Deregulation of Downstream Oil Industry

Key definitions and regulated industry

Section 4 defines “Downstream Oil Industry (DOI) or Industry” as the business of importing, exporting, re-exporting, shipping, transporting, processing, refining, storing, distributing, marketing and/or selling crude oil, gasoline, diesel, LPG, kerosene, and other petroleum products.
Section 4 defines “Dealer” as any person engaged in the marketing and direct selling of petroleum products to motorists, end users, and other consumers.
Section 4 defines “Hauler” as a person engaged in transporting, distributing, hauling, and carriage of petroleum products in bulk or packed form from oil companies and independent marketers to dealers and other consumers.
Section 4 defines “LPG Distributor” as any person or entity engaged in exporting, refilling, transporting, marketing, and/or selling LPG to end users and other consumers.
Section 4 defines “New Industry Participants” as new participants in a particular downstream oil sub-sector with investments and initial business operations commencing after January 1, 1994.
Section 4 defines “Wholesale Posted Price (WPP)” as the ceiling price of petroleum products set by the Board based on its duly approved automatic pricing formula.
Section 4 defines “Singapore Posting (SP)” and “Singapore Import Parity (SIP)” for use in pricing computations.
Section 4 defines “Petroleum” and “Petroleum Products,” including a key threshold that the resultant product contains not less than fifty percent (50%) by weight of petroleum products.

Liberalized entry and pricing tariff structure

Section 5 requires that, any law to the contrary notwithstanding, any person or entity may:
- Import or purchase any quantity of crude oil and petroleum products from a foreign or domestic source;
- Lease or own and operate refineries and other downstream oil facilities; and
- Market the products under a generic name or its own trade name, or use them for its own requirement.
Section 5 requires prior notice to the DOE for monitoring purposes for any person or entity engaging in these activities.
Section 5 requires that prior DOE notice does not exempt any such person or entity from securing:
- Certificates of quality, health and safety, and environmental clearance from proper government agencies.
Section 5 requires reporting to the DOE for monitoring purposes of every importation/exportation.
Section 5 requires that all oil importations be in accordance with the Basel Convention.
Section 6 imposes a single and uniform tariff duty on both imported crude oil and imported refined petroleum products at three percent (3%), starting with the effectivity of the Act.
Section 6 authorizes the President to reduce the tariff rate when warranted, pursuant to Republic Act No. 1937 (Tariff and Customs Code, as amended).
Section 6 provides that beginning January 1, 2004 or upon implementation of the Uniform Tariff Program under World Trade Organization and ASEAN Free Trade Area commitments, the tariff rate shall be automatically adjusted to the appropriate level.
Section 6 provides that while the National Power Corporation (NPC) enjoys exemptions from taxes and duties on petroleum products used for power generation, the exemption applies to:
- purchases through local refineries, and
- the importation of fuel oil and diesel.

Fair trade promotion and dispute handling

Section 7 requires the Department of Trade and Industry (DTI) and DOE to take measures to promote fair trade and prevent:
- cartelization, monopolies, combinations in restraint of trade, and unfair competition under Article 186 of the Revised Penal Code and Articles 168 and 169 of Republic Act No. 8293.
Section 7 directs the DOE to continue encouraging practices serving the public interest and intended to achieve:
- efficiency and cost reduction,
- continuous supply of petroleum products, and
- enhanced environmental protection.
Section 7 specifically lists encouraged practices that may include:
- borrow-and-loan agreements,
- rationalized depot and manufacturing operations,
- hospitality agreements,
- joint tanker and pipeline utilization, and
- joint actions on oil spill control and fire prevention.
Section 7 directs the DOE to monitor the relationship between:
- oil companies (refiners and importers) and
- their dealers, haulers, and LPG distributors,
  to help ensure observance of fair and equitable practices and enforcement of existing contracts.
Section 7 requires DOE to conciliate and arbitrate disputes relating to:
- dealers’ mark-up,
- freight rate for transporting petroleum products, and
- LPG distributors’ margins,
  for protection of the public and to prevent ruinous competition.
Section 7 provides that DOE’s arbitration award is subject to judicial review under existing law.

New entrants and retail competition incentives

Section 8 requires the DOE, DFA, and DTI to jointly formulate and establish a program to promote entry of new participants.
Section 8 requires the program to include a strategic international information campaign implemented through selected Philippine embassies and consular offices.
Section 8 provides that the program commences after three (3) months from the effectivity of the Act.
Section 8 requires DOE to provide a “Philippine Downstream Oil Industry Investment Guide” containing:
- an introduction to the industry and government commitment to deregulation;
- entry requirements;
- benefits and incentives for new industry participants, including incentives/benefits they can enjoy and procedural/substantive requirements for entitlement; and
- other information DOE deems necessary.
Section 9 extends to qualified persons with new investments (as determined by DOE and registered with the BOI) in refining, storage, marketing, and distribution of petroleum products the same incentives granted to BOI-registered enterprises in a preferred area under Executive Order No. 226 (Omnibus Investment Code of 1987).
Section 9 enumerates incentives including:
- income tax holiday;
- additional deduction for labor expenses;
- minimum tax and duty of three percent (3%) and VAT on imported capital equipment;
- tax credit on domestic capital equipment;
- exemption from contractor’s tax;
- unrestricted use of consigned equipment;
- exemption from real property tax on production equipment or machineries;
- exemption from taxes and duties on imported spare parts; and
- other applicable incentives under Article 39 of Executive Order No. 226.
Section 9 allows these incentives for five (5) years from BOI registration, notwithstanding contrary law.
Section 9 restricts entitlement for storage, marketing and distribution to investments of new industry participants; it also states that “marketing of petroleum products” includes the establishment of gasoline stations.
Section 9 provides that the industry shall be included in the annual Investment Priorities Plan (IPP).
Section 9 preserves that qualified persons/entities under the Omnibus Investments Code may apply for or continue enjoying incentives under that Code.
Section 10 requires DOE to promote and encourage participation of the private sector and cooperatives in retailing petroleum products through joint venture/supply agreements with new industry participants for establishment and operation of gasoline stations.
Section 10 requires DOE training to include LPG retailing and to coordinate with TLRC and TESDA for a two-fold program on management and skills training for establishing, operating, and maintaining gasoline stations.
Section 10 provides that persons who complete the training are entitled to government assistance through government lending agencies in the form of medium-to long-term loans with low interest rates and from the gasoline station training and loan fund.
Section 10 establishes a gasoline station training and loan fund with an initial amount of Three hundred million pesos (P300,000,000) from PAGCOR, administered by DOE under a separate account.
Section 10 allocates the fund as follows:
- two percent (2%) plus any additional funding for the two-fold program;
- one percent (1%) plus any additional funding for administrative, maintenance, and other operating expenses;
- ninety-four percent (94%) exclusively for lending and financial assistance;
- remaining three percent (3%) in accordance with Section 26.
Section 10 provides that loans are short- to medium-term with low interest rates and are awarded to qualified persons able to comply with the conditions in the preceding paragraphs.
Section 25 requires DOE, in coordination with the Board and the Philippine Information Agency (PIA), to undertake an information campaign to educate the public on the deregulation program.

Anti-trust safeguards and prohibited acts

Section 11 prohibits cartelization, predatory pricing, and related prohibited conduct to ensure fair competition and prevent cartels and monopolies.
Section 11 defines cartelization as any agreement, combination, or concerted action by refiners, importers and/or dealers (or their representatives) to fix prices, restrict outputs, divide markets (by products or areas), or allocate markets (by products or areas) in restraint of trade or free competition, including contractual stipulations prescribing pricing levels and profit margins.
Section 11 defines predatory pricing as selling or offering to sell any oil product at a price below the seller’s or offeror’s average variable cost to destroy competition, eliminate a competitor, or discourage entry.
Section 11 provides an exception: pricing below average variable cost to match a competitor’s lower price—not for destroying competition—is not predatory pricing.
Section 11 imposes criminal liability on any person (including chief operating officer, chief executive officer, or chief finance officer) found guilty of the prohibited acts:
- three (3) to seven (7) years imprisonment, and
- a fine ranging from One million pesos (P1,000,000) to Two million pesos (P2,000,000).
Section 12 prohibits refusal to comply with:
- submission of any reportorial requirements;
- use of clean and safe (environment and worker-benign) technologies;
- any DOE Secretary order or instruction issued in enforcement under Section 15; and
- registration of any fuel additive with DOE prior to its use as an additive.
Section 12 imposes penalties on responsible corporate officers and any other involved persons found guilty:
- two (2) years imprisonment, and
- a fine ranging from Two hundred fifty thousand pesos (P250,000) to Five hundred thousand pesos (P500,000).

Enforcement, monitoring, and DOE powers

Section 14(a) requires DOE to:
- monitor and publish daily international crude oil prices; and
- follow movements of domestic oil prices.
Section 14(a) requires DOE to monitor petroleum product quality and to stop operations of businesses involved in sale of petroleum products that do not comply with national standards of quality aligned with national standards/protocols.
Section 14(a) directs Bureau of Product Standards (BPS) of DTI, together with DENR, DOE, DOST, industry representatives, and consumers to set specifications for all fuel and fuel-related products to improve fuel composition for increased efficiency and reduced emissions.
Section 14(a) requires BPS to specify allowable content of additives in all types of fuels and fuel-related products.
Section 14(b) requires DOE to monitor refining and manufacturing processes to ensure clean and safe technologies are applied, including during marketing of local and imported petroleum products.
Section 14(c) requires DOE to maintain a periodic schedule of present and future total industry inventory of petroleum products to determine supply levels.
Section 14(c) requires importers, refiners, and marketers to submit monthly to DOE their actual and projected:
- importations,
- local purchases,
- sales and/or consumption, and
- inventory,
  on a per crude/product basis.
Section 14(d) requires immediate action on any report of an unreasonable rise in petroleum product prices.
Section 14(d) mandates a DOE-DOJ Task Force to determine within thirty (30) days the merits of the report and initiate necessary actions, including rules and guidelines drafted by a committee jointly appointed by the Secretaries of Energy and Justice.
Section 14(d) provides that the Task Force is organized and its members appointed within one (1) month from the Act’s effectivity.
Section 14(e) authorizes DOE, during national emergencies when public interest so requires, to temporarily take over or direct the operation of any person or entity engaged in the industry under reasonable terms prescribed by DOE.
Section 15 grants the DOE Secretary powers including:
- gather and compile information and investigate industry organization, business, conduct, practices, and management;
- issue general or special orders requiring annual or special reports and written answers, filed under oath and within a reasonable time prescribed by the Secretary;
- investigate and report facts on alleged violations upon direction of the President or either House of Congress;
- investigate and recommend readjustment of business upon application of the Secretary of Justice so the entity maintains lawful organization, management, and conduct;
- recommend suspension or revocation and termination of a business permit of an offender to the proper government agency;
- comply with energy supply continuity consistent with Section 5(c) of Republic Act No. 7638;
- make public information portions in the public interest;
- make annual and special reports to Congress and submit recommendations for additional legislation; and
- provide publication of reports and decisions for public information and use.
Section 15 limits disclosure: the Secretary has no authority to make public trade secrets or privileged or confidential commercial/financial information, except disclosure to law enforcement officers/employees upon prior certification that it will be kept confidential and used only for official law enforcement purposes.
Section 15 requires the Secretary to investigate, on his initiative, the manner of execution of a final government decree aimed at preventing and restraining anti-trust violations, and to transmit findings and recommendations to the Secretary of Justice, who may make the report public at discretion.

Civil remedies and judicial relief

Section 13(a) authorizes government action: when the Joint Task Force determines a threatened, imminent, or actual violation of Section 11, it shall direct provincial or city prosecutors having jurisdiction to file an action to prevent or restrain the violation with the Regional Trial Court of the place where the defendant resides or has its place of business.
Section 13(a) empowers the court, pending hearing and before final judgment, to issue a temporary restraining order or order of injunction under rules and conditions for injunctive relief under the Rules of Court.
Section 13(a) authorizes damages suits by government instrumentalities: when the Joint Task Force determines that government (including GOCCs) suffers loss or damage due to violation of Section 11, the instrumentality/agency/corporation may file an action to recover damages and costs with the same Regional Trial Court.
Section 13(b) provides a private remedy: any person or entity shall report Section 11 violations to the Joint Task Force for investigation.
Section 13(b) requires the Joint Task Force to prepare a report of findings and recommendations and allows public disclosure at its discretion.
Section 13(b) provides that if the Joint Task Force determines a Section 11 violation occurred, the private person or entity is entitled to sue for and obtain injunctive relief and damages in the Regional Trial Court with jurisdiction over any of the parties, under the same conditions and principles as injunctive relief under the Rules of Court.

Transition and automatic pricing mechanism

Section 16 provides that deregulation occurs in two phases: Phase I (Transition Phase) and Phase II (Full Deregulation Phase).
Section 17 authorizes the President, when consumer interest so requires and considering domestic price rise, to use the “Reserve Control Account” as a buffer fund not exceeding Two billion nine hundred million pesos (P2,900,000,000) to cover increases in petroleum product prices (except premium gasoline) during the Transition Phase over prices prevailing as of the Act’s effectivity.
Section 18 establishes an automatic oil pricing mechanism to enable domestic petroleum product prices to approximate and promptly reflect international market oil prices.
Section 18 amends pricing governance during the Transition Phase by modifying provisions of Republic Act No. 6173 and related issuances so that:
- the Board sets WPP during the Transition Phase using a market-oriented formula based solely on changes in either Singapore Posting, SIP, or crude landed cost;
- the Board approves the formula within one (1) month after the Act’s effectivity after due notice and hearing for affected consumers and parties; and
- afterward the Board automatically adjusts WPP through appropriate orders without further notice and hearing.
Section 18 requires publication: on the dates of effectivity of the automatic oil pricing formula (initial and adjusted WPP), the Board publishes the WPP and computation in two (2) national newspapers of general circulation.
Section 18 requires that monthly domestic price reviews be aligned with the approved automatic pricing formula: review and reset on or before the third Monday of each month to reflect the new WPP based on the approved formula.
Section 18 deletes prior paragraph 2 of Letter of Instruction No. 1441 and replaces it with an automatic reflection requirement in the approved WPP.
Section 18 directs that, notwithstanding contrary provisions of Executive Order No. 172, during the Transition Phase the Board maintains current dealer margins and rates charged by water transport operators, haulers, and pipeline concessionaires, and then prescribes within one (1) month after effectivity (after proper notice and full public hearing) a formula to automatically set margins and rates.
Section 18 requires that the formula for margins and rates takes effect simultaneously with the automatic oil pricing formula, and afterward the Board sets margins and rates based on the approved formula without necessity for public notice and hearing.
Section 18 requires publication in at least two (2) newspapers of general circulation of the mechanics of the formula on the day of effectivity.

Full deregulation start and repeals

Section 19 provides that full deregulation starts five (5) months after the Act’s effectivity.
Section 19 authorizes the President to accelerate full deregulation upon recommendation of DOE and DOF when:
- world market crude oil and petroleum product prices are declining, and
- the peso-to-US dollar value is stable,
  considering relevant trends and prospects.
Section 19 provides that regardless of acceleration, the five (5)-month Transition Phase continues to apply to LPG, regular gasoline and kerosene as socially-sensitive petroleum products, and these products are covered by the automatic pricing mechanism during that period.
Section 19 provides that upon implementation of full deregulation, the Transition Phase is terminated and repeals:
- Republic Act No. 6173, as amended;
- Section 5 of Executive Order No. 172, as amended;
- Letter of Instruction No. 1431 dated October 15, 1984;
- Letter of Instruction No. 1441 dated November 20, 1984, as amended;
- Letter of Instruction No. 1460 dated May 9, 1985;
- Presidential Decree No. 1889; and
- Presidential Decree No. 1956, as amended by Executive Order No. 137.
Section 19 provides an exception: if the President starts full deregulation, those repealed laws continue to be in force with respect to LPG, regular gasoline and kerosene for the remaining five (5)-month period.

Piped gas pricing and final implementation

Section 20 amends Section 3 of Executive Order No. 172 to provide that the Board fixes and regulates the rate schedule or prices of piped gas charged by duly franchised gas companies distributing gas by means of underground pipe system, upon proper notice and hearing.
Section 21 converts outstanding OPSF claims as of the Act’s effectivity into accounts payable of the National Government, subject to COA auditing rules and regulations.
Section 21 requires that DOE reimbursement certificates covering outstanding OPSF claims be honored and accepted by the Bureau of Customs and the Bureau of Internal Revenue as payment to the extent of ten percent (10%) per payment of the tariff duties and specific taxes due from the creditor-claimants until claims are settled in full.
Section 21 provides that reimbursement certificates are not transferable.
Section 22 requires any person or entity engaged in oil refinery business to make a public offering through the stock exchange of at least ten percent (10%) of its common stock within a period of three (3) years from the Act’s effectivity or the commencement of refinery operations.
Section 22 limits ownership of the stock offering: no single person or entity may own more than five percent (5%) of the stock offering.
Section 22 prohibits cross-acquisition: no crude oil refining company and no stockholder of a crude oil refining company may acquire any share of stock offered by another crude oil refining company pursuant to Section 22.
Section 22 exempts a company from the public offering requirement if it made the requisite public offering before the Act’s effectivity.
Section 23 requires DOE, coordinating with the Board, DENR, DFA, DOLE, DOH, DOF, DTI, NEDA, and TLRC, to issue implementing rules and regulations within sixty (60) days after the Act’s effectivity.
Section 24 imposes penal sanctions: any person who violates any provision of the Act is punished with three (3) months to one (1) year imprisonment and a fine ranging from Fifty thousand pesos (P50,000) to Three hundred thousand pesos (P300,000).
Section 26 authorizes budgetary sourcing for implementation from DOE’s annual appropriations, DOE’s Special Fund under Section 8 of Presidential Decree No. 910, as amended, and amounts allocated under Section 10.
Section 27 establishes separability: unconstitutional or invalid parts do not affect the remaining valid parts.
Section 28 establishes repeal of inconsistencies: laws, presidential decrees, executive orders, issuances, rules and regulations, or parts thereof inconsistent with the Act are repealed or immediately modified accordingly.