The Philippine Wholesale Electricity Spot Market 2008 APEx Conference Sydney, Australia Lasse A. Holopainen – President Mario R. Pangilinan – Executive Vice President Philippine Electricity Market Corporation

Presentation Outline Philippine Power Industry Overview of the Philippine WESM Results of Market Operations Market Benefits Market and Industry Outlook Conclusions and Considerations

The Philippine Power Industry

The Philippine Power Industry Overview Electric Power Industry Reform Act of 2001 mandated deregulation and restructuring of the electricity industry Generation sector was dominated by the National Power Corporation but is currently undergoing privatization Transmission sector is a monopoly franchise awarded to private sector Distribution sector is divided into franchise areas among private utilities or cooperatives but will be subjected to open access and retail supply competition The WESM was established by law to promote supply competition at the wholesale level

The Philippine Power Industry The New Industry Structure Competitive generation Regulated transmission and distribution Establishment of WESM Competitive retail electricity providers Privatization of NPC Unbundling of electricity rates for transparency End-user choice Establishment of an Independent Transmission Company Open Access of distribution network and retail competition

The Philippine Power Industry Generation Rated Capacity Mix, % MW Luzon 33.4% 24.3% 14.6% 19.8% 7.7% Coal Nat. Gas Diesel/ Oil Hydro Geo Wind 0.2% Visayas 34% Diesel/ Oil Geo Coal Hydro 0.6% 11% Mindanao 52% Coal Geo 6% Hydro 31% 11% Diesel Luzon Visayas Mindanao Philippines Total Gen Rated Capacity (MW) 11,396 1,778 1,907 15,081 2007 Peak Demand (MW) 6,589 1,171 1,203 8,963

The Philippine Power Industry Demand Distribution No. of Distribution Utilities Per Region Luzon Mindanao Visayas 30 (25.4%) 34 (28.8%) 54 (45.8%) Wholesale Customers (% based on Peak Demand) 28% 11% 61% Meralco Private DUs Elec. Coops End-Users (% based on Actual Energy) 35% 27% Industrial Commercial Residential Others 3%

Overview of the Philippine WESM

Market Design Gross Pool Net Settlement Locational Marginal Pricing All energy transactions are scheduled through the market Net Settlement Bilateral Contract quantities transacted in the pool can be settled outside of the market Locational Marginal Pricing Marginal price computed at each node or location to reflect transmission loss and / or congestion Reserve Co-Optimization Reserve and energy offers are scheduled at the same time Demand Bids Customers’ choice to buy energy lower than a specified price Mandatory Market EPIRA mandates procurement of at least 10% from the market for distribution utilities for the first 5 years from the establishment of the WESM 9

Generators/ Customers* WESM Product Offering Product Description Purchaser Sellers Energy Electricity provided to Consumers Customers Generators Ancillary Services 1. Regulating Reserve Load Following and Frequency Regulation Generators/ Customers* 2. Contingency Spinning reserve to provide response to significant decrease in system frequency. 3. Dispatchable Back-up Reserves in response to a re-dispatch performed by the System Operator. 4. Interruptible Load Customer loads that can respond to re-dispatch from the System Operator. 10

WESM at a Glance Locational Marginal Pricing (LMP) market with 270 trading nodes 30 Generating Resources/13 Trading Teams 8 Direct Customer Participants 135 Indirect/Unregistered Customers 1st Year Operation 2nd Year Operation % Change Peak Demand, MW 6,589 6,681 1.4% Total Energy Volume, GWh 39,006 40,488 3.8% Spot Market Volume, GWh 10,263 4,927 -52% Average % Spot Volume 27% 13% -55.6% Spot Market Value, MPhp 51,253 22,542 -56% Cumulative ESP, P/MWh 5,062 4,933 -2.5% 11 11

WESM Structure and Governance Oversight DOE Policy making Planning ERC Enforcement Pricing Governance Market Surveillance Committee Rule Change Dispute Resolution Group Technical PEM Board PEMC PEM Audit Market Operator Enforcement and Compliance Market Assessment Group Acting as the governing body of the market is the Philippine Electricity Market Board or the “PEM Board”. The creation of a PEM Board is geared towards encouraging industry self-regulation. Under the Board are the different Committees that would assist the Board of Directors in its decision-making process. There would be several Committees, the Rule Change Committee, the Disputes Committee, the Market Surveillance Committee, the Technical Committee, and the PEM Auditor. WESM Members Generators/ A/S Providers Network Service Providers (SO-Transco & DUs) Suppliers/ Aggregators Buyers

Results of Market Operations

7-Day Moving Averages - Supply, Demand & LWAP Market Outcomes 7-Day Moving Averages - Supply, Demand & LWAP Hydro and & Coal Supply Limitation ( 990 MW) Maintenance of Nat. Gas Facility (2700 MW) Forced & Planned Outages ( 1280 MW) Congestion at EHV Backbone 2006 2007 2008 Generation Offers Actual Demand Hourly LWAP 14

Market Outcomes Luzon Energy Mix Max = 52.9% Min = 35.1% Max = 36.3% Hydro and Coal Supply Limitation Congestion at EHV Backbone Maintenance of Nat Gas Facility Tight Supply 4.6% 4.8% 6.8% 9.6% 5% 5.2% 10.2% Max = 52.9% Min = 35.1% Max = 36.3% Min = 21.2% Max = 11.7% Min = 6.3% Max = 21.8% Min = 5.1% Note: Data based on metered quantities 15

Representative Nodes: Ave Nodal Price and Max Price Spread Market Outcomes Representative Nodes: Ave Nodal Price and Max Price Spread Average Monthly LMPs La Trinidad Mexico Balintawak Maximum Price Spread Sucat Price spikes due to line congestions Batangas Naga 2006 2007 2008 16

Effective Settlement Price Market Outcomes Effective Settlement Price Cumulative Average: P4,989/MWh * * 2006 2007 2008 - TOU Rates Applied * 17

Transaction Volumes and Values Market Outcomes Transaction Volumes and Values 2006 2007 2008 18

Market Benefits

Long-Term Pricing Impact Market Benefits Long-Term Pricing Impact Price Trend Year

Generation Efficiency Market Benefits Generation Efficiency 11.5% 5% 4.1% 3.2% 44.1% 39.7% 41.5% 31.1% 2.4% 34.2% 39% 36.1% 47.1% 31.8% 8.5% 28.1% 9.6% 7.6% 6.7% 10.7% 10.6% 10.7% 13.3% 10.9% 11.6% 1st Half

Increased Investor Interest Market Benefits Increased Investor Interest Tiwi-Makban Geo (747.5MW, $446.9M) WESM Commercial Operations Ambuklao-Binga Hydro (175 MW, $325M) Calaca Coal (600 MW, $787M) Masinloc Coal (600 MW, $930M) Loboc Hydro (1.2 MW, $1.4M) Cawayan Hydro (0.4 MW, $0.4M) Agusan Hydro (1.6 MW, $0.4M) Barit Hydro (1.8 MW, $0.48M) Talomo Hydro (3.5 MW, $1.37M) Magat Hydro (360 MW, $530M) Pantabangan-Masiway Hydro (112 MW, $129M) 2005 2006 2007 2008

Market and Industry Outlook

Market and Industry Outlook Visayas Market Completed System Readiness, Participant Training, Trial and Live Dispatch Operations Awaiting for DOE’s decision for WESM Commercial Operation Reserve Market The Energy Regulatory Commission (ERC) has recently released on order setting forth additional compliance requirements on the part of PEMC-MO and Transco-SO prior to the opening of the reserve market Industry is continually evolving towards retail competition Monitoring and Enforcement of Market Rules Regulatory oversight and policy planning for new capacities Customer participation and Demand side management Full preparation for Retail Competition Enhanced competition with Wholesale Aggregators (WA) and Retail Electricity Suppliers (RES) participation 24

Market and Industry Outlook Traders Accreditation Program Formation of an Electricity Traders Association Aims to institutionalize the “Electricity Trader” as a profession, promoting competency, professionalism, compliance and ethics Electricity Derivatives Forward Market Development of an OTC bulletin board facility to allow auctioning and trading of standardized Forward Contracts Market is non-mandatory and is the venue for hedging physical spot market risks, and trading of excess capacities Capacities in IPPA portfolios can be bundled into Forward Contracts Aims to provide indications of future supply scenario and economics

Conclusion and Considerations

Conclusion and Considerations Operation of Electricity Markets brings benefits to the industry, stakeholders and government Market is faced with challenges Policy Regulation Design Operations Market is only good as industry Stakeholders Regulator Policymakers Physical System on which it operates

Conclusion and Considerations While vested interests exist in the Market, decisions should be focused on objectives for which the Market was established Good governance and enforcement is key to the sustainable operation of the Market As the industry evolves the Market should continuously develop itself to maintain its relevance in the reform process

THANK YOU WWW.WESM.PH laholopainen@wesm.ph mrpangilinan@wesm.ph