RP s MARCH TOWARDS ENERGY INDEPENDENCE

2. OUTLINE OF PRESENTATION Power Sector Reforms New Power Sector Structure Privatization Open Access & Retail Competition Other Power Sector Reforms Power Supply-Demand Profile (National, Luzon, Visayas, Mindanao) NPC Financial Status Update on the Oil Industry Energy Independence Agenda Energy Mix 5-Point Plan Legislative Agenda TransCo Franchise Bill Natural Gas Bill Renewable Energy Bill LPG Bill Conclusion

5. R.A. 9136 took effect on June 26, 2001 Provides for the: Privatization of the National Power Corporation (“NPC”) Creation of Transmission Company (“TRANSCO”) Creation of Power Sector Asset and Liabilities Management Corporation (“PSALM”) Creation of Wholesale Electricity Spot Market (“WESM”) Creation of Energy Regulatory Commission (“ERC”) Establishment of Open Access for competitive consumers

7. Privatization by concession 25 year lease, renewable for 25 years Finance, operate, expand, maintain and manage facilities Attractive to investors if franchise transfers to Concessionaire PSALM to secure congressional franchise after selecting Concessionaire Purchase consideration to include deferred payments Performance-Based Rate Methodology promulgated by ERC in May 2003 (first PBR in the region)

9. Approval of unbundled transmission and distribution wheeling charges Initial implementation of cross subsidy removal scheme Establishment of wholesale electricity spot market (WESM) Privatization of at least 70% of total capacity of generating assets of NPC in Luzon and Visayas Transfer of management and control of at least 70% percent of total energy output of power plants under contract with NPC to IPP Administrators (IPPAs)

10. Generation and transmission functions of NPC already unbundled Need to complete the unbundling of electricity rates to identify and separate charges relating to generation, transmission, distribution and supply 76% of rate unbundling cases filed with ERC by DUs resolved as of June 2004 Loan condonation for all 119 electric cooperatives (P18 Bn)

11. EPIRA requires only the initial removal of cross subsidies in order to implement open access For NPC, this involves removal of inter-grid (e.g., between Luzon, Visayas Grids) and intra-grid (e.g., within the Luzon Grid) subsidies For DUs, this involves removal of inter-class subsidies (e.g., between industrial and residential classes). Initial year of intra-grid cross subsidy removal (equivalent to one-third of the cross subsidy) began Sept. 2003

12. Constitution of the Phil. Electricity Market Corp. Board in Nov. 03 Demo WESM inaugurated in Dec 03 Contract for MMS software awarded last Feb. 2004 Price-Determination Methodology (PDM) for pricing of electricity traded in the WESM, approved in principle by ERC in March 2004 Constitution of AGMO by Sept. 04 Market trials for bidding of electricity to commence in June 05 Target commercial operation by Jan. 06

13. 70% NPC Luzon & Visayas capacity to be privatized by end-2005 Three gencos already privatized: 3.5 MW Talomo HEP 1.6 MW Agusan HEP 1.8 MW Barit HEP Precedents to accelerated privatization of NPC assets: Expedite NG absorption of NPC debt to secure consent of creditors for asset and debt transfer Transfer of NPC assets to PSALM /TRANSCO Transfer of NPC debts to PSALM Negotiate Transitional Power Supply Contracts (TSCs) with DUs Secure franchise for Transco privatization

14. Transfer to IPP Administrators (IPPAs) to be effected on or shortly before an operational WESM (Jan 2006) Ongoing review of implementation details by PSALM

15. Electric Cooperative Enhancement Systems Loss national average from 15.63% in 2002 reduced to 15.08% in 2003 Aklan showed the biggest improvement with almost 8% reduction in systems loss Masbate marked 6.30% improvement Rule of thumb: 1% reduction in systems loss ? P 360 Mn savings to the electric cooperatives P/GMA Challenge to further reduce SL to a single digit national average before 2010 Participation of private sector through Investment Management Contracts (IMC) Management Academy for ECs

16. IPP Contracts reviewed and renegotiated resulting in US$1.03 billion savings in NPV terms

18. MERALCO 1,316,329 Davao Light 77,268 Dagupan Electric 29,289 Cagayan Electric 28,440 Cabanatuan Electric 17,431 Iligan Light 16,418 Panay Electric 14,754 Cotabato Light 3,783 TOTAL 1,503,691

31. Tariff adjustment NPC debt absorption by NG Ensure successful privatization of TransCo & Genco assets Ensure privatization and management of NPC IPPs Provide competitive power rates Introduction of time-of-use tariff Elimination of cross-subsidy between industrial and residential users

36. Market: 374 players engaged in different downstream activities Liquid Fuel Bulk Marketing 54 Liquid Fuel Retail Marketing 286 LPG Bulk Marketing 11 Terminalling 3 Bunkering 20 Total demand: 0.317 million barrels/day or 0.36% of the world oil demand Supply: current inventory recorded at 14,481 MB (or 50 days supply) Prevailing Domestic Prices In Metro Manila: Unleaded Gasoline P25.35 – P26.38 / liter Kerosene P20.14 – P21.58 / liter Diesel P19.90 – P20.75 / liter LPG (11kg) P331 – 369

38. Energy self-sufficiency level which increased from 45.5% in 2001 to 50.9% in 2002 will continue to be above 50% in 2003. This will be the result of the projected increase in natural gas production from 11.2 MMBFOE in 2002 to 26.3MMBFOE in 2003Energy self-sufficiency level which increased from 45.5% in 2001 to 50.9% in 2002 will continue to be above 50% in 2003. This will be the result of the projected increase in natural gas production from 11.2 MMBFOE in 2002 to 26.3MMBFOE in 2003

40. In 2003, the 3 biggest users of oil are: Transport sector, which consumed 58.01 MMBFOE Industrial sector, which consumed 12.09 MMBFOE or 14% of total oil consumption Residential sector, which consumed 7.05 MMBFOE or 8% of total oil consumption Among the 3, the biggest user is the transport sector accounting for 68% of total oil consumptionIn 2003, the 3 biggest users of oil are: Transport sector, which consumed 58.01 MMBFOE Industrial sector, which consumed 12.09 MMBFOE or 14% of total oil consumption Residential sector, which consumed 7.05 MMBFOE or 8% of total oil consumption Among the 3, the biggest user is the transport sector accounting for 68% of total oil consumption

41. The increase in fuel taxation will be significantly felt by the more affluent sector of the society (private car owners belong to the middle to upper income class) than the low income group. Impact: A family that logs 10,000 kms per year (based on GTZ estimate of average distance traveled for cars, I.e., 10,000 kms) at an average of 16 kms/liter (based on the results of fuel economy run) will have to spend around P1,250 per annum if gas prices go up by P2 due to increase in fuel tax. However, if conservation and efficiency measures are employed by car owners, this additional expense may be avoided. The P1,250 additional expense translates to 45 kms of distance traveled (using gasoline pump price of P27.73 which already includes the P2 tax increase). This means that if one reduces the distance traveled by at least 45 kilometers in a given year (maybe by planning one’s trips), the P2 increase in fuel taxation would not be felt. The increase in fuel taxation will be significantly felt by the more affluent sector of the society (private car owners belong to the middle to upper income class) than the low income group. Impact: A family that logs 10,000 kms per year (based on GTZ estimate of average distance traveled for cars, I.e., 10,000 kms) at an average of 16 kms/liter (based on the results of fuel economy run) will have to spend around P1,250 per annum if gas prices go up by P2 due to increase in fuel tax. However, if conservation and efficiency measures are employed by car owners, this additional expense may be avoided. The P1,250 additional expense translates to 45 kms of distance traveled (using gasoline pump price of P27.73 which already includes the P2 tax increase). This means that if one reduces the distance traveled by at least 45 kilometers in a given year (maybe by planning one’s trips), the P2 increase in fuel taxation would not be felt.

42. Chapter IV Section 14 of Republic Act 8479, otherwise known as the Downstream Oil Industry Deregulation Act of 1998, mandates the DOE to monitor and publish daily international crude oil prices, as well as follow the movements of domestic oil prices. The latest ERB-approved APM (Automatic Pricing Mechanism), uses Dubai crude oil as reference, being the crude oil benchmark in Asia and the nearest type of crude which yields similar percentage of products compared to our local demand. Historical figures show that Dubai crude oil peaks during periods of conflicts in the Middle East, highest at $31.52/bbl during the Gulf crisis in 1990. However, in October last year, similar peak was reached at $30.52/bbl when OPEC cartel cut their production and forged a supply management agreement to keep price of crude oil within the band of 22-28 US $/bbl. Today, OPEC targets a narrower price band of $24-26/bbl, again to protect their supply within the manageable level.Chapter IV Section 14 of Republic Act 8479, otherwise known as the Downstream Oil Industry Deregulation Act of 1998, mandates the DOE to monitor and publish daily international crude oil prices, as well as follow the movements of domestic oil prices. The latest ERB-approved APM (Automatic Pricing Mechanism), uses Dubai crude oil as reference, being the crude oil benchmark in Asia and the nearest type of crude which yields similar percentage of products compared to our local demand. Historical figures show that Dubai crude oil peaks during periods of conflicts in the Middle East, highest at $31.52/bbl during the Gulf crisis in 1990. However, in October last year, similar peak was reached at $30.52/bbl when OPEC cartel cut their production and forged a supply management agreement to keep price of crude oil within the band of 22-28 US $/bbl. Today, OPEC targets a narrower price band of $24-26/bbl, again to protect their supply within the manageable level.

43. International oil prices hit all-time high Steep demand in China and India due to increased economic activities Decreasing spare production and refining capacity Speculative trading activities rather than supply and demand fundamentals Terror alerts in the US Unresolved tax problems between Yukos and the Russian government Sabotage on Iraqi pipelines Government has no control over the international oil price surge Price rather than a supply problem Government has no resources to subsidize oil prices

47. Regulated environment : Only three companies in operation; All are refiners Practically all supplies were locally sourced, with refinery utilization reaching more than 85% Thermal power plants (Sucat, Malaya, Tegen) were in full operation hence the higher demand for bunker fuel Demand mix similar to hydroskimming yield of Dubai which is a heavy crude Government Subsidy (OPSF) to stabilize prices Guaranteed return of 6-10% Deregulated Environment: Entry of new players; All direct importers Clean Air Act requires importations of higher qualify fuels the quality of which local refiners cannot meet Decrease in the demand for bunker fuel, following decommissioning of thermal plants which modified the demand mix to favor importation of lighter crude No OPSF, No subsidy Power of Choice for consumers No guaranteed return

53. Deregulation considered as a success in view of: Increased players in the market providing better competition Increased new investments in bulk & retail businesses Better ancillary services Wider access of petroleum products outside Metro Manila Enhanced consumers power of choice LPG safety standards need further strengthening through legislative measures To give more teeth to implement sanctions to violators To establish safety standards for consumer protection

55. Energy self-sufficiency level which increased from 45.5% in 2001 to 50.9% in 2002 will continue to be above 50% in 2003. This will be the result of the projected increase in natural gas production from 11.2 MMBFOE in 2002 to 26.3MMBFOE in 2003Energy self-sufficiency level which increased from 45.5% in 2001 to 50.9% in 2002 will continue to be above 50% in 2003. This will be the result of the projected increase in natural gas production from 11.2 MMBFOE in 2002 to 26.3MMBFOE in 2003

56. Energy self-sufficiency level which increased from 45.5% in 2001 to 50.9% in 2002 will continue to be above 50% in 2003. This will be the result of the projected increase in natural gas production from 11.2 MMBFOE in 2002 to 26.3MMBFOE in 2003Energy self-sufficiency level which increased from 45.5% in 2001 to 50.9% in 2002 will continue to be above 50% in 2003. This will be the result of the projected increase in natural gas production from 11.2 MMBFOE in 2002 to 26.3MMBFOE in 2003

57. Increase reserves of indigenous oil and gas Aggressively develop renewable energy potential such as biomass, solar, wind and ocean resources Increase the use of alternative fuels Form strategic alliances with other countries Strengthen & enhance energy efficiency and conservation programs

58. Intensive promotion of oil & gas exploration PCR-1 launched in August 2003 offering 46 contract areas 2 blocks bidded by BHP Billiton, Amerada Hess & Occidental Petroleum PCR-2 to be launched in 2005 More investments expected to be generated if Supreme Court reconsiders Mining Act ruling

59. Strengthen Philippine National Oil Company to take the lead in the development of indigenous energy sources PNOC Energy Development Corp. (PNOC-EDC) to increase geothermal capacity and become a geothermal world leader PNOC Exploration Corporation (PNOC-EC) to be strengthened to increase new oil & gas discoveries PNOC Petrochemical Dev’t. Corp. to play a key role in the development of the petrochem industry PNOC Shipping & Transport Corp. to modernize fleet thru strategic alliances with the private sector to bring fuel to demand centers

60. To be the world’s leader in geothermal energy Active promotion of geothermal exploration through Geothermal Bid Round 10 prospective geo sites with 300 – 510 MW potential capacity Bidding extended to November 2004 4 Japanese, 1 American firms interested to bid

61. To be the largest wind power producer in SEA Launched the first ever wind investment kit for 16 wind power areas with 345 MW potential capacity in June ‘04 Groundbreaking of Northwind’s 25MW Wind power project in Bangui, Ilocos Norte in April ‘04 Inaugurated the first commercial 1.1 MW wind-diesel hybrid project in Batanes in Aug. ‘04

62. Infrastructure development BatMan 1 & spur lines by 2007 LNG Terminal by 2008 Power Sector Conversion of existing and decommissioned power plants Construction of greenfield power plants Transport Sector Commercial operation of CNG buses CNG buses to start plying major routes of Manila to Laguna by 1Q ‘05 Local bus operators to sign purchase contracts for 140 units of CNG buses from China by Sept. ‘04 Establish Mother-Daughter station by 1Q ‘05 Industrial Introduction of combined heat & power systems by 2007

63. Acceleration of the Coco Bio-Diesel Program Memo Circular 55 to utilize coco-based diesel on government vehicles signed in Feb. ‘04 Program officially launched in April ‘04 Commercial utilization in July ‘04 Development of Ethanol as gasoline blend Cooperation with Thailand One major oil company willing to support Support from the Dept. of Agriculture & Sugar Planters Association of the Phils. crucial

64. Cooperation with Thailand for possible use of Subic as regional storage facility Joint development efforts on upstream exploration with neighboring countries Russia as a new oil supplier Australia, China and Indonesia as primary coal suppliers

65. DOE to push for mandatory implementation of nationwide energy efficiency & conservation program CNG for transport buses Biofuels as mandatory fuel blends Expand scope of energy labeling to other appliances, vehicles, electrical devices & equipment Shift to energy efficient lighting in residential, commercial & industrial establishments

66. National Energy Efficiency and Conservation Program to be launched on 25 August 2004 To help mitigate impact of rising oil prices To reduce expenditures on fuel and power To contribute to environment protection program Fuel Efficiency & Conservation Program Voluntary Agreements (e.g., anti-idling campaign, carpooling, carless days) Partnership with leading fast food chains, ecozones, industries, companies Energy Labeling & Efficiency Standards (e.g., fuel efficiency rating labels in auto dealers showroom) Energy Audits & Demand Side Management Mandatory reduction of fuel consumptions among government agencies

68. Legislative measures critical to the country’s thrust of energy independence TransCo Franchise Bill Enhancement of value of transmission assets to potential concessionaires Natural Gas Bill Promotion of nat gas as a secure, stable and clean source of energy Promotion of competition by liberalizing entry and fair trade measures Renewable Energy Bill Promotion of RE resources through the provision of incentives Preferential treatment in terms of interconnection, dispatch LPG Bill Provision of more stringent safety standards Provision of stringent penalty / sanctions to violators Alternative Fuels Utilization Bill Promotion of wider utilization of alternative fuels