EPIRA

Republic Act No 9136, also known as the Electric Power Industry Reform Act of 2001 (EPIRA), was passed in June 2001 with the main objective of providing affordable and reliable electricity supply by: (i) restructuring and deregulating the industry; and (ii) privatising NPC assets and NPC-IPP contracts. Prior to the EPIRA, the industry was mainly made up of National Power Corporation (NPC) and the distribution utilities in the country. NPC, which at that time controlled approximately 90% of the country’s installed generating capacity, also performed generation and transmission functions. Distribution utilities were responsible for the distribution, pertaining to the physical distribution, and the supply, pertaining to the buying and selling, of electricity. As of April 2024, Power Sector Assets and Liabilities Management Corporation (PSALM) has privatised 84% of the generating facilities and 78% of the NPC-IPP contracts.

Today, the industry has transitioned into four sectors:

• generation;
• transmission;
• distribution; and
• supply.

Of these sectors, the transmission and distribution sectors are regulated.

Generation

The generation sector converts fuel and other forms of energy into electricity. Under the EPIRA, generation companies are allowed to sell electricity to distribution utilities or retail electricity suppliers through either bilateral contracts or the Wholesale Electricity Spot Market (WESM).

The goal of the EPIRA is for the generation sector to be open and competitive and for the private sector to introduce additional generation capacity. Nevertheless, no generation company is allowed to own more than 30% of the installed generating capacity of the Luzon, Visayas or Mindanao grids and/or 25% of the total nationwide installed generating capacity. Further, no generation company associated with a distribution utility may supply more than 50% of the distribution utility’s total demand under bilateral contracts, without prejudice to the bilateral contracts entered into prior to the enactment of EPIRA.

Transmission

Electricity generated by power generation facilities is generally transported via a high-voltage transmission system to various distribution utilities or electric co-operatives. Transmission is critical in ensuring that generated electricity is delivered to distribution utility’s load centres within proper technical standards. It is a regulated common electricity carrier business subject to the rate-making powers of the Energy Regulatory Commission (ERC). The operation of the transmission system requires a national franchise.

Pursuant to the EPIRA, NPC transferred its transmission and sub-transmission assets to the National Transmission Corporation (TransCo), which was created to operate the transmission systems throughout the Philippines. The principal function of TransCo is to ensure and maintain the reliability, adequacy, security, stability and integrity of the nationwide electrical grid in accordance with the Philippine Grid Code (the “Grid Code”). TransCo is also mandated to provide Open Access to all industry participants. The EPIRA granted TransCo a monopoly over the high-voltage network and subjected it to performance-based regulations. The EPIRA also mandated the privatisation of TransCo through an outright sale or concession contract carried out by PSALM.

In December 2007, the consortium of Monte Oro Grid Resources Corp, Calaca High Power Corporation and State Grid Corporation of China won the concession contract for TransCo. On 14 January 2009, PSALM formally turned over the 25-year concession of TransCo to the National Grid Corporation of the Philippines, the project company established by Monte Oro Grid Resources Corp for this purpose. Ownership of the transmission assets remains with TransCo.

Distribution

The distribution of electricity to end users is considered a common carrier business requiring a national franchise and is regulated primarily by the ERC. Distribution of electricity is carried out by a distribution utility, which is any electric co-operative, private corporation, government-owned utility or existing local government unit that has an exclusive franchise to operate a distribution system in accordance with the EPIRA. A distribution utility shall provide distribution services and connections to its system for any end user within its franchise area. Access by all users to its system shall be open and non-discriminatory. In remote and unviable areas where immediate extension of distribution line is not feasible, the areas shall be opened to other qualified third parties that may provide the service.

Under the EPIRA, distribution utilities are required by law to supply electricity in the least expensive manner given that generation costs are passed entirely to the consumers. Distribution utilities may enter into bilateral power supply contracts with generation companies subject to the review of and approval by the ERC. Distribution utilities are also mandated to procure supply of electricity through a competitive selection process, which is a transparent process for procuring power supply for the captive market.

Supply

The supply of electricity means the sale of electricity directly to the end users. The supply function used to be undertaken by the franchised distribution utility. However, with the implementation of the of Retail Competition and Open Access (RCOA), a retail electricity supplier is authorised to supply electricity to “Contestable Customers” with an average monthly peak demand of at least 500 kW for the 12 months preceding. Contestable Customers, as opposed to the captive market that is served by the distribution utility, have their choice of retail electricity supplier. This framework encourages competition at the retail level and is structured such that the threshold for retail competition will gradually decrease over time to reach the household levels.

The supply of electricity is not a public utility. Retail electricity suppliers are nevertheless required to secure a licence from the ERC and are subject to the rules and regulations on abuse of market power and other anti-competitive behaviour.

RE Act

In 2008, pursuant to the goal of strengthening and enhancing the energy efficiency and conservation programme of the Philippines and aggressively developing its renewable energy (RE) potential, the Philippine Congress enacted Republic Act No 9,513 or the Renewable Energy Act of 2008 (the “RE Act”).

The RE Act lays out the framework for the accelerated development and advancement of RE resources, including, among others:

• biomass;
• solar;
• wind;
• geothermal;
• ocean energy; and
• hydropower.

It also provides for the development of a strategic programme to increase the utilisation of such RE resources and institutionalising the development of national and local capabilities in the use of RE systems or energy systems which convert renewable energy resources into useful energy such as electrical energy. The RE Act promotes the efficient and cost-effective commercial application of these RE systems by providing fiscal and non-fiscal incentives to RE developers. A developer intending to utilise renewable energy sources for power generation is required to secure a renewable energy service contract from the Department of Energy (DOE).

Based on the latest available data from the ERC, the largest generation company in terms of generating capacity is Aboitiz Equity Ventures, Inc, with 5,745.22 MW representing 22.47% of the total installed capacity. San Miguel Corporation and First Gen Corporation follow, with generating capacities of 5,057.36 MW and 3,392.89 MW, respectively. NGCP operates the country’s transmission system through a concession. Manila Electric Company is the largest distribution utility, covering 39 cities and 72 municipalities. These entities are all private entities.

Transmission and distribution of electricity are public utilities. Section 11, Article XII of the 1987 Philippine Constitution states that no franchise, certificate or any other form of authorisation for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organised under the laws of the Philippines, at least 60% of whose capital is owned by such citizens; nor shall such franchise, certificate or authorisation be exclusive in character or for a longer period than 50 years. Republic Act No 11659 or the Public Service Act, as amended, reiterated that the transmission and distribution sectors are considered as public utilities.

The Foreign Investment Act of 1991 deems a corporation to be a “Philippine national” if it is organised under the laws of the Philippines and of which at least 60% of the capital outstanding stock and entitled to vote is owned and held by citizens of the Philippines. The Securities and Exchange Commission further explained that in determining compliance with the required Philippine ownership, 60% of both (i) the total number of outstanding shares of stock entitled to vote in the election of directors and (ii) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors, must be owned and held by citizens of the Philippines or by Philippine nationals. Thus, the maximum foreign direct investment in the transmission and distribution sectors is 40% of both the voting stock and the total outstanding capital stock of a transmission or distribution utility.

While the generation sector is not subject to foreign ownership limitations, the operation of a generation facility may require permits that can only be issued to Philippine citizens or Philippine nationals. Ownership of private lands and lease or utilisation of public lands are also reserved to Philippine citizens or Philippine nationals.

A foreign shareholder is allowed to nominate and elect foreign directors in proportion to its shareholding in the corporation. Foreign nationals are nevertheless disallowed from occupying management positions.

The sale of power industry assets or businesses is not restricted per se. Nevertheless, there are change in control clauses in some key permits where prior approval of the regulator must be secured. As an example, under the DOE Department Circular No DC2024-06-0018 or the “Revised Omnibus Guidelines Governing the Award and Administration of Renewable Energy Contracts and the Registration of Renewable Energy Developers”, any sale or acquisition of shares or other share capital, or a series thereof, that results in a change in control over the developer of a renewable energy facility (RE Developer) shall be subject to the prior written approval of the DOE.

In addition, RA No 10667 or the “Philippine Competition Act” (PCA) prohibits parties to a merger or acquisition agreement that meets the notification thresholds from consummating their agreement until the Philippine Competition Commission (PCC) has approved the transaction. The PCC applies the following tests to determine the notifiability of a transaction: (i) Size of the Party Test, and (ii) Size of the Transaction Test. The threshold for the Size of the Party Test is currently set at PHP7.8 billion while the threshold for the Size of the Transaction Test is now set at PHp3.2 billion. Both tests should be met in order for a transaction to be notifiable.

The primary Philippine regulators are:

• the DOE, the agency responsible for preparing, co-ordinating, supervising and controlling all plans, programmes and activities of the Philippine government relative to energy exploration, development, utilisation, distribution and conservation;
• the ERC, the independent, quasi-judicial regulatory body created under the EPIRA, with the function to promote competition, encourage market development, ensure customer choice, and penalise abuse of market power in the restructured electricity industry; and
• the National Electrification Administration, which carries out the Philippines’ electrification policy and exercises supervision over electrical co-operatives.

DOE Department Circular No 2022-11-0034

On 15 November 2022, the DOE issued Department Circular No DC2022-11-0034, which amends the Implementing Rules and Regulations of the RE Act. The amendment removes the nationality restrictions on the exploration, development and utilisation of renewable energy resources such as solar, wind, biomass, ocean or tidal energy. The amendment follows DOJ Opinion No 21, series of 2022 issued by the Department of Justice which states that exploration, development and utilisation of solar, wind, hydro and ocean or tidal energy should not be subject to the 40% foreign equity limitation under the 1987 Philippine Constitution. Notably, the 40% foreign equity limitation continues to apply in respect of appropriation of water directly from the source for power generation.

Executive Order (EO) No 21 Series of 2023

EO No 21 series of 2023 was issued by President Ferdinand R Marcos Jr on 19 April 2023 to hasten the roll-out of offshore wind (OSW) projects by mandating policy and administrative framework for the optimal development of OSW resources.

The EO intends to harmonise and streamline permitting processes under a whole-of-government approach by directing “all permitting agencies shall within 60 days from the effectivity of this Order, submit to the DOE a complete list of appropriate permits required by relevant permitting agencies, including all requirements, fees and procedures for the issuance thereof”.

2023 Revised COC Rules

Under the EPIRA, generation companies must secure a Certificate of Compliance (COC) from the ERC prior to operations. The issuance of the COCs was previously governed by ERC Resolution No 16, series of 2014, which is now superseded by ERC Resolution No 17, series of 2023 (2023 Revised COC Rules). Under the 2023 Revised COC Rules, a COC is no longer subject to a term and will remain valid unless suspended, revoked or annulled by the ERC after due notice and hearing. The 2023 Revised COC Rules likewise institutionalised the issuance of a Provisional Authority to Operate (PAO). A PAO is issued in the event that a generation company is unable to submit any or some of the requirements for a COC. A PAO is valid for one year and can be renewed annually but cannot exceed five consecutive issuances. 

Simplified Registration Procedure for Power Generators and Distribution Utilities

Generation companies and distribution utilities which are not publicly listed are required to offer and sell to the public a portion that is not less than 15% of their common shares of stocks (“Public Offering Requirement” or POR). Among the modes of public offering that are compliant with the POR are those set out in the Securities Regulation Code and its Implementing Rules and Regulations. Pursuant to this, the SEC issued SEC Memorandum Circular No 4, series of 2024, where it adopted the guidelines for a simplified registration of securities for generation companies and distribution utilities (“Securing & Expanding Capital for PowerGen Operators & Wholesale Electricity and Retail Services” or SEC POWERS). Under the SEC POWERS, the SEC must review and decide on the application for registration within 45 days from complete submission of the requirements. The SEC POWERS also allow direct public offering without underwriters or selling agents.

Downstream Natural Gas Industry

Several bills have been filed with the Senate and the House Representatives seeking to establish the Philippine Downstream Natural Gas Industry to promote the role of natural gas as a safe, environment-friendly, efficient and cost-effective source of energy.

Nuclear Energy

House Bill (HB) No 9293, also known as the “Philippine National Nuclear Energy Safety Act”, was approved on third and final reading at the House of Representatives. The bill aims to establish a legal framework to govern and facilitate nuclear energy’s peaceful, safe and secure uses. It also creates the Philippine Atomic Energy Regulatory Authority, which has sole and exclusive jurisdiction to exercise regulatory control for the peaceful, safe and secure uses of nuclear energy and radiation sources in the Philippines. The bill was transmitted to the Senate for concurrence.

A similar bill, Senate Bill No 2498, was filed in the Senate. The bill is pending with the Senate Committee on Energy.

There are no noteworthy aspects in this jurisdiction.

The EPIRA mandates the establishment of a wholesale market that provides the mechanism for identifying and setting the price of actual variations from the quantities transacted under contracts between sellers and purchasers of electricity. This market, the Wholesale Electricity Spot Market (WESM), became operational in the Luzon grid on 26 June 2006. It is a “gross pool, net settlements” market that enables suppliers and buyers to trade electricity as a commodity. The main purpose of the WESM is to provide industry stakeholders with the correct price signals in order to properly guide them in making various investments as well as in their operational decisions. The establishment of WESM was a necessary precondition before robust competition could be achieved in the market because electricity prices prior to its operation were significantly distorted.

Prior to the initial operation, the DOE issued the WESM Rules, which set the guidelines and standards for participation in the market to provide a level playing field for all electric power industry participants. Such guidelines and standards include procedures for establishing the merit order dispatch for each time (ie, hourly) trading period and determining the market-clearing prices. The ERC also approved and issued the price determination methodology for the WESM.

The Philippine Electricity Market Corporation (PEMC) acted as the market operator of the WESM. Pursuant to the EPIRA, the PEMC transferred the operations of the WESM to the Independent Electricity Market Operator (IEMOP) in 2018. The PEMC continues to be the governing body of the WESM, through its board of directors composed of representatives of electric power industry participants and independent members. The IEMOP serves as the main platform for wholesale electricity trading by, among other things, managing the registration for new entrants, receiving electricity bids and offers, demand forecasting, calculating real-time market prices and dispatch schedules of participants, monitoring the day-to-day market trading, and handling billing, settlement and collections.

The DOE and the ERC imposed the following as mitigating measures to protect against extreme price volatilities: (i) an offer price cap of PHP32.00/kWh; and (ii) in case of sustained high prices of an average of PHP9.00/kWh for 168 trading intervals, a secondary cap of PHP6.245/kWh until the average goes below PHP9.00/kWh.

The Philippines does not currently have policies on imports and exports of electricity.

Based on the latest available data from the DOE, even with the issuance of the coal moratorium in 2020, coal-fired power plants continue to dominate the installed capacity mix with 44.1% share, followed by renewable energy or RE at 21%, oil-based at 17.8%, and natural gas at 13.3%.

Section 45 of the EPIRA provides that “No company or related group can own, operate or control more than thirty percent (30%) of the installed generating capacity of a grid and/or twenty-five percent (25%) of the national installed generating capacity.”

Further, no generation company associated with a distribution utility may supply more than 50% of the distribution utility’s total demand under bilateral contracts, without prejudice to the bilateral contracts entered into prior to the enactment of EPIRA.

All persons and entities covered by the market share limits are reminded to strictly adhere to limitations, as well as to their duty to report to the ERC should they exceed the limits within 15 days from the start of occurrence, and the reason therefor.

The ERC is mandated under the EPIRA to promote competition and penalise abuse of market power in the restructured electricity industry. The PCC, on the other hand, has the authority to penalise all forms of anti-competitive agreements, abuse of dominant position and anti-competitive mergers and acquisitions pursuant to the Philippine Competition Act. In 2019, the ERC and the PCC entered into a Memorandum of Agreement which sets outs co-ordination and collaboration mechanisms to fulfil their respective mandates in respect of the power industry. These mechanisms include sharing of information, conduct of joint fact-finding inquiries and capacity building.

Construction and operation of generation facilities are generally governed by the EPIRA and its implementing rules and regulations, the issuances of the ERC, in particular the 2023 Revised COC Rules, the Philippine Grid Code and the Philippine Distribution Code. In addition, the RE Act applies in respect of renewable energy power plants.

Approvals are issued upon a direct application with the relevant government agencies. Apart from some permits such as the Environmental Compliance Certificate (ECC) and endorsements from the local government unit (LGU Endorsements), approvals are issued without the need for public hearings. Consultations with the stakeholders and affected communities are required in connection with the issuance of the ECC and LGU endorsements. Consensus building is likewise mandated if the site is an ancestral domain land.

Land rights over public lands, in the form of land use permits or leases, are likewise applied for with the Department of Environment and Natural Resources (DENR). The DENR is the government agency that administers public lands in the Philippines.

Land rights over private lands, on the other hand, are typically secured by agreement with the private landowners.

The terms and conditions of approvals vary. Commonly, the approvals require compliance with the applicable laws under whose mandate the approvals were issued. As an example, the COC requires compliance with the EPIRA and the ECC requires compliance with environmental laws. Terms and conditions of approvals are not subject to amendments.

Eminent domain, also known as expropriation, is a power vested in the state to take private property for public use upon payment of just compensation. Private generation companies generally cannot compel the state to exercise eminent domain for the purposes of acquiring sites for their projects. However, under the renewable service energy contracts awarded by the DOE pursuant to the RE Act, the government, through the DOE, undertakes to provide assistance to the renewable energy developer, including the exercise of power of eminent domain, if necessary, to secure rights of way and similar rights on, over, under, across and through the contract area, if the renewable energy developer is unable to secure such rights at commercially reasonable costs through negotiations and the same is the most expedient course of action to support the timely execution of the renewable energy operations.

A generation company intending to decommission its generating plant or unit, which has reached its maximum economic life and is no longer viable to operate, must submit a letter to the DOE signifying its intention to decommission its generating plant or unit at least 365 days prior to the target decommissioning date. The DOE shall evaluate the application as to the appropriateness of the decommissioning and its impact on the power system. The same procedure applies in respect of mothballing of generating plant or unit.

There is no specific requirement to set up a decommissioning fund. However, a generation company is required to establish an environmental guarantee fund (EGF) which is immediately disbursable for the immediate rehabilitation of areas affected by damage to the environment and the resulting deterioration of environmental quality as a direct consequence of project construction, operation and abandonment, among others. The amount of the EGF will be determined by a committee composed of representatives from the DENR, the local government unit, the affected community, the generation company and others as may be identified.

Construction and operation of transmission lines and associated facilities are generally governed by the EPIRA and its implementing rules and regulations, the issuances of the ERC and the Philippine Grid Code.

Please see 3.2 Obtaining Approvals to Construct and Operate Generation Facilities. As previously mentioned, the operation of transmission lines and associated facilities is a public utility that requires a franchise from Congress. The grant of such franchise is subject to public hearings.

The key approval for the operation of transmission lines and associated facilities is the legislative franchise. The franchise is typically valid for up to 50 years and contains the following rights and obligations:

• authority of the transmission network provided (TNP) to exercise the right of eminent domain in so far as it may be reasonably necessary for the construction, expansion and efficient maintenance and operation of the transmission system and grid, and the efficient operation and maintenance of the sub-transmission systems;
• prohibition on sale, lease or transfer of the franchise or of the rights and privileges acquired thereunder;
• not to engage in any anti-competitive behaviour including, but not limited to, cross-subsidisation, price or market manipulation, or other unfair trade practices detrimental to the encouragement and protection of contestable markets; and
• obligation to list and make a public offering of the shares representing at least 20% of its outstanding capital stock or a higher percentage that may hereafter be provided by law within 10 years from the commencement of its operations.

The legislative franchise authorises the TNP to exercise the right of eminent domain in so far as it may be reasonably necessary for the construction, expansion and efficient maintenance and operation of the transmission system and grid, and the efficient operation and maintenance of the sub-transmission systems.

Just compensation is the fair market value of the property based on the current tax declaration of the property to be expropriated.

The EPIRA granted TransCo a monopoly over the high-voltage network and subjected it to performance-based regulations. The concession granted by TransCo to NGCP as the TNP is on an exclusive basis which translates to a natural monopoly.

Generation companies, however, are allowed to develop, construct, own and operate a point-to-point transmission facility for the sole purpose of connecting the generating facility to the Grid. The same is subject to the approval of the ERC, whose approval contains a condition that NGCP will carry out the operations and maintenance of such point-to-point transmission line.

The transmission charges are determined in accordance with the Amended Rules For Setting Transmission Wheeling Rates issued by the ERC under Resolution No 8, series of 2022. Under the rate reset process, the NGCP seeks approval for its annual revenue requirement (ARR), which it can recover from consumers. The ARR is computed using a formula that sums up operating and maintenance expenses, taxes other than income tax, and return on capital.

The Rules, Terms and Conditions for the Provision of Open Access Transmission Service (OATS Rules) describe the services provided by the Transmission Network Provided (TNP), which operates the high-voltage backbone, transmission system. The OATS Rules set out the responsibilities accepted by Transmission Customers as a condition of receiving the services. Transmission customers and the TNP (currently NGCP) will execute a connection agreement, transmission services agreement and metering services agreement, which set out the terms of service.

The OATS Rules mandate the TNP to provide open access subject only to the confirmation by the TNP that the Grid shall be adequate to accommodate all or part of the service application or if no costs are likely to be incurred for new Facilities or Grid upgrades. This evaluation is carried through the conduct of a System Impact Study and a Facility Study.

Construction and operation of electric distribution facilities are generally governed by the EPIRA and its implementing rules and regulations, the issuances of the ERC, and the Philippine Distribution Code.

Please see 3.2 Obtaining Approvals to Construct and Operate Generation Facilities.

The operation of electric distribution facilities is a public utility which requires a franchise from Congress. The grant of a franchise is subject to public hearing.

The key approval for the operation of transmission lines and associated facilities is the legislative franchise. The franchise is typically valid for up to 50 years and contains the following rights and obligations:

• authority to exercise the right of eminent domain in so far as it may be reasonably necessary for the efficient maintenance and operation of services. The grantee is authorised to install and maintain its poles, wires and other facilities over and across public property, including streets, highways, forest reserves and other similar property of the government of the Philippines, its branches or any of its instrumentalities;
• prohibition on sale, lease or transfer of the franchise or of the rights and privileges acquired thereunder; and
• the retail rates to its captive market and charges for the distribution of electric power by the grantee to its end users shall be regulated by and subject to the approval of the ERC.

A distribution utility is authorised under a franchise to exercise the right of eminent domain in so far as it may be reasonably necessary for the efficient maintenance and operation of services. The grantee is authorised to install and maintain its poles, wires and other facilities over and across public property, including streets, highways, forest reserves and other similar property of the government of the Philippines, its branches or any of its instrumentalities.

Statutorily, a franchise does not confer exclusive rights to operate distribution facilities within the franchised area.

Sections 24 and 25 of the EPIRA provide as follows.

“Section 24. Distribution Wheeling Charge – The distribution wheeling charges of distribution shall be filed with and approved by the ERC pursuant to Paragraph (f) of Section 43 hereof.

Section 25. Retail Rate – The retail rates charged by distribution utilities for the supply of electricity of their captive market shall be subject to regulation by the ERC based on the principle of full recovery of prudent and reasonable economic costs incurred, or such other principles that will promote efficiency as may be determined by the ERC.

Every distribution utility shall identify and segregate in its bills to end users the components of the retail rate, as defined in this Act.”

The ERC promulgated the Rules for Setting Distribution Wheeling Rates (RDWR). The purpose of the RDWR is to set out the methodology to be used in setting the maximum distribution wheeling rates that may be charged for the provision of distribution services.

Rate filings and settings for Distribution Charges are done on a Regulatory Period (RP) basis. One RP consists of four Regulatory Years. A Regulatory Reset Process (RRP) is mandated prior to the start of each RP. RRP involves the determination by the ERC of price control arrangements to govern a RP. The setting of rates begin with the application for and determination of the Annual Revenue Requirement (ARR).

For electric co-operatives (EC) that are connected to the Grid, ERC Resolution No 20, series of 2009, also known as the “Rules for Setting Electric Cooperatives Wheeling Charges (RSEC-WR) for on-grid ECs”, sets the initial tariff to be charged by ECs. The initial tariff is subject to adjustment.

Distribution utilities are mandated to make available all regulated services at rates, terms and conditions that are approved by the ERC and shall not unjustly or unreasonably discriminate in the rates, terms and conditions of service to similarly situated customers.