Electric Power Industry Reform Act

Policy, objectives, and guiding principles

The State policy is to ensure and accelerate total electrification of the country (Section 2).
The State policy is to ensure quality, reliability, security, and affordability of electric power supply (Section 2).
The State policy is to ensure transparent and reasonable electricity prices in a regime of free and fair competition with full public accountability, aiming for greater operational and economic efficiency (Section 2).
The State policy is to enhance private capital inflows and broaden ownership in generation, transmission, and distribution (Section 2).
The State policy is to require fair and non-discriminatory treatment of public and private entities in the restructuring process (Section 2).
The State policy is to protect the public interest affected by electricity rates and services (Section 2).
The State policy is to assure socially and environmentally compatible energy sources and infrastructure (Section 2).
The State policy is to promote indigenous and new and renewable energy resources to reduce dependence on imported energy (Section 2).
The State policy is to support orderly and transparent privatization of NPC assets and liabilities (Section 2).
The State policy is to establish a strong and purely independent regulatory body and system for consumer protection and improved competitiveness (Section 2).
The State policy is to encourage efficient energy use and demand side management modalities (Section 2).

Key definitions that control interpretation

“Aggregator” means a person or entity consolidating electric power demand of end-users in the contestable market for group-based purchasing and resale of electricity (Section 4).
“Ancillary Services” are services necessary to support transmission capacity and energy delivery while maintaining reliable transmission system operation under the Grid Code (Section 4).
“Captive Market” means electricity end-users without choice of supplier, as determined by the ERC (Section 4).
“Contestable Market” means electricity end-users with choice of supplier, as determined by the ERC (Section 4).
“Energy Regulatory Commission (ERC)” is the regulatory agency created herein, and “Commission” refers to its decision-making body composed of a Chairman and four (4) members (Section 4).
“Distribution Wheeling Charge” is the ERC-regulated cost or charge for use of a distribution system and related services (Section 4).
“Universal Charge” is a charge, if any, imposed for recovery of stranded cost and other purposes pursuant to Section 34 (Section 4).
“Open Access” is allowing any qualified person use of transmission and/or distribution systems subject to payment of ERC-approved wheeling rates (Section 4).
“Supplier’s Charge” is the charge imposed by electricity suppliers for sale of electricity to end-users, excluding generation, transmission, and distribution wheeling (Section 4).

Organization of the industry sectors

The electric power industry is divided into four (4) sectors: generation, transmission, distribution, and supply (Section 5).
Generation is competitive and open; the Act requires that any new generation company secure an ERC certificate of compliance and obtain health, safety and environmental clearances from appropriate agencies under existing laws before operating (Section 6).
Power generation is not a public utility operation; entities engaged in generation and electricity supply are not required to secure a national franchise (Section 6).
ERC does not regulate generation company supply prices in the retail competition and open access regime except as the Act provides (Section 6).
Transmission is a regulated common carrier business subject to ERC ratemaking powers (Section 7).
Transmission voltage standards distinguish transmission from subtransmission assets: 230 kilovolts and above in the Luzon Grid; 69 kilovolts and above in the Visayas and isolated distribution systems; and 138 kilovolts and above in the Mindanao Grid, with a rule for certain 69 kV lines in Visayas (Section 7).
Distribution is a regulated common carrier business requiring a national franchise, and may be undertaken by private distribution utilities, cooperatives, local government units, and other authorized entities subject to ERC regulation (Section 22).
Supply to the contestable market is a business affected with public interest; suppliers require an ERC license except distribution utilities and electric cooperatives with respect to their existing franchise areas (Section 29).

Creation and powers of TRANSCO and sector regulation

A National Transmission Corporation (TRANSCO) is created to assume NPC’s electrical transmission function and to perform planning, construction, and centralized operation and maintenance of high voltage transmission facilities, including grid interconnections and ancillary services (Section 8).
Within six (6) months from effectivity, NPC’s transmission and subtransmission facilities and related transmission assets must be transferred to TRANSCO, and TRANSCO is to be wholly owned by PSALM Corp. (Section 8).
Subtransmission functions and assets must be segregated from transmission functions, assets, and liabilities for transparency and disposal (Section 8).
TRANSCO must negotiate and transfer subtransmission functions, assets, and associated liabilities to qualified connected distribution utilities not later than two (2) years from Act effectivity or start of open access, whichever comes earlier, with a concessional financing arrangement for electric cooperatives over twenty (20) years (Section 8).
TRANSCO may exercise eminent domain subject to the Constitution and existing laws; aside from PSALM Corp., TRANSCO, and connected distribution utilities, no third party may own or manage participation in subtransmission assets (Section 8).
No person other than TRANSCO shall own transmission facilities except as provided in the Act (Section 8).
Prior to transfer of transmission functions and before promulgation of the Grid Code, the ERC must ensure NPC provides open and non-discriminatory access to its transmission system; violations are subject to fines and penalties imposed herein (Section 8).
TRANSCO must submit any plan for expansion or improvement of its facilities for ERC approval, and TRANSCO must undertake preparation of the Transmission Development Plan (TDP) (Section 9).
TRANSCO must adopt central dispatch consistent with the dispatch schedule submitted by the market operator, taking into account outstanding bilateral contracts (Section 9).
TRANSCO must ensure reliability, adequacy, security, stability, and integrity of the nationwide grid in accordance with a Grid Code to be promulgated by ERC within six (6) months from effectivity (Section 9).

Governance of TRANSCO

All TRANSCO powers are vested in and exercised by a Board of Directors composed of a Chairman and six (6) members (Section 11).
The Secretary of the Department of Finance (DOF) is the ex officio Chairman, and the other board members include the Secretary of DOE, the Secretary of DENR, the President of TRANSCO, and three (3) presidential appointees representing Luzon, Visayas, and Mindanao (Section 11).
Presidential appointees serve six (6) years; fill-ins serve only the unexpired term (Section 11).
Board members must be professionals of recognized competence in engineering, finance, economics, law, or business management (Section 11).
Board members and their relatives within the fourth civil degree of consanguinity or affinity may not have any interest as investor, officer, or director in any generation company or distribution utility or entity engaged in transmitting, generating, and supplying electricity specified by the ERC (Section 11).
A quorum requires the presence of at least four (4) members, and majority vote of members present in quorum is adequate unless a greater vote is agreed (Section 15).

TRANSCO corporate powers and compensation rules

TRANSCO has corporate powers including continuous succession, corporate seal, power to sue and be sued, to enter contracts, and to borrow funds and issue bonds and evidence of indebtedness (Section 10).
Bond issuance requires approval of the President upon recommendation of the Secretary of Finance (Section 10).
TRANSCO may maintain a provident fund funded by contributions from TRANSCO and its officials and employees for benefits to employees or their heirs (Section 10).
TRANSCO employees’ salaries and benefits are exempt from Republic Act No. 6758, and the TRANSCO Board shall fix compensation and benefits (Section 17).
TRANSCO’s net profits, if any, must be remitted to PSALM Corp. no later than ninety (90) days after the immediately preceding quarter (Section 18).

Transmission charges, related businesses, and privatization

TRANSCO transmission charges must be filed with and approved by the ERC under Paragraph (f) of Section 43 (Section 19).
TRANSCO may engage in related business maximizing asset utilization, but a portion of net income derived from rate-base assets used for such undertaking must reduce transmission wheeling rates as determined by ERC, not exceeding fifty percent (50%) of net income (Section 20).
Separate accounts must be maintained for each undertaking to prevent the transmission business from subsidizing other undertakings or encumbering transmission assets (Section 20).
TRANSCO privatization requires PSALM Corp. to submit a plan within six (6) months for endorsement by the Joint Power Commission and approval by the President, followed by open competitive bidding for transmission facilities through outright sale or concession contract (Section 21).
Concession contracts have a contract period of twenty-five (25) years, subject to review and renewal for a maximum of another twenty-five (25) years (Section 21).
Sale/concession awards must maximize present value of proceeds to the national government (Section 21).
The awardee must comply with the Grid Code and TDP; the sale agreement must include performance/financial guarantees and national government covenants, and ERC must impose sanctions or penalties for non-compliance (Section 21).
Awardees must be financially and technically capable with proven domestic and/or international experience comparable to the Philippines’ transmission system coverage and capacity (Section 21).

Distribution duties, charges, and rate structure

Distribution is a regulated common carrier requiring a national franchise; distribution may be undertaken by private utilities, cooperatives, local government units, and other authorized entities subject to ERC regulation (Section 22).
Distribution utilities must provide distribution services and connections for any end-user within their franchise area consistent with the Distribution Code (Section 23).
Distribution utilities must provide open and non-discriminatory access to their distribution systems to all users (Section 23).
Distribution utilities may impose and collect distribution wheeling charges and connection fees from end-users, as approved by ERC (Section 23).
Captive market supply must be provided in the least cost manner subject to collection of an ERC-approved retail rate (Section 23).
Distribution utilities may pursue structural and operational reforms such as joint actions after due notice and public hearing, subject to ERC guidelines, to improve efficiency, reliability, reduce costs, and comply with performance standards in the IRR (Section 23).
Distribution utilities must submit to ERC a statement of compliance with technical specifications under the Distribution Code and performance standards under the IRR; non-compliant utilities must submit a plan to comply within three (3) years (Section 23).
ERC must evaluate the compliance plan within sixty (60) days upon receipt and notify the distribution utility of its action; failure to submit a feasible/credible plan and/or implement it allows sanctions, fines, or penalties (Section 23).
Distribution utilities must submit annual distribution development plans to DOE, with electric cooperative plans submitted through NEA (Section 23).
Distribution utilities must provide universal service within their franchise over a reasonable time, including unviable areas, sustaining economic viability and subject to ERC approval for private or government-owned utilities; plans for serving such areas must be part of distribution development plans (Section 23).
If a franchised distribution utility cannot or does not find viable an area, service may be transferred to another distribution utility subject to ERC approval; where franchise holders fail/refuse service and another utility serves, the status quo must be respected (Section 23).
Distribution utilities may exercise eminent domain subject to the Constitution and existing laws (Section 23).
Distribution wheeling charges must be filed with and approved by ERC under Paragraph (f) of Section 43 (Section 24).
Retail rates charged for captive-market supply are regulated by ERC using full recovery of prudent and reasonable economic costs, or other efficiency-promoting principles as ERC determines (Section 25).
Distribution utilities must identify and segregate in bills to end-users the components of the retail rate as defined in the Act (Section 25).
Distribution utilities may engage in related business maximizing utilization of assets, and net income from rate-base assets used for the undertaking must reduce distribution wheeling charges as determined by ERC, capped at fifty percent (50%), with separate accounts to prevent cross-subsidy and asset encumbrance (Section 26).

Supply sector rules and spot market

Supply to the contestable market is a public-interest business; all suppliers to the contestable market require an ERC license except distribution utilities and electric cooperatives within their existing franchise areas (Section 29).
ERC must promulgate supplier qualification rules requiring technical capability, financial capability, and creditworthiness; ERC has authority to require suppliers to furnish a bond or other evidence of the ability to withstand market disturbances or events increasing service cost (Section 29).
Supply of electricity to the contestable market is not a public utility operation, so suppliers to the contestable market are not required to secure a national franchise (Section 29).
Supplier prices in the contestable market are not subject to ERC regulation, but suppliers are subject to ERC rules on abuse of market power, cartelization, and other anti-competitive or discriminatory behavior (Section 29).
Every supplier must segregate and identify in end-user billings the components of supplier’s charge as defined in the Act (Section 29).
DOE must establish within one (1) year from effectivity a wholesale electricity spot market with participants and mechanisms to identify and set prices for actual variations from contracted quantities (Section 30).
DOE and industry participants must formulate detailed spot market rules, including ERC-approved price determination methodology for electricity not covered by bilateral contracts, and procedures covering merit order dispatch, market-clearing price determination, market administration including admission/termination criteria and security/performance bond requirements, surveillance and compliance, emergency operation guidelines, and rules amendments (Section 30).
The spot market is implemented by a market operator as an autonomous group initially under TRANSCO administrative supervision, with equitable representation from industry participants (Section 30).
Within one (1) year after spot market implementation, an independent entity must be formed, and the functions, assets, and liabilities of the market operator must be transferred to it with joint endorsement of DOE and industry participants; thereafter TRANSCO administrative supervision ceases (Section 30).
Membership eligibility includes generating companies, distribution utilities, suppliers, bulk consumers/end-users, and other similar entities authorized by ERC, subject to ERC membership criteria; eligible entities and transactions must be bound by spot market rules (Section 30).
NEA may guarantee purchases in the spot market for an electric cooperative or small distribution utility, in exchange for adequate security and a guarantee fee, consistent with the Act; NEA’s authorized capital stock is increased to Fifteen billion pesos (P15,000,000,000.00) (Section 30).
The wholesale spot market administration charge must be filed with and approved by ERC and recovered from market members (Section 30).
ERC may suspend spot market operations or declare temporary spot market failure in national and international security emergencies or natural calamities (Section 30).

Retail competition and open access deadlines

Retail competition and open access on distribution wires must be implemented not later than three (3) years from effectivity, subject to conditions: spot market establishment, ERC approval of unbundled transmission and distribution wheeling charges, initial implementation of cross subsidy removal scheme, privatization of at least seventy percent (70%) of NPC generating assets capacity in Luzon and Visayas, and transfer of management and control of at least seventy percent (70%) of NPC-contracted power plant energy output to IPP Administrators (Section 31).
On initial open access, ERC must allow all electricity end-users with monthly average peak demand of at least one megawatt (1MW) in the preceding twelve (12) months to be the contestable market (Section 31).
After two (2) years, the contestable market threshold must be reduced to seven hundred fifty kilowatts (750 kW) (Section 31).
At the 750 kW level, aggregators may supply contestable-market end-users whose aggregate demand within a contiguous area is at least seven hundred fifty kilowatts (750 kW) (Section 31).
ERC must evaluate market performance every year and gradually reduce the contestable market threshold until it reaches household demand level (Section 31).
For electric cooperatives, retail competition and open access must be implemented not earlier than five (5) years from effectivity (Section 31).

Stranded costs, Universal Charge, and billing mechanisms

Stranded debt of NPC means unpaid financial obligations of NPC (Section 32).
Stranded contract costs of NPC mean excess of contracted cost of electricity under eligible IPP contracts over actual selling price of contracted energy output, with eligible contracts approved by ERB as of December 31, 2000 (Section 32).
The national government must directly assume a portion of NPC obligations up to Two hundred billion pesos (P200,000,000,000) (Section 32).
ERC must verify reasonable amounts and determine manner and duration for full recovery of stranded debt and stranded contract costs, with recovery duration not shorter than fifteen (15) years nor longer than twenty-five (25) years (Section 32).
ERC must conduct reviews starting at the end of the first year and every year thereafter to adjust true-up levels for under-recovery or over-recovery (Section 32).
Stranded cost recovery must appear as a separate item in the consumer billing statement (Section 32).
Distribution utility stranded contract costs must be recovered for excess contracted costs under eligible contracts approved by ERB as of December 31, 2000 (Section 33).
Distribution utility stranded cost recovery is subject to ERC review for fairness and reasonableness relating to the average price of land-based NPC IPP projects entered into at the time of contracting, including factors affecting total NPC IPP project cost and any direct or indirect government subsidies/incentives (Section 33).
Within one (1) year from the start of open access, any distribution utility seeking stranded contract cost recovery must file a notice of intent with an estimate of obligations, including present value and required supporting data; failure to file on time bars eligibility (Section 33).
Distribution utilities seeking stranded cost recovery must mitigate potential stranded contract costs by making reasonable best efforts to: reduce existing IPP contract costs to a level not exceeding the average buying price of other land-based electric power generators; and submit to annual earnings review by ERC and use earnings above authorized rate of return to reduce book value of contracts until the end of the stranded cost recovery period (Section 33).
ERC may not require a distribution utility to take a loss to reduce stranded contract costs or divest assets unless divestiture is imposed as a penalty as provided in the Act (Section 33).
The distribution utility must submit quarterly reports to ERC showing amounts recovered and balance remaining (Section 33).
ERC must verify reasonable amounts and determine manner and duration for stranded cost recovery within three (3) months from submission of the application, with duration not shorter than fifteen (15) years nor longer than twenty-five (25) years (Section 33).
Stranded cost recovery must appear as a separate item in the consumer billing statement (Section 33).
ERC must review at the end of the first year and every year thereafter for under-recovery or over-recovery, and in over-recovery ensure excess amounts are remitted to the Special Trust Fund under Section 34, held in trust for future claims; at the end of the stranded cost recovery period, remaining trust amounts must be used to reduce electricity rates to end-users (Section 33).
A Universal Charge must be imposed within one (1) year from effectivity and must be determined, fixed, and approved by ERC (Section 34).
The Universal Charge applies to all electricity end-users for purposes including: payment for NPC stranded debts and qualified NPC stranded contract costs, missionary electrification, equalization of taxes and royalties on indigenous/renewable sources vs imported energy fuels, an environmental charge of one-fourth of one centavo per kilowatt-hour (P0.0025/kWh) accruing to an environmental fund for watershed rehabilitation and management (managed by NPC under existing arrangements), and a charge for all forms of cross-subsidies for a period not exceeding three (3) years (Section 34).
The Universal Charge is non-bypassable and is passed on and collected monthly by distribution utilities (Section 34).
Collections by distribution utilities and TRANSCO in any month must be remitted to PSALM Corp. on or before the fifteenth (15th) of the succeeding month, net of any amount due to the distribution utility (Section 34).
End-users or self-generating entities not connected to a distribution utility must remit their universal charge directly to TRANSCO (Section 34).
PSALM Corp. as administrator must create a Special Trust Fund disbursed only for the specified purposes in an open and transparent manner; ERC must provide the disbursement distribution to beneficiaries within a reasonable period (Section 34).

De-monopolization, ownership dispersal, and franchising

Congress exclusively holds the power to grant franchises for transmission and distribution of electricity, and laws inconsistent with the Act, particularly Section 43 of PD 269 (“National Electrification Decree”), are deemed repealed or modified accordingly (Section 27).
Existing franchises must be allowed to their full term (Section 27).
For electric cooperatives, renewals and cancellations remain with the National Electrification Commission under NEA for five (5) more years after enactment (Section 27).
Ownership dispersal and de-monopolization require that holdings (including directors, officers, stockholders, and related interests) in a distribution utility and its holding companies must not exceed twenty-five percent (25%) of voting shares unless listed in the Philippine Stock Exchange (PSE) (Section 28).
Controlling stockholders of small distribution utilities must list in the PSE within five (5) years from enactment if they already own the stocks (Section 28).
New controlling stockholders must undertake PSE listing within five (5) years from the time they acquire ownership and control (Section 28).
A small distribution company is one with peak demand equal to or less than Ten megawatts (10 MW) (Section 28).
ERC must promulgate rules to implement this provision within sixty (60) days from effectivity (Section 28).
Electric cooperatives are excluded from the application of this ownership dispersal provision (Section 28).

Unbundling of rates and functional alignment

NPC must file revised unbundled rates with ERC within six (6) months from effectivity, unbundling between transmission and generation rates and reflecting respective costs, while inter-grid and intra-grid cross subsidies for both transmission and generation rates are removed as provided in the Act (Section 36).
Each distribution utility must file revised rates with ERC within six (6) months from effectivity for approval; distribution wheeling charges must be unbundled from the retail rate and reflect service costs, and inter-class subsidies must be removed for distribution retail wheeling and supplier’s charges as provided in the Act (Section 36).
ERC must notify entities of approval of revised rates within six (6) months from the date of submission by NPC and each distribution utility (Section 36).
Every electric power industry participant must functionally and structurally unbundle its business activities and rates in line with the sectors in Section 5, and ERC must ensure full compliance (Section 36).

Role and expanded mandate of the DOE

DOE is mandated to supervise the restructuring of the electricity industry and to amend Section 5 of Republic Act No. 7638 as follows (Section 37).
DOE must formulate policies for the planning and implementation of an efficient energy supply and use program aligned with the national economic plan and environmental protection and conservation policies, including coordination and rationalization of government energy programs (Section 37).
DOE must develop and update annually the Philippine Energy Plan (PEP), submit it to Congress not later than the fifteenth day of September and yearly thereafter, and include policy direction toward privatization of government agencies related to energy, deregulation of the power and energy industry, and reduction of dependency on oil-fired plants (Section 37).
DOE must prepare and update annually the Power Development Program (PDP) and integrate it into the Philippine Energy Plan, considering integration of transmission, generation, and distribution development plans submitted to DOE; ERC retains exclusive authority over the Grid Code and pertinent rules and regulations it may issue (Section 37).
DOE must ensure reliability, quality, and security of supply of electric power (Section 37).
Following restructuring, DOE must encourage private investment, promote indigenous and renewable energy, facilitate distribution utility reforms, and in consultation with other agencies promote incentives for adequate and reliable supply by participants, including new generating companies and end-users (Section 37).
DOE must coordinate information campaigns educating the public on restructuring and privatization of NPC assets, including with ERC, NEA, and the Philippine Information Agency (PIA) (Section 37).
DOE must jointly establish the wholesale electricity spot market and formulate detailed rules governing operations thereof (Section 37).