Consolidated Presentation on Proposed Amendments to Resolution 16 s. 2011 July 8, 2014

1. Consolidated Presentation on Proposed Amendments to Resolution 16 s. 2011July 8, 2014

2. Resolution No. 16, Series of 2011 • Issued on July 6, 2011, entitled: “Resolution Adopting the Amended Rules on the Definition and Boundaries of Connection Assets for Customers of Transmission Provider” (“Resolution No. 16”)

3. Amendments Sought by PIPPA … • PIPPA seeks the following amendments to Resolution 16: • First: Replacement of Diagram 4 of Annex C with Diagrams 4-A and 4-B (*Main amendment being sought) • Second: Revision of the definition of “Connection Assets” in Section 2.0 of Annex A • Third: Inclusion of the definitions of “Generator”, “Distribution Utility” and “Load Customer” in Section 2.0 of Annex A

4. First Proposed Amendment … • Replace Diagram 4 of Annex C with Diagrams 4-A and 4-B PIPPA’s Reasons: • Proposed Diagrams 4-A and 4-B distinguish between assets that are shared with another Generator and those that are not, whereas Diagram 4 does not. • Unlike Diagram 4, the Proposed Diagrams are consistent with Section 4.2 of Annex A: “Connection Assets for Generation Customers of Transmission Provider include those assets from the last Single Mechanical Connection of a User System or Equipment of a Generator, at its Connection Point, to the last Single Mechanical Connection which is not shared with another Generator within the Grid”.

5. First Proposed Amendment … • The Published Diagram erroneously classifies connection assets such as switchyard or related facilities as transmission assets if another customer of NGCP happens to be connected to those facilities, even if that other customer is merely a loadcustomer of NGCP and is not itself a GenCo …

6. First Proposed Amendment … • Proposed Diagrams 4-A & 4-B:

7. 2nd Proposed Amendment …Revision of the definition of “Connection Assets” in Section 2.0 of Annex A • “Connection Assets (CA): Those assets that are put in place primarily to connect a Customer/s to the Grid and used for purposes of Transmission Connection Services for the conveyance of electricity which if taken out of the System, will only affect the Customer connected to it and will have minimal effect on the Grid, or other connected Customers. For the avoidance of doubt, Connection Assets exclude a User System or Equipment or other Facilities owned by a Customer such as a Load Customer or a Generator, which User System or Equipment or other Facilities shall remain owned by such Customer.” (Proposed revisions underscored) NGCP’s argument: • “NGCP disagrees with the proposal of PIPPA. NGCP proposes that the existing definition be retained.” PIPPA’s counterargument: • It is in the interest of all concerned that the boundaries of “Connection Assets” are clearly defined, especially considering the significant investments required for the construction of new plants to address the country’s rapidly increasing energy requirements.

8. 3rd Proposed Amendment … Add definitions in Section 2.0 of Annex A “Generator: Has the same meaning as Generation Company under the Philippine Grid Code, which is a person or entity authorized by the ERC to operate a facility used in the generation of electricity.” “Distribution Utility: Has the same meaning given to this in the Philippine Grid Code, which is an Electric Cooperative, private corporation, government-owned utility, or existing local government unit that has an exclusive franchise to operate a Distribution System.” “Load Customer: A Distribution Utility or other End User that receives electricity through the Grid.” NGCP’s argument: • “NGCP is in a position that it is best practice to cross reference the definition with the primary document.” PIPPA’s counterargument: • Resolution 16 does not say which document should be cross-referenced for the definition of these terms; not ideal considering the myriad ERC issuances existing

9. NGCP’s “Counter-Proposal” (to 1stAmendment) … • NGCP’s proposed solution:revise the definition of “Connection Assets for Generation Customers of Transmission Provider” to make it consistent with Diagram 4, Annex C of Resolution 16: “Connection Assets for Generation Customers of Transmission Provider include those assets from the last Single Mechanical Connection of a User System or Equipment of a Generator, at its Connection Point, to the last Single Mechanical Connection which is not shared with another GeneratorCustomer within the Grid.”(Section 4.2, Annex A) PIPPA Counter: • NGCP’s proposal is unusual. It is Diagram 4 that should be amended and not the definition in Section 4.2, because the diagram was meant to illustrate the definition, and not the other way around. • The existing definition in Section 4.2 is consistent with the definitions contained in previous issuances of the ERC (Resolutions 25 as and 41) pursuant to which the GenCos have designed their Generation Plants.

10. NGCP’s Main Argument against Proposed Amendment… • Diagram 4 is “consistent with Section 9 of the EPIRA”, which provide: “A generation company may develop and own or operate dedicated point-to-point limited transmission facilities that are consistent with the TDP : Provided, That such facilities are required only for the purpose of connecting to the transmission system, and are used solely by the generating facility,subject to prior authorization by the ERC ...” (Section 9 of EPIRA; emphasis supplied in NGCP presentation) “With an End-user connected at the Generator’s switchyard, the Generator is already performing a Transmission Function”

11. PIPPA’s counter to NGCP’s Main Argument … • NGCP assumes that the switchyard facilities of a Generation Plant are “transmission facilities” -- but they are not • The ERC’s Subtransmission Guidelines, as amended, provides: ‘Transmission Assets’ shall refer to the grid-wide electrical infrastructure through which electricity flows in large quantities between generators or generating plants consisting of several units or blocks of generators and the many more dispersed load centers. *** (Emphasis supplied)” • Thus, functionally, an asset is not a “Transmission Asset” simply because it happens to connect one generation plant to a DU

12. PIPPA’s counter to NGCP’s Main Argument … • The “dedicated point-to-point limited facilities” referred to in Section 9 of the EPIRA and its IRR refers to a line(composed of wires, poles or towers, insulators, line hardware) used to connect a Generation Plant to the grid or to a DU system without any entity connected in between - They do not include the switchyard of the Generation Plant at which one end of thelinehappens to be connected. • The switchyard of the Generation Plant forms part of the GenCo’s User System (Section 5.4.4.1 of the Amended Grid Code)

13. PIPPA’s counter to NGCP’s Main Argument …Dedicated Point-to-Point limited facilities (no tapping between end-points) Power plant/Customer-owned Switchyard or Substation (User System) Transco/NGCP Switchyard or Substation

14. AECOM Report re Definition of Connection Assets in other jurisdictions … • The definition of “Connection Assets” in Section 2.0, Annex A of Resolution 16 is consistent with the definition of connection assets in other jurisdictions • In practice, there is a broad diversity in connection assets, which depends on the intended operational and business purposes they will serve.

15. AECOM Report re Definition of Connection Assets in other jurisdictions … • In most jurisdictions connection assets are established through a connection process, pursuant to “grid investment agreement” between the grid asset owner and the connecting customer. • The type and complexity of the connection assets, and ownership “who provides what” is flexible - a matter of negotiation through the grid investment agreement. • The definition of “Connection Assets” is not a physical or a technical definition, but rather a term that signifies the assets that the connecting customer must provide for himself or, if provided by the grid owner, then assets to which full cost recovery will apply, as set out in the grid investment agreement.

16. AECOM Report – Different Approaches to Connection Assets

17. AECOM Report - AEMC Recommendation for Classification & Ownership (Transmission Frameworks Review 11 April 2012)

18. AECOM Report - Types of assets or equipment considered “Connection Assets” in other jurisdictions … • Connection assets are links in the electricity network that are constructed to connect one grid customer at a location in the network. • There is a broad diversity in types of assets which serve as connection assets, ranging from entire switchyards and transmission lines, to as simple as the conductors that link a generator to a transmission switchyard. The form depends on the purpose they will fulfil.

19. AECOM Report - Types of assets or equipment considered “Connection Assets” in other jurisdictions … • For example, if the need to connect a new power plant to the grid causes the construction of a switchyard, then the purpose of that switchyard is that of a connection asset. • In contrast, if the grid company requires a new switchyard to be constructed to increase grid capacity or reliability, then that switchyard is a grid asset. One cannot be assumed to be the other, because each is created to fulfil separate technical purposes. • Some customers want complex connection assets to provide more flexibility and reliability through redundant plant. Others want the absolute bare minimum because they are not so concerned about reliability/availability but more concerned about the initial cost.

20. AECOM Report - Types of assets or equipment considered “Connection Assets” for Generation Customers of Transmission Provider “ in other jurisdictions … • Is the definition of “Connection Assets for Generation Customers of Transmission Provider” in Section 4.2, Annex A of Resolution 16 consistent with the definition of connection assets in other jurisdictions? • There is a wide diversity in the forms and the extent of connection assets of power plants in other jurisdictions. • There is also wide diversity in the forms and extent of connection assets of distribution customers, which may in turn, connect generation with the grid.

21. AECOM Report - Types of assets or equipment considered “Connection Assets” in other jurisdictions … NETWORK

22. AECOM Report - Examples 115 kV Switchyard & Line supplying local Distribution Customer The 500 kV Connection Assets of Nam Theun 2 Corporation - Laos ~ 320 km of 500 kV Transmission Line Connecting NT2 to EGAT RE2 Substation

23. AECOM Report - Captive Power Plant Built or Taken Over, By a Generation Company - Examples • At; Industry Parks - Steel Mills – Oil & Gas Facilities – Pulp & Paper Mills – Sugar Refineries – Mines – Port Facilities – Municipal Substations - - - - Etc.

24. AECOM Report - Types of assets or equipment considered “Connection Assets” in other jurisdictions … • All of the power plant projects completed by my AECOM T&D Group in the last four or five years have been Hybrid and Embedded generation projects. • These were: NT2, Banpu, McKee, Mokai, Nga Awa Purau, Ngatamariki, Rotokawa, Condong, Broadwater, and Norske Skog. • None of these are direct connected generators. All these generators are connected to NO/NSP via HV Switchyard owned by either the Generator or the Industrial Customer. • No one questions that a Distribution Company “Grid User” owns switchyards for its distribution business purposes. Why should we question that a Generation Company would own switchyards?

25. 1st NGCP Comment to the AECOM Report … NGCP Comment: The Report does not consider NGCP’s main argument that … “Resolution 16 did not reclassify the Genco Switchyard and other related facilities into transmission assets”. AECOM Reply: • Energy law very young law and due for change, according to: “not what is, but what could be”, i.e., music industry and national postal service vis-à-vis banking/financial services • The Australian Energy Market Commission (AEMC) has in the Transmission Frameworks Review ‐ Chapter 11, called for contestable ownership of power plant switchyards , to end the economic inefficiencies and the asymmetry in negotiating power between connection proponents and the Grid Company

26. NGCP’s 2nd Argument vs PIPPA 1st Amendment … • The switchyards should be transferred to NGCP because of “Competitive Purposes”. • “The generator is already competing with the transmission provider”; and • DU’s connected to Grid via generator-owned asset cannot procure and compete for the lowest priced electricity” • “Owner of generator-connection asset can deny access between competing generators/RES”; • “No alternative source of supply if generator connection to the grid is unavailable”; and • “The alleged ‘savings’ of the DUs can easily be wiped out by uncompetitive pricing.”

27. PIPPA’s counter to NGCP’s 2nd Argument … • GenCos are not in competition with NGCP • “Competitive purposes” refers to competition among Generation Companies. • reason for transferring ownership of the assets to a third party (i.e. NGCP) – so that a GenCocannot control the ability of another GenCo to supply electricity to the Grid • transferring ownership of these assets to NGCP unfairly favors one competitor (NGCP) against the other (GenCo) • GenCos do not compete with the DU’s • No DU is compelled to purchase electricity from a particular GenCo, whether or not it is directly connected to the DU • A direct connection to a GenCo benefits the DUs and their customers because of “cheaper electricity” - No PDS charges • Frequently, DUs directly connected to a GenCo are also connected to the Grid via another line

28. AECOM Report - With regard to a switchyard being an integral part of a power plant … • A switchyard is part of a power plant, if it has been built primarily for the purpose of conducting the business of power generation. • New power plant is developed near its fuel source. It will have a switchyard – for its own operational & business purposes – reliability, maintenance, expansion, etc. • A switchyard is not part of a power plant if it has been built primarily for the purposes of the shared grid, even if power plant connects to it.

29. AECOM Report - With regard to a switchyard being an integral part of a power plant … • In a contestable generation environment, the purposes for which a power plant owner owns a switchyard, are his own. We can presume they are related to the way he wants to conduct his business. • His commercial art, must be private and confidential in the normal commercial sense. We can just say the switchyard is a part of his business. If he no longer requires it, he could choose to sell it to a willing buyer. • In contrast, the grid owner would rightly construct a switchyard once it has completed a formal planning process, which demonstrates the need for a defined, least-cost augmentation of the system.

30. AECOM Report - With regard to a switchyard being an integral part of a power plant … • Before the deregulated electricity system, the Generation Development Group of the vertically integrated electricity company always specified and developed a switchyard as a part of a power station development. • The job of the Transmission Group was to develop only grid substations and switching stations in order to strengthen and increase grid capacity.

31. 2nd NGCP Comment to the AECOM Report … NGCP Comment: “We need to own the power station switchyardsbecause we rely for grid security on the correct performance of equipment that is owned by NGCP” AECOM Reply: • this is a narrow view which is not in keeping with the realities which underpin grid security. • The continued maintenance of grid security is, and will always be, utterly reliant on plant and equipment which is owned and operated by grid users • Rather than improving security, the modified facilities would increase the complexity and decrease the rationality of the systems,

32. AECOM Report - With regard acquisition by NGCP of a plant’s switchyard to ensure grid security… • “The acquisition of a power plant’s switchyard does not affect Grid Security.” • There are no means by which the acquisition of a grid-user customer’s assets could be justified under a regulated, grid investment process. • If there is a need for any asset, then the Grid Investment Process ensures that grid company can fund its own asset.

33. AECOM Report - Taking over the Switchyards is expansion of the Grid

34. AECOM Report - The process that a regulated grid company uses to justify Grid expansion involves a three-step process • Demonstration of the need for an addition to the grid through a process of engineering and economic assessment by valid means. For example, simulation. • Consideration of a range of valid alternative solutions, to determine the solution with the least cost. • Demonstrating that the cost of the proposed solution will return benefits to grid users that are in excess of the cost imposed by the proposed solution. • Investment proposals are subjected to a Regulatory Investment Test – (RIT).

35. AECOM Report - Regulatory Grid Investment Test:

36. AECOM Report:The Rationale for the RIT Rule Change

37. AECOM Report - “With regard NGCP’s acquisition of a power plant’s switchyard for Grid Security” • I know of no mandate by which it could disrupt its customers’ businesses by breaking them up. • I know of no cases wherein Power Plant switchyards have been compulsorily acquired from Power Plant Owners by the Grid Company. • I have been Expert Witness in the break up of a Power Generation Business wherein the High Court decided that:- “Any assets created as part of Power Plant are parts of the Power Plant and must remain with the Power Plant in the division of assets to be sold separately.” • Transferring ownership of power plant switchyards would DECREASE RELIABILITY and INCREASE THE COST of the grid for users and the public.

38. AECOM Report: Existing Systems Need to be Modified: – Loss of Reliability – Loss of production due to shut-downs

39. AECOM Report Mostly - the only effective approach is to undertake a Complete Rebuild.

40. AECOM Report: Increased Cost - Existing Control Stations must undergo Detailed Modifications

41. AECOM Report: More effective ways to achieve grid security … • There are many and better ways of improving grid reliability other than increasing the number of assets Better designs - better materials – more standardisation – Reliability Centred Maintenance – (FMECA) – clear and exacting systems performance requirements – better condition monitoring and testing – better in-service training of engineers – stricter compliance and reporting – proactive investigations of non-compliances – well developed codes and standards of performance – • and also: “N-1 and “N-2”

42. AECOM Report: More effective ways to achieve grid security … • For the Transmission Industry; the formal consideration of reliability centres on “N-1” and “N-2”, which is not efficient. • Other reliability techniques are not formally implemented within utilities.Grid reliability would benefit from any and all of the initiatives listed on the previous slide. • Current initiatives being undertaken by utilities include: • Changing the utility’s culture from being “CAPEX-led” to being “Services-led” with “Asset Management” as the focus. • Improving the quality of organisational function e.g., training and adopting PAS55, is the current target for leading utilities.

43. AECOM Report: More effective ways to achieve grid security … • No effect on grid security if a power plant’s switchyard connects the plant to the grid and at the same time directly connects the plant to a distribution utility, if correctly engineered and adequate planning and operational processes are followed. • There is a recognised commercial problem - the reduction in Grid Company Revenues resulting from such connections. • The commercial concerns of the grid company can be addressed, but not by restricting connections.

44. AECOM Report: Direct Connection and Operational Efficiency • Direct connection to a DU enhances a power plant’s operational efficiency. • Serving local load reduces transmission losses and therefore increases power plant efficiency • Most System Operators formally practice “Locational Marginal Pricing” (LMP) to weight the bid-prices in favour of power plants that are closest to the load prior to determining the order of dispatch. • The method of determining LMPs is to consider the system losses.

45. AECOM Report: Direct Connection and Operational Efficiency • Many technical advantages of connecting a DU directly to the switchyard of a power plant • The main advantage is an improvement the efficiency of the utilisation of the transmission grid assets. • There is also a general improvement in the reliability of supply for the local distribution customers, if the facility is effectively engineered. • There are no disadvantages.

46. 3rd NGCP Comment to the AECOM Report … NGCP Comment: “Institutional arrangements such as MOA’s recommended by AECOM as the least cost solution to grid reliability will not capture the peculiarities in the switchyard operations ” AECOM Reply: • (In my experience,) both power plant owners and grid owners contract out this kind of work (O&M) to the same qualified third parties operating in the commercial services sector, with satisfactory results. • Conversely, the failure to do so, creates a poverty of ideas and points of view, promoting frailty in the approaches being practiced, which not only creates inefficiency, but can lead to a decrease in grid security

47. AECOM Report: Hybrid & Embedded Generation • Hybrid embedded generation (where a power plant is connected to a grid and at the same time directly connected to a distribution utility or other end user) is allowed in other jurisdictions • In fact, it is very actively encouraged by governments, and actively facilitated by Electricity Regulators through preparation of suitable codes and standards for planning, connections and operations.

48. Re Hybrid & Embedded Generation • Issues in determining whether or not hybrid & embedded generation should be allowed: • Precedent – they existed in isolation before the grid, and continue operation after grid connection • Requirement for green energy, and energy efficiency • Advances in technology have created many new forms • Effective international standards have been prepared allowing ease of connection and operation. • Issues in determining why they are not allowed: • Opposition from Grid Companies about loss of revenue and increasing operational complexity of the grid • Lack of grid planning processes that allow for the effects and the needs of HG/EG • Poor technical administration of connection processes • Misplaced concerns about the security impacts on the grid

49. Impact of Embedded Generation on Network Company Profits

50. Re Hybrid & Embedded Generation • Hybrid & embedded generation is encouraged in – All States of the European Union - The United Sates –Australia - New Zealand - The Pacific Islands - Parts of Asia – e.g. Singapore, Laos. It is the Future