1. Connection Assets The definition of connection assets needs to match the following documents –OATS –TWRG –Connection Charging Policy –TRANSCO/PSALM Application –Draft Determination The ERC has a significant concern that the provisions under these documents shall be consistent As defined in the following slides

2. Connection Assets: TWRG Regulated Transmission Services… – (d) until the commencement of the Second Regulatory Period, Transmission Connection Services; Transmission Connection Services – (a) the provision of capability at a Connection Point to deliver electricity to or take electricity from the Connection Point; –(b) the conveyance of electricity: (i)from the User System or Equipment of a Customer to the Connection Point; or (ii)from the Connection Point to the User System or Equipment of a Customer; Transmission Connection Assets –The components of the Grid used to provide Transmission Connection Services Connection Point –The point of connection of a User System or Equipment to the Grid. User System –User System as defined in the Grid Code. (from TWRG) –Refers to a System owned and operated by a User of the Grid or Distribution System (from Grid Code)

3. Connection Assets: OATS Rules Connected Transmission Customer –Any Transmission Customer with Facilities directly connected to the Grid at one or more Points of Connection. For the avoidance of doubt, this includes Generation Customers and Load Customers. Connection Definition Method –The method used by the Transmission Provider to distinguish Connection Assets from Grid Assets. Connection Facilities –The Transmission Provider’s Connection Facilities and the Connected Transmission Customer’s Connection Facilities. Connection Point –See Point of Connection. Grid –As defined in the Grid Code. Point of Connection –A point where Electricity may flow into or out of the Grid. –Also known as Connection Point. Point of Delivery –A Point of Connection on the Grid where Electricity may flow out of the Grid. Point of Receipt –A Point of Connection on the Grid where Electricity may flow into the Grid.

4. Connection Assets: Connection Charging Policy (Aug 2005) Connection Assets are those assets that are put in place for the primary purpose of connecting a customer. These assets may be bypassed or removed from the network without affecting any customer except those that are directly connected to it. Even though transmission power flows on portions of these assets, that is just the consequence of connecting the customer to the Grid. TransCo will also consider the inclusion of those assets defined as Subtransmission Assets by the ERC in its Order of 17 October 2003. To the extent possible, TransCo shall treat all Subtransmission Assets covered by the ERC Order as Connection Assets until such time that the assets are sold.

5. Connection Assets: TRANSCO/PSALM Application TRANSCO/PSALM – claims that it is consistent with its proposed Connection Charging Policy dated August 2005 TRANSCO/PSALM claim that these assets either directly benefit a particular user or “a specified group of users” SKM et al – appears to have implemented “shallow connection” and “unshared” assets following its classification in the RAB

6. Connection Assets – Draft Determination To use SKM definition as implicitly provided in its spreadsheet on substation assets.

7. RAB Outcome Table 5.8 Table 5.9

8. Weighted Average Cost of Capital David Dawson ERC Regulatory Expert

9. WACC (a) Follow TWRG Recognize differences between TRANSCO Independent Expert and TWRG Review values for parameters separately Summary follows mid-point analysis

10. WACC (vanilla) WACC = Re x E / V + Rd x D / V WACC = Re x E / (D + E) + Rd x D / (D + E) WACC = 0.1832 x 0.5 + 0. 1256 x 0.5 WACC = 0.1544 of 15.4%

11. Return on Equity & Debt Re = Rf + Be x MRP Re = 0.1131 + 1.17 x 0.0600 Re = 0.1832 or 18.3% Rd = Rf + DM Rd = 0.1131 + 0.0125 Rd = 0.1256 or 12.6%

12. Risk Free Rate (a) Two measures explored: –Internal measure using Philippine Treasury Bonds –External measure using US Treasury Bonds Internal: Use Philippines 10y Treasury Bond for August 2005 Rf = 0.1173 or 11.7%

13. Risk Free Rate (b) External: Use average 6 USA ~ 10y Treasury Bond for August 2005 Rf = (1+Rf USA ) x (1+i USA ) / (1+i Phil ) x (1+CRP) – 1 Rf = (1+0.0461) x (1+0.0710) / (1+0.0469) x (1+0.04) Rf = 0.1131 or 11.3% Both measures close, but took 11.3%

14. Inflation Rates Spread for “long-term” average versus “spot” average is similar Spot data better matches bond data which is average spot as well

15. CRP (a) Two measures explored: –Philippine vs USA US$ bond yields –CRP statistical method using Country Ratings US$ Bond yields, ~ 20 year bonds CRP = 8.2% - 4.8% = 3.4%

16. CRP (b) Statistical on Country Rating = 4.0%

17. Return on Equity & Debt Re = Rf + Be x MRP Re = 0.1131 + 1.17 x 0.0600 Re = 0.1832 or 18.3% Rd = Rf + DM Rd = 0.1131 + 0.0125 Rd = 0.1256 or 12.6%

18. Beta Followed TWRG Equity Beta average of 5 transcos and 5 distribution businesses Ba = Be / [1+(1-Te) x D/E] for Market Ba = 0.58 Be = Ba x (1+D/E) for TRANSCO Be = 1.17

19. Return on Equity & Debt Re = Rf + Be x MRP Re = 0.1131 + 1.17 x 0.0600 Re = 0.1832 or 18.3% Rd = Rf + DM Rd = 0.1131 + 0.0125 Rd = 0.1256 or 12.6%

20. WACC (vanilla) WACC = Re x E / V + Rd x D / V WACC = Re x E / (D + E) + Rd x D / (D + E) WACC = 0.1832 x 0.5 + 0.1256 x 0.5 WACC = 0.1544 of 15.4%

21. Return on & of Capital Table 7.2

22. Lawrence Luczon Engineer II Performance Incentive Scheme

23. Proposed Performance Indices No.Issues Paper TRANSCO Proposal/ ERC’s Adopted PIs QualityReliability 1.Number of interruption events (NIE) OK 2. Average Sustained Interruption Frequency Index (ASIFI) OK 3. Momentary Average Interruption Frequency Index (MAIFI) OK 4. Average Sustained Interruption Duration Index (ASIDI) OK 5.System Interruption Severity Index (SISI) OK 6. Number of Frequency Limit Violations (FLV) Frequency Limit Compliance (FLC) OK 7.Number of Voltage Limit Violations (VLV) Voltage Limit Compliance (VLC) OK 8.System Losses 9. Frequency of Trippings per 100ckt-km (FOT/100ckt-km) OK 10.System Availability (SA) OK

24. Performance Indices% 1. System Interruption Severity Index (SISI) 30 2. Frequency of Tripping per 100 ckt- km (FOT/100ckt-km) 25 3.System Availability (SA)25 4.Frequency Limit Compliance (FLC)10 5.Voltage Limit Compliance (VLC)10 TransCo Proposed Weightings

25. ERC Proposed Weightings PIWeightings Weightings by Grid LuzonVisayasMindanaoTotal SISI45%20%50%30%100% FOT25%32%29%39%100% SA10%34%33% 100% FLC10%34%33% 100% VLC10%29%36%35%100% Total100% Note: Weightings by Grid - based on proportional average performance from 2000-2004 with higher proportion given to a bad performing grid

26. TransCo Proposed Bandwidth

27. ERC Proposed Bandwidth PI Collar (Penalty) Deadband Cap (Reward) Max. Measure LowTargetHigh -3%0% 3% Luzon SISI18.44113.66711.2806.5061.7320 min. FOT7.5155.8385.0002.4850.8090 min. SA99.00299.12799.19099.44099.565100% FLC99.89399.94199.96599.988100.00100% VLC64.61575.57981.06086.54297.506100% Visayas SISI553.756366.453272.802179.1510.000 min. FOT10.2158.0747.0042.7230.5820 min. SA98.87799.02699.10099.39799.546100% FLC96.86598.11098.73299.354100.00100% VLC98.02899.04199.547100.00no reward100% Mindanao SISI116.76679.98361.59243.2016.4180 min. FOT14.71111.2739.5544.3970.9590 min. SA98.45098.86999.07899.49699.915100% FLC99.68499.78899.84099.89299.997100% VLC96.93697.92698.42198.91599.905100%

28. ERC’s Approach: 1 st Step – Set the Target based on “whichever is better between the mean (i.e. from 2000 to 2004) and the last year’s (i.e. 2004) measure of the PI”; 2 nd Step – Set the Deadband to minus one-half (-1/2) STDEV and plus two (+2) STDEV; 3 rd Step – Change the Target to mean value (or last year’s measure) if Cap value is falling beyond the Maximum Measure; 4 th Step – Reduce the +2 STDEV to a lower STDEV (i.e. +1½, +1 or +1/2) until such time that Cap will not fall beyond the maximum measure; Adjustment on the Reward

29. (ERC’s Approach) On the Proposed Targets PIMean (2000-2004) 2004 Actual Measure Approach to Target Target Luzon SISI17.0811.28Lowest11.28 FOT7.585.00Lowest5.00 SA99.1999.17Highest99.19 FLC99.9599.96Highest99.96 VLC81.0690.77Highest90.77 Visayas SISI272.80591.04Lowest272.80 FOT7.004.94Lowest4.94 SA99.0599.10Highest99.10 FLC98.7397.44Highest98.73 VLC99.5597.73Highest99.55 Mindanao SISI61.5936.01Lowest36.01 FOT9.868.13Lowest8.13 SA99.0898.88Highest99.08 FLC99.8499.74Highest99.84 VLC98.4299.58Highest99.58

30. (ERC’s Approach) 0% -3% +3% Target Cap 2 σ ½ σ 1 σ Performance 1 σ Collar Deadband Bonus / Penalty On the Deadband

31. ERC’s Proposed Standard Deviation: PI Collar (Penalty) Deadband Cap (Rewar d) Max. Measure LowTargetHigh -3%0% 3% Luzon SISI 1 STDEV1/2 STDEVTarget1 STDEV 0 min. FOT 1 STDEV1/2 STDEVTarget1½ STDEV1 STDEV 0 min. SA 1 STDEV1/2 STDEVTarget2 STDEV1 STDEV 100% FLC 1 STDEV1/2 STDEVTarget1/2 STDEV<1 STDEV 100% VLC 1 STDEV1/2 STDEV Mean 1/2 STDEV1 STDEV 100% Visayas SISI 1 STDEV1/2 STDEVTarget1/2 STDEV<1 STDEV 0 min. FOT 1 STDEV1/2 STDEV Mean 2 STDEV1 STDEV 0 min. SA 1 STDEV1/2 STDEVTarget2 STDEV1 STDEV 100% FLC 1 STDEV1/2 STDEVTarget1/2 STDEV<1 STDEV 100% VLC1 STDEV1/2 STDEVTarget<1/2 STDEVno reward100% Mindanao SISI 1 STDEV1/2 STDEV Mean 1/2 STDEV1 STDEV 0 min. FOT 1 STDEV1/2 STDEV Mean 1½ STDEV1 STDEV 0 min. SA 1 STDEV1/2 STDEV Target 1 STDEV 100% FLC 1 STDEV1/2 STDEV Target 1/2 STDEV1 STDEV 100% VLC 1 STDEV1/2 STDEV Mean 1/2 STDEV1 STDEV 100%

32. (ERC’s Approach) Adjustment on the Reward 0% -3% +3% Target Cap 1/2 σ <1 σ Performance Bonus / Penalty 1 σ Collar Deadband Max. Measure X% = 3% a b X% a b

33. 0% -3% +3% Target Cap <½ σ ½ σ No reward Performance Bonus / Penalty 1 σ Collar Deadband Max. Measure (ERC’s Approach) Adjustment on the Reward

34. END OF PRESENTATION