1. Regulation [and Competition] in the Philippine Electricity Industry
Maria Fe Villamejor-Mendoza
University of the Philippines
September 2002

2. Objectives of the Paper
Provide a macro-overview of the state of regulation [and competition] in the Philippine electricity industry [PEI]
Present an analysis of the changing configuration of the industry
Proffer preliminary inferences and statements on the past, present and future of regulation and competition in the PEI

3. Paper Outline The Patterns of Economic Regulation in the PEI
Nationalization Period [ ]
Restructuring/Opening Up Regime [1987-present]
The Changing Configuration of the PEI
Some Preliminary Inferences and Suggestions

4. Regulation
An all-encompassing public policy term which is a direct result of the society’s concept of the role of government
Connotes control, direction and guidance, and influence of actions of business by government to promote public interest and welfare
Both restrictive [red light] and facilitative [green light]

5. The Changing Patterns of Regulation in the PEI
From a command-control type of economic regulation to one, which is envisioned to be positive, facilitative and promoting competition for public interest and welfare
The century old orientation remains to set power rates and prescribe standards of service provision, using the cost-of service COS) or return on rate base regulatory regime

6. Economic Regulation
Takes the overt barriers to entry and exit, licensing and tariff laws, price and wage controls
Covers sectors of the economy such as electricity, gas, etc., which are deemed strategic to development

7. Command and Control Regulation
The exercise of government influence or control by imposing standards backed by criminal sanctions
Uses carrots and sticks in reining over the industry

8. Cost of Service or RORB Regime
Establishes a “satisfactory” or “normal” profit or rate of return on the firm’s regulated asset base, after allowing for efficient capital and operating costs
12% RORB allowed in the Philippines

9. The Regulatory Periods
“Nationalization” Period,
, from American colonial rule to earlier period of the Aquino administration
Characterized by the predominant state involvement in the provision, transmission, and regulation of electricity

10. The Regulatory Periods
Opening Up/Restructuring Period
From 1987-present, from the latter part of the Aquino administration to the Arroyo administration [post-Martial Law regimes]
Distinguished by efforts of the state to open the PEI for competition and involve the private sector and other stakeholders in the provision and regulation of electricity

11. The Nationalization Period, 1900-1987
The Opening Up/Restructuring Period,
American Period
Japanese Period,
“Republican Period”
Martial Law Period,
People Power1
Post-Martial Law Period, 1986-Present
Municipal Franchise
Act of 1903;
Corporation Law of 1906
PD 40 of 1972
EO 215 of 1987
Omnibus Investments Code of 1987
Public Service Act of 1913, 1923, 1929, 1931, 1936
NPC Act of 1936
NPC Amendment of 1949, 1971
NEA Act of
1973
The BOT Law of 1991
Environmental Laws of 1977, 1978
DOE Act of 1977, 1978
Oil Industry Commission Act of 1977;
BOE Act of 1978
ERB Act of 1987/OEA Reorganization Act of 1987
Electric Power Crisis Act of 1993
DOE Act of 1992
DOE Regulations
Anti-Pilferage Act of 1994
Tariff Segregation & Unbundling of 1998 (EO 473)
ERB Open Access Transmission 1997; Pricing Policy 1999
EPIRA Act of 2001
1935 Philippine Constitution
1972 Philippine Constitution
1987 Philippine Constitution
1900
(Active Provision, Sale, and Regulation of Electricity by the National Government)
1986
(Opening of the PEI to Competition)
2001

12. Nationalization Period
Ownership and operation of a vertically integrated state monopoly in power generation and transmission, e.g., the National Power Corporation [NPC]

13. Nationalization Period
Supervising the distribution and supply backbone through the financing and organization of private rural electric cooperatives [RECs] through the National Electrification Administration [NEA]

14. Nationalization Period
The policy determination and planning of the energy sector by the Department of Energy [DOE]
The economic price setting by the NPC until 1993

15. Nationalization Period
The economic regulation [price setting and prescription of service standards] of public service electricity utilities by the Public Service Commission [PSC], the Oil Industry Commission [OIC], the Board of Energy [BOE], and the Energy Regulatory Board [ERB] from 1923, 1977, 1987, respectively

16. Nationalization Period
Public Service/Electric Utilities
Organizations for public service
Private, sometimes public organizations with public character
Provide essential public services such as electricity, gas, transportation, telephone, water, under legally established monopoly conditions

17. Nationalization Period
Grant of franchises to electric power utilities by the PSC, NEA, local government units and the Philippine Congress
Franchise is the privilege extended to a “person” to operate an electric system for service to the public at retail, within a designated geographical area

18. Nationalization Period
The arbitration of constitutional questions, particularly of the nationalistic provisions of the Constitution by, and with recourse to judicial appeal from the Judiciary

19. Nationalization Period
The intermittent “intervention” by the President of the Republic on certain issues and public demands related to the PEI, e.g., the take over of private generating plants during Martial Law

20. On the Regulation of the PEI
Implications of EO 172 or the “Energy Regulatory Board Act of May 8, 1987”
On the Regulation of the PEI
Regulator
Regulatory Concern
Legal Basis
National Power Corporation
Rate fixing of all its services, e.g., power generation and transmission; Retained sole responsibility for power generation and transmission
RA 6395; PD 40
Public Service Commission
Cases contesting NPC Board-determined rates; Retained power to grant certificates of public convenience and necessity to public utilities
RA 6395; CA 146
Oil Industry Commission
Grant certificates of public convenience & necessity for oil & gas companies; Fix rates of electric utilities except that of NPC and the electric cooperatives
RA 6173, PD 1206
National Electrification Administration
Grant franchises to electric cooperatives
PD 269
Department of Energy /Office of Energy Affairs
Overall planning of the energy sector
PD 1206; EO 193
Energy Regulatory Board
Not material to the PEI: focus was on energy resource regulation
EO 172

21. Nationalization Period
Nationalistic Philippine Constitution
Protect Filipinos against unfair foreign competition and trade practices
Give preference to qualified Filipinos in the granting of rights, privileges, and concessions covering national economy and patrimony

22. Nationalization Period
Nationalistic Philippine Constitution
No franchise, certificate, or any form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or corporations at least sixty percent of whose capital is owned by Filipinos

23. Nationalization Period
It is the duty of the State to regulate or prohibit monopolies when the public interest so requires, and prohibit combinations in restraint of trade or unfair competition

24. Nationalization Period
Combinations in Restraint of Trade or Unfair Competition
Monopolies, mergers and acquisitions
Cartel arrangements
Predatory pricing, price manipulation
Cross ownership, cross subsidization

25. Restructuring/ Opening Up Period
Philosophy of Reforms
De-Marcosification
Privatization
Deregulation, liberalization
Reenginering, reinventing
Governance

26. Restructuring/ Opening Up Period
The government was cash-strapped but necessary public services had to be provided
The private sector was willing and able to provide public services, which the government used to provide

27. Restructuring/ Opening Up Period
EO 215
Ended the monopoly of the NPC in power generation
Opened the sub sector to private sector participation; gave rise to IPPs or independent power producers
Retained transmission monopoly of NPC

28. Restructuring/ Opening Up Period
EO 226 [Omnibus Investments Code of 1987]
RA 6957 [The BOT Law] and RA 7718 [Revised BOT Law]

29. Restructuring/ Opening Up Period
RA 7638 [The DOE Act of 1992] with power to set prices transferred from C to ERB, a task it was not prepared to do
RA 7648 [The Electric Power Crisis Act of 1993]

30. The NPC IPP Plants, 1986 –1998 Year (with Milestones) Administration
Year (with Milestones)
Administration
Number of IPP Plants Contracted
Total Capacity
1986
Aquino Administration
(Mothballing of the PNPPI-Nuclear Power Plant)
Nine (9)
1, MW
June 30, 1992
Start of Ramos Administration
Ten (10) MW
April 20, 1993
RA 7648 (Electric Power Crisis Act)
(Start of 1 year-Effectivity Period) MW
April 20, 1994
(End of RA 7648)
Fourteen (14)
4, MW
June 30, 1998
End of Ramos Administration
(Start of Estrada Administration)
Three (3) MW
Total
Forty five (45)
9, MW
Source: Department of Energy, 2002

31. Restructuring/ Opening Up Period
ERB Regulation [Standard Rules and Regulations for the Operation of Electric Power Services] with provision for open access transmission tariff and tariff for ancillary services [OATTS]

32. Restructuring/ Opening Up Period
EO 473 [Segregation and Unbundling of Electric Power Tariff Components of NPC and Franchised Utilities]
ERC Pricing Regulation for RORB

33. Restructuring/ Opening Up Period
RA 9136 [The Electric Power Industry Restructuring Act of 2001] or the Omnibus Electricity Industry Reform Act

34. RA 9136 or the EPIRA Act of 2001 Features
Unbundling of the PEI into four sectors: generation [G], transmission [T], distribution [D], and supply [S]
G and S as businesses affected with public interest, shall be competitive and open

35. RA 9136 or the EPIRA Act of 2001
T and D as natural monopolies and public utilities or common carrier businesses for public service, shall remain as monopolies subject to the regulation of the Energy Regulatory Board [ERC]

36. RA 9136 or the EPIRA Act of 2001
NPC generation assets will be privatized and sold to the private sector
Competition in G and S shall be introduced
Open access in T and D
Creation of the WESM or wholesale electricity spot market

37. RA 9136 or the EPIRA Act of 2001 Market Safeguards
Cross Ownership Prohibition
No generation company, distribution utility or stockholder/officer thereof shall be allowed to hold ownership share in the transmission company or its concessionaire and vice versa

38. RA 9136 or the EPIRA Act of 2001 Concentration of Ownership Limits
No company…can own or control more than 30% of the installed capacity of a grid and/or 25% of the national installed capacity
Bilateral Supply Contracts
No distribution utility shall be allowed to source from bilateral power supply contracts more than 50% of its total demand from its affiliate in generation

39. RA 9136 or the EPIRA Act of 2001 Other Features
Mandated P0.30/kWh rebates for all residential consumers
Condonation and assumption by the national government of all debts of NPC to at most P200B, also of all debts of cooperatives from NEA and other government agencies

40. The Changing Object of Electricity Regulation
From nationalized to an industry being restructured and pumped prime for competition

41. Changing Configuration of the PEI
State and Private Monopoly during the Nationalization Period before the 1980s
Initial Opening up of the Sector and The Power Crisis Years
The EPIRA of 2001

42. The Industry Structure During the “Nationalization” Years (Before late 1980s):
Vertically Integrated State Monopoly in Generation and Transmission of Electricity
Generation
NPC
Transmission
Distribution
Distributors &
Large Customers
Supply
“Small”
Customers

43. Structure of the Industry with Initial Reforms
to Open Up the Industry ( )
NPC
Independent Power Producers (IPPs)
Generation
Transmission
NPC
Distribution
Distributors & Large Customers
Supply
End Users

44. The Existing Power Industry Structure
Regulation:
-ERB regulates the price of electricity from generator to distributor (wholesale rate) and from the latter to the consumers (retail).
-The DOE regulates the non-pricing activities.
- NEA regulates the financial performance of cooperatives
NPC Power Plants
NPC Power Plants
Independent Power Producers (30)
Generation
Transmission
NPC
17 Electric Utilities, e.g., MERALCO
119 Electric Cooperatives; 10 LG Utilities
Distribution
Distribution
Large Industries
Others, e.g., Residential, Commercial, Industrial users
Others, e.g., Residential, Commercial, Industrial users
Consumers
Source: Adapted from the National Power Corporation, “National Power Corporation Privatization and Restructuring Program.” A Presentation to the Philippine Senate Committee on Energy, August 17, 1998, Department of Energy, “Electricity Industry Reform. A Primer,” 1999, Payumo and Parayno, , and DOE Database, 2001.

45. General Characteristics of the PEI before RA 9136
Vertically integrated G and T in NPC
Fragmented and inefficient D/S sub-sector with MERALCO getting 80% market share in D
High electricity retail rates, second to Japan

46. The PEI Envisioned in RA 9136
Regulation:
The ERC regulates the price of transmitting and distributing electricity (transmission charge and distribution wheeling charge); ensures the compliance of the former with performance standards; also ensures the compliance of all generating companies, TRANSCO, distribution utilities and suppliers, with financial capacity, health and safety, and other standards
-The DOE regulates the non-pricing activities; supervises the restructuring of the industry; entrusted to establish and formulate rules on the wholesale spot market
NEA regulates the franchising of RECs; strengthens the technical capability and financial viability of RECs
The Power Sector Assets and Liabilities Management Corporation (PSALM) manages the privatization of NPC assets and contracts and the TRANSCO
The Congressional Power Commission oversees the proper implementation of RA 9136
Generation
NPC Privatized Generating Companies (GENCOs)
NPC Residual GENCOs/
Small Power Utilities Group (SPUG) for missionary electrification
Independent Power Producers (IPPs)
Own Genera
tion
Wholesale Electricity Spot Market
Transmission
National Transmission Corporation (TRANSCO)
Private Distribution Utilities, e.g. Meralco
Rural Electric Cooperatives
Local Government Utilities
Distribution
Supply
Aggregators/Suppliers
End Users
Residential
Commercial
Industrial
Others

47. Some Statements
The PEI has a long tradition of state control in electric power generation, transmission and regulation
It has been a ‘closed’ system since the start of the 20th century

48. Some Statements
Efforts to reform, restructure and open up the industry for competition have been only fairly recent, e.g., in the past two decades prior to 2001
Regulation has been mainly economic rate setting of public service utilities

49. Some Statements
With the EPIRA of 2001, innovations were envisioned to be introduced, e.g., WESM and segregation of sub-sectors
Provisions to safeguard competition are present but competition will not be automatic or instantaneous

50. Some Statements But there are hanging issues, e.g.
Stranded debts of NPC
Renegotiation of IPP contracts
Perpetuation of monopoly position of distribution and transmission; cross-ownership in G and D
Promotion of public interest in G/S