Regulation [and Competition] in

the Philippine Electricity Industry

Maria Fe Villamejor-Mendoza
University of the Philippines
September 2002
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
Paper Outline
 The Patterns of Economic Regulation in
the PEI
 Nationalization Period [1903-1987]
 Restructuring/Opening Up Regime [1987-
present]
 The Changing Configuration of the PEI
 Some Preliminary Inferences and
Suggestions
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]
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
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
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
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
The Regulatory Periods
 “Nationalization” Period,
 1900-1987, 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
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
  
The Nationalization Period, 1900-1987 The Opening Up/Restructuring Period, 1987-2001
           
1900-1941 Japanese Period, “Republican Martial Law People Power1 Post-Martial Law Period, 1986-Present
American Period 1942-45 Period”1945- Period, 1972-
1971 1986

           
Municipal Franchise              
Act of 1903; PD 40 of 1972 EO 215 of 1987
   
Corporation Law of 1906 Omnibus
Investments Code
of 1987
 
Public Service NPC Act of 1936 NPC Amendment NEA Act of   The BOT Law of    
Act of 1913, 1923, of 1949, 1971 1973 1991
1929, 1931, 1936  
    Environmental   Electric Power   Anti-Pilferage Act
Laws of 1977,   Crisis Act of 1993   of 1994
1978      
    DOE Act of 1992 Tariff Segregation
DOE Act of 1977,   DOE Regulations & Unbundling of
1978   94-2000 1998 (EO 473)
  ERB Act of  
Oil Industry 1987/OEA ERB Open Access
Commission Act Reorganization Transmission
of 1977; Act of 1987 1997; Pricing
BOE Act of 1978   Policy 1999
     
EPIRA Act of
2001

             
1935 Philippine 1972 Philippine 1987 Philippine
Constitution Constitution Constitution

         
         
         
1900 (Active Provision, Sale, and Regulation of Electricity by the   (Opening of the PEI to Competition)  
National Government) 1986 2001
Nationalization Period
 Ownership and operation of a vertically
integrated state monopoly in power
generation and transmission, e.g., the
National Power Corporation [NPC]
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]
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
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
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
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
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
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
 Implications of EO 172 or the “Energy Regulatory Board Act of May 8, 1987”
Regulator
National Power Corporation
Public Service Commission
Oil Industry Commission
National Electrification
Administration
Department of Energy /Office
of Energy Affairs
Energy Regulatory Board
On the Regulation of the PEI
Regulatory Concern Legal Basis
 
Rate fixing of all its services, e.g., power RA 6395; PD 40
generation and transmission; Retained
sole responsibility for power generation
and transmission
Cases contesting NPC Board-determined RA 6395; CA 146
rates; Retained power to grant
certificates of public convenience and
necessity to public utilities
Grant certificates of public convenience RA 6173, PD 1206
& necessity for oil & gas companies; Fix
rates of electric utilities except that of
NPC and the electric cooperatives
Grant franchises to electric cooperatives PD 269
Overall planning of the energy sector PD 1206; EO 193
 
Not material to the PEI: focus was on EO 172
energy resource regulation
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
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
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
Nationalization Period
 Combinations in Restraint of Trade or
Unfair Competition
 Monopolies, mergers and acquisitions
 Cartel arrangements
 Predatory pricing, price manipulation
 Cross ownership, cross subsidization
Restructuring/
Opening Up Period
 Philosophy of Reforms
 De-Marcosification
 Privatization
 Deregulation, liberalization
 Reenginering, reinventing
 Governance
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
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
Restructuring/
Opening Up Period
 EO 226 [Omnibus Investments Code of
1987]
 RA 6957 [The BOT Law] and RA 7718
[Revised BOT Law]
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]
The NPC IPP Plants, 1986 –1998
 
Year (with Milestones)
Number of IPP Plants
Contracted
Total Capacity

Administration
1986    
Aquino Administration Nine (9) 1, 988.73 MW
(Mothballing of the PNPPI-Nuclear Power
Plant)
June 30, 1992    
Start of Ramos Administration Ten (10) 961.95 MW
April 20, 1993    
RA 7648 (Electric Power Crisis Act) Nine (9) 896.80 MW
(Start of 1 year-Effectivity Period)
April 20, 1994    
(End of RA 7648) Fourteen (14) 4, 610.25 MW
 
June 30, 1998    
Source: Department of
End of Ramos Administration
Energy, 2002 Three (3) 766.00 MW
(Start of Estrada Administration)
Total Forty five (45) 9, 223.73 MW
Restructuring/
Opening Up Period
 ERB Regulation 95-21 [Standard Rules
and Regulations for the Operation of
Electric Power Services] with provision
for open access transmission tariff and
tariff for ancillary services [OATTS]
Restructuring/
Opening Up Period
 EO 473 [Segregation and Unbundling of
Electric Power Tariff Components of
NPC and Franchised Utilities]
 ERC Pricing Regulation for RORB
Restructuring/
Opening Up Period
 RA 9136 [The Electric Power Industry
Restructuring Act of 2001] or the
Omnibus Electricity Industry Reform Act
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
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]
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
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
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
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
The Changing Object of
Electricity Regulation
 From nationalized to an industry being
restructured and pumped prime for
competition
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
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
 Structure of the Industry with Initial
Reforms
to Open Up the Industry (1987-2001)
 
  Independent
Generation NPC
  Power
  Producers
  (IPPs)
 
 
Transmission
 
  NPC
 
 
 
 
Distribution Distributors & Large Customers
 
 
 
 

Supply
End Users
 The Existing Power Industry Structure

 
Regulation:
NPCNPC Independent
-ERB
  regulates Power
Power Power
 
the price of Plants
Plants Producers
 
electricity from (30)
 
generator to Generation
 
distributor
(wholesale
  rate)
and  from the Transmission
NPC
latter  to the
consumers
 
(retail).
 
 
17 Electric 119 Electric
-The  DOE Utilities, e.g., Cooperatives;
 
regulates the Distribution
MERALCO 10 LG Utilities
 
non-pricing
activities.
 
- NEA regulates
the financial Consumers
Large Others, e.g.,
performance of Industries Residential,
cooperatives Commercial, Industrial
users

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, 1998-1999, and DOE Database, 2001.
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
 The PEI Envisioned in RA 9136
  Regulation:
Generation NPC NPC Independ Own
The ERC regulates the Privatized Residual ent Power Genera
price of transmitting and Generating GENCOs/ Producer tion
distributing electricity Companies Small s (IPPs)
(transmission charge and (GENCOs) Power  
distribution wheeling Utilities
charge); ensures the Group
Wholesale
compliance of the former (SPUG) for
with performance Electricity
Spot Market missionary
standards; also ensures electrificatio
the compliance of all n
generating companies,
TRANSCO, distribution
utilities and suppliers, with
financial capacity, health National Transmission
and safety, and other
Transmission
Corporation (TRANSCO)
standards
-The DOE regulates the
non-pricing activities;
supervises the
restructuring of the
industry; entrusted to
Private Rural Electric Local
establish and formulate
Distribution Distribution Cooperatives Government
rules on the wholesale
Utilities, Utilities
spot market e.g.
NEA regulates the Meralco
franchising of RECs;
strengthens the technical
capability and financial
viability of RECs
The Power Sector Assets
and Liabilities Supply
Management Corporation Aggregators/Suppliers
(PSALM) manages the
privatization of NPC
assets and contracts and
the TRANSCO
The Congressional Power
Commission oversees the
proper implementation of End Users Residenti Commercial Industrial Others
RA 9136 al
 
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
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
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
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