Project Number: 36018 Loan Number: 1984 January 2012

Philippines: Electricity Market and Transmission

Development Project

Completion Report

CURRENCY EQUIVALENTS

Currency Unit – peso (P)

At Appraisal At Project Completion 4 November 2002 3 August 2009

P1.00 = $0.0189 $0.0208 $1.00 = P53.00 P48.20

ABBREVIATIONS ADB – Asian Development Bank DOE

DSCR ECC EIRR EPIRA ERC FIRR ICB IDC IMO JBIC LARP LGU LRMC Meralco MMS NGCP NPC O&M PCR PEMC PSALM ROW RRP TA TDP Transco WACC WESM

– – – – – – – – – – – – – – – – – – – – – – – – – – – – –

Department of Energy debt service coverage ratio environmental compliance certificate economic internal rate of return Electric Power Industry Reform Act Energy Regulatory Commission financial internal rate of return international competitive bidding interest during construction independent market operator Japan Bank for International Cooperation land acquisition and resettlement plan local government unit long-run marginal cost Manila Electric Company market management system National Grid Corporation of the Philippines National Power Corporation operation and maintenance project completion report Philippine Electricity Market Corporation Power Sector Assets and Liabilities Management Corporation right-of-way report and recommendation of the President technical assistance Transmission Development Plan National Transmission Corporation weighted average cost of capital wholesale electricity spot market

WEIGHTS AND MEASURES

km – kilometer kV – kilovolt MW – megawatt MWh – megawatt-hour

NOTE

(i) In this report, ―$‖ refers to US dollars.

Vice-President S.P. Groff, Vice-President, Operations 2 Director General K. Senga, Southeast Asia Department (SERD) Director A. Jude, Energy Division, SERD Team leader R. Kausar, Unit Head, Project Administration, SERD Team members R. Butler, Safeguards Specialist (Resettlement), SERD A. Fernando, Project Analyst, SERD P. Hattle, Energy Specialist, Pacific Department

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i

MAPS v

I. PROJECT DESCRIPTION 1

II. EVALUATION OF DESIGN AND IMPLEMENTATION 2

A. Relevance of Design and Formulation 2 B. Project Outputs 3 C. Project Costs 4 D. Disbursements 4 E. Project Schedule 5 F. Implementation Arrangements 6 G. Conditions and Covenants 6 H. Related Technical Assistance 7 I. Consultant Recruitment and Procurements 7 J. Performance of Contractors, Suppliers, and Consultant 7 K. Performance of the Borrower and the Executing Agency 8 L. Performance of the Asian Development Bank 9

III. EVALUATION OF PERFORMANCE 9

A. Relevance 9 B. Effectiveness in Achieving Outcome 9 C. Efficiency in Achieving Outcome and Outputs 10 D. Preliminary Assessment of Sustainability 11 E. Impact 11

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 13

A. Overall Assessment 13 B. Lessons 13 C. Recommendations 14

APPENDIXES 1. Project Framework 16 2. Chronology of Events–Project Processing and Implementation 20 3. Chronology of Events–Land Acquisition and Resettlement Plan 22 4. Project Outputs–Appraisal vs. Completion 23 5. Quarterly Actual Disbursements (ADB Portion) 24 6. Quarterly Actual Disbursements (Japan Bank for International Cooperation Portion) 25 7. Japan Bank for International Cooperation Disbursement Based on Components 26 8. Implementation Schedule (Appraisal vs. Actual) 27 9. Status of Compliance with Project Covenants 28 10. WESM’s Load Weighted Average Prices 31 11. System Peak Demand and Dependable Generation Capacity 33 12. Financial Analysis for WESM Component 35 13. Financial Analysis for Transmission Development Component (2007–2053) 36 14. Status of Right-of-Way Compensation Payments 40 38

BASIC LOAN DATA

A. Loan Identification 1. Country Republic of the Philippines 2. Loan Number 1984 3. Project Title Electricity Market and Transmission Development Project 4. Borrower National Power Corporation 5. Guarantor Republic of the Philippines 6. Executing Agency National Transmission Corporation 7. Loan Amount $40.00 million 8. Project Completion Report Number PCR:PHI 1316

B. Loan Data

1. Fact-finding 2–26 April 2002

2. Appraisal – Date Started 22 July 2002 – Date Completed 9 August 2002

3. Loan Negotiation 14 November 2002

4. Date of Board Approval 19 December 2002

5. Date of Loan Agreement 16 December 2003

6. Loan Effectiveness

– In Loan Agreement 15 March 2004 – Actual 9 March 2004 – No. of Extensions None

7. Closing Date

– In Loan Agreement 30 June 2009 – Actual 3 August 2009 – No. of Extensions None

8. Terms of Loan

– Interest Rate ADB’s London Interbank Offered Rate– based lending facility

– Maturity (years) 20 – Grace Period (years) 6 – Commitment Fee 0.75% per annum of the

undisbursed portion of the loan – Front-End Fee 1% of the amount of the loan – Amortization Semiannual payments from 15 April

2009 to 15 October 2022

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9. Disbursements (ADB Portion Only) a. Dates

Initial Disbursement Final Disbursement Time Interval

31 March 2004 3 August 2009 64 months

Effective Date Closing Date Time Interval

9 March 2004

3 August 2009

65 months

b. Amount ($ million)

Reference Number Category

Original Allocation

Last Revised

Allocation Amount

Disbursed Undisbursed

Balancea

1 WESM hardware and software installation

1.80 0.73 0.73 0.00

2 Turnkey contract for Luzon transmission line and substation

26.00 28.47 28.77 (0.30)

2A Calamba Tower 50 to Biñan Transmission Line

0.00 4.00 2.68 1.32

3 Mindanao substation equipment (JBIC)

0.00 0.00 0.00 0.00

4 Consulting services (JBIC)

0.00 0.00 0.00 0.00

5 Front-end fee 0.40 0.40 0.40 0.00 6 Interest and commitment

charge 6.40 6.40 3.01 3.39

7 Unallocated 5.40 0.00 0.00 0.00 Total 40.00 40.00 35.59 4.41

JBIC = Japan Bank for International Cooperation, WESM = wholesale electricity sport market, ( ) = negative. a

final cancelled amount Source: Asian Development Bank.

10. Local Costs (Financed) – no local costs financed by ADB

C. Project Data

1. Project Cost ($ million) Cost Component Appraisal Estimate Actual Cost

Foreign Exchange Cost Local Cost

Total

85.5 20.5 106.0

66.9 23.5 90.4

Sources: Asian Development Bank; Japan Bank for International Cooperation; National Transmission Corporation.

2. Financing Plan ($ million) Financing Appraisal Estimate Actual Cost

A. Implementation Costs 1. ADB Financed 2. Other External Financing (JBIC) 3. Borrower Financed

Subtotal (A)

33.2

45.5a

20.5 99.2

32.2 31.3 23.4 86.9

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Financing Appraisal Estimate Actual Cost

B. IDC and Front-end Fee 1. ADB Financed 2. Borrower Financed

Subtotal (B) Total

6.8 0.0 6.8

106.0

3.4 0.0 3.4

90.4

ADB = Asian Development Bank, IDC = interest during construction, JBIC = Japan Bank for International Cooperation. a At appraisal, JBIC’s commitment was $45.5 million. However, JBIC’s board of directors only approved a loan amount of $40 million. The borrower was to shoulder the balance. Sources: Asian Development Bank; Japan Bank for International Cooperation; National Transmission Corporation.

3. Cost Breakdown by Project Component ($ million)

Item

Appraisal Estimate ($ million equivalent)

Actual Cost ($ million equivalent)

Foreign Local Total Foreign Local Total

Part A: Electricity Market 1. Hardware and Software 21.0 1.0 22.0 8.4 0.0 8.4 2. Project Management 2.0 1.0 3.0 2.1 0.2 2.3 3. Metering Instrument

a 0.0 0.0 0.0 2.7 0.0 2.7

Subtotal (Part A) 23.0 2.0 25.0 13.2 0.2 13.4 Part B: Transmission Development

1. Luzon Transmission Upgrade 26.0 12.0 38.0 28.8 19.1 47.9 2. Calamba Tower 50 to Biñan

a 0.0 0.0 0.0 10.8 3.4 14.2

3. Mindanao Substation Expansion 11.0 1.5 12.5 10.7 0.8 11.5 Subtotal (Part B) 37.0 13.5 50.5 50.3 23.3 73.6 Contingencies/IDC 25.5 5.0 30.5 3.4 0.0 3.4

Total 85.5 20.5 106.0 66.9 23.5 90.4 IDC = interest during construction. a

New item added during project implementation, funded from the loan savings. Sources: Asian Development Bank; Japan Bank for International Cooperation; National Transmission Corporation.

4. Project Schedule

Item Appraisal Actual

Part A: Electricity Market 1. WESM MMS

Bid Opening Contract Effectiveness Completion Date

2. Project Management (Consultancy) Bid Opening Contract Effectiveness Completion Date

3. Metering Instruments (Supply)

Bid Opening Contract Effectiveness Completion

Part B: Transmission Development 1. Luzon Transmission Upgrade

i. San Manuel–Concepcion–Mexico Transmission Line Bid Opening Contract Effectiveness Completion Date

ii. San Manuel, Concepcion and Mexico Substation Upgrade

Bid Opening Contract Effectiveness

2 December 2002 2 June 2003 30 December 2004 2 December 2002 2 June 2003 30 December 2004 22 December 2004 21 April 2005 15 February 2006 1 April 2004 1 July 2005 30 June 2008 1 April 2004 1 July 2005

30 June 2003 17 March 2004 30 December 2005 20 June 2003 17 March 2004 31 October 2005 22 December 2004 22 February 2007 31 December 2007 22 February 2005 19 May 2006 13 October 2008 12 April 2005 5 January 2007

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Item Appraisal Actual

Completion iii. Calamba Tower 50–Biñan Transmission Line

Bid Opening Contract Effectiveness Completion

2. Mindanao Substation Expansion Supply of Equipment Bid Opening Contract Effectiveness Completion

30 June 2008 30 September 2005 29 June 2006 25 April 2007 3 January 2005 2 January 2006 30 September 2007

15 April 2009 13 January 2006 22 February 2008 28 March 2009 11 October 2005 26 June 2007 31 July 2008

MMS = market mmanagement system, WESM = wholesale electricity spot market. Sources: Asian Development Bank; National Transmission Corporation.

5. Project Performance Report Ratings

Implementation Period

Ratings

Developmental Objective

Implementation Progress

From 1 December 2002 to 31 May 2003 Satisfactory Satisfactory From 1 June 2003 to 29 February 2004 Satisfactory Unsatisfactory From 31 March 2004 to 30 June 2009 Satisfactory Satisfactory

D. Data on Asian Development Bank Missions

Name of Mission Date No. of

Persons

No. of Person-

Days Specialization of

Members

Fact-Finding 2–26 April 2002 8 40 a, b, c, d, e, f, g, h Appraisal 22 July–9 August 2002 2 6 f, i Review 15–17 February 2005 (Mindanao) 2 4 f, i 15 March 2005 (WESM) 1 2 f 31 March–1 April 2005 (Luzon) 2 2 f, i Review (Special Follow-Up Mission and Field Inspection)

18–19 October 2005 1 2 e

Review 18 February–8 March 2006 1 3 e, f Review 6–16 March 2007 2 8 e, h Review 31 July 2008 (WESM only) 3 3 f, h Review 6–31 October 2008 5 10 a, b, e, f, i, Review 8 December 2008–16 January

2009 2 14 f, i

Review 9–10 June 2009 2 4 f, i Project completion review

26 May–16 June 2011 2 9 f, i

a = engineer, b = financial analyst, c = counsel, d = environment specialist, e = social development specialist, f = energy specialist, g = programs officer, h = investment specialist, i = project analyst, WESM = wholesale electricity spot market.

v

Map 1

vi

Ma

p 2

I. PROJECT DESCRIPTION

1. In support of the creation of the wholesale electricity spot market (WESM), as embodied in the Electric Power Industry Reform Act (EPIRA) enacted in June 2001, the Asian Development Bank (ADB) and the Japan Bank for International Cooperation (JBIC)1 cofinanced the Electricity Market and Transmission Development Project2. A competitive electricity market requires a functional wholesale market management system and adequate transmission capacity. With the implementation of a WESM, it is expected that competition in the power sector will bring electricity prices closer to marginal cost in the medium and long term. Reinforcement and upgrading of the critical transmission lines and substations in Luzon and Mindanao, as defined in the Transmission Development Plan of 2001–2005 (TDP), will improve reliability of the power supply and help expand rural electrification. 2. ADB approved the project on 19 December 2002 and the loan agreement was signed on 16 December 2003. JBIC and ADB cofinanced the foreign exchange portion of the project, contributing $40 million each. ADB administered both loans in accordance with the co-lenders’ agreement dated 19 May 2004. The National Power Corporation (NPC) was the borrower, the Government of the Philippines was the guarantor, and the National Transmission Corporation (Transco) was the executing agency. As indicated in Schedule 1 of the report and recommendation of the President (RRP), the project has two components: Part A (Electricity Market Component) and Part B (Transmission Development Component). 3. Part A: Electricity Market Component. This included procurement and installation of WESM hardware, software, and system integration including consultancy services, to control and process transactions and functions associated with the market management system and communication infrastructure of the WESM. The hardware included main servers, application servers, meter data servers, data warehouses, e-commerce servers, networking equipment, user interface work stations, rear projection equipment, and backup hardware. The software included standard software, custom tailored software developed for the Philippine WESM, and backup software. 4. Part B: Transmission Development Component

(i) Luzon transmission upgrading. This included procurement and erection of

lines and substation equipment to reinforce and upgrade the existing 230 kilovolt (kV) overhead transmission network in Luzon, which was envisaged to increase transfer capacities to accommodate load growth in related provinces. The San Manuel–Concepcion (80 kilometer [km]) and Concepcion–Mexico (37 km) lines were upgraded from single circuit-single aluminum conductor steel reinforced to double circuit-twin thermal aluminum conductor steel reinforced. The thermal aluminum conductor steel reinforced conductor wires’ carrying capacity is almost twice that of the aluminum conductor steel reinforced conductor wires. This increased the capacity of the said transmission lines from 300 megawatts (MW) to 1100 MW and the associated substations were also upgraded.

1 JBIC and the Japan International Cooperation Agency (JICA) reorganized on 1 October 2008 wherein JBIC’s

official development assistance operations merged with the new JICA. 2 ADB. 2002. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the National

Power Corporation and Technical Assistance Grant to the Republic of the Philippines for Electricity Market and Transmission Development Project. Manila (Loan 1984-PHI).

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(ii) Mindanao substation expansion. This consisted of procurement and installation of six units of 138 kV power transformers with a total capacity of 525 megavolt-amperes, nine units of 138 kV, and 15 units of 69 kV power circuit breakers at Davao, Bislig, Butuan, Kibawe, Sta. Clara, and Tindalo.

II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 5. The project fitted ADB’s country operational strategy for the Philippines3 at appraisal. It continued to be relevant through its support for economic growth, which is a key thematic priority for ADB assistance to the Philippines. The project was a vital component of the government’s program of restructuring and privatizing the electric power industry, which was designed to assure accessible, high quality, affordable and sustainable electricity supply. 6. The overall objective of the project was to establish the necessary infrastructure for power sector restructuring. This is in line with the government’s efforts to restructure the power sector by privatizing the electricity power industry and creating a competitive electricity market. ADB’s Policy for the Energy Sector 4 was built on four key pillars: (i) poverty reduction, (ii) promoting private sector participation, (iii) regional and environmental impacts, and (iv) regional cooperation. A review of the policy in 20005 rated ADB highly effective in supporting power sector restructuring and increasing the role of the private sector. Therefore, this project supports the prior policy of 2000 well, and is in line with the Energy Policy of 2009.6

7. The project components and their respective objectives are: (i) establishing a wholesale electricity market for electricity generation to be dispatched on a competitive basis to meet power demand at a lower cost, and (ii) reinforcing and upgrading critical transmission lines and substations in Luzon and Mindanao to improve reliability of the power supply and help expand rural electrification. As envisaged, the project was to be completed as follows: Part A–WESM by December 2004 and Part B–Luzon Transmission Upgrading by June 2008 and Mindanao Substation Expansion by December 2008. 8. During implementation of the project, the following additional components were financed from the loan savings, following the approval of ADB and JBIC.

Additional Components Funded from the Loan Savings

Additional Components Approval Date

Reallocated Amount

($ million) Source of Funds

Part A (i) WESM Training 7 September 2006 0.2 JBIC Part A, WESM Project Management (ii) Metering Equipment

(to be installed at NPC generating plants)

10 June 2004 3.5 JBIC Part A, WESM hardware and Software Installation (foreign expenditures)

3 ADB. 1998. Country Operational Strategy Study: Philippines. Manila.

4 ADB. 1995. Bank Policy for the Energy Sector. Manila.

5 ADB. 2000. Energy 2000: Review of the Energy Policy. Manila.

6 ADB. 2009. Policy Paper: Energy Policy. Manila.

3

Additional Components Approval Date

Reallocated Amount

($ million) Source of Funds

Part B (i) Calamba Tower 50 to

Biñan Transmission Line 28 March 2005

7 March 2005

12.0

4.0

JBIC Part A, WESM Project Management ($6 million) and JBIC Unallocated ($6 million) ADB Unallocated ($4 million)

ADB = Asian Development Bank, JBIC = Japan Bank for International Cooperation, NPC = National Power Corporation, WESM = wholesale electricity spot market. Source: Annex A, Transco’s Quarterly Progress Report No. 21 for January–March 2009.

9. The additional components were necessary to have a functional wholesale market management system and adequate transmission capacity. The Calamba Tower 50 to Biñan transmission line was a former component of the Power Transmission Reinforcement Project.7 However, because of the inadequate loan allocation and the forthcoming loan closing date, ADB and JBIC agreed in March 2005 that this component would be implemented using the savings from the Electricity Market and Transmission Development Project8. The completion of the Calamba Tower 50 to Biñan Transmission Line concluded the upgrading of the transmission system in Batangas and Laguna. This system is now capable of transmitting the 2,100 MW of generation capacity from Calaca Coal and the natural gas plants (San Lorenzo and Sta. Rita).

10. Overall, the technical design and formulation of the project substantially met its objectives except for some weaknesses in the Mindanao Substation Expansion component (inaccurate load forecasts) and Luzon Transmission Upgrade component (underestimated ROW issues). In Mindanao, the transformers were primarily meant to serve the n-1 grid requirement (redundancy or back-up) and the lower than expected load growth plus the acute power shortage caused by the prolonged dry spell in 2008 and 2009 minimized the negative impacts of the delays in implementation. In the Luzon grid, however, if the upgrading of the transmission lines and substations had been completed as envisaged at appraisal, it could have eased the impact of the transmission constraints experienced during the frequent breakdowns of the 500 kV transformers at San Jose Substation in 2008 to 2009 as the San Manuel–Concepcion–Mexico 230 kV transmission line is one of three 230 kV paths in transferring power to the Metro Manila and nearby provinces covered by the Meralco-franchised area9.

B. Project Outputs

1. Part A: Electricity Market

11. WESM Hardware and Software. Though the installation and testing of the system was completed on 31 December 2005, WESM commercial operation only started on 26 June 2006 in the Luzon grid and on 1 January 2011 in the Visayas grid. The commercial operation of WESM in Luzon did not immediately take place as stakeholders had to be familiarized and trained first with the operation of the system. In the Visayas grid, the operation of the WESM waited until NPC had privatized majority of its generating plants in order to promote healthy competition on the supply side of the market. There is no WESM yet in Mindanao as majority of the plants are still owned by NPC.

7 ADB. 1997. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the National

Power Corporation for the Power Transmission Reinforcement Project in the Republic of the Philippines. Manila (Loan 1590-PHI).

8 ADB. 2006. Completion Report: Power Transmission Reinforcement Project in Philippines. Manila.

9 Meralco is the distribution utility which hold the franchise in the area covering Metro Manila and nearby provinces.

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12. Project Management. The consultant supervised the contract for the WESM Hardware and Software as envisaged. 13. Metering Instrument. The delivery of the metering equipment was completed on 31 December 2007. Most of the meters were already installed except the ones intended for the generating plants in Mindanao. The meters installed for the generating plants in Luzon and Visayas regions now comply with the requirements of the Grid Code and WESM rules. This enables the unconstraint participation of the said plants in the electricity trading under WESM. The uninstalled meters, however, will have no negative impact to the system until the operation of WESM in the Mindanao grid.

2. Part B: Transmission Development 14. Luzon Transmission Upgrade and Calamba Tower 50 to Biñan. The completion of the Luzon transmission upgrade (last sub-component energized on 28 March 2009) contributed to the resolution of the transmission congestion in the Luzon grid. The Luzon grid is now capable of transmitting the generation dispatch of the power plants in Luzon without constraint. 15. Mindanao Substation Expansion. Delivery of the substation equipment was completed on 28 March 2009. Completion of the equipment installation and commissioning of last substation was on 13 November 2011. Though delay was encountered in its implementation, the negative impact was mitigated by the lower than expected load forecast in the Mindanao grid. 16. The project completion review mission assessed the project’s achieved objectives against appraisal targets (Appendix 1). The chronology of events of the project is in Appendixes 2 and 3. Appendix 4 summarizes the project outputs anticipated at appraisal compared with those achieved at completion. C. Project Costs

17. At appraisal, the cost of the project, including physical and price contingencies and interest during construction, was estimated at $106.0 million equivalent, including a foreign exchange cost of $85.5 million and a local currency cost of $20.5 million. ADB was to finance up to $40.0 million of the foreign exchange cost while JBIC initially indicated to co-finance, through an untied loan, the remaining $45.5 million of the foreign exchange cost. However, JBIC’s board of directors only approved a loan amount of $40.0 million. Transco financed the local cost of the project, estimated at $20.5 million. At completion, the actual cost of the project was $90.4 million, 85.3% of the estimated cost, including $66.9 million equivalent in foreign exchange cost and $23.5 million equivalent in local currency cost. Substantial savings were realized for Part A, with an actual cost of $10.7 million compared with the appraisal estimate of $25.0 million. This was mainly due to lower than expected contract prices resulting from competitive bidding under international competitive bidding, overestimation of some items, and exclusion of items that could be dispensed without sacrificing the basic requirements of the system.

D. Disbursements

18. The ADB loan was to be fully disbursed by 30 June 2009 and the JBIC loan by 28 February 2009. The actual yearly disbursements for both loans are in Appendixes 5, 6 and 7. During project implementation, additional items were added and financed out of the unallocated

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portion and savings realized from Part A. The ADB loan account was closed on 3 August 2009 and the undisbursed balanced of $4.41 million was cancelled. The JBIC loan account was closed on 28 February 2009 and the undisbursed balance of $8.7 million was also cancelled. The actual disbursement of the loan (ADB and JBIC) was $66.9 million against the original loan amount of $80 million—83.60% utilization of the loan. The difference is due to the lower contract cost of some components as compared with the estimated cost for reasons cited in para. 17. E. Project Schedule

19. Although the overall loan implementation period was not extended, there were initial implementation delays in different components compared with appraisal estimates. For Part A (WESM), challenges were encountered during the procurement stage—particularly start-up delays and the need to train all market participants extensively. This was understandable because of the complexity of the market system and the WESM being a new concept for the Philippines. For Part B, the Luzon Transmission Upgrading was delayed by about 1 year and the Mindanao Substation Expansion delayed by about 3 years. Both components encountered delays during the procurement stage as well as in the bid evaluations. The Luzon Transmission Upgrading also encountered right-of-way (ROW) problems. The Mindanao Substation Expansion timing for the bidding of the supply of equipment and installation works was not synchronized. The procurement for this component was split into supply of equipment (financed by JBIC) and installation works (financed by Transco’s internal funds). When Transco was about to bid the installation works portion, the incoming concessionaire, National Grid Corporation of the Philippines (NGCP), requested Transco to hold the bidding to give it time to study the allocation of the substation equipment in view of the shifting of the loads in some areas in the Mindanao region. As a result of the study, three transformers were redeployed: (i) the one intended for Kibawe Substation was redeployed to Maramag Substation, (ii) the one intended for Bislig Substation was redeployed to Matan-ao Substation, and (iii) the one intended for Tindalo Substation was redeployed to Maco Substation. Completion of the installation of the transformers and their associated equipment in Maramag, Matan-ao, New Loon, and Maco substations ensured reliable power supply of the nearby loads, enough capacity to support rural electrification in Mindanao, and compliance with the requirement of the Philippine Grid Code of n-1.10 20. The appraisal schedule is compared with the actual project schedule in Appendix 8. According to the appraisal schedule, Part A (Market Management System [MMS] for WESM) was to be completed by December 2004. However, the system availability test was not completed until 31 December 2005 and WESM commercial operations only began on 26 June 2006. The main reasons for the delay were protracted procurement procedures and the need to train all market participants extensively. Part B (Luzon Transmission Upgrade, including Calamba Tower 50 to Biñan) was to be completed by June 2008 but the last component was actually completed in April 2009. The main reasons for the delay were protracted procurement procedures, ROW problems for the transmission lines, and the delay in the delivery of the transformer intended for Concepcion Substation (supply was not part of the contract or loan, but installation was part of the contract). For Part B (Mindanao Substation Expansion), supply of substation equipment was to be completed by September 2007 but it was not delivered until 31 July 2008. Installation of the substation equipment under Transco’s financing was to be completed by December 2008 but the last two transformers were only installed and substations energized on 24 October 2011 (Butuan Substation) and 13 November 2011 (Sta. Clara

10

n-1 is a transmission redundancy grid requirement. Meaning, if one line route (n) is out, a back-up line is available to prevent system failure.

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Substation). The delay was mainly due to protracted procurement procedures for supply of equipment and the request to Transco of the incoming concessionaire, NGCP, to defer the bidding of the installation works (para. 19). F. Implementation Arrangements

21. The National Power Corporation (NPC) was the borrower, the Government of the Philippines was the guarantor, and Transco was the executing agency. Transco appointed a project director with a sufficient number of suitably qualified staff to implement the project. A project manager was appointed to oversee implementation of Part A. Transco coordinated closely and provided the Department of Energy (DOE), the executing agency for the attached technical assistance (TA)11, regular progress reports for Part A. During initial operations of the WESM, Transco provided administrative and financial support to the autonomous group market operator. For Part B, the organizational setup for the Construction Group of Transco was one project manager per region, so the project manager handled implementation in the field with assistance from site managers. Although this arrangement complied with ADB requirements, the project director did not have the authority to ensure timely implementation of the project, and problems such as procurement and ROW issues were beyond his control. G. Conditions and Covenants

22. Generally, NPC and Transco complied with the covenants as listed in the project and loan agreements. Transco implemented the project in conformity with sound administrative, financial, engineering, environmental, and public utility practices. NPC and Transco substantially performed their obligations as set forth in the loan agreement. All the covenants are relevant to ensure successful implementation and meeting the objectives of the project. Appendix 9 shows the status of NPC and Transco’s compliance with the project covenants. 23. Transco submitted quarterly progress reports and regular audited financial reports up to January–March 2009; since the NGCP took over the operation and maintenance of Transco’s assets in July 2009, no such reports have been submitted. The quality of those reports was satisfactory. According to Transco, most of the staff responsible for monitoring the accomplishments of the projects were either terminated or transferred to the NGCP when it took over. Independent auditors, in accordance with Section 4.04 of the loan agreement, audited NPC’s accounts and financial statements, and provided opinions in compliance with the loan covenants. 24. Transco did not incur any debt, as the Power Sector Assets and Liabilities Corporation (PSALM) took over all NPC’s outstanding obligations. Based on its unaudited accounts, Transco earned P20,744 million12 in 2008, its last year as the grid operator. This amount is 23.6% higher than the 2007 net income of P16,777 million. 25. The transfer of WESM’s assets from Transco to the market operator has not yet taken place. The DOE has yet to develop the design of the independent market operator (IMO) envisaged in the EPIRA. Five years since WESM operations began in Luzon, the Philippine

11

ADB. 2002. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the National Power Corporation and Technical Assistance Grant to the Republic of the Philippines for Electricity Market and Transmission Development Project. Manila (TA 4073-PHI).

12 Transco. 2009. 2008 Annual Report, Quezon City: Transco. In January 2009, the private concessionaire, NGCP, took over the operation of the nationwide transmission system.

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Electricity Market Corporation (PEMC) is still acting as the interim market operator. The transfer of assets may take place once the IMO is created. H. Related Technical Assistance

26. The advisory TA was designed to support the government’s objective of improving the accessibility, quality, affordability, and sustainability of the national electricity supply. The TA had two parts. Part A was to prepare the bid documents for the procurement of an MMS and assist Transco with bid evaluation. Part B was to provide independent advice to the government during initial implementation of the WESM and develop a transition plan for the selection of an IMO for the WESM. The TA completion report13 was approved in March 2009. Based on this, the TA was relevant at the time of its design and efficacious in achieving its objective. Overall, the TA was rated successful. However, one of the expected TA outputs—the appointment of an IMO—was not achieved as envisaged in the TA design. The government deferred the appointment of an IMO and established the PEMC to operate the WESM instead. This was considered a necessary transitional arrangement to ensure that all market dysfunctionalities (disorders in the operation of WESM) experienced during the initial years of WESM operations were fully mitigated before handing over WESM administration to an independent operator. To date, an IMO has not been appointed. I. Consultant Recruitment and Procurements

27. All project components financed by the ADB and JBIC loans were procured in accordance with ADB’s Guidelines for Procurement (2002, as amended from time to time). 28. Part A. For the WESM MMS, a turnkey contract was procured through limited international bidding. The contract was a turnkey one as this component involved closely integrating hardware supply, software development, installation, and commissioning. For the metering equipment, however, international competitive bidding (ICB) was used for the supply and delivery of the metering equipment. Transco’s metering staff installed the metering equipment. 29. Part B. For the Luzon Transmission Line and Substation Upgrade and Calamba Tower 50 to Biñan components, separate turnkey contracts using ICB were employed. For the Mindanao substation equipment component, ICB was used for the supply and delivery of the substation equipment; national competitive bidding was used for the procurement of the substation equipment installation. 30. A consulting firm was selected, using quality-and cost-based selection, in accordance with ADB’s Guidelines on the Use of Consultants14 (2002, as amended from time to time), to assist in supervising implementation of Part A (MMS for WESM). J. Performance of Contractors, Suppliers, and Consultant

31. The performance of the suppliers and contractors was generally satisfactory. All suppliers and contractors, except for the one undertaking the two remaining installation works for the expansion of Butuan and Sta. Clara substations in Mindanao, were able to complete their

13

ADB. 2009. Technical Assistance Completion Report: Transition to Competitive Electricity Market in the Philippines. Manila.

14 ADB. 2002. ADB’s Guidelines on the Use of Consultants. Manila.

8

contracts in accordance with the approved contract schedules. Contract time extensions were granted to the contractors of the transmission lines and substations because of Transco’s inability to hand over the ROW on time and late delivery of the transformer supplied by others (supply was not part of the contract or loan, but installation was part of the contract) to be installed in the Luzon substation component. NGCP is installing the metering equipment. Because of the delay in the settlement of the assets boundary between the generating plants and the transmission grid in Mindanao, installation of the metering equipment only started in December 2010 and is targeted for completion by the second quarter of 2012. The consulting firm employed for Part A produced high quality outputs and ensured the successful initial launching of the WESM in Luzon. As well as assisting Transco in the successful implementation of the contract, the consultant helped in the design of a comprehensive training program for all market participants. K. Performance of the Borrower and the Executing Agency

32. Transco regularly informed ADB about the project implementation. Progress reports were submitted quarterly but Transco stopped submitting reports as of the quarterly reporting period covering January–March 2009 despite the loan closing date of 30 June 2009. The reason was that the NGCP took over Transco’s grid operations and most of Transco’s employees in charge of monitoring the project were either terminated or transferred to other departments. To date, Transco has not submitted completion reports to ADB for the whole of Part A and the Luzon substation upgrade for Part B. ADB has been following up the submission of these reports. Transco indicated to submit the reports within the first quarter of 2012.Transco is in constant coordination with the PEMC for the preparation of the completion report for Part A (WESM) and NGCP for the preparation of the completion report for Part B (Luzon substation upgrade). Though Transco is responsible for the submission of the completion reports to ADB, it has to rely to NGCP and PEMC for the preparation of the said reports. Records and key personnel involved in the projects are with NGCP and PEMC.15

33. Transco’s procurement process was delayed by startup challenges. Most contracts under this project took 1–2 years from bid submission to contract effectiveness because of Transco’s cumbersome procedures, particularly in bid evaluations and approval of contract award. The installation of equipment at two substations (Butuan and Sta. Clara) under Part B (Mindanao substation expansion) was completed in November 2011, almost 3 years after the appraisal schedule. 34. Transco complied with ADB’s guidelines and national laws for land acquisition and resettlement. The valuation and compensation procedure involved information campaigns, data gathering, stakeholder consultations, and verification of documentary requirements (e.g., land titles, proof of ownership, tax declarations), cost valuation, negotiations, and processing of payments. Expropriation cases were filed in courts for failed negotiations. Serious ROW problems were encountered in the Luzon transmission upgrade (particularly tower sites CM 1716, 48, 63 and 96), which resulted in a contract extension of 90 days. Transco was unable to complete the land acquisition and resettlement plan (LARP) within the appraised implementation schedule.

15

The NGCP took over Transco’s business operations in February 2009 and the PEMC implemented the WESM component.

16 This is the name of the tower and CM has no specific meaning.

9

35. In light of the above, the performance of the NPC as the borrower and Transco as the executing agency is considered partly satisfactory. With the completion of the Luzon transmission upgrade and the Calamba Tower 50–Biñan transmission line—together with the recently completed Biñan–Sucat Line 4 and rehabilitation of the San Jose substation transformers projects (both projects were funded through Transco’s internal cash flow)—transmission constraints in northern and southern Luzon have been resolved. The dispatch of the generating plants in Luzon is now unhampered and electricity prices in the WESM have stabilized, except when there are generation problems (Appendix 10). L. Performance of the Asian Development Bank

36. ADB’s performance did not contribute to implementation delays. ADB assisted the Transco in resolving issues brought to its attention during the procurement and project implementation stages. However, closer monitoring of the procurement process and the social engineering parts of the project by ADB would have helped to minimize the implementation delays. ADB’s project administration was satisfactory.

III. EVALUATION OF PERFORMANCE

A. Relevance

37. The project fitted ADB’s country operational strategy for the Philippines (footnote 3) at appraisal. It continues to be relevant through its support for economic growth—an ADB priority area for assistance to the Philippines.

B. Effectiveness in Achieving Outcome

38. The implementation delay of about 1.5 years for Part A gave the market operator more time to prepare stakeholders for commercial operation of the WESM. Since the electricity market was new in the country, the market operator needed more time to orient and train market participants. WESM operation has opened the door to more private power generator participants, resulting in competitive electricity pricing—restraining the rising trend of electricity rates in the country. 39. The implementation delay for Part B did not disrupt the operation of the transmission system significantly, since the demand forecast17 was not met as a result of the global economic slowdown in 2008 and 2009. For Luzon, the actual growth rates were only 1.1% in 2008 and 3.8% in 2009, against a forecast of 3.88% in 2008 and 4.18% in 2009. For Mindanao, the actual growth rates were -1.1% in 2008 and -9.2% in 2009, against a forecast of 5.65% in 2008 and 5.90% in 2009. For the whole of the Philippines, the actual growth rates were only 1.4% in 2008 and 4.7% in 2009, against a forecast of 4.43% in 2008 and 4.61% in 2009 (Appendix 11). With the completion of Part B, the transmission congestion in Luzon was addressed and the transformation capacity in Mindanao was increased—resulting in more reliable and dependable delivery of quality power in the grid, and expansion of rural electrification coverage in Mindanao. 40. Overall, the project is considered effective in support of the ongoing development and restructuring of the power sector in the Philippines.

17

DOE demand forecast adopted by the Energy Regulatory Commission (ERC) for the Second Regulatory Period Final Determination of Transco.

10

C. Efficiency in Achieving Outcome and Outputs

41. Completion of the project opened the electricity market in the Philippines, on 26 June 2006 in Luzon and 1 January 2011 in Visayas. WESM operation is considered a success. According to the back-to-office report by the review mission dated 31 July 2008, WESM operation has contributed to reversing the rising trend of electricity rates in the Luzon grid (blended WESM and NPC rates). This also applies to WESM operation in Visayas; there is no WESM to date in Mindanao. Completion of the transmission line and substation components in Luzon (including the recently completed rehabilitation of the San Jose substation transformers and Biñan–Sucat line) has increased the transmission and transformation capacities of Luzon grid, enabling full dispatch of the generating plants in northern and southern Luzon. 18 In Mindanao, the additional transformers installed made the substations compliant with n-1, which will ensure reliable power supply to loads in nearby areas as well as sufficient capacity for rural electrification. The overall efficiency in achieving the outcome and outputs of the project was satisfactory. 42. Financial analysis. The financial impact of the MMS can be evaluated by looking at the revenues earned by the PEMC from market fees against the costs of operating the MMS until 2012, when a new system has to be put in place.

43. Based on actual results of operations from 2006 to 2010 and forecasts for 2011 and 2012, the financial internal rate of return (FIRR) is calculated at 65%19 (Appendix 12). The returns appear very attractive partly because the actual MMS cost is approximately 43% of the initial estimate—the PEMC purchased a large part of the software modules off the shelf rather than custom-made as in other markets (actual cost of $10.7 million vs. $25.0 million at the time of the RRP). 44. The transmission development part of the loan is more difficult to assess because of three main reasons. First, being a monopoly, transmission service costs are not directly related to revenues. Compliance with the Grid Code can define additional costs but not necessarily incremental revenues. Assets acquired to raise redundancy levels for improving overall reliability do not correspond directly to financial benefits. Second, the project financed separate portions of an integrated system and it is very difficult to identify specific benefits accruing from ownership of such assets. Third, given the delay in NGCP providing the actual values of the specific assets, as carried in its asset register, the analysis assumed that the values in the rate base equal the total procurement costs and an asset life of 45 years. 45. The approach most feasible for linking the costs to the benefits involves examining how the transmission asset base is increased and the revenues associated with the weighted average cost of capital (WACC) of 15.04% produce cash inflows over the lifetime of the individual asset. The relevant cash inflows can then be divided into two categories: (i) capital recovery equal to the depreciation added back to the cash flows per year, and (ii) the return on capital defined by the WACC multiplied by the remaining value of the asset carried in the rate base. The cash outflows for the Luzon transmission projects were assumed to have been incurred in 2008 whereas the outflows for the Mindanao project and the metering equipment occurred in 2007.

18

Based on the DOE, 2009, Power Sector Situationer. Taguig City: DOE, as of the end of 2009 Luzon grid has a total dependable capacity of 10,230 MW, 5,379 MW (53%) of which is located in southern Luzon and 4,851 MW in northern Luzon.

19 The pre-tax FIRR is the same as the after-tax return because the PEMC does not pay taxes—it is a non-stock, non-profit organization.

11

46. Using this approach, the after-tax FIRR was estimated at 9.94% (Appendix 13), above the expected inflation rate but below the cost of capital approved by the Energy Regulatory Commission (ERC).

47. Economic analysis. The approach adopts a departure from the usual economic analysis because the MMS employed in the WESM and the transmission upgrades in Luzon and Mindanao are not economic alternatives. The EPIRA mandated the Philippine Power Sector (Sec. 30) to establish a WESM. Under the new industry structure following the EPIRA, the beneficial owners of the assets financed under the loan are assignees of the government, namely; NGCP and PEMC.

48. The MMS is the heart of the WESM, but it is still a hardware and software system subject to technological obsolescence. According to the PEMC, the current MMS will have to be replaced no later than 2012. Current estimates of the new system are about $30 million and include functionalities to handle retail open access and renewable energy sources. 49. The EPIRA (Sec. 9c) also mandated Transco to satisfy the performance standards stipulated in the Grid Code. Section 7.2.2.3 of the Philippine Grid Code specifies that the security and reliability of the grid be based on the ―single outage contingency‖ criterion, more popularly known as the n-1 standard. The projects undertaken as part of the transmission development component of the loan aim to achieve the redundancy levels required to satisfy the n-1 requirement. This is why the assets put in place under this project carried very low loads during site inspections.

50. Overall, the funds expended for the two project components should be viewed as costs incurred to comply with legislative reforms that ADB supported. D. Preliminary Assessment of Sustainability

51. In general, the project is likely to be sustainable. For Part A, the market operator obtains its revenue from fees derived from the market participants. The MMS hardware and software necessary to operate a fully functional WESM are still operational as envisaged and are being improved progressively. However, because the system infrastructure is already 5 years old and nearing obsolescence, it will need to be replaced in the near future. 52. For Part B, Transco’s revenue (now transferred to the NGCP) is ensured through a performance-based regulation. With the operation and maintenance of Transco’s assets now under the NGCP, sustainability can be ensured with good maintenance of the facilities, and strict compliance with safety and operational procedures. Maintenance standards of transmission and substation facilities visited during the PCR mission were generally high.

E. Impact

1. Environmental Aspects

53. The project was classified category B and an initial environmental examination (IEE) was undertaken. This was needed essentially for Part B component (i) (upgrading of the San Manuel–Concepcion–Mexico line) and component (ii) (installation of the Calamba Tower 50 and Biñan line). Part A, which included the procurement and installation of WESM hardware, software, and consultancy services, and Part B component (iii), which involved expanding the existing Mindanao substations, have either no or very little adverse environmental impacts.

12

54. Transco is credited for operating and maintaining the facilities built for the project in accordance with: (i) Philippine national environmental laws, regulations, and standards; (ii) applicable provincial and local regulations and standards concerning environmental protection, land use, and safety; (iii) ADB’s Environmental Guidelines for Selected Industrial and Power Development Projects; 20 and (iv) conditions and restrictions included in the environmental compliance certificate (ECC) issued by the Department of Environment and Natural Resources.

2. Social Aspects 55. Part A (upgrading of the WESM with procurement and installation of software, hardware, and consultancy services) and the Part B component (procurement and installation of power transformers and circuit breakers in selected Mindanao substations) did not require any land acquisition or resettlement. 56. Part B component (i) (upgrading of the San Manuel–Concepcion–Mexico Transmission Line) required a LARP, finalized on 2 April 2004, on which all the compensation payments and support activities were based. Regarding the approval of the final LARP, Transco stated that the original budget allocation of P79.5 million was increased to P231 million to properly address the impact of socio economic displacement. However, the actual amount paid for land acquisition and relocation compensation is more than double the committed amount—P504,095,440.

57. Appendix 14 shows the status of compensation payments as of the EA’s report (April 2009).

58. Of the total 63421 project-affected people whose house/structure was demolished, 22 in Stage 1 (San Manuel–Concepcion Transmission Line) opted for self-relocation and were given financial assistance, disturbance compensation, and payment for affected property. The 30 project-affected people under Stage 2 (Concepcion–Mexico Transmission LIne) in Barangay Dutung Amatas (Jefmin) and 23 of the 25 project-affected people from Barangay San Nicolas chose to be relocated in resettlement areas provided by Transco.22 The relocation site for those in Barangay Dutung Amatas is within the same barangay while that of the Barangay San Nicolas project-affected people is in the adjacent Barangay San Pablo (about 2 km from the original settlement). However, reports reaching the NGCP indicate that only nine resettled households in Barangay San Pablo have remained in their resettlement site while 21 have allegedly sold their rights. In Barangay Dutung Amatas, 29 households have remained and only one sold its rights. 59. Part B component (Calamba Tower 50 to Biñan Transmission Line) had some social impacts. The transmission line required compensation for about six households since it traversed the properties. A concession was made to roadside business owners in the form of revised technical specifications for the poles supporting the transmission line, e.g., the installation of bigger and taller poles as well as employing a ―single file‖ arrangement of lines to give way to and maintain the visibility of equally tall and large business signage. These changes entailed higher project costs. The South Luzon Expressway (SLEX) has likewise been

20

ADB. 1993. Environmental Guidelines for Selected Industrial and Power Development Projects. Manila. 21

During the 15 June 2011 meeting with Transco social engineering staff, prior to a field visit to the two resettlement areas, the total number of housing structures dismantled requiring relocation was quoted as 641.

22 In the same 15 June meeting, the number of resettled project-affected persons from Barangay San Nicolas, Magalang, Pampanga was quoted at 30 households. The relocation area developed by Transco for the project-affected people is in the adjacent Barangay San Pablo, also in Magalang, Pampanga.

13

compensated for the use of its road easement.23 A LARP was not prepared for this component, but compensation payments were disbursed to the few affected households. 60. Reliable, quality, and affordable supply of electricity is an important input to economic development, which is essential for poverty reduction. The project has contributed to the reliability, quality, and affordability of power supply in the Luzon and Mindanao grids. The impact of the project on poverty reduction could not be quantified, although the upgrading and expansion of the lines and substations covered by the loan helped to meet the power demand in these service areas and facilitate rural electrification, which benefited the poor.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

61. The project was implemented with some items added later and funded from loan savings. For Part A, implementation delays are understandable considering that the WESM is new in the Philippines and that extensive training had to be given to all market participants to ensure a successful market operation. For Part B, implementation delays were mainly due to a protracted procurement process and difficulties in obtaining the necessary ROW for the transmission lines. A lower than forecast demand also somewhat mitigated the negative impacts of the delays in completing the project. Overall, the project is rated successful.

B. Lessons

62. Part A. As the WESM is new in the Philippines, the market operator should have worked earlier to develop training programs to educate the market participants in the operation of WESM, as the success of the WESM depends on the readiness of all the market participants. The market operator should have taken proactive measures as to the training needs of the market participants—avoiding unnecessary delays in the launching of the WESM.

63. Part B. The protracted procurement process for the transmission line and substation components was one of the main reasons for the delay in the completion of this part. If there had been closer consultation between ADB and Transco, issues could have been addressed as early as possible to avoid delays. ADB could have regularly monitored with Transco the progress and issues encountered during the procurement stage. This would have triggered Transco’s actions, in a timely manner, on the issues encountered. Transco should have assigned dedicated full-time staff to handle bid evaluations and could have shortened its approval process.

64. The separate procurements for the supply (funded by JBIC) and installation (funded by Transco) of the substation equipment for the Mindanao substation expansion delayed its implementation. Turnkey contracts could have reduced the implementation delays of this component, as there would have been only one procurement package.

65. ROW acquisition was another main cause of delay in the completion of Part B. The project’s ROW staff should have dedicatedly followed the project implementation schedule. Transco committed to ADB that the ROW for the transmission lines would be acquired and paid for prior to the commencement of works, but this did not fully happen. The works were stopped because of ROW issues and some project-affected families allege that they have yet to receive complete payment.

23

A large section of the transmission line was constructed within the right-of-way of SLEX.

14

66. The social engineering group which undertook the meetings and consultations with the affected people should have conducted initial assessment of strategies used in improving affected people’s awareness on matters of compensation and resettlement. Improvements could have minimized the instances of claims on lack of knowledge of the process of property valuation. An affected person who understands what the impact of the project will be and knows the willingness of the project proponent to mitigate adverse impacts will result to increased level of his/her cooperation and acceptance.

67. While ADB policy as well as the LARP clearly outlined the steps to take in cases of complaints, actual setting up of the institutional arrangements was overlooked. Disputes on inventory and valuation of property lost indeed slowed down implementation of compensation and resettlement. A strong and working grievance redress committee results to quicker resolution of issues brought up by the affected people. The social engineering and ROW clearing units following due diligence in conflict resolution will be credited for the timely receipt of assistance of affected people.

68. Affected people knew that their property and livelihood will be affected because of transmission towers and lines that will be set-up. However, the broader project objective of propelling progress and development (through more energy supplied in the region) if communicated effectively can result to better appreciation of the project. The few affected people who have expressed apprehension, as well as those LGUs which still refused to cooperate24 may in the end offer more positive attitude in doing their share to achieve the goals of the project.

69. While the project as stated in the LARP recognizes the importance of active participation of the different local stakeholders, the municipal, and barangay LGUs have largely been credited only on organizing consultation meetings between Transco and the affected people. LGUs could have been likewise tapped as information disseminators and the ―first line of troubleshooters‖ in instances of grievance. When Transco completed the project and left the project area, it is after all the LGU that is left and is expected to continually address the needs of affected people. 70. The external monitoring group may have to be on board early on the LARP implementation. This is to allow sufficient time for the group doing the EM to understand the project and the LARP. Due to the highly specialized task of external monitoring group, it is true that not many groups such as those in the academe or NGO have actual experience doing the task. The group would need more time to study the issues, and come up with recommendations that can still be incorporated in the on-going process of assisting affected people.

C. Recommendations

1. Project-Specific Recommendations 71. The following are the project-specific recommendations to the executing agency for implementing future projects:

(i) Project implementation schedule. The executing agency should regularly remind its project staff of the project’s objective and schedule for them to work as one team and respond in a timely fashion in carrying out their assigned tasks.

24

A persisting problem in Concepcion, Tarlac is refusal to clear ROW of tower and lines with structures–a barangay hall, and an open basketball court.

15

Transco should also provide sufficient lead time for ROW acquisition and should not start site works unless the ROW is substantially acquired.

(ii) Resettlement and land acquisition. On ROW acquisition, the executing agency should strengthen its information, education, and communication activities among project-affected people and other stakeholders. An information, education, and communication plan that explores all methodologies to communicate messages to project-affected people should set the direction and goals of information dissemination. Review missions should always include a resettlement specialist for assistance if the project involves land acquisition and resettlement.

72. Future monitoring. ADB and the executing agency should have frequent consultations on issues encountered, particularly during the procurement stage of the project, to resolve them immediately. ADB should strengthen its monitoring function, including validation of progress reports, to anticipate and address problems that may cause implementation delays. 73. Covenants. Following the operation of the WESM, ADB should continue its policy dialogue with DOE, PEMC, ERC and other stakeholders. 74. Further action and follow-up. ADB should request Transco to continue reporting the status of the installation of the remaining metering equipment in Mindanao and the balance ROW payments to the affected people. Transco should institute further action to ensure that all affected people are paid. 75. Additional assistance. Considering the reforms already made by the Government of the Philippines in the power sector, ADB should continue supporting the government’s efforts of restructuring the power sector by providing TA, e.g., in the areas of strengthening the WESM, the ERC, and creating an enabling environment for renewable energy. 76. Timing for the project performance evaluation report. The project performance evaluation is recommended to be carried out in the last quarter of 2012.

2. General Recommendations

77. For project appraisal:

(i) ADB should carefully assess the capability of the executing agency in procurement of contracts and project implementation. If found wanting, hiring of consultants must be imposed for the successful implementation of the project. Consulting services should include capacity building among the executing agency’s staff involved in the project.

(ii) Turnkey contracting for transmission projects should be used rather than

separate supply and works contracts. This scheme would reduce the risk of project delays as one bidding is needed and only one entity is responsible for the project.

78. During project implementation and review, ADB and the executing agency should at least have a regular quarterly project review to assess meeting of projects milestones or targets. A project’s progress reporting format should be agreed with the executing agency in order for ADB to see all information or data it needs to know from the report.

16 Appendix 1

PROJECT FRAMEWORK

Design Summary Performance

Indicators/Targets Assessment

Goal Improved well-being of Filipino people and reduce poverty through improvements to the national economy

Increased gross national product per capita Reduced national debt Reduce unemployment

Gross Domestic Product grew by 1.1% in 2009 and 7.3% in 2010. External debt, as of 30 June 2011, was at $53.9 billion against $56.0 billion as of 30 June 2010. Unemployment rates in 2009 and 2010 are 7.5% and 7.3%, respectively.

Purpose Assist the government improve the accessibility to, quality of, affordability of, and sustainability of the national electricity supply

A reduction in real terms, of the average retail electricity price within 5 years Reliability remains better than Energy Regulatory Commission (ERC) targets Grid losses remain below ERC’s system loss cap Improve accessibility, achieving 100% village electrification by 2006 and about 5,000 households could benefit from the project in Mindanao Improved and sustainable financial performance of the industry as measured at a national level

The operation of the WESM contributed to reverse the rising trend of electricity rates in the country (Appendix 10). Performance incentive award for surpassing the ERC’s reliability indicators was awarded to the grid operator in 2009 and 2010.

The grid losses remain better than the ERC caps. The historical transmission system loss was 2.87% (2009) and 2.47% (2010) for Luzon, and 4.69% (2009) and 3.81% (2010) for Mindanao. The ERC caps are 2.98% for Luzon and 4.35% for Mindanao. The project greatly improved the system reliability; and ensured adequate power supply in Luzon and Mindanao, in support of the Department of Energy’s rural electrification project. By 2009, 100% barangay electrification had been achieved in Mindanao. No data gathered.

Outputs A competitive wholesale electricity market

Commissioning of limited functionality market management system (MMS) by end 2003 Timely production of dispatch schedules, calculation of market

Because of delays encountered during the procurement stage, a system availability test was not completed until 31 December 2005.

Being done regularly by Philippine Electricity

Market Corporation (PEMC).

Appendix 1 17

Design Summary Performance

Indicators/Targets Assessment

Appointment of an Independent Market Operator

230 kilovolt (kV) double circuit transmission line between San Manuel and Mexico

Six increased capacity transmission substations in Mindanao

prices, and preparation of settlement statements Successful phased implementation of MMS from interim market to a fully functional final solution by December 2004 Transfer of responsibility for day-to-day operation of the wholesale electricity spot market (WESM) to an independent market operator (IMO) by 31 December 2004

Commissioning of new San Manuel–Concepcion–Mexico transmission line and six Mindanao Substation Expansions by 31 December 2008

After the market trial operation, the commercial WESM operation in Luzon started on 26 June 2006. From start of commercial operations to date, the PEMC has acted as the market operator. The Department of Energy (DOE) has yet to develop the design of an IMO, as envisaged in the Electric Power Industry Reform Act, 2001 (EPIRA). The final commissioning scheme of the San Manuel–Conception–Mexico line and its associated substation expansions was only done on 15 April 2009. The delay was due to right-of-way (ROW) issues and delayed delivery of the transformer intended for Concepcion Substation (not part of the loan but part of the substation expansion). Substation expansions in Mindanao were completed on 13 November 2011. The procurement of contracts for both the supply of the substation equipment and installation contracts was delayed.

Activities WESM Procurement of MMS hardware and software under turnkey contract (Transco)

Procurement of project management technical assistance (TA) consultant (Transco)

Contract let in March 2003 Interim market functional by December 2003 Fully functional WESM by December 2004

Consultant appointed by March 2003

Because of start-up delays during the procurement stage, the contract for the MMS hardware and software did not become effective until 17 March 2004. Functionality test completed on 31 December 2005. WESM commercial operations in Luzon started on 26 June 2006. Project management consultant was appointed on 17 March 2004, when the contract for the MMS became effective. Transco’s in-house staff handled the project management of the turnkey contractor.

18 Appendix 1

Design Summary Performance

Indicators/Targets Assessment

Project management of turnkey contractor (Transco) Coordination of interim market start (Transco)

Interfacing of MMS to Transco Systems to provide full functionality system (Transco) Procurement of ADB financed TA consultant (ADB) Appointment of an IMO (DOE)

Luzon Transmission (Transco) Ongoing management of ROW and settlement issues Procurement of line and substation under turnkey contract Management of turnkey contractor Mindanao Substation Procurement of equipment under supply contract Installation and commissioning of equipment under installation contract Management of supply and installation contractors

September–December 2003 Undertaken progressively throughout 2004

Panel of experts appointed in January 2003 Consulting firm appointed in March 2003 Appointment process commences by January 2004. IMO in place by December 2004

Full access to route available by June 2005

Contract let by June 2005

Site work commences by October 2006 Commissioning by August 2008 Supply contract let by December 2005 Equipment delivery complete by September 2007 Installation complete by December 2008

Not met because of start-up delays. Done from December 2005 to June 2006. Engaged from February 2003 to October 2004. Engaged from May 2005 to November 2006. DOE has yet to develop the design of IMO as envisaged in the EPIRA. To date or 5 years after the start of WESM commercial operations in Luzon, the PEMC is still the interim operator. Up to almost project completion, there are still unresolved ROW issues. Line turnkey contract became effective on 19 May 2006; S/S turnkey contract became effective on 9 January 2007. Site works started 6 months after contract affectivity. Commissioning using final scheme was on 15 April 2009. Delay was due to protracted procurement process. Supply contract became effective on 26 June 2007. Equipment delivery was completed on 31 July 2008. Installation of equipment for the substation expansions was completed on 13 November 2011. The delay was due to the protracted bidding process for the supply of equipment. The separate procurement of contracts for the construction and installation contributed to the delay in implementation.

Appendix 1 19

Design Summary Performance

Indicators/Targets Assessment

Inputs $85.5 million ADB/Japan Bank for International Cooperation (JBIC) $20.1 million Transco project input Transco Project Management Team ADB financed attached TA consultancy DOE personnel to oversee WESM start and manage IMO appointment and implementation process

Review of input consumption/availability against budget and schedule

JBIC approved a loan amount of $40.0 million instead of the $45.5 million applied for. Hence, the total loan amount for both ADB and JBIC was $80.0 million, of which $13.1 million was cancelled.

TRANSCO fully funded the project cost not covered by the loan.

TRANSCO fielded in-house competent staff in its project team. Attached TA

1 provided advisory TA to ensure

the transition to a competitive electricity market.

PEMC was constituted to act as the interim market operator. To date, no independent market operator, as envisaged in the EPIRA, has been appointed.

ADB = Asian Development Bank, DOE = Department of Energy, EPIRA = Electric Power Industry Reform Act, ERC = Energy Regulatory Commission, IMO = independent market operator, JBIC = Japan Bank for International

Cooperation, MMS = market management system, PEMC = Philippine Electricity Market Corporation, ROW = right-of-

way, Transco = National Transmission Corporation. Source: Asian Development Bank.

1 ADB. 2002. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the National

Power Corporation and Technical Assistance Grant to the Republic of the Philippines for Electricity Market and Transmission Development Project. Manila (TA 4073-PHI).

20 Appendix 2

CHRONOLOGY OF EVENTS–PROJECT PROCESSING AND IMPLEMENTATION Date Project Event

A. Project Processing

29 April–14 May 1999

Asian Development Bank (ADB) fact-finding mission for Transmission Interconnection and Reinforcement Project (TIRP), which included four components: (i) Leyte–Mindanao Interconnection, (ii) Luzon Transmission Upgrading, (iii) Mindanao Substation Expansion, and (iv) Power Trading and Pooling System.

18–29 September 2000 Appraisal mission for TIRP.

5 October 2001 Receipt letter from Power Sector Assets and Liabilities Management (PSALM) informing ADB of its decision to postpone the implementation of the Leyte–Mindanao interconnection.

9 January 2002

Request received from government for financing the wholesale electricity spot market (WESM), i.e., the power trading and pooling system component of the TIRP.

2–26 April 2002

Fact-finding mission (in addition to WESM, Luzon Transmission Upgrading, and Mindanao Substation Expansion are included in the Project).

22 July−9 August 2002 Appraisal mission

25 October–4 November 2002 Technical discussions

14 November 2002 Loan negotiations

19 December 2002 Loan approval

16 December 2003 Loan signing

9 March 2004 Loan effectiveness

30 June 2009 Loan closing

B. Implementation

17 February 2003 Technical assistance1 effectiveness.

15 December 2003

ADB approved the award of turnkey contract for WESM market management system (MMS).

24 October 2003 ADB approved project management consultancy contract for WESM.

10 June 2004 Effectiveness of turnkey contract for WESM MMS and project management consultancy contract for WESM.

31 January 2005

ADB approved inclusion of the supply of metering equipment as a new component under Part A of the loan.

7 March 2005

ADB approved the inclusion of additional work for WESM project management consultancy contract.

16 September 2005

ADB approved the inclusion of Calamba Tower 50 to Biñan Transmission Line as a new component under Part B of the loan.

31 October 2005 ADB approved the award of contract for the supply of metering equipment.

2 November 2005 Completion of project management consultancy contract for WESM MMS.

31 December 2005

ADB approved the award of turnkey contract for Luzon Transmission Line Upgrading I Project.

19 May 2006 Completion of system availability test of WESM MMS.

26 June 2006

Effectiveness of turnkey contract for Luzon Transmission Line Upgrade I Project.

1 ADB. 2002. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the National

Power Corporation and Technical Assistance Grant to the Republic of the Philippines for Electricity Market and Transmission Development Project. Manila (TA 4073-PHI).

Appendix 2 21

Date Project Event

28 June 2006 Start of WESM commercial operation.

7 September 2006

ADB approved the award of turnkey contract for Luzon Substation Upgrading I project.

7 September 2006

ADB approved the inclusion of WESM training as a new component under Part A of the loan.

9 January 2007

ADB approved the reallocation of $2.47 million for Luzon Transmission Upgrade.

22 February 2007 Effectiveness of turnkey contract for Luzon Substation Upgrading I Project.

15 August 2007 Effectiveness of the contract for the supply of metering equipment.

31 December 2007

ADB approved award of turnkey contract for Calamba Tower 50 to Biñan Transmission Line.

22 February 2008 Completion of delivery of metering equipment.

31 July 2008

Effectiveness of turnkey contract for Calamba Tower 50 to Biñan Transmission Line.

3 November 2008

Completion of delivery of substation equipment under the Mindanao Substation Expansion Project.

13 October 2008

Completion of turnkey contract for Luzon Transmission Line Upgrade I Project but energized on temporary scheme pending completion of substation upgrade.

28 March 2009

Completion and energization (to electrify a newly completed transmission line or substation) of Calamba Tower 50 to Biñan Transmission Line.

15 April 2009

Final scheme energization of Luzon Transmission Line and Substation Upgrade.

3 August 2009 Loan closing date.

6 June–16 June 2011 Project completion review mission. ADB = Asian Development Bank, MMS = market management system, PSALM = Power Sector Assets and Liabilities Management Corporation, TA = technical assistance, TIRP = Transmission Interconnection and Reinforcement Project, WESM = wholesale electricity sport market. Source: Asian Development Bank.

22 Appendix 3

CHRONOLOGY OF EVENTS–LAND ACQUISITION AND RESETTLEMENT PLAN

Date Project Event

May–August 2002

Socioeconomic survey conducted by Transco with 1,623 or 58% of the 2,783 PAPs.

15 October 2002

Cut-off date for identifying PAPs/PAFs who were entitled to compensation and benefits.

2 April 2004 Land acquisition and resettlement plan was finalized and submitted.

March 2005–November 2007

Release of payments to 104 PAPs for land acquired for ROW (for towers).

31 May 2005

Luzon Transmission Line Upgrading Project I (San Manuel–Concepcion–Mexico) Status Report on Implementation of LARP by Social Engineering-ROW Management Department, Transco.

31 October 2005

Under Stage I (San Manuel-Mexico Transmission Line), payments for houses and structures were 80% completed. In Stage II (Concepcion–Mexico Transmission Line 1), payments had just started. Acquisition of two resettlement areas for Stage II completed.

26 April 2007

Contract signing between Transco and Central Luzon State University (CLSU) for CLSU to undertake external monitoring and evaluation of the LARP project.

October–November 2007 Socioeconomic survey conducted as part of the M&E.

June–August 2008

Impact evaluation conducted as part of the M&E of LARP implementation.

16 March 2007 99% of the PAPs under Stage I paid compensation while under Stage II, compensation is completed for 92% of those with affected houses/structures, 86% of those whose land was acquitted, 71% for tower occupancy fee, and 40% paid with affected crops, plants, and trees.

2007–2008 External monitoring activities were conducted.

8 December 2008–16 June 2011

ADB conducted a review mission, whose results were detailed in a report to the Southeast Asia Energy Division Director dated 23 January 2009. The report rated the development outcome satisfactory, having achieved commercial operations in the wholesale electricity market for Part A. The Project Completion Report team mission from 6–16 June 2011 found the development outcome of Part B satisfactory, having addressed the transmission congestion and transformation capacity deficit in the grid. However, it noted a few pending cases of unpaid PAPs with incomplete documentation. Twenty-two (22) resettled families were said to have left the resettlement areas.

15 July 2011 Evaluation report of the external monitoring agent submitted to ADB. ADB = Asian Development Bank, CLSU = Central Luzon State University, LARP = land acquisition and resettlement plan, M&E = monitoring and evaluation, PAF = project affected family , PAP = project affected person, ROW = right-of-way, Transco = National Transmission Corporation. Source: Asian Development Bank.

Appendix 4 23

PROJECT OUTPUTS–APPRAISAL vs. COMPLETION

Appraisal Completion Remarks Part A (i) WESM Hardware and

Software Installation 31 December 2005 System availability test completed on 31

December 2005, but WESM’s commercial operations did not start until 26 June 2006 and initially covered only the Luzon Grid. WESM was launched in the Visayas Grid on 1 January 2011 and competition was limited to the trading participants in Visayas only. There is no WESM yet for Mindanao.

(ii) Consulting Services (a) WESM Project

Management 31 October 2005 The consultant supervised the contract

for the system as envisaged. (b) Additional Work

for WESM Project Management

31 October 2005 The consultant undertook the audit of the implementation of MMS.

(c) WESM Training May 2007 Training on performance-based regulation and regulatory practices was conducted in Australia.

(iii) Metering Equipment Delivery of metering equipment completed 31 December 2007

To date, about 80% of the meters have been installed. The uninstalled meters are mostly in Mindanao.

Part B (i) San Manuel–

Concepcion–Mexico Transmission Line & Substation Upgrade

San Manuel–Concepcion Line 1 completed 12 March 2008; Line 2 completed 13 October 2008 Concepcion–Mexico Line 1 completed 13 September 2008; Line 2 completed 13 October 2008 Substation upgrade completed 15 April 2009

Pending completion of the substation upgrade, the lines were energized based on a temporary scheme. The final energization scheme was realized on 15 April 2009.

(ii) Calamba Tower 50 to Biñan Transmission Line

28 March 2009 This was a minor change in scope under Power Transmission Reinforcement Project

1 funded from the savings of

Electricity Market and Transmission Development Project

2 because of its

forthcoming loan closing. Because of the then problems in ROW, completion of this component would not meet the loan closing date, hence, deleted from the loan.

(iii) Mindanao Substation–Equipment

Delivery of substation equipment completed 31 July 2008

All substations energized on 13 November 2011.

MMS = market management system, ROW = right-of-way, WESM = wholesale electricity spot market. Source: Asian Development Bank.

1 ADB. 1997. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the National

Power Corporation for the Power Transmission Reinforcement Project in the Republic of the Republic of the Philippines. Manila (Loan 1590-PHI).

2 ADB. 2002. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the National

Power Corporation and Technical Assistance Grant to the Republic of the Philippines for Electricity Market and Transmission Development Project. Manila (Loan 1984-PHI).

24 Appendix 5

QUARTERLY ACTUAL DISBURSEMENTS (ADB PORTION) ($ million)

Year Quarter Amount Cumulative Annual

2004 2005 2006 2007 2008 2009

1 2 3 4

1 2 3 4

1 2 3 4

1 2 3 4

1 2 3 4

1 2 3

0.40 0.01 0.42 0.33

0.00 0.05 0.00 0.08

0.00 0.11 2.87 0.19

4.29 4.50 1.84 2.73

9.73 1.52 0.91 1.76

0.97 2.51 0.38

0.40 0.41 0.83 1.16

1.16 1.21 1.21 1.29

1.29 1.40 4.27 4.46

8.75

13.25 15.09 17.82

27.55 29.07 29.98 31.74

32.71 35.22 35.60

1.16

0.13

3.17

13.36

13.92

3.86

Note: Loan amount: $40 million. Source: Asian Development Bank.

Appendix 6 25

QUARTERLY ACTUAL DISBURSEMENTS (JAPAN BANK FOR INTERNATIONAL COOPERATION PORTION)

($ million) Year Quarter Amount Cumulative Annual

2004 2005 2006 2007 2008 2009

2 3 4

1 2 3 4

1 2 3 4

1 2 3 4

1 2 3 4

1

4.17 0.00 1.63

2.94 0.00 0.70 0.00

2.99 0.00 0.00 0.00

0.00 0.00 0.00 0.00

4.80 0.00 8.20 2.72

3.13

4.17 4.17 5.80

8.74 8.74 9.44 9.44

12.43 12.43 12.43 12.43

12.43 12.43 12.43 12.43

17.23 17.23 25.43 28.15

31.28

5.80

3.64

2.99

0.00

15.72

3.13

Note: Loan amount: $40 million. Source: Japan Bank for International Cooperation.

26 Appendix 7

JAPAN BANK FOR INTERNATIONAL COOPERATION DISBURSEMENT BASED ON COMPONENTS

($ million)

Reference Category Original

Allocation

Last Revised

Allocation Amount

Disbursed Undisbursed

Balance

1 WESM Hardware and Software installation

20.20 10.52 7.67 2.85

1A Metering Equipment 0.00 3.50 2.70 0.80 2 Turnkey contract for Luzon

Transmission Line and Substation

0.00 0.00 0.00 0.00

2A Calamba Power 0.00 12.00 8.11 3.89 3 Mindanao substation-

Equipment 11.00 11.00 10.70 0.30

4 Consulting Services 2.00 2.18 2.10 0.08 5 Front End Fee 0.00 0.00 0.00 0.00 6 Interest and Commitment

Charge 0.00 0.00 0.00 0.00

7 Unallocated 6.80 0.80 0.00 0.80 Total 40.00 40.00 31.28 8.72

WESM = wholesale electricity spot market. Source: Asian Development Bank

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Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Procurement

Procurement

Supply Contract

Legend: Appraisal Actual

Construction

Appointment of IMO

1. Luzon Transmission Upgrade

2. Calamba Tower 50--Biñan T/L

3. Mindanao Substation Exp.

Turnkey Contract

Turnkey Contract

1. Wholesale Electricty Market

2004 2005

Procurement

Part B

Supply Contract

Resettlement

2. Metering

Procurement

2008 2009

Part A

Activity

2002 2003

Project Management

Procurement

Implementation Schedule (Appraisal vs Actual)

Turnkey Contract

2006 2007

IMPLEMENTATION SCHEDULE (APPRAISAL VS. ACTUAL)

Sources: Asian Development Bank; National Transmission Corporation.

28 Appendix 9

STATUS OF COMPLIANCE WITH PROJECT COVENANTS

Covenant

Reference in Project/Loan Agreement

Status of Compliance

Project Administration Transco shall carryout the project with due diligence and efficiency, and conformity with sound administrative, financial, engineering, environmental, and public utility practices and perform its obligations as set forth in the Loan Agreement. Transco shall only apply the proceeds of the Loan to finance the expenditures of the project. Transco shall provide counterpart funds and other resources for the carrying out of the project. Transco shall appoint consultant and contractors acceptable to ADB. All goods and services financed out of the Loan shall be procured in accordance with the provisions of the Loan Agreement. Transco to insure the equipment financed out of the Loan. ADB and Transco shall cooperate fully to ensure that the purposes of the Loan are accomplished. Transco shall enable ADB to inspect the project and the goods financed out of the Loan. Plans, Design Standards, Specifications and Work Schedules Transco shall carry out the project in accordance with plans, design standards, specifications, work schedules and construction methods acceptable to ADB.

Article II, Section 2.01 (a) & (b) of the project agreement and Section 4.01 (a) & (b) of the loan agreement Article II, Section 2.13 of the project agreement Article II, Section 2.02 of the project agreement and Section 4.02 of the loan agreement Article II, Section 2.02 (a) of the project agreement Article II, Section 2.02 (b) of the project agreement Article II, Section 2.05 (a) & (b) of the project agreement Article II, Section 2.07 (a) & (b) of the project agreement Article II, Section 2.10 of the project agreement Article II, Section 2.04 of the project agreement

Complied with. Reference: EA’s Quarterly Progress Reports, External Monitoring Firm, Missions Reports and ECC. Complied with. Reference: Request for Loan Withdrawals and ADB’s Disbursement Reports. Complied with. Reference: EA’s Quarterly Progress Reports. Complied with. Reference: ADB’s approval of the contracts Complied with. Reference: ADB’s approval of the contracts. Complied with. Transco’s assets are covered by Industrial All Risk Insurance. Complied with. Reference: EA’s Quarterly Progress Reports, project meetings and missions. Complied with. Reference: ADB Mission Reports Complied with. Reference: EA’s Quarterly Progress Reports.

Appendix 9 29

Covenant

Reference in Project/Loan Agreement

Status of Compliance

Reports and Information Prior to considering transfer of assets of the WESM, ADB’s prior written approval must be secured. Transco shall maintain records and accounts to identify the goods, services and other items of expenditures of the project. Transco shall furnish to ADB quarterly reports on the execution of the Project. Within 3 months of physical project’s completion, Transco will prepare a PCR and forward it to ADB. Audited Financial Statements NPC shall maintain separate records for the project and its overall operations and furnish to ADB certified copies of its financial statements within 6 months of the end of each fiscal year. Land Acquisition and Resettlement Transco shall be responsible for acquiring the land required for the project, compensation and, if required, relocation and resettlement of project affected people. Such shall be carried out in accordance with the Resettlement Plan agreed upon between Transco and ADB, the Guarantor’s laws, regulations and procedures, and ADB’s requirements as defined in ADB’s Policy on involuntary Resettlement. Transco shall engage an independent external monitor to monitor and evaluate implementation of the Resettlement Plan and verify internal monitoring results. External monitoring reports shall be submitted to ADB biannually until completion of the resettlement program. A final evaluation report shall be submitted to ADB 3 months after the completion of the project.

Schedule 6, para. 2 of the loan agreement Article II, Section 2.06 of the project agreement Article. II, Section. 2.08 (b),of the project agreement Article II, Section 2.08 (c), of the project agreement Article IV, Section 4.04 (a) of the loan agreement and Article II, Section 2.09 (a) & (b). Also, Section 4.04 (a) & (b) of the loan agreement Schedule, para. 2 &3 of the project agreement Schedule, para. 7 of the project agreement

No transfer of assets yet as per PCR’s Team meeting with EA and PEMC. Complied with. Reference: EA’s Quarterly Progress Reports. Complied with but up to the period January to March 2011 only. Partially complied with. Part A –WESM and Part B–Luzon Substation Upgrade have no PCR’s yet. Late compliance. Reference: EA’s reports submission to ADB. Complied with. Reference: EA’s Quarterly Progress Reports and External Monitoring Firm Reports. Complied with. Reference: EA’s submitted reports.

30 Appendix 9

Covenant

Reference in Project/Loan Agreement

Status of Compliance

Environment Transco shall ensure that the Project is carried out in accordance with all applicable (i) national environmental laws, regulations and standards; (ii) all applicable provincial and local regulations and standards concerning environmental protection, land use and safety; (iii) ADB’s Environmental Guidelines for Selected Industrial and Power Development Projects; and (iv) applicable safety and health standards of the Guarantor. Business Operations Transco to maintain its corporate existence and conduct its business in accordance with sound practices Transco shall operate and maintain its assets in accordance with sound practices and shall not dispose of its assets except for the purpose of privatization.

Schedule, para.9 of the project agreement Article II, Section 2.11 (a) & (b) Article II, Sec. 2.11 (c) and Sec. 2.12 of the project agreement

Complied with. Reference: EA’s Quarterly Progress Reports and ECC Reports. Complied with. Transco’s corporate life is 25 years. Complied with. Transco’s transfer of assets to NGCP was with the concurrence of ADB.

ADB = Asian Development Bank, ECC = environmental compliance certificate, NGCP = National Grid Corporation of the Philippines, PEMC = Philippine Electricity Market Corporation, PCR = project completion report, Transco = National Transmission Corporation, WESM = wholesale electricity spot market. Source: Asian Development Bank.

Appendix 10 31

WHOLESALE ELECTRICITY SPOT MARKET’s LOAD WEIGHTED AVERAGE PRICES (P/MWh)

Date System LWAP Luzon Only Visayas Only

RTD RTX RTD RTX RTD RTX

July 2006 2,788 2,595 August 2006 3,079 2,889 September 2006 4,853 4,669 October 2006 6,770 6,583 November 2006 5,030 4,955 December 2006 7,816 7,750 January 2007 3,372 3,300 February 2007 3,678 3,532 March 2007 4,923 4,820 April 2007 7,337 7,244 May 2007 5,610 5,602 June 2007 6,009 5,827 July 2007 7,622 7,453 August 2007 3,529 3,373 September 2007 3,112 2,973 October 2007 3,013 3,153 November 2007 2,790 2,792 December 2007 5,301 5,344 January 2008 1,624 1,559 February 2008 4,190 4,100 March 2008 4,609 4,606 April 2008 4,998 4,999 May 2008 1,754 1,731 June 2008 2,197 2,255 July 2008 5,836 5,814 August 2008 2,115 1,594 September 2008 1,216 769 October 2008 5,437 5,241 November 2008 5,439 5,302 December 2008 1,139 1,042 January 2009 (630) (479) February 2009 2,620 2,621 March 2009 2,639 2,448 April 2009 3,296 3,246 May 2009 2,843 2,853 June 2009 2,159 2,097 July 2009 1,632 1,682 August 2009 1,818 1,823 September 2009 1,165 1,165 October 2009 1,259 1,232 November 2009 1,683 1,673 December 2009 2,865 2,803 January 2010 3,917 3,842 February 2010 10,945 10,723 March 2010 11,182 11,159 April 2010 7,457 7,428 May 2010 7,022 7,028 June 2010 7,945 7,959 July 2010 7,395 7,106 August 2010 3,574 3,222 September 2010 5,588 5,447

32 Appendix 10

Date System LWAP Luzon Only Visayas Only

RTD RTX RTD RTX RTD RTX

October 2010 7,835 7,800 November 2010 6,298 6,232 December 2010 5,155 5,112 January 2011 3,545 3,551 3,680 3,670 2,822 2,919 February 2011 3,112 3,102 3,055 3,036 3,431 3,467 March 2011 2,432 2,427 2,380 2,371 2,721 2,734 April 2011 3,171 3,162 3,261 3,256 2,686 2,655 May 2011 5,946 5,842 6,008 5,944 5,600 5,273 June 2011 3,890 3,901 3,895 3,889 3,864 3,970 July 2011 4,138 4,157 4,111 4,144 4,284 4,229

LWAP = load weighted average price, MWh = megawatt-hour, RTD = real time dispatch (ex-ante), RTX = real time ex-post (ex-post). Note: Visayas has been integrated with the WESM Luzon since January 2011, so the LWAPs for Luzon and Visayas prices are shown separately. Source: Philippine Electricity Market Corporation.

Appendix 11 33

SYSTEM PEAK DEMAND AND DEPENDABLE GENERATION CAPACITY

Table A11.1: Actual and Projected System Peak Demand (MW)

Notes: 1. System peak demand and dependable generation capacity both refer to total system–includes National Grid

Corporation of the Philippines (NGCP) system and embedded. 2. The system peak demand forecast is based on DOE’s 2011-2030 Power Development Plan (PDP). 3. The dependable generation capacity forecast is based on Department of Energy’s 2010–2030 Power

Development Plan (PDP). The 2011-2030 PDP forecast for the statistic yet to be released by DOE, as of 28 July 2011.

Source: Department of Energy.

Year Luzon Visayas Mindanao Philippines Growth Rate

(%)

Actual 2007 6,750.75 1,102.49 1,241.43 9,094.67 4.65 2008 6,822.00 1,176.00 1,227.67 9,225.67 1.44 2009 7,079.00 1,242.00 1,341.00 9,662.00 4.73 2010 7,799.00 1,431.00 1,288.00 10,518.00 8.86 Forecast 2011 7,672.61 1,553.31 1,484.00 10,710.04 1.83 2012 8,048.18 1,646.80 1,550.24 11,245.22 5.00 2013 8,331.09 1,705.64 1,615.97 11,652.69 3.62 2014 8,618.49 1,768.23 1,685.73 12,072.46 3.60 2015 8,921.42 1,850.29 1,755.47 12,527.18 3.77 2016 9,247.43 1,915.07 1,828.73 12,991.23 3.70 2017 9,587.24 1,983.35 1,905.84 13,476.44 3.73 2018 9,947.83 2,056.39 1,987.18 13,991.39 3.82 2019 10,322.19 2,131.58 2,071.30 14,525.07 3.81 2020 10,658.34 2,225.52 2,163.22 15,047.08 3.59 2021 11,006.80 2,324.30 2,259.36 15,590.46 3.61 2022 11,368.04 2,428.17 2,359.93 16,156.14 3.63 2023 11,742.57 2,537.39 2,465.13 16,745.08 3.65 2024 12,130.87 2,652.25 2,575.18 17,385.31 3.66 2025 12,533.50 2,773.04 2,690.32 17,996.86 3.68 2026 12,951.00 2,900.07 2,810.78 18,661.85 3.70 2027 13,383.94 3,033.67 2,936.82 19,354.43 3.71 2028 13,382.92 3,174.18 3,068.70 20,075.80 3.73 2029 14,298.57 3,321.96 3,206.70 20,827.23 3.74 2030 14,781.53 3,477.39 3,351.11 21,610.03 3.76 Average Annual Compounded Rate (%) 2002–2010 3.65 4.79 3.39 3.77 2011–2010 3.17 4.52 5.32 3.65 2011–2030 3.25 4.54 4.90 3.67 2002–2030 3.37 4.62 4.43 3.70

34 Appendix 11

Table A11.2: Actual and Projected Dependable Generation Capacity (MW)

() = negative. Notes: 1. System peak demand and dependable generation capacity both refer to total system–includes National Grid

Corporation of the Philippines (NGCP) system and embedded. 2. The system peak demand forecast is based on DOE’s 2011-2030 Power Development Plan (PDP). 3. The dependable generation capacity forecast is based on Department of Energy’s 2010–2030 Power

Development Plan (PDP). The 2011–2030 PDP forecast for the statistic yet to be released by DOE, as of 28 July 2011.

Source: Department of Energy.

Year Luzon Visayas Mindanao Philippines Growth Rate

(%)

Actual 2007 10,310.56 1,498.13 1,670.50 13,479.19 (1.17) 2008 9,867.66 1,499.44 1,682.08 13,049.18 (3.19) 2009 10,230.10 1,392.33 1,696.59 13,319.02 2.07 2010 10,498.45 1,744.89 1,658.18 13,901.52 4.37 Forecast 2011 10,197.00 1,436.00 1,673.00 13,306.00 (4.28) 2012 10,197.00 1,600.00 1,673.00 13,470.00 1.23 2013 10,272.00 2,046.00 1,681.00 13,999.00 3.93 2014 10,327.00 2,046.00 1,681.00 14,054.00 0.39 2015 10,927.00 2,046.00 1,681.00 14,654.00 4.27 2016 10,927.00 2,046.00 1,831.00 14,804.00 1.02 2017 10,927.00 2,046.00 1,931.00 14,904.00 0.68 2018 10,927.00 2,046.00 1,931.00 14,904.00 0.00 2019 10,927.00 2,046.00 1,931.00 14,904.00 0.00 2020 10,927.00 2,046.00 1,931.00 14,904.00 0.00 2021 10,927.00 2,046.00 1,931.00 14,904.00 0.00 2022 10,927.00 2,046.00 1,931.00 14,904.00 0.00 2023 10,927.00 2,046.00 1,931.00 14,904.00 0.00 2024 10,927.00 2,046.00 1,931.00 14,904.00 0.00 2025 10,927.00 2,046.00 1,931.00 14,904.00 0.00 2026 10,927.00 2,046.00 1,931.00 14,904.00 0.00 2027 10,927.00 2,046.00 1,931.00 14,904.00 0.00 2028 10,927.00 2,046.00 1,931.00 14,904.00 0.00 Average Annual Compounded Growth Rate (%) 2002–2010 2.34 2.66 2.66 2.42 2011–2010 0.40 1.60 1.53 0.70 2011–2030 0.20 0.80 0.76 0.35 2002–2030 0.86 1.37 1.35 0.99

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FINANCIAL ANALYSIS FOR WHOLESALE ELECTRICITY SPOT MARKET COMPONENT

Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Inflation (%) 3.0 3.5 6.0 7.6 6.2 2.8 9.3 3.2 3.8 4.0 4.0 US$ Exchange Rate to Peso 51.60 54.20 56.04 55.09 51.31 46.15 44.47 47.63 45.11 43.26 44.00 Revenues (Market Fees, P’000) 18,152 434,259 537,289 740,660 769,758 897,445

1 1,324,265

2

less: O&M MMS 2,884 4,166 15,573 18,338 18,073 23,014 25,681 MMS R&M 299 11,533 15,120 16,596 18,256 20,447 Leased Lines 2,884 3,868 4,040 3,218 1,477 4,758 5,234 Net Operating Profit (P’000) 115,269 430,092 521,716 722,322 751,684 874,431 1,298,584 Net Operating Profit ($’000) (10,700) 2,246 9,319 11,730 15,165 16,663 20,211 29,513 FIRR (%): 65

FIRR = financial internal rate of return, MMS = market management system, O&M = operations and maintenance, WESM = wholesale electricity spot market. Note: For the WESM MMS, the FIRR is the internal rate from the stream of revenues minus the relevant costs of operating the MMS for the period 2006–2012. This period coincides with the economic life of the hardware and software components as they are limited by technological obsolescence. Sources: Bangko Sentral ng Pilipinas Inflation Report; 2011 Quarter II Report; Consultant’s estimates.

1 Forecast by Philippine Electricity Market Corporation.

2 Footnote 1.

36

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FINANCIAL ANALYSIS FOR TRANSMISSION DEVELOPMENT COMPONENT (2007–2053) (P million)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

46.15 44.47 47.63

45

15

A. Luzon Transmission Upgrade+Cont/IDC (22,771)

Capital Recovery (Depreciation) 506 506 506 506 506 506 506 506 506 506

Return on Capital 3,349 3,273 3,196 3,120 3,044 2,968 2,892 2,816 2,740 2,664

Total 1,069 1,048 1,027 1,006 985 964 942 921 900 879

B. Calamba Tower 50-Binan (6,315)

Capital Recovery (Depreciation) 140 140 140 140 140 140 140 140 140 140

Return on Capital 929 908 887 865 844 823 802 781 760 739

Total 1,069 1,048 1,027 1,006 985 964 942 921 900 879

C. Mindanao Substation Expansion (5,307)

Capital Recovery (Depreciation) 118 118 118 118 118 118 118 118 118 118 118

Return on Capital 780 763 745 727 709 692 674 656 639 621 603

Total 898 881 863 845 827 810 792 774 756 739 721

D. Metering Equipment (1,246)

Capital Recovery (Depreciation) 28 28 28 28 28 28 28 28 28 28 28

Return on Capital 183 179 175 171 167 162 158 154 150 146 142

Total 211 207 203 198 194 190 186 182 178 173 169

964 5,219 5,100 4,981 4,862 4,743 4,624 4,504 4,385 4,266 4,147

308 1,670 1,632 1,594 1,556 1,518 1,480 1,441 1,403 1,365 1,327

655 3,549 3,468 3,387 3,306 3,225 3,144 3,063 2,982 2,901 2,820

146 792 792 792 792 792 792 792 792 792 792

(6,553) (28,285) 4,341 4,260 4,179 4,098 4,017 3,936 3,855 3,774 3,693 3,612

FIRR (9.94%)

Income Tax Rate (32%)

Taxes Payable

Income after Tax

Add Back Depreciation

Total Cash Flows

ERC Approved WACC (%)

Economic Life of Asset (years)

Exchange Rate Used ($ to Peso)

Item

Total Taxable Income

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37

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

A. Luzon Transmission Upgrade+Cont/IDC

Capital Recovery (Depreciation) 506 506 506 506 506 506 506 506 506 506 506 506

Return on Capital 2,588 2,511 2,435 2,359 2,283 2,207 2,131 2,055 1,979 1,903 1,827 1,750

Total 858 837 816 795 774 752 731 710 689 668 647 626

B. Calamba Tower 50-Binan

Capital Recovery (Depreciation) 140 140 140 140 140 140 140 140 140 140 140 140

Return on Capital 718 697 675 654 633 612 591 570 549 528 507 485

Total 858 837 816 795 774 752 731 710 689 668 647 626

C. Mindanao Substation Expansion

Capital Recovery (Depreciation) 118 118 118 118 118 118 118 118 118 118 118 118

Return on Capital 585 568 550 532 514 497 479 461 443 426 408 390

Total 703 686 668 650 632 615 597 579 561 544 526 508

D. Metering Equipment

Capital Recovery (Depreciation) 28 28 28 28 28 28 28 28 28 28 28 28

Return on Capital 137 133 129 125 121 117 112 108 104 100 96 92

Total 165 161 157 153 148 144 140 136 132 128 123 119

4,028 3,909 3,790 3,671 3,552 3,432 3,313 3,194 3,075 2,956 2,837 2,718

1,289 1,251 1,213 1,175 1,136 1,098 1,060 1,022 984 946 908 870

2,739 2,658 2,577 2,496 2,415 2,334 2,253 2,172 2,091 2,010 1,929 1,848

792 792 792 792 792 792 792 792 792 792 792 792

3,531 3,450 3,369 3,288 3,207 3,126 3,045 2,964 2,883 2,802 2,721 2,640

FIRR (9.94%)

Income Tax Rate (32%)

Taxes Payable

Income after Tax

Add Back Depreciation

Total Cash Flows

ERC Approved WACC (%)

Economic Life of Asset (years)

Exchange Rate Used ($ to Peso)

Item

Total Taxable Income

38

Ap

pe

ndix

13

2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042

A. Luzon Transmission Upgrade+Cont/IDC

Capital Recovery (Depreciation) 506 506 506 506 506 506 506 506 506 506 506 506

Return on Capital 1,674 1,598 1,522 1,446 1,370 1,294 1,218 1,142 1,065 989 913 837

Total 605 584 562 541 520 499 478 457 436 415 394 373

B. Calamba Tower 50-Binan

Capital Recovery (Depreciation) 140 140 140 140 140 140 140 140 140 140 140 140

Return on Capital 464 443 422 401 380 359 338 317 296 274 253 232

Total 605 584 562 541 520 499 478 457 436 415 394 373

C. Mindanao Substation Expansion

Capital Recovery (Depreciation) 118 118 118 118 118 118 118 118 118 118 118 118

Return on Capital 372 355 337 319 302 284 266 248 231 213 195 177

Total 490 473 455 437 419 402 384 366 349 331 313 295

D. Metering Equipment

Capital Recovery (Depreciation) 28 28 28 28 28 28 28 28 28 28 28 28

Return on Capital 87 83 79 75 71 67 62 58 54 50 46 42

Total 115 111 107 103 98 94 90 86 82 78 73 69

2,599 2,480 2,360 2,241 2,122 2,003 1,884 1,765 1,646 1,527 1,407 1,288

832 793 755 717 679 641 603 565 527 489 450 412

1,767 1,686 1,605 1,524 1,443 1,362 1,281 1,200 1,119 1,038 957 876

792 792 792 792 792 792 792 792 792 792 792 792

2,559 2,478 2,397 2,316 2,235 2,154 2,073 1,992 1,911 1,830 1,749 1,668

FIRR (9.94%)

Income Tax Rate (32%)

Taxes Payable

Income after Tax

Add Back Depreciation

Total Cash Flows

ERC Approved WACC (%)

Economic Life of Asset (years)

Exchange Rate Used ($ to Peso)

Item

Total Taxable Income

Ap

pe

ndix

13

39

2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053

A. Luzon Transmission Upgrade+Cont/IDC

Capital Recovery (Depreciation) 506 506 506 506 506 506 506 506 506 506 506

Return on Capital 761 685 609 533 457 381 304 228 152 76

Total 351 330 309 288 267 246 225 204 183 161 506

B. Calamba Tower 50-Binan

Capital Recovery (Depreciation) 140 140 140 140 140 140 140 140 140 140 140

Return on Capital 211 190 169 148 127 106 84 63 42 21

Total 351 330 309 288 267 246 225 204 183 161 140

C. Mindanao Substation Expansion

Capital Recovery (Depreciation) 118 118 118 118 118 118 118 118 118 118

Return on Capital 160 142 124 106 89 71 53 35 18

Total 278 260 242 224 207 189 171 153 136 118

D. Metering Equipment

Capital Recovery (Depreciation) 28 28 28 28 28 28 28 28 28 28

Return on Capital 37 33 29 25 21 17 12 8 4

Total 65 61 57 53 49 44 40 36 32 28

1,169 1,050 931 812 693 574 455 335 216 97

374 336 298 260 222 184 145 107 69 31

795 714 633 552 471 390 309 228 147 66

792 792 792 792 792 792 792 792 792 792 646

1,587 1,506 1,425 1,344 1,263 1,182 1,101 1,020 939 858 646

FIRR (9.94%)

Income Tax Rate (32%)

Taxes Payable

Income after Tax

Add Back Depreciation

Total Cash Flows

ERC Approved WACC (%)

Economic Life of Asset (years)

Exchange Rate Used ($ to Peso)

Item

Total Taxable Income

ERC = Energy Regulatory Commission, FIRR = financial internal rate of return, IDC = interest and other charges during construction, WACC = weighted average cost of capital. Note: For the transmission reinforcement portion, the relevant cash inflows can then be divided into two categories: capital recovery equal to the depreciation added back to the cash flows per year and the return on capital defined by the WACC multiplied by remaining value of the asset carried in the transmission rate base. The FIRR is calculated on the sub of the cash streams per year, adjusted for taxes payable due to the return on capital portion. Source: National Grid Corporation of the Philippines

40 Appendix 14

STATUS OF RIGHT-OF-WAY COMPENSATION PAYMENTS

Total Affected

Stage 1 (San Manuel–

Concepcion with 79.66 km

Transmission Line)

Paid as of 16 March 2007 (%)

Stage 2 (Concepcion–

Mexico with 37.42 km Transmission

Line)

Paid as of 16 March 2007 (%)

634 houses and structures to be demolished

371 99 263 92

284 landowners’ property to be acquired

194 99 90 86

340 to be paid for tower occupancy fee

86 99 254 71

1,874 persons to be compensated for crops, plants, and trees

1,420 99 454 40

Source: Asian Development Bank.