOE shall provide other
grounds for disconnection of persons or entities in the guidelines as
it may deem proper pursuant to the overall intent of the EPIRA.

Pursuant to Section 4.1. below, the DOE shall formulate the necessary
guidelines for the disconnection of persons or entities who fail to
comply with this Circular, taking into consideration existing laws and
procedures.

SECTION 3. Transition Period. Sections 1 and 2 above are
hereby subjected to a transition period of ninety (90) days from the
effectivity of this Circular. Within the 90-day period, the following
shall take place:

3.1 All DUs, i.e. privately-owned utilities and electric
cooperatives, generation companies, and other entities connected to the
grid, are hereby directed to register with the WESM. Failure to comply
with this requirement shall result in the disconnection of the concerned
entity pursuant to Section 2 of this Circular.

3.2. Any DU, i.e. privately-owned utilities and electric
cooperatives, which has arrearages with NPC and PSALM at the time of the
effectivity of this Circular, shall be allowed to register in the WESM;
Provided, that such DU shall settle its arrearages or enter into a
restructuring agreement with NPC and PSALM within ninety (90) days from
the effectivity of this Circular. The failure of any electric power
industry participant to comply with this requirement within the
prescribed period shall constitute a violation of this Circular and
shall result in the disconnection of the participant from the grid. For
this purpose, the subsequent settlement or restructuring of the
arrearages with NPC and PSALM is hereby considered a condition for the
reconnection of the participant.

3.3. In the case of private entities, i.e. generation companies,
distribution utilities, transmission service providers and other
service providers, settlement arrangements of the outstanding
obligations, if any, shall be governed by their existing bilateral
contracts.

SECTION 4: Responsibilities of Entities:

4.1 Pursuant to the mandate of the DOE under Section 37(p) of the
EPIRA to formulate rules and regulations as may be necessary to
implement the objectives of the EPIRA and the WESM Rules, the DOE, in
coordination with NGCP, TRANSCO, NPC, PSALM, NEA, and PEMC shall provide
the guidelines within ninety (90) days from the effectivity of this
Circular for the disconnection of persons or entities who fail to comply
with this Circular.

4.2 In addition, the DOE shall, together with PEMC and NEA, provide
the necessary support, including liaison with financial institutions, to
the DUs in need in complying with this Circular and the requirements
for registration with the WESM.

4.3 Pursuant to the EPIRA and the OATS Rules, NGCP is hereby given
the authority to disconnect from the grid persons or entities who fail
to comply with their obligations under the OATS Rules, the Grid Code,
the WESM Rules, and this Circular in accordance with the guidelines to
be issued by the DOE in Section 4.1 of this Circular.

4.4 PEMC shall continuously monitor and submit regular reports to the
DOE on the status of the registration in the WESM.

4.5 PSALM and NPC shall provide the DOE all information on DWS
arrangements and assist the DOE in the implementation of the termination
of the DWS arrangement. PSALM and NPC are likewise required to submit
to the DOE a regular monthly report on the restructuring of the
outstanding obligations of its customers.

4.6 NEA is directed to provide assistance to all electric
cooperatives for their registration in the WESM, including compliance
with the requirement to settle or restructure their outstanding
obligations with NPC and PSALM. It shall, together with the DOE,
undertake an information and education campaign for the termination of
the DWS arrangement and the implementation of the disconnection policy.

4.7 All electric power industry participants are directed to register
in the WESM pursuant to WESM Rules 2.2.4.2.

SECTION 5. Creation of Implementation Review Committee (IRC).
An IRC composed of representatives from DOE, PEMC, PSALM, NPC, TRANSCO,
NEA, and NGCP is hereby created. The DOE shall chair the IRC.

5.1 The IRC shall be responsible for ensuring the smooth termination
of the DWS arrangement and the implementation of the disconnection
policy.

5.2 The IRC shall formulate the implementing rules and regulations of
this Circular.

SECTION 6. Separability Clause. 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 7. Effectivity and Publication. This Circular shall
be effective fifteen (15) days from its publication in a newspaper of
general circulation. PEMC is hereby directed to publish this Circular in
the market information website.

This Circular shall remain in effect until otherwise revoked.

Adopted: 6 May 2010

(SGD.) JOSE C. IBAZETA
Acting Secretary