ASG Law

Tag: Distribution Utilities

  • Navigating Subtransmission Asset Acquisition: The Consortium Requirement in Philippine Power Industry

    Mandatory Consortium for Subtransmission Asset Acquisition: A Key Lesson from NGCP v. Meralco

    G.R. No. 239829, May 29, 2024

    Imagine a scenario where two companies want to jointly operate a critical piece of infrastructure. What if the law requires them to form a partnership first, even if one company isn’t fully on board? This is precisely the issue addressed in the recent Supreme Court decision of National Grid Corporation of the Philippines (NGCP) v. Manila Electric Company (Meralco). The case delves into the complexities of acquiring subtransmission assets within the Philippine power industry, emphasizing the mandatory nature of forming a consortium when multiple distribution utilities are involved. This ruling clarifies the interpretation of the Electric Power Industry Reform Act of 2001 (EPIRA) and its implications for power distribution companies.

    Legal Context: EPIRA and Subtransmission Asset Disposal

    The Electric Power Industry Reform Act of 2001 (EPIRA) aimed to restructure the Philippine power industry, introducing competition and privatizing state-owned assets. A key component of this reform was the disposal of subtransmission assets, which are the links between high-voltage transmission lines and local distribution networks. Section 8 of EPIRA outlines the process for this disposal, prioritizing qualified distribution utilities already connected to these assets.

    Section 8, paragraph 6 of EPIRA is the crux of the matter. It states: “Where there are two or more connected distribution utilities, the consortium or juridical entity shall be formed by and composed of all of them and thereafter shall be granted a franchise to operate the subtransmission asset by the ERC.” This provision mandates the formation of a consortium when multiple distribution utilities share a connection to a subtransmission asset. A ‘consortium’ in this context refers to a partnership or joint venture created specifically for the purpose of operating the asset.

    To illustrate, consider two neighboring towns, each served by a different electric cooperative. If a subtransmission line connects both towns to the main power grid, and that line is being sold off by TRANSCO, EPIRA requires the two cooperatives to form a consortium to jointly manage that line. This ensures coordinated operation and prevents one cooperative from monopolizing access to the power supply.

    Case Breakdown: The Battle Over Dasmariñas-Abubot-Rosario Assets

    The NGCP v. Meralco case revolved around the proposed sale of certain subtransmission assets (STAs), specifically the Dasmariñas-Abubot-Rosario 115 kV Line and the Rosario Substation Equipment (collectively, DAR Assets), from the National Transmission Corporation (TRANSCO) to Manila Electric Company (Meralco). However, the Cavite Economic Zone (CEZ), managed by the Philippine Economic Zone Authority (PEZA), was also connected to these assets. PEZA initially waived its right to acquire the DAR Assets in favor of Meralco.

    The Energy Regulatory Commission (ERC) initially disapproved the sale of the DAR Assets to Meralco alone, citing Section 8 of EPIRA and insisting on the formation of a consortium between Meralco and CEZ/PEZA. Despite PEZA’s waiver and Meralco’s attempts to form a consortium, PEZA cited legal impediments preventing them from joining. This led to a series of motions and orders, culminating in a petition for review before the Court of Appeals (CA).

    Here’s a simplified breakdown of the case’s procedural journey:

    • TRANSCO and Meralco filed a Joint Application with the ERC for approval of the sale.
    • NGCP intervened, claiming unpaid upgrade costs.
    • ERC approved the sale of some assets but disapproved the sale of DAR Assets, requiring a consortium.
    • Meralco sought reconsideration, arguing PEZA’s waiver.
    • ERC denied the reconsideration.
    • CA initially dismissed Meralco’s petition but later reversed its decision, approving the sale to Meralco.
    • NGCP appealed to the Supreme Court.

    The Supreme Court ultimately sided with NGCP and the ERC’s original interpretation. The Court emphasized the mandatory nature of the consortium requirement, stating: “Section 8 is unequivocal in stating that ‘[w]here there are two or more connected distribution utilities, the consortium or juridical entity shall be formed by and composed of all of them’.” The Court further added: “Clearly, the use of the word ‘shall’ means that a consortium is a mandatory requirement.”

    Furthermore, the Court highlighted the potential for PEZA to participate in a consortium without being burdened by operational responsibilities outside the CEZ, stating that Meralco and PEZA had the option of limiting the latter’s subscription rights to be lower than that of its load requirements.

    Practical Implications: Navigating Future Asset Acquisitions

    This ruling has significant implications for distribution utilities seeking to acquire subtransmission assets in the Philippines. It reinforces the importance of strict compliance with EPIRA’s requirements, particularly the consortium mandate. Distribution utilities must now prioritize collaboration and consortium formation when multiple parties are connected to the assets in question. Waivers from other connected utilities may not be sufficient to bypass the consortium requirement.

    Key Lessons:

    • Consortium is Mandatory: When two or more distribution utilities are connected to a subtransmission asset, forming a consortium is non-negotiable.
    • Waivers Are Insufficient: A waiver from one distribution utility does not automatically allow another to acquire the asset unilaterally.
    • ERC’s Expertise Matters: The ERC’s technical findings regarding asset classification and potential rate impacts are given significant weight.
    • Explore Alternative Arrangements: Distribution utilities can explore alternative consortium arrangements that limit the operational responsibilities of certain members.

    Hypothetical Example: Suppose a rural electric cooperative (REC) wants to purchase a subtransmission line serving both its area and a nearby industrial park. Even if the industrial park operator is uninterested in actively managing the line, the REC must still form a consortium with the operator. The consortium agreement could stipulate that the REC will handle all operational aspects while the industrial park retains a minimal ownership stake.

    Frequently Asked Questions

    Q: What happens if one of the distribution utilities refuses to join a consortium?

    A: According to Rule 6, Section 8(e) of the EPIRA’s Implementing Rules and Regulations (IRR), if a qualified Distribution Utility refuses to acquire such assets, then TRANSCO shall be deemed in compliance with this obligation and TRANSCO shall be relieved of its obligation to sell said assets.

    Q: Can a distribution utility waive its right to participate in a consortium?

    A: No, a waiver does not remove the requirement to form a consortium. The Supreme Court has clarified that forming a consortium is mandatory when multiple distribution utilities are connected to the asset.

    Q: What factors does the ERC consider when approving the sale of subtransmission assets?

    A: The ERC considers whether the assets meet the technical and functional criteria for subtransmission assets and whether the acquiring distribution utility or consortium meets the qualification criteria.

    Q: What is the purpose of requiring a consortium in the acquisition of subtransmission assets?

    A: The consortium requirement aims to prevent monopolization by a single distribution utility and promote competition in the power industry. By encouraging competition, the possibility of price or market manipulation is avoided.

    Q: What is the effect of reclassifying a subtransmission asset to a transmission asset?

    A: If the ERC determines that an asset should be reclassified as a transmission asset, it can no longer be the subject of sale to a distribution utility.

    ASG Law specializes in energy law and regulatory compliance in the Philippines. Contact us or email hello@asglawpartners.com to schedule a consultation.

  • Navigating the Philippine Electric Power Industry: Understanding Mandatory vs. Voluntary Migration

    Voluntary Migration in the Electric Power Industry: A Key to Competition and Choice

    Philippine Chamber of Commerce and Industry, et al. v. Department of Energy, et al., G.R. Nos. 228588, 229143, 229453, March 21, 2021

    Imagine a bustling factory in the heart of Manila, where the hum of machinery is suddenly interrupted by a power outage. The cost of electricity, a critical factor in the factory’s operations, becomes a pressing concern. This scenario underscores the importance of the electric power industry’s structure and the impact of regulations on businesses and consumers alike. At the center of this issue is the debate over mandatory versus voluntary migration in the contestable market, a topic that was recently addressed by the Philippine Supreme Court in a landmark decision involving the Electric Power Industry Reform Act of 2001 (EPIRA).

    The case revolved around the Department of Energy’s (DOE) circular mandating contestable customers to switch to the competitive retail electricity market, a move challenged by various stakeholders including the Philippine Chamber of Commerce and Industry and several educational institutions. The central legal question was whether such mandatory migration was consistent with the EPIRA’s goal of promoting competition and customer choice.

    Legal Context: Understanding EPIRA and the Contestable Market

    The Electric Power Industry Reform Act of 2001 (EPIRA) was enacted to restructure the electric power industry in the Philippines, aiming to create a competitive market that would provide reliable electricity at reasonable prices. Under EPIRA, the industry is divided into four sectors: generation, transmission, distribution, and supply. The law introduced the concept of a contestable market, where end-users with a monthly average peak demand of at least one megawatt could choose their electricity supplier.

    Key to understanding this case is the term “contestable market,” which refers to the segment of electricity consumers who can freely choose their electricity supplier, as opposed to the captive market, where consumers are served by a designated supplier. Section 31 of EPIRA states that the Energy Regulatory Commission (ERC) “shall allow” end-users with a monthly average peak demand of at least one megawatt to be part of the contestable market, leading to debates over whether this implies mandatory or voluntary migration.

    The EPIRA also distinguishes between distribution utilities (DUs), which are public utilities that distribute electricity within a specific franchise area, and retail electricity suppliers (RES), which are non-regulated entities that can supply electricity to the contestable market. The law requires DUs to unbundle their business activities and rates to promote competition and efficiency.

    Case Breakdown: From Mandatory to Voluntary Migration

    The controversy began with DOE Circular No. DC2015-06-0010, which mandated all contestable customers with an average demand of one megawatt and above to secure retail supply contracts by June 25, 2016. This directive was challenged by various petitioners, including businesses and educational institutions, who argued that it violated the voluntary nature of migration as intended by EPIRA.

    The Supreme Court’s decision hinged on the interpretation of “shall allow” in Section 31 of EPIRA. The Court ruled that this phrase implies that end-users must request to transfer to the contestable market, and the ERC is mandated to approve such requests if the end-users meet the necessary criteria. The Court emphasized that nothing in Section 31 suggests an automatic or mandatory migration.

    The Court’s reasoning was further supported by DOE’s own circulars, which initially upheld the voluntary nature of migration. For instance, DOE Circular No. DC2012-05-0005 recognized the contestable customer’s choice in sourcing electricity. However, the 2015 circular marked a departure from this policy, leading to the legal challenge.

    Justice Leonen, writing for the Court, stated, “A plain interpretation of the phrase ‘shall allow’ implies that an end-user has requested to transfer to the contestable market to the Energy Regulatory Commission for its approval.” The Court also noted that the DOE later admitted the inconsistencies between the 2015 circular and EPIRA, leading to the issuance of new circulars in 2017 that rectified the policy to reflect voluntary migration.

    The procedural journey of the case saw multiple petitions consolidated before the Supreme Court, with the DOE eventually withdrawing its support for the mandatory migration policy. The Court’s decision to strike down the 2015 circular and related ERC resolutions was based on the principle that administrative agencies must adhere to the law they seek to implement.

    Practical Implications: Empowering Customers and Promoting Competition

    This ruling reaffirms the EPIRA’s goal of promoting competition and customer choice in the electric power industry. Businesses and consumers in the contestable market now have the freedom to choose their electricity supplier based on their needs and preferences, rather than being forced into a particular arrangement.

    For businesses, this means the ability to negotiate better rates and services, potentially leading to cost savings and improved operations. For the electric power industry, the ruling encourages more players to enter the market, fostering competition that can drive down prices and improve service quality.

    Key Lessons:

    • Understand your rights as a contestable customer under EPIRA, including the ability to choose your electricity supplier.
    • Stay informed about regulatory changes that may affect your business operations and electricity costs.
    • Engage with industry associations and legal experts to advocate for policies that promote competition and customer choice.

    Frequently Asked Questions

    What is the difference between the captive and contestable markets?
    The captive market consists of consumers who are served by a designated electricity supplier within a specific franchise area. In contrast, the contestable market allows consumers with a certain level of electricity demand to choose their supplier from a competitive pool.

    How does the Supreme Court’s ruling affect my business?
    If your business is part of the contestable market, you now have the freedom to choose your electricity supplier, potentially leading to cost savings and better service.

    Can distribution utilities still supply electricity to contestable customers?
    Yes, distribution utilities can supply electricity to contestable customers within their franchise area, provided they comply with the unbundling requirements of EPIRA.

    What should I do if I want to switch electricity suppliers?
    Contact the Energy Regulatory Commission to request certification as a contestable customer and explore available retail supply contracts from licensed suppliers.

    How can I stay updated on changes in the electric power industry?
    Subscribe to industry newsletters, engage with business associations, and consult with legal experts specializing in energy law.

    ASG Law specializes in energy law and regulatory compliance. Contact us or email hello@asglawpartners.com to schedule a consultation.

  • Upholding Transparency: Competitive Bidding Mandate in Power Supply Agreements

    The Supreme Court declared that the Energy Regulatory Commission (ERC) does not have the statutory authority to postpone the implementation of Competitive Selection Process (CSP) for Power Supply Agreements (PSAs). This decision ensures that all PSAs submitted after June 30, 2015, must undergo CSP, which mandates competitive public bidding to secure transparent and reasonable electricity prices for consumers. The Court emphasized that ERC’s actions, which effectively delayed CSP implementation, were a grave abuse of discretion that compromised the public’s interest in affordable and fair electricity rates. As a result, power purchase costs from non-compliant PSAs cannot be passed on to consumers, reinforcing the State’s commitment to regulating monopolies and ensuring fair competition in the energy sector.

    Safeguarding Affordable Electricity: Did the ERC Overstep Its Authority in Postponing Competitive Bidding?

    In Alyansa Para sa Bagong Pilipinas, Inc. (ABP) v. Energy Regulatory Commission, the Supreme Court addressed the critical issue of transparency and fairness in the procurement of power supply agreements (PSAs). The case stemmed from a petition filed by ABP challenging the Energy Regulatory Commission’s (ERC) decision to postpone the mandatory implementation of the Competitive Selection Process (CSP) for PSAs, a move ABP argued undermined the public’s right to affordable and reasonably priced electricity.

    At the heart of the controversy was ERC Resolution No. 1, Series of 2016 (ERC Clarificatory Resolution), which effectively delayed the effectivity of the CSP, a mechanism designed to ensure that Distribution Utilities (DUs) purchase power at the most competitive rates through public bidding. ABP contended that this postponement, orchestrated by the ERC, was a grave abuse of discretion, violating the Electric Power Industry Reform Act of 2001 (EPIRA) and the Department of Energy (DOE) Circular No. DC2015-06-0008 (2015 DOE Circular), which mandated the CSP. The Supreme Court was asked to determine whether the ERC had the authority to unilaterally postpone the CSP’s effectivity, thus potentially compromising transparency and fairness in the energy sector.

    The facts leading up to the case are significant. The DOE, in its efforts to promote transparency and reasonable electricity prices, issued the 2015 DOE Circular mandating all DUs to undergo CSP in securing PSAs. Section 3 of the 2015 DOE Circular mandated CSP whenever DUs secure PSAs and took effect on June 30, 2015, upon its publication in two newspapers of general circulation. Subsequently, the ERC issued the CSP Guidelines, fixing a new date of effectivity for compliance with CSP, effectively postponing the date of effectivity of CSP from June 30, 2015, to November 7, 2015. Later, the ERC issued the ERC Clarificatory Resolution, which restated the date of effectivity of the CSP Guidelines from November 7, 2015, to April 30, 2016.

    The ERC’s decision to postpone the CSP implementation allowed several PSAs between Manila Electric Company (Meralco) and its power suppliers to be executed and submitted to the ERC within ten days before the restated April 30, 2016 deadline. These PSAs, according to the ERC Clarificatory Resolution, were not required to comply with CSP. Meralco admitted that no actual bidding is conducted. According to the petitioner, non-implementation of CSP affects various areas of the country, and the postponement resulted in the exemption from CSP of a total of ninety (90) PSAs covering various areas of the country.

    In its analysis, the Supreme Court emphasized the constitutional mandate for the State to regulate monopolies when the public interest requires, as enshrined in Section 19, Article XII of the 1987 Constitution. Since electricity distribution utilities operate as regulated monopolies, competitive public bidding becomes essential to prevent price gouging and ensure fair rates for consumers. The Court underscored that competitive bidding is the most efficient, transparent, and effective guarantee against price gouging, aligning with practices adopted in numerous countries worldwide.

    The Court found that the ERC’s actions in postponing the CSP’s implementation were a grave abuse of discretion, particularly due to the absence of coordination or approval from the DOE, thus violating Section 4 of the 2015 DOE Circular mandating CSP. According to the Supreme Court, the ERC’s delegated authority is limited to implementing or executing CSP in accordance with the 2015 DOE Circular, not postponing CSP so as to freeze CSP for at least 20 years, effectively suspending CSP for one entire generation of Filipinos. To further strengthen its argument, the Supreme Court quotes the Section 43 of the EPIRA, prescribing the functions of the ERC, and there is absolutely nothing whatsoever in this complete enumeration of the ERC’s functions that grants the ERC rule-making power to supplant or change the policies, rules, regulations, or circulars prescribed by the DOE.

    The Supreme Court also noted that the postponements effectively allowed Distribution Utilities (DUs) nationwide to avoid the mandatory CSP, freezing for at least 20 years the DOE-mandated CSP to the great prejudice of the public. The high court explained that without CSP, there is no transparency in the purchase by DUs of electric power, and thus there is no assurance of the reasonableness of the power rates charged to consumers. As a consequence, all PSA applications submitted to the ERC on or after June 30, 2015, should be deemed not submitted and should be made to comply with CSP.

    In resolving the case, the Supreme Court ultimately granted ABP’s petition, holding that the ERC does not have the statutory authority to postpone the date of effectivity of CSP, and thereby cannot amend the 2015 DOE Circular. As a result, the 90 PSAs submitted to the ERC after the effectivity of CSP on or after June 30, 2015, cannot serve as a basis to pass on the power cost to consumers. The ERC was mandated to require CSP on all PSA applications submitted on or after June 30, 2015.

    The implications of the Supreme Court’s decision are far-reaching, particularly for electricity consumers across the Philippines. By nullifying the ERC’s postponements, the Court reinforced the mandatory nature of CSP, requiring all Distribution Utilities (DUs) to adhere to competitive public bidding in securing Power Supply Agreements (PSAs) after June 30, 2015. This ensures a more transparent and competitive procurement process, fostering fair and reasonable electricity rates for consumers. Moreover, it underscores the crucial balance between regulatory independence and adherence to statutory mandates within the energy sector, promoting accountability and public interest.

    FAQs

    What was the key issue in this case? The key issue was whether the ERC had the authority to postpone the mandatory implementation of the Competitive Selection Process (CSP) for Power Supply Agreements (PSAs).
    What is the Competitive Selection Process (CSP)? The CSP is a mechanism that requires Distribution Utilities (DUs) to undergo competitive public bidding when securing Power Supply Agreements (PSAs) to ensure transparency and reasonable electricity prices.
    Why is CSP important for consumers? CSP is vital for consumers as it helps prevent price gouging by distribution utilities and ensures they purchase electricity at the most competitive rates.
    What did the Supreme Court rule in this case? The Supreme Court ruled that the ERC did not have the authority to postpone the implementation of CSP and that all PSAs submitted after June 30, 2015, must comply with the CSP.
    What was the effect of the ERC’s postponements of the CSP? The ERC’s postponements allowed several PSAs to be executed without complying with CSP, potentially leading to non-transparent and less competitive electricity prices.
    What happens to PSAs that did not comply with CSP due to the postponement? The Supreme Court ruled that power purchase costs from PSAs that did not comply with CSP cannot be passed on to consumers.
    Did the Supreme Court question the ERC’s regulatory authority? No, the Supreme Court affirmed the ERC’s regulatory authority but emphasized that it must operate within the bounds of its statutory mandate and in coordination with the DOE.
    What is the role of the Department of Energy (DOE) in this process? The DOE formulates policies and issues rules and regulations for the energy sector, while the ERC enforces these policies and ensures fair competition and reasonable prices.
    What is the significance of this ruling for the energy sector? The ruling reinforces the importance of transparency and competitive bidding in the energy sector and holds regulatory bodies accountable for upholding the public interest.
    What is the current regulation regarding Competitive Selection Process (CSP)? On February 1, 2018, the DOE issued Circular No. DC2018-02-0003 entitled “Adopting and Prescribing the Policy for the Competitive Selection Process in the Procurement by the Distribution Utilities of Power Supply Agreements for the Captive Market”.

    In conclusion, the Supreme Court’s decision in Alyansa Para sa Bagong Pilipinas, Inc. v. Energy Regulatory Commission serves as a landmark ruling, underscoring the vital role of transparency and competitive bidding in the Philippine energy sector. By reaffirming the State’s commitment to regulating monopolies and ensuring fair competition, the Court has fortified protections for electricity consumers and promoted a more equitable distribution of power and responsibilities within the industry.

    For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

    Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
    Source: Alyansa Para sa Bagong Pilipinas, Inc. v. Energy Regulatory Commission, G.R. No. 227670, May 03, 2019