Updates on the Pricing and Cost Recovery Mechanism (PCRM) for Reserves in the Philippine Wholesale Electricity Spot Market Market Operations ServiceEnergy Regulatory Commission

Application to Establish the Reserve Market in the Wholesale Electricity Spot Market (WESM). 8 January 2007 Ancillary Services Cost Recovery Mechanism (AS-CRM) Reserve Pricing and Cost Recovery Mechanism (PCRM) Other ancillary services that are not traded in the WESM as well as to reserve regions or cost recovery zones where the WESM reserve market is not yet in operation Regulating, Contingency and Dispatchable Reserves

Aims of the Reserve PCRM Establishment of pricing of reserves traded Reserve trading amounts of reserve providers Allocation of reserve costs among the market participants Administered prices and cost recovery charges during market suspension and intervention.

7 July 2008 Order directing PEMC to comply with at least ten (10) major directives before the approval of the implementation of the PCRM for Reserves in the WESM, Implement Ex-ante Partial Effectiveness Factors to allow broader competition in Reserve Market Categories;Realign the Specification of Reserve Services to Create a Fast Contingency Service;Introduce New Lower Reserve Service;Introduce Interruptible Load Dropping (ILD) as a Fully Functioning Reserve Service;Implement an Interim Arrangement for ILD;Ensure that Appropriate Changes are introduced to the Grid Code;Document Procedures of the System Operator;Develop Measures to Mitigate Market Power;Plan for Future Enhancements; andDevelop Interim Plans.

Motion for Approval of Phased–In Implementation of WESM Pricing and Cost Recovery Mechanism for Reserves 5 June st Phase – Initial Operations of the Reserve Market; and 2 nd Phase – Operational Enhancements of the Reserve Market. Initial implementation of the reserve market pending the development of further studies, incorporation of the required changes in the OATS Rules and the ASPP, and introduction of operational enhancements. Operational enhancements in accordance with the directives of the Commission in its 7 July 2008 Order

hearing on issues Commission 1 March 2010 directed to submit its proposed timeline for the phased-in approach Hearing on Issues. PEMC was directed to submit proposed timeline for phased-in approach 1 March 2010 Inherent upon the SO to provide adequate ancillary services Market Operator (MO) has the authority to (1) administer the competitive tendering process for Ancillary Services Providers, and/or (2) establish and administer the spot market and trading for the purchase of certain reserve categories, Deferment of phased-in implementation PEMC directed to comply with July 7, 2008 Order, with a consideration of the planned integration of the Visayas and Luzon Grid 15 November 2010 Order

Omnibus Motion for Partial Reconsideration and to Issue an Order Impleading the System Operator 18 March 2011 Approval of the phased-in implementation of the WESM Pricing and Cost Recovery Mechanism (PCRM) for Reserves; Holding in abeyance the filing for approval of the reserve market in the Visayas pending resolution of the Luzon reserve market; and Impleading the System Operator in the case.

Filed “Compliance” -- Update on its compliance to the directed operational enhancements April 20, 2010 ERC Directives/TasksPEMC Updates/Remarks as of March Zonal Reserve Pricing in the Visayas  Initial study completed  On-going finalization/review by MO and SO 2 Submit Measures to Mitigate Market Power within 3 months  Creation of a technical working group for the purpose of formulating policy and regulartory proposals which include study of mitigating measure for energy and reserves. 3Implement an Ex-ante Partial Effectiveness Factor  Target completion of plan and study by end of 2Q Realign the Specification of Reserve Services to Create a Fast Contingency Service  Target completion of plan and study by end of 2Q Introduce New Lower Reserve Service  Target completion of impact assessment by end of 2Q Introduce ILD as a Fully Functioning Reserve Service  Preliminary study is on-going. Needs further consultation with NGCP- SO. 7Implement an Interim Arrangement for ILD  Preliminary study is on-going. Needs further consultation with NGCP- SO. 8 Document Procedures of the SO to Apprise Participants How its Practices Affect Operation and Commercial Outcomes  Initial study identified the following as the main focus for apprising the participants: o Implementation of Merit Order Table o Implementation of Real-time Must-run o Implementation of Generator Security Limits  Target completion of SO procedures and impact assessment by end of 2Q 2011

hearing on issues Commission 1 March 2010 directed to submit its proposed timeline for the phased-in approach 6 July 2011 Order Denied the following: Approval of the phased-in implementation of the WESM Pricing and Cost Recovery Mechanism (PCRM) for Reserves; and Holding in abeyance the filing for approval of the reserve market in the Visayas pending resolution of the Luzon reserve market Granted:Implead the System Operator

hearing on issues Commission 1 March 2010 directed to submit its proposed timeline for the phased-in approach 6 July 2011 Order Reiterates directives embodied in the November 15, 2011 Order with modifications as follows: Implement an Ex-ante Partial Effectiveness Factors to allow broader competition in Reserve Market Categories; Realign the Specification of Reserve Services to Create a Fast Contingency Service; Set up New Lower Reserve Service;Introduce ILD as a Fully Functioning Reserve Service;Set up an Interim Arrangement for ILD;Set up Appropriate Changes in the PGC; and Submit Plans for Future Enhancements and Develop Interim Plans. Within six (6) months Within three (3) months Submit measures to Mitigate Market Power