REGULATORY ASSET BASE VALUATION USING ODRC Meralco Experience

1. REGULATORY ASSET BASE VALUATION USING ODRC Meralco Experience Good afternoon! Having heard all those introductions and input sessionsfrom ERC and PB Associates, let me now share with you Meralco�s own experience with regards to the valuation of our RAB under the PBR.Good afternoon! Having heard all those introductions and input sessionsfrom ERC and PB Associates, let me now share with you Meralco�s own experience with regards to the valuation of our RAB under the PBR.

2. Let me start by stating the outline of my presentation --- first a discussionon the ODRC background, followed by Asset Accounting � (name all 6) Some parts of my presentation contain ODRC concepts and theories already discussed this morning, so I will just go over them very quicklywithout further explanations. Instead, I will focus more on the problemsencountered by Meralco with the PBR, and the learnings we got from this exercise.Let me start by stating the outline of my presentation --- first a discussionon the ODRC background, followed by Asset Accounting � (name all 6) Some parts of my presentation contain ODRC concepts and theories already discussed this morning, so I will just go over them very quicklywithout further explanations. Instead, I will focus more on the problemsencountered by Meralco with the PBR, and the learnings we got from this exercise.

3. Now, very quickly, just to reiterate the concept we learned earlier, the ODRC is an approach normally applied to specialized assets such aselectricity transmission & distribution networks. It is also a methodology considered consistent with the building blockapproach used for rate setting purposes, and it is the method specified under the RDWR. (Read the slide) This concept is consistent with the principles of fairness & equity requiredin assessing access charges in that users (consumers) only pay for thoseassets that are required in a commercial context and therefore are notrequired to pay for any excess capacity or over-engineering embodied inthe existing assets. The ODRC is a valuation approach used to assess the value of assets where: (1) the base value of the assets can be based on historical asset costs, indexed replacement costs or on a modern equivalent asset base (MEA); and (2) an optimization component is introduced to ensure that assets are constructed in the most efficient manner possible while maintaining required service standards. Now, very quickly, just to reiterate the concept we learned earlier, the ODRC is an approach normally applied to specialized assets such aselectricity transmission & distribution networks. It is also a methodology considered consistent with the building blockapproach used for rate setting purposes, and it is the method specified under the RDWR. (Read the slide) This concept is consistent with the principles of fairness & equity requiredin assessing access charges in that users (consumers) only pay for thoseassets that are required in a commercial context and therefore are notrequired to pay for any excess capacity or over-engineering embodied inthe existing assets. The ODRC is a valuation approach used to assess the value of assets where: (1) the base value of the assets can be based on historical asset costs, indexed replacement costs or on a modern equivalent asset base (MEA); and (2) an optimization component is introduced to ensure that assets are constructed in the most efficient manner possible while maintaining required service standards.

4. Typical Entries in the ODRC Register Now let me show how an ODRC register looks like. Actually, the entries in the ODRC register (asset description, installed date, age, historic cost, replacement cost, optimization adjustment, and Optimized Depreciated Replacement Cost) are prepared by both Meralco and PB Associates.The information on the first 9 columns (category, asset code, historiccost, etc.) are inputted by Meralco, while the other remaining 4 columns are established and inputted by PB Associates (RC, optimization adjustment, ORC, ODRC). Now let me show how an ODRC register looks like. Actually, the entries in the ODRC register (asset description, installed date, age, historic cost, replacement cost, optimization adjustment, and Optimized Depreciated Replacement Cost) are prepared by both Meralco and PB Associates.

5. Asset Accounting

6. As part of the initial steps toward asset valuation, PBA made use of theseasset accounting tools: The Fixed Asset Register, more commonly known in Meralco as the Asset Tracker (AT) is a very large database of a stand alone information system that is manually updated for movements in Fixed Assets. It has the functionality of providing the historical cost information, count, asset description, installation date and location of the assets. Meralco also maintains an AM/FM system that is linked to a GeographicInformation System (GIS). The AM/FM system contains detailed information for network (or system) assets including physical location, category and sub-category. However, the system does not hold the installed date for the majority of the assets. Note that the AT has information for all fixed assets of Meralco, whereasthe AM/FM contains information only on the network assets. Field surveys were done by PB Associates to verify the existence ofassets in the AT and AM/FM System in the field. As part of the initial steps toward asset valuation, PBA made use of theseasset accounting tools: The Fixed Asset Register, more commonly known in Meralco as the Asset Tracker (AT) is a very large database of a stand alone information system that is manually updated for movements in Fixed Assets. It has the functionality of providing the historical cost information, count, asset description, installation date and location of the assets. Meralco also maintains an AM/FM system that is linked to a GeographicInformation System (GIS). The AM/FM system contains detailed information for network (or system) assets including physical location, category and sub-category. However, the system does not hold the installed date for the majority of the assets. Note that the AT has information for all fixed assets of Meralco, whereasthe AM/FM contains information only on the network assets. Field surveys were done by PB Associates to verify the existence ofassets in the AT and AM/FM System in the field.

7. The biggest challenge for Meralco was this: Asset information was available in different databases. PB Associates said that our Asset Tracker (AT) only contains historic costs, count, and asset age data of repetitive assets (poles, wires, DTs).It needs to verify the assets in the asset tracker in the field, but the asset tracker has not enough information on the location of assets. So, PBA relied on the AM/FM System to verify the location of the repetitive assets.Though there are discrepancies between the AT and the AM/FM system, PBA said that they are immaterial (only 5% discrepancy) so the AT was used as the main basis for the development of the ODRC register. Nonetheless, in any case, optimization of these assets has reduced thequantity of assets deemed to have excessive counts (e.g. meters).The biggest challenge for Meralco was this: Asset information was available in different databases. PB Associates said that our Asset Tracker (AT) only contains historic costs, count, and asset age data of repetitive assets (poles, wires, DTs).It needs to verify the assets in the asset tracker in the field, but the asset tracker has not enough information on the location of assets. So, PBA relied on the AM/FM System to verify the location of the repetitive assets.Though there are discrepancies between the AT and the AM/FM system, PBA said that they are immaterial (only 5% discrepancy) so the AT was used as the main basis for the development of the ODRC register. Nonetheless, in any case, optimization of these assets has reduced thequantity of assets deemed to have excessive counts (e.g. meters).

8. For substation assets, PBA said that the Asset Tracker cannot be sortedand cleansed to allow the development of ODRC register data. For one, the AT description for substation assets is difficult to be classified according to RDWR asset categories. This is because under the Old FERC category � substation is only one line account item New RDWR category � station equipment is further classified into 6 sub-categories: power transformer switch gear protective equipment metering & control equipment communication equipment other station equipment So, PBA implemented a superior method of 100% field inspection in accounting for Meralco�s substation assets. (read the slide) For substation assets, PBA said that the Asset Tracker cannot be sortedand cleansed to allow the development of ODRC register data. For one, the AT description for substation assets is difficult to be classified according to RDWR asset categories. This is because under the Old FERC category � substation is only one line account item New RDWR category � station equipment is further classified into 6 sub-categories: power transformer switch gear protective equipment metering & control equipment communication equipment other station equipment So, PBA implemented a superior method of 100% field inspection in accounting for Meralco�s substation assets. (read the slide)

9. The survey of all the Meralco substations took almost a month. The survey started on March 15, 2006 and ended in June 8. PB Associates assigned 5 teams of appraisers inspecting 5 different substations per day. Each team was accompanied by Meralco personnel from Substation, Power System Protection, SCADA, and Electric System Planning offices. (Groups A, B, C, D , E represent the 5 teams of PB Associates and AACI who conducted the field verification.) The survey of all the Meralco substations took almost a month. The survey started on March 15, 2006 and ended in June 8. PB Associates assigned 5 teams of appraisers inspecting 5 different substations per day. Each team was accompanied by Meralco personnel from Substation, Power System Protection, SCADA, and Electric System Planning offices. (Groups A, B, C, D , E represent the 5 teams of PB Associates and AACI who conducted the field verification.)

10. Here is a picture of the pre-survey meeting last March 15, 2006. In thismeeting, the objectives and procedure to be followed in conducting the 100% inventory of all substation assets were agreed upon. Here is a picture of the pre-survey meeting last March 15, 2006. In thismeeting, the objectives and procedure to be followed in conducting the 100% inventory of all substation assets were agreed upon.

11. (I�m not an engineer, so allow me to look at my notes to describe thepictures, because I might be saying the wrong description for eachpicture.) The picture at the left shows the appraisers verifying the substation equipment count and ratings with what were installed in the field. In the picture at the right, the appraisers inspect the nameplate ratings of the circuit breaker to estimate its installed date. (I�m not an engineer, so allow me to look at my notes to describe thepictures, because I might be saying the wrong description for eachpicture.) The picture at the left shows the appraisers verifying the substation equipment count and ratings with what were installed in the field. In the picture at the right, the appraisers inspect the nameplate ratings of the circuit breaker to estimate its installed date.

12. These pictures show the inspections of the switchgear (left) and the protection and control panels (right). These pictures show the inspections of the switchgear (left) and the protection and control panels (right).

13. For the asset accounting activities, we realized that it was difficult to getasset information from different data sources. Since these different data sources are maintained by different people/different offices, they tend to have discrepancies in terms of asset information. There will always be different versions of the same asset information. Based onthis, one of the solutions being considered is that there should be one facility manager per asset item who will keep track of the important asset information and store them in one integrated system. We have actually a task force group called NAM (Network Assets Management) group that looks into this. We also did benchmarking activities with otherAsian utilities as to how they effectively manage and account for theirnetwork assets. For the poles, we realized that we need to revive our pole monitoring system. And for the major equipment, we need to assign company numbers so that asset information can be monitored, updated and recorded in a timely manner.For the asset accounting activities, we realized that it was difficult to getasset information from different data sources. Since these different data sources are maintained by different people/different offices, they tend to have discrepancies in terms of asset information. There will always be different versions of the same asset information. Based onthis, one of the solutions being considered is that there should be one facility manager per asset item who will keep track of the important asset information and store them in one integrated system. We have actually a task force group called NAM (Network Assets Management) group that looks into this. We also did benchmarking activities with otherAsian utilities as to how they effectively manage and account for theirnetwork assets. For the poles, we realized that we need to revive our pole monitoring system. And for the major equipment, we need to assign company numbers so that asset information can be monitored, updated and recorded in a timely manner.

14. Replacement Cost (RC)

15. There are three methods of establishing the replacement cost of assets; these are: indexation, replacement cost analysis and the modern equivalent asset approach. These were already discussed earlier soI won�t go through them in detail anymore. Indexation: This is used for assets where there has been little technological change and relevant costs are included in the valuation. This method is linked to the historic cost of the asset. Replacement cost analysis: This includes the valuation of the asset attheir current unit price multiplied by their volumes. Modern Equivalent Asset: This method values relevant costs at the costof a modern equivalent asset with similar service potential. There are three methods of establishing the replacement cost of assets; these are: indexation, replacement cost analysis and the modern equivalent asset approach. These were already discussed earlier soI won�t go through them in detail anymore. Indexation: This is used for assets where there has been little technological change and relevant costs are included in the valuation. This method is linked to the historic cost of the asset. Replacement cost analysis: This includes the valuation of the asset attheir current unit price multiplied by their volumes. Modern Equivalent Asset: This method values relevant costs at the costof a modern equivalent asset with similar service potential.

16. We now go to the challenges encountered by in the aspect ofreplacement costs. Meralco submitted its recommended replacement costs of assets based on its existing cost estimation methodology. However, upon careful study and analysis of this of this cost estimation method, it appears that this cost estimating method used average pricesinstead of last purchase price. Also, this estimating method does not include overtime costs as relevant cost. Therefore, the current Replacement Cost estimating methodology of Meralco in its systems like WOMS, MWMS, OTMS, yield understated costs. WOMS � work order management system MWMS � maintenance work management system OTMS � operating trouble management system As a result, the estimated and actual labor cost are also not that accurate. We now go to the challenges encountered by in the aspect ofreplacement costs. Meralco submitted its recommended replacement costs of assets based on its existing cost estimation methodology. However, upon careful study and analysis of this of this cost estimation method, it appears that this cost estimating method used average pricesinstead of last purchase price. Also, this estimating method does not include overtime costs as relevant cost. Therefore, the current Replacement Cost estimating methodology of Meralco in its systems like WOMS, MWMS, OTMS, yield understated costs. WOMS � work order management system MWMS � maintenance work management system OTMS � operating trouble management system As a result, the estimated and actual labor cost are also not that accurate.

17. To reflect a more accurate replacement cost, Meralco should incorporate overtime costs, differential pay costs, and other relevant costs currently not considered in its estimating methodology. Meralco should also review its required man-hours per constructive unitin its project cost estimating modules because these man-hours were not regularly updated and may be outdated already. Also, to check for replacement cost accuracy, Meralco should also implement some feedback mechanism on actual and estimated costs by the implementing offices.To reflect a more accurate replacement cost, Meralco should incorporate overtime costs, differential pay costs, and other relevant costs currently not considered in its estimating methodology. Meralco should also review its required man-hours per constructive unitin its project cost estimating modules because these man-hours were not regularly updated and may be outdated already. Also, to check for replacement cost accuracy, Meralco should also implement some feedback mechanism on actual and estimated costs by the implementing offices.

18. Optimization

19. With regards to optimization, the following principles were used by PB Associates to optimize Meralco�s assets: Stranded assets were optimized. System is reconfigured to see if it can be replaced by a lower value network. Over-capacities were optimized. Ratings of equipment were replaced with lower values to see if theycan be replaced with lower ratings. Stores and spares were also evaluated to check for excesses. With regards to optimization, the following principles were used by PB Associates to optimize Meralco�s assets: Stranded assets were optimized. System is reconfigured to see if it can be replaced by a lower value network. Over-capacities were optimized. Ratings of equipment were replaced with lower values to see if theycan be replaced with lower ratings. Stores and spares were also evaluated to check for excesses.

20. The above table shows the ERC-specified planning horizons for thenetwork components. As the peak load in the Philippines occurs in summer prior to the start of the first regulatory year (July 1, 2007) of the Second Regulatory Period, planning horizon commences from year 2008. Planning horizon refers to the time period during which the asset is allowed to attain its service potential or optimization criteria. If not, the asset will be optimized out. For example, the power transformers have a planning horizon of 10 years and an optimization criteria of 70%. Thismeans that an existing power transformer is allowed to attain 70% utilization throughout the planning horizon without being optimized. Planning horizon is different from an asset�s economic or useful life. The above table shows the ERC-specified planning horizons for thenetwork components. As the peak load in the Philippines occurs in summer prior to the start of the first regulatory year (July 1, 2007) of the Second Regulatory Period, planning horizon commences from year 2008. Planning horizon refers to the time period during which the asset is allowed to attain its service potential or optimization criteria. If not, the asset will be optimized out. For example, the power transformers have a planning horizon of 10 years and an optimization criteria of 70%. Thismeans that an existing power transformer is allowed to attain 70% utilization throughout the planning horizon without being optimized. Planning horizon is different from an asset�s economic or useful life.

21. Meralco submitted and explained these data to PB Associates during the valuation process. These data served as reference of PB in conducting the optimization. (Just read the following data to say that Meralco submitted them and PB Associates evaluated accordingly�) Meralco submitted and explained these data to PB Associates during the valuation process. These data served as reference of PB in conducting the optimization. (Just read the following data to say that Meralco submitted them and PB Associates evaluated accordingly�)

22. � PB Associates also reviewed the load forecasting methodology employed by Electric System Planning and they said that it was robust. � PB Associates also reviewed the load forecasting methodology employed by Electric System Planning and they said that it was robust.

23. The above table is a portion of the optimization done by PB Associateswith regards to Meralco�s distribution plant assets. (Again, please allow me to read from my notes because the explanationsfor the optimization are somewhat technical terms for an accountant likemyself; for the engineers, I�m sure they will understand.) Thirty (30) of our 34.5 KV Gas-Insulated Switchgears (GIS) wereoptimized because PB Associates said that Air-Insulated Switchgears (AIS) can be used instead. Ten (10) of our 115 KV GIS circuit breakers were also optimized because PB said that they are not yet being used within the planning horizon. Meralco installed these breakers in advance to avoidcompatibility problems later. Sixty-six (66) of our 40 kA breakers were also optimized to 31.5 kA and 25 kA. PB evaluated that the expected fault currents to beexperienced by these breakers will be lower than 40 kA. The optimization of circuit breakers was not included in the final valuation report, because the cost is not material as per PB Associates. The above table is a portion of the optimization done by PB Associateswith regards to Meralco�s distribution plant assets. (Again, please allow me to read from my notes because the explanationsfor the optimization are somewhat technical terms for an accountant likemyself; for the engineers, I�m sure they will understand.) Thirty (30) of our 34.5 KV Gas-Insulated Switchgears (GIS) wereoptimized because PB Associates said that Air-Insulated Switchgears (AIS) can be used instead. Ten (10) of our 115 KV GIS circuit breakers were also optimized because PB said that they are not yet being used within the planning horizon. Meralco installed these breakers in advance to avoidcompatibility problems later. Sixty-six (66) of our 40 kA breakers were also optimized to 31.5 kA and 25 kA. PB evaluated that the expected fault currents to beexperienced by these breakers will be lower than 40 kA. The optimization of circuit breakers was not included in the final valuation report, because the cost is not material as per PB Associates.

24. This is an example of optimization done on distribution transformers. As a general rule, 50% is the acceptable minimum energy utilization fora typical load factor of 0.4. For the DTs, the optimization was only applied in the Dasmari�asSector because the expected loading of our DTs there was only 46.5%which is less than the 50% optimization criterion. This is an example of optimization done on distribution transformers. As a general rule, 50% is the acceptable minimum energy utilization fora typical load factor of 0.4. For the DTs, the optimization was only applied in the Dasmari�asSector because the expected loading of our DTs there was only 46.5%which is less than the 50% optimization criterion.

25. SUMMARY OF PBA�s PROPOSED OPTIMIZATION OF MERALCO DISTRIBUTION ASSETS Amount of optimization in final determination: Switchgear � P659,677,151 Meters � P10,561,217,945 Excess meters determined by ERC: Meralco ERC Single phase 883,341 (5,104,273 � 4,220,932) LV secondary 151,814 (214,673 � 62,860) Total 1,035,155 ? excess meters optimized out Amount of optimization in final determination: Switchgear � P659,677,151 Meters � P10,561,217,945 Excess meters determined by ERC: Meralco ERC Single phase 883,341 (5,104,273 � 4,220,932) LV secondary 151,814 (214,673 � 62,860) Total 1,035,155 ? excess meters optimized out

26. Meralco�s initial GIS modules should be reviewed, since our practice is to build the complete 115 kV module of our GIS substations during theinitial construction stage to avoid compatibility problems later, even if some of the 115 kV breakers will remain idle for several years. PBAoptimized out these breakers. Our circuit breaker fault current rating of 40 KA should also be reviewed because a number of our circuit breakers were optimized out. PB Associates said that some of the 40 KA breakers can be downgraded to lower ratings because the fault currents will be less than 40 KA. Fault current ratings of breakers should be based on future or expected fault current levels in the planning horizon. (KA is kilo-amperes and kVA means kilovolt-amperes. KA is a fault c current magnitude and KVA is a capacity.) Since some of our DTs were optimized out due to < 50% loading, there should be a review on our DT sizing. Meralco should also review its asset data on meters and continue thecleanup of meter data base, to update the information on the asset tracker . Meralco�s initial GIS modules should be reviewed, since our practice is to build the complete 115 kV module of our GIS substations during theinitial construction stage to avoid compatibility problems later, even if some of the 115 kV breakers will remain idle for several years. PBAoptimized out these breakers. Our circuit breaker fault current rating of 40 KA should also be reviewed because a number of our circuit breakers were optimized out. PB Associates said that some of the 40 KA breakers can be downgraded to lower ratings because the fault currents will be less than 40 KA. Fault current ratings of breakers should be based on future or expected fault current levels in the planning horizon. (KA is kilo-amperes and kVA means kilovolt-amperes. KA is a fault c current magnitude and KVA is a capacity.) Since some of our DTs were optimized out due to < 50% loading, there should be a review on our DT sizing. Meralco should also review its asset data on meters and continue thecleanup of meter data base, to update the information on the asset tracker .

27. Depreciation

28. PB Associates used the straight line method of depreciation using theeffective and standard lives and equipment age. PB Associates used the straight line method of depreciation using theeffective and standard lives and equipment age.

29. PB Associates considered these factors in assessing the standard lives of Meralco�s assets: Frequent maintenance extends asset life. High weather temperature shortens asset life. Extreme operating conditions like high loading levels shorten assetlife. Rapid technological changes (e.g. for computers) shorten asset life. PB Associates also considered failure rates of equipment to estimate asset lives. (Failure rate is no. of failures per year per equipmentor per asset category) PB Associates considered these factors in assessing the standard lives of Meralco�s assets: Frequent maintenance extends asset life. High weather temperature shortens asset life. Extreme operating conditions like high loading levels shorten assetlife. Rapid technological changes (e.g. for computers) shorten asset life. PB Associates also considered failure rates of equipment to estimate asset lives. (Failure rate is no. of failures per year per equipmentor per asset category)

30. Because we cannot provide our own asset failure data, PB Associatesused their expert and professional judgment in estimating the standardeffective lives of our assets. In the RORB methodology, there was no incentive for utilities to get record and study failure rate data. However, in the PBR, asset failuredata affect the standard life of assets. Even CEPALCO and DECORPcannot provide robust asset failure data. Because we cannot provide our own asset failure data, PB Associatesused their expert and professional judgment in estimating the standardeffective lives of our assets. In the RORB methodology, there was no incentive for utilities to get record and study failure rate data. However, in the PBR, asset failuredata affect the standard life of assets. Even CEPALCO and DECORPcannot provide robust asset failure data.

31. Due to the importance of failure rate data of equipment, Meralco must have failure rates of its equipment especially for power transformers, distribution transformers and meters. Due to the importance of failure rate data of equipment, Meralco must have failure rates of its equipment especially for power transformers, distribution transformers and meters.

32. Results of Meralco�sODRC Valuation

33. In the Distribution plant category, Asset Category A2 (structures andimprovements � distribution) was optimized by 1%. Asset Category A3b (the optimized circuit breakers) was optimized by 7% (P633,306,589 in the final determination; P659,677,151 in the optimization report). In the Distribution plant category, Asset Category A2 (structures andimprovements � distribution) was optimized by 1%.

34. The last item optimized for distribution plant was the asset category A16 (meters), which was optimized by 40% (P10,561M). For the total Distribution Plant, the optimization was 8% and the ODRCis 55% of the Replacement Cost. The Distribution Plant Asset Category comprises 79% of Meralco�sRegulatory Asset Base (RAB). Excess meters determined by ERC: Meralco ERC Single phase 883,341 (5,104,273 � 4,220,932) LV secondary 151,814 (214,673 � 62,860) Total 1,035,155 ? excess meters optimized out The last item optimized for distribution plant was the asset category A16 (meters), which was optimized by 40% (P10,561M). For the total Distribution Plant, the optimization was 8% and the ODRCis 55% of the Replacement Cost. The Distribution Plant Asset Category comprises 79% of Meralco�sRegulatory Asset Base (RAB). Excess meters determined by ERC: Meralco ERC Single phase 883,341 (5,104,273 � 4,220,932) LV secondary 151,814 (214,673 � 62,860) Total 1,035,155 ? excess meters optimized out

35. For General Plant, asset category B1 (land and land rights � non-network) was optimized by 13% (P2,241M).  For category B2 (structures and improvements), the optimization was 8% (P371M).  For the entire General plant category, the optimization was 9%. General Plant comprises 21% of Meralco�s RAB. For General Plant, asset category B1 (land and land rights � non-network) was optimized by 13% (P2,241M). For category B2 (structures and improvements), the optimization was 8% (P371M). For the entire General plant category, the optimization was 9%. General Plant comprises 21% of Meralco�s RAB.

36. In summary , the optimization done for Meralco�s assets was 8.2% and the total ODRC value was 57% of the Replacement Cost. Based on ERC�s final determination released last Aug. 31, 2007, thefinal initial value of Meralco�s RAB as of June 30, 2006 was P96,375M which is about P285M lower than the initial valuation figure of P96,640M. The difference can be due to Meralco�s voluntary submission of removing from the RAB those properties which are intended to be used for commercial and office spaces (strip mall & BPO). Since these spaces will no longer be required for electricity distribution purposes, a reduction in RAB was deemed appropriate by Meralco. Added info: MFC (Jollye) was optimized out 100%, but a portion of CWC(formerly JFCH) or 67.83% was restored back to RAB after Meralco pointed out that 67.83% of CWC�s OPEX was approved (this is the proportion of total OPEX related to distribution network employees). In summary , the optimization done for Meralco�s assets was 8.2% and the total ODRC value was 57% of the Replacement Cost. Based on ERC�s final determination released last Aug. 31, 2007, thefinal initial value of Meralco�s RAB as of June 30, 2006 was P96,375M which is about P285M lower than the initial valuation figure of P96,640M. The difference can be due to Meralco�s voluntary submission of removing from the RAB those properties which are intended to be used for commercial and office spaces (strip mall & BPO). Since these spaces will no longer be required for electricity distribution purposes, a reduction in RAB was deemed appropriate by Meralco. Added info: MFC (Jollye) was optimized out 100%, but a portion of CWC(formerly JFCH) or 67.83% was restored back to RAB after Meralco pointed out that 67.83% of CWC�s OPEX was approved (this is the proportion of total OPEX related to distribution network employees).

37. THANK YOU!