° SENATE
FIFTEENTH CONGRESS OFTHE «pg PRICE OR THE SEMETARY
REPUBLIC OF THE PHILIPPINES y .
First Regular Session )
16 WL 26 P38

SENATE ,
Senate Bill No. 2037 RECEIVED BY fen

Introduced by SENATOR EDGARDO J. ANGARA

EXPLANATORY NOTE

From 1998 to 2002, the electric bills of end-users for the same usage tripled,
increasing by 201%. Nearly half of the amount billed to end-users consists of the
Purchase Power Adjustment, or PPA. The PPA is an automatic monthly adjustment to
basic electric bills co recover the changes in the cost of power purchased from private
producers. The PPA is broad enough to allow power generators and distributors to pass
on to consumers the cost of its mistakes and inefficiencies as well as the burden of the
onerous contracts entered into by the National Power Corporation and distribution
utilities with independent power producers.

Although end-users have been charged the PPA since the early 1990s, it was only
during the passage of Republic Act No. 9136, or the Electric Power Industry Reform Act
(“EPIRA”), in 2001 that charging the PPA to end-users was recognized. The EPIRA also
authorizes the imposition of a “universal charge” on end-users to replace the PPA.

It is no coincidence therefore, that the passage of the EPIRA was accompanied by
increases in electric bills, this, despite the escalating poverty in the country and the
assurances by President Arroyo that the EPIRA would translate to lower electric bills.

‘The EPIRA is evidently anti-poor and anti-people, benefiting only a few power
generators and distributors. It results in electricity cost that is ore burdensome on
consumers.

It is in our national interest to pass an amendatory law that is pro-people,
lessening the hardship of the majority of consumers that can no longer afford to pay for
their electric bills. We need a drastic, real and substantial solution to make the cost of
electricity affordable to the consumers.

This bill seeks to lessen the hardships on consumers by preventing power
generators and distributors from passing on the costs of their inefficiency, mistakes and
questionable onerous contracts they have entered into to the end-users through the
following means:

1. Cost-sharing of stranded costs of NPC between the NPC and the end-users,
the amount to be shouldered by end-users shall be limited to twenty three
centavos (P0.23);

2, Mandatory requirement by distribution utilities to refinance their stranded
contract costs, the cost of refinancing together with the stranded cost recovery
being capped at a maximum of twenty three centavos per kilowatt hour
(PO.23/kwh);

3. Limitation of PPA charged by distribution utilities to twenty three centavos
(P0.23);



4, Exemption from PPA of end-users consuming less than 100 KWH a month;

5. 50% discount on PPA or universal charge for end-users consuming 100 KWH
to less than 300K WH a month;

6. Retail competition and open access on distribution wires by 1 June2004,

subject only to the conditions of establishment of the wholesale electricity

spot market and approval of unbundled transmission and distribution wheeling
charges;

Stringent review by the NPC of its stranded costs;

Performance Based Revenue forms of rate setting for transmission and

distribution utilities by June 2003; and a review of the Return on Rate Base

method currently adopted, including disallowance of certain deductions from
the return on rate base;

9. Prohibition of cross-ownership and bilateral contracts between generation
companies and distribution utilities and limited crossownership among
generation companies; and

10. Arms-length review and renegotiation of all IPP contracts, the benefits from
the renegotiation directly translating the lower PPA and stranded cost charges
to the end-users by an international panel of experts.

ex

Through these measures, it is anticipated that both the PPA and the basic rate will
be significantly reduced, directly translating to lower cost of electricity to end-users.

In view of the foregoing, approval of this bill is earnestly requested.

tae

EDGARDO J. ANGARA
Senator



SENATE -
FIFTEENTH CONGRESS OF THE) 1 ROMEO TS
REPUBLIC OF THE PHILIPPINES )
First Regular Session )

YO WL 26 3:

SENATE

Senate Bill No,_ 2037 receweo my: Se

Introduced by SENATOR EDGARDO J. ANGARA.

AN ACT
AMENDING REPUBLIC ACT NO. 9136, OTHERWISE
KNOWN “AS THE ELECTRIC POWER INDUSTRY REFORM ACT
OF 2001”, AND FOR OTHER PURPOSES

Be it enacted by the Senate and the House of Representatives in Congress

assembled:

SEC. 1. Section 2 of Republic Act No. 9136 is hereby amended to read as

follows:

“See. 2. Declaration of Policy. It is hereby declared the policy of the

State:

(@) To ensure and accelerate the total electrification of the country;

(b) To ensure the quality, reliability, security and affordability of the supply of
electric power;

(c) To ensure transparent and reasonable prices of electricity in a regime of free
and fair competition and full public accountability to achieve;

(@) To enhance the inflow of private capital and broaden the greater operational
and economic efficiency and enhance the competitiveness of Philippine
products in the global market; ownership base of the power generation,
transmission and distribution sectors;

(©) To ensure fair and non-discriminatory treatment of public and private sector
entities in the process of restructuring the electric power industry;

(0 To protect the public interest as it is affected by the rates and services of
electric utilities and other providers of electric power;

(@ To assure socially and environmentally compatible energy sources and

. infrastructure;

(h) To promote the utilization of indigenous and new and renewable energy
resources in power generation in order to reduce dependence on imported
energy;

(i) To provide for an orderly .and transparent privatization of the assets and
liabilities of the National Power Corporation (NPC), THE DILIGENT

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MITIGATION, SEGREGATION AND FAIR DISTRIBUTION OF ITS
STRANDED OBLIGATIONS AND THE ORDERLY LIQUIDATION ITS
STRANDED COSTS;

(i) To establish a strong and purely independent regulatory body and system to

ensure consumer protection and enhance the competitive operation of the
electricity market; and

(k) To encourage the efficient use of energy and other modalities of demand side
management [.], INCLUDING ENSURING, TO THE GREATEST
POSSIBLE EXTENT, THAT ELECTRIC SUPPLY DOES NOT OVERLY
EXCEED DEMAND;

() TO DEVELOP CONCRETE STRATEGIES TO STRENGTHEN RURAL
ELECTRIC COOPERATIVES ‘7.

SECTION 2. Section 6 of the Act is hereby amended to read as follows:

“See. 6. Generation Sector. -- Generation of electric power, a business
affected with public interest, shall be competitive and open.

“Upon the effectivity of this Act, any new generation company shall, before
it operates, secure from the Energy Regulatory Commission (ERC) a certificate of
compliance pursuant to the standards set forth in this Act, INCLUDING, BUT
NOT LIMITED TO, COMPLIANCE WITH A MINIMUM LEVEL OF
CAPACITY TO BE DETERMINED BY THE ERC, THE GRID CODE,
DISPATCH SYSTEM AND WHOLESALE SPOT MARKET RULES, as well as
health, safety and environmental clearances from the appropriate government
agencies under existing laws.

Any law to the contrary notwithstanding, power generation shall not be
considered a public utility operation. For this purpose, any person or entity
engaged or which shall engage in power generation and supply of electricity shall
not be required to secure a national franchise.

Upon implementation of retail competition and open access, the prices
charged by a generation company for the supply of electricity shall not be subject to
regulation by the ERC except as otherwise provided in this Act.

Pursuant to the objective of lowering electricity rates to endusers, sales of
generated power by generation companies shall be value added tax zero-rated. The
ERC shall, in determining the existence of market power abuse or anti-competitive
behavior, require from generation companies the submission of their INDIVIDUAL
PRICING FORMULA, AS WELL AS THEIR financial statements, POWER
PURCHASE AGREEMENTS, AND ANY AGREEMENTS THAT AFFECT
COSTS, TERMS, AND GUARANTEES, AMONG OTHERS."



eo Aw ED

SEC. 3. Section 31 of the Act is hereby amended to read as follows:

"SEC. 81. Retail Competition and Open Access. - Any law to the contraty
notwithstanding, retail competition and open access on distribution wires shall be
implemented BY 1 JUNE 2003 {not later than three (3) years upon the effectivity of
this Act], subject to the following conditions:

(a) Establishment of the wholesale electricity spot market;
(b) Approval of unbundled transmission and distribution wheeling charges;
«

(a) Privatization of at least seventy (70%) percent of the total capacity of

Initial implementation of the cross subsidy removal scheme;

generating assets of NPC in Luzon and Visayas; and

(e

‘Transfer of the management and control of at least seventy percent (70%) of the
total energy output of power plants under contract with NPC to the IPP
Administrators.]

Upon the initial implementation of open access, the ERC shall allow all electricity
end-users with a monthly average peak demand of at least one megawatt (IMW) for the
preceding twelve (12) months to be the contestable market. Two (2) years thereafter, the
threshold level for the contestable market shall be reduced to seven hundred fifly
kilowatts (750kW). At this level, aggregators shall be allowed to supply
electricity to end-users whose aggregate demand within a contiguous area is at least
seven hundred fifty kilowatts (7501W). Subsequently and every year thereafter, the ERC
shall evaluate the performance of the market. On the basis of such evaluation, it shall
gradually reduce threshold level until it reaches the household demand level. In the case
of electric cooperatives, retail competition and open access shall be

implemented not earlier than five (5) years upon the effectivity of this Act.

SEC. 4, Section 32 of the Act is hereby amended to read as follows:

"Sec. 32. NPC Stranded Debt and Contract Cost Recovery.- Stranded
debt of NPC shall refer to any unpaid financial obligations of NPC.

Stranded contract costs of NPC shall refer to the excess of the contracted
cost of electricity under eligible IPP contracts of NPC over the actual selling price
of the contracted energy output of such contracts in the market. Such contract
shall have been approved by the ERB as of December 31,2000.

TO PROTECT THE PUBLIC FROM ONEROUS AND GROSSLY
DISADVANTAGEOUS PROVISIONS ARISING PROM PRIVATELY
NEGOTIATED CONTRACTS, [the national government shall be made to
assume a portion of the financial obligations of NPC in an amount not to exceed
FIVE [Two] hundred billion pesos _(P500,000,000,000.00) _[(P200,
000,000,000.00) UPON SHOWING OF PROOF TO THE ERC THAT THE NPC.



HAS UNDERTAKEN A STRINGENT AND EXHAUSTIVE PROCESS OF
MITIGATION, SEGREGATION AND DISPOSITION.

The ERC shall verify the reasonable amounts and determine the manner
and duration for the full recovery of stranded debt and stranded costs as defined
herein; Provided, That the duration for such recovery shall not be shorter than
fifteen (15) years not longer than twenty-five (25) years. The ERC shall, at the
end of the first year of the implementation of stranded cost recovery and every
year thereafter, conduct a review to determine whether there is under-recovery or
over-recovery and adjust (true-up) the level of stranded cost recovery charge
accordingly. Any amount to be included for stranded cost recovery shall be
reflected as a separate item in the consumer billing statement.

THE ERC SHALL CONDUCT A COMPREHENSIVE REVIEW OF
THE EXTENT OF THE STRANDED COSTS OF NPC ON A SEMIANNUAL
BASIS AND ENSURE THAT THE NPC HA§ UNDERTAKEN A STRINGENT
AND EXHAUSTIVE PROCESS OF MITIGATION, SEGREGATION AND
DISPOSITION.”

SEC. 5. Section 33 of the Act is hereby amended to read as follows:

“SEC. 33. Distribution Utilities Stranded Contract Costs Recovery. -
Stranded contract costs of distribution utilities shall refer to the excess of the
contracted cost of electricity under eligible contracts of such utilities over the
actual selling price of such contracts in the market. Such contracts shall have been
approved by the ERB as of December 31, 2000.

“A distribution utility shall recover stranded contract costs: Provided,
however, That such costs of the IPPs of distribution utilities are subject to review
by ERC in order to determine fairness and reasonableness in relation to the
average price of land-based IPP projects entered into by NPC at the time they
were contracted, The ERG shall take into consideration all factors that affect the
total cost of NPC IPP generation projects, including direct or indirect subsidies or
incentives provided by the Government; PROVIDED, FURTHER, THAT THE
AMOUNT OF STRANDED CONTRACT COSTS OF THE DISTRIBUTION
UTILITY FROM ITS ELIGIBLE CONTRACTS SHALL NOT
EXCEEDTWENTY THREE CENTAVOS PER KILOWATT HOUR
(P0.23/KWH); PROVIDED, FINALLY, THAT THE DISTRIBUTION UTILITY
SHALL REFINANCE THEIR STRANDED CONTRACT COSTS ARISING
FROM ELIGIBLE CONTRACTS OR UNDERTAKE OTHER SIMILAR
ARRANGEMENT IN ORDER TO IMMEDIATELY MITIGATE THE IMPACT
ON END-USERS. THE DISTRIBUTION UTILITY SHALL SUBMIT THE



REFINANCING SCHEME TO THE ERC FOR ITS APPROVAL PRIOR TO.

_ITS IMPLEMENTATION.

“A DISTRIBUTION UTILITY SHALL BE ENTITLED TO RECOVER
FROM THE UNIVERSAL CHARGE OVER A PERIOD OF NOT LESS THAN
FIFTEEN (15) YEARS BUT NOT MORE THAN TWENTY-FIVE (25) YEARS,
AN AMOUNT DETERMINED BY THE ERC AND IN ACCORDANCE WITH
THE PROVISIONS OF THIS SECTION REPRESENTING ITS STRANDED
CONTRACT COSTS FROM ELIGIBLE CONTRACTS AND THE COST OF
REFINANCING DIRECTLY ATTRIBUTABLE TO THE DEBT RAISED FOR
THE PURPOSE OF LENGTHENING THE PERIOD FOR THE FULL
RECOVERY OF ITS OWN STRANDED CONTRACT COSTS; PROVIDED,

[HAT IN NO CASE SHALL THE AMOUNT OF RECOVERABLE
STRANDED CONTRACT COSTS OF A DISTRIBUTION UTILITY EXCEED
TWENTY THREE CENTAVOS PER KILOWATT HOUR (P0.23IK WH).

TO PROTECT THE PUBLIC FROM ONEROUS AND GROSSLY
DISADVANTAGEOUS PROVISIONS ARISING FROM PRIVATELY
NEGOTIATED CONTRCTS, THE ERC SHALL STRICTLY REVIEW THE
FAIRNESS AND REASONABLENESS OF THE STRANDED COSTS OF THE
DISTRIBUTION UTILITIES IN RELATION TO THE AVERAGE PRICE OF
IPP PROJECTS ENTERED INTO BY IT AT THE TIME THEY WERE
CONTRACTED, TAKING INTO CONSIDERATION ALL FACTORS THAT
AFFECT THE TOTAL COST OF IPP CONTRACTS OF THE DISTRIBUTION
UTILITY, INCLUDING BUT NOT LIMITED TO DIRECT AND INDIRECT
SUBSIDIES OR INCENTIVES PROVIDED BY THE GOVERNMENT,
BEFORE IT WOULD ALLOW RECOVERY OF STRANDED COSTS;
PROVIDED, THAT THE DISTRIBUTION UTILITY MUST PROVE TO THE
SATISFACTION OF THE ERC
THATTHESTRANDEDCOSTCOULDNOLONGERBEFURTHER
MITIGATED, SEGREGATED AND DISPOSED.

"Within one (1) year from the start of open access, any distribution utility
that seeks recovery of stranded contract costs shall file with the ERC notice of
such intent together with an estimate of such obligations, including the present
value thereof and such other supporting data as may be required by the ERC. Any
distribution utility that does not file within the date specified shall not be eligible
for such recovery.

“Any distribution utility which seeks to recover stranded cost shall have a
duty to mitigate its potential stranded contract costs by making reasonable best
efforts to:


a. reduce the costs of its existing contracts with IPPs to a level not exceeding the
average buying price of other land-based electric power generators; and

b. submit to an annual earnings review by the ERC and use its earnings above its
authorized rate of return to reduce the book value of contracts until the end of
the stranded cost recovery period.

"Other mitigating measures which are reasonably known and generally
accepted within the electric power industry shall be utilized, [The ERC shall not
require the distribution utility to take a loss to reduce stranded contract costs or
divest assets, unless the divestiture is imposed as a penalty as provided herein.]

"The relevant distribution utility shall submit to the ERC quarterly reports
showing the amount of stranded costs recovered and the balance remaining to be
recovered.

"Within three (3) months from the submission of the application for

stranded cost recovery by the relevant distribution utilities, the ERC shall verify

the reasonable amounts and determine the manner and duration for the full
recovery of stranded contract costs as defined herein: Provided, That the duration
for such recovery shall not be shorter than fifteen (15) years nor longer than
twenty-five (25) years. PROVIDED, FURTHER, THAT IN NO CASE SHALL
THE AMOUNT OF RECOVERABLE STRANDED CONTRACT COSTS OF A
DISTRIBUTION UTILITY EXCEED TWENTY THREE CENTAVOS PER
KILOWATT HOUR (P0.23/KWH).

“Any amount to be included for stranded cost recovery shall be reflected
as a separate item in the consumer billing statement.

"The ERC shall, at the end of the first year of the implementation of
stranded cost recovery and every year thereafter, conduct a review to determine
whether there is under recovery or over recovery and adjust (true-up) the level of
stranded cost recovery charge accordingly. In case of an over-recovery, the ERC
shall ensure that any excess amount shall be remitted to the Special Trust Fund
created under Section 34 hereof, A separate account shall be created for these
amounts which shall be held in trust for any future claims of distribution utilities
for stranded cost recovery. At the end of the stranded cost recovery period, any
remaining amount in the account shall be used to reduce the electricity rates to the
end-users. PROVIDED, THAT IN NO CASE SHALL THE AMOUNT OF
RECOVERABLE STRANDED CONTRACT COSTS OF A DISTRIBUTION
UTILITY EXCEED TWENTY THREE CENTAVOS PER KILOWATT HOUR
(PO. 23/K WH).

SEC. 6. A new Section 33-A is hereby added, to read as follows:



"SEC. 33-A. A DISTRIBUTION UTILITY SHALL NOT BE
ALLOWED TO CHARGE END-USERS POWER PURCHASE ADJUSTMENT
(PPA) ARISING FROM ITS OWN IPP'S IN EXCESS OF TWENTY THREE
CENTAVOS (P0.23) PER KILOWATT HOUR; PROVIDED, THAT THIS
SHALL BE WITHOUT PREJUDICE TO THE REVIEW AND
RENEGOTIATION OF IPP CONTRACTS TO FURTHER REDUCE THE PPA
AS REQUIRED IN SECTION 68 OF THIS ACT."

SEC. 7. Section 34 of the Act is hereby amended to read as follows:

"Sec. 34. Universal Charge. - Within one (1) year from the effectivity of
this Act, a universal charge to be determined, fixed and approved by the ERC,
shall be imposed on all electricity end-users for the following purposes:

(a) Payment for the stranded debts in excess of the amount assumed by the
National Government and stranded contract costs of NPC and as well as
qualified stranded contract costs of distribution utilities resulting from the
restructuring of the industry [;]: PROVIDED, THAT END-USERS SHALL
BE CHARGED NOT MORE THAN TWENTY THREE CENTAVOS
(P0.23) PER KWH FOR THE STRANDED COSTS OF NPC. THE
BALANCE OF THE STRANDED COSTS OF NPC SHALL BE ASSUMED
BY THE NATIONAL GOVERNMENT; PROVIDED, FURTHER, THAT IN
NO CASE SHALL THE AMOUNT OF RECOVERABLE STRANDED
CONTRACT COSTS OF A DISTRIBUTION UTILITY EXCEED TWENTY

. THREE CENTAVOS PER KILOWATT HOUR (PO .23/KWH).

(b) Missionary electrification;

(c) The equalization of the taxes and royalties applied to indigenous or renewable
sources of energy vis-a-vis imported energy fuels;

(d)An environmental charge equivalent to one-fourth of one centavo per
kilowatt-hour (PO.0025/kwh), which shall accrue to an environmental fund to
‘be used solely for watershed rehabilitation and management. Said fund shall
be managed by NPC under existing arrangements; and

(e) A charge to account for all forms of cross-subsidies for a period not exceeding
three (3) years.

‘The universal charge shall be non-by passable charge, which shall be
passed on and collected from all end-users on a monthly basis by the distribution
utilities, Collections by the distribution utilities and the TRANSCO in any given
month shall be remitted to the PSALM Corp. on or before the fifteenth (15th) of
the succeeding month, net of any amount due to the distribution utility. Any end-



user or self-generating entity not connected to a distribution utility shall remit its
corresponding universal charge directly to the TRANSCO.

The PSALM Corp., as administrator of the fund, shall create a Special
Trust Fund, which shall be disbursed only for the purposes specified herein in an
open and transparent manner. All amounts collected for the universal charge shall
be distributed to the respective beneficiaries within a reasonable period to be
provided by the ERC."

SEC. 8, A new Section 34-A is hereby added, to read as follows:

"SEC. 34-A. EXEMPTIONS AND REDUCTION OF PPA. -
ENDUSERS CONSUMING LESS THAN ONE HUNDRED KILOWATT
HOURS (100 KWH) PER MONTH ARE EXEMPTED FROM PAYMENT OF
THE NPCS PPA.

END-USERS CONSUMING ONE HUNDRED KILOWATT HOURS
BUT NOT MORE THAN THREE HUNDRED KILOWATT HOUR
(300/KWH) PER MONTH SHALL ONLY BE REQUIRED TO PAY FOR,
FIFTY PER CENT (50%) OF THE PPA CORRESPONDING TO NPC.

A DISTRIBUTION UTILITY MUST IMMEDIATELY EFFECT A
PROPORTIONATE REDUCTION IN THE POWER PURCHASE
ADJUSTMENT (PPA) AND SUBSEQUENTLY, THE COMPONENT OF THE
UNIVERSAL CHARGE PERTAINING 7O THE STRANDED CONTRACT
COSTS OF ELIGIBLE CONTRACTS OF SUCH DISTRIBUTION UTILITY
BY REASON OF THE EXEMPTION AND\ REDUCTION OF NPC'S PPA
PURSUANT TO THE FIRST AND SECOND PARAGRAPHS OF THIS
SECTION."

SECTION 9. Section 43() of the Act is hereby amended as follows:
"Sec, 43. Functions of the ERC. -
(a) xxx
(f) In the public interest, establish and enforce a methodology for setting
transmission and distribution wheeling rates and retail rates for the captive
market of a distribution utility, taking into account all relevant considerations,
including the efficiency or inefficiency of the regulated entities. THE ERC
* SHALL ADOPT PERFORMANCE BASED REVENUE ("PBR") FORMS
OF RATESETTING BY JUNE 1, 2003. PRIOR TO SUCH DATE, THE ERC
SHALL ADOPT RATE-SETTING FORMS WHERE the rates must be such
as to allow the recovery of just and reasonable costs and a reasonable return

‘on rate base (RORB) to enable the entity to operate viably. The ERC may



adopt alternative forms of internationally accepted rate-setting methodology
as it may deem appropriate. The rate-setting methodology so adopted and
applied must ensure a reasonable price of electricity. The rates prescribed
shall be non-discriminatory. To achieve this objective and to ensure the
complete removal of cross subsidies, the cap on the recoverable rate of system
losses prescribed in Section 10 of Republic Act No. 7832, is hereby amended
and shall be replaced by caps which shall be determined by the ERC based on
load density, sales mix, cost of service, delivery voltage and other technical
considerations it may promulgate, The ERC shall determine such form or rate-
setting methodology, which shall promote efficiency. In case the rate setting
methodology used is RORB, it shall be subject to the following guidelines:
@

For purposes of determining the rate base, the TRANSCO or any distribution

utility SHALL NOT BE ALLOWED TO REVALUE ITS ELIGIBLE

ASSETS FOR PURPOSES OF INCREASING ITS RATE BASE:

PROVIDED, THAT ASSETS WHICH ARE NOT USED AND USEFUL

FOR THE TRANSMISSION OR DISTRIBUTION OF ELECTRICITY

SHALL

NOT BE INCLUDED BY. THE TRANSCO OR ANY DISTRIBUTION

, UTILITY IN COMPUTING THE RATE BASE [may be allowed to revalue
its eligible assets not more than once every three (3) years by an independent
appraisal company; Provided, howeuer, That ERC may give an exemption in
case of unusual devaluation: Provided, further, That the ERC shall exert
efforts to minimize price shocks in order to protect the consumers];

(ii) Interest expenses, INCOME TAX, FRANCHISE TAX, WORKING
CAPITAL, AND SYSTEMS LOSSES IN EXCESS OF FOUR AND A
HALF PER CENT (4%%) OF TOTAL ENERGY PURCHASED are fiat
allowable deductions from permissible return on rate base;

(ii) In determining eligible cost of services that will be 26 passed on to the end-
users, the ERC shall establish minimum efficiency performance standards for
the TRANSCO and distribution utilities including systems losses,
interruption frequency rates, and collection efficiency;

(iv) Further, in determining rate base, the TRANSCO or any distribution utility

shall not be allowed to include management inefficiencies like cost of project

delays not excused by force majeure, penalties and related interest during

construction applicable fo these unexcused delays; and

ct

“Any significant operating costs or project investments of the TRANSCO and
distribution utilities which shall become part of the RETURN ON rate base
AND SIGNIFICANT OPERATING COSTS THAT ARE PASSED ON TO



THE CONSUMERS shall be subject to verification by the ERC to ensure
that the contracting and procurement of the equipment, assets and services
have been subjected to [transparent and accepted industry procurement and
purchasing _— practices] © PROCUREMENT PROCEDURES NO
LESSSTRINGENT AND TRANSPARENT THAN GOVERNMENT
PROCUREMENT GUIDELINES, AND SUBJECT TO OPEN
COMPETITIVE PUBLIC BIDDING IN ORDER to protect the public

interest.”

SEC. 10. - Section 45 of the Act is hereby amended ¢o read as follows:

“Sec. 45. Cross Ownership, Market Power Abuse and Anti-
Competitive Behavior. - No participant in the electricity industry or any other
person may engage in any anti-competitive behavior including, but not limited to,
cross-subsidization, price or market manipulation, or other unfair trade practices

detrimental to the encouragement and protection of contestables market.

NO DISTRIBUTION UTILITY, I$ RESPECTIVE SUBSIDIARY OR
AFFILIATE OR STOCKHOLDER OR OFFICIAL OF A DISTRIBUTION
UTILITY SHALL BE ALLOWED TO HOLD ANY INTEREST, DIRECTLY
OR INDIRECTLY, IN ANY GENERATION COMPANY: PROVIDED, THAT
THE DISTRIBUTION UTILITY HOLDING AN INTEREST IN ANY
GENERATION COMPANY AT THE TIME OF THE PASSAGE OF THIS ACT
SHALL BE REQUIRED TO DIVEST THE SAME WITHIN ONE (1) YEAR
FROM THE EFFECTIVITY OF THIS ACT.

No generation company, distribution utility, or its respective subsidiary or
affiliate or stockholder or official of a generation company or distribution utility,
or other entity engaged in generating and supplying electricity specified by ERC
within the fourth civil degree of consanguinity or affinity, shall be allowed to hold
any interest, directly or indirectly, in TRANSCO or its concessionaire. Likewise,
the TRANSCQ, or its concessionaire or any of its stockholders or officials or any
of their relatives within the fourth civil degree of consanguinity or affinity, shall

+ not hold any interest, whether directly or indirectly, in any generation company or

distribution utility. Except for ex officio government-appointed representatives, no
person who is an officer or director of the TRANSCO or its concessionaire shall
be an officer or director of any generation company, distribution utility or
supplier. A GENERATION COMPANY MAY BE PERMITTED TO HOLD
INTEREST, DIRECTLY OR INDIRECTLY, IN ANOTHER GENERATION
COMPANY: PROVIDED, THAT THE EXTENT OF SUCH INTEREST SHALL



BE LESS THAN THE AMOUNT OF SHARES NEEDED TO VOTE ONE
MEMBER OF THE BOARD OF DIRECTORS.

‘An "affiliate" means any person which, alone or together with any other
person, directly or indirectly, through one or more intermediaries, controls, is
controlied by, or is under common contro! with another person. As used herein,
“contro!” shall mean the power to direct or cause the direction of the management
policies of a person by contract, agency or otherwise.

To promote true market competition and prevent harmful monopoly and

market power abuse, the ERC shall enforce the following safeguards:
(a) 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. "Related group"
includes a person's business interests, including its subsidiaries, affiliates,
directors or officers or any of their relatives by consanguinity or affinity,
legitimate or common law, within the fourth civil degree;

(6) Distribution utilities may enter into bilateral power supply contracts

. subject to review by the ERG: Provided, That such review shall not only be

required for distribution utilities whose markets have not reached household
demand level, For the purpose of preventing market power abuse between
associated firms engaged in generation and distribution, [no] A distribution utility
shall NOT be allowed to source from bilateral power supply contracts [more than
fifty percent (50%) of its total demand] from an associated’ firm engaged in
generation but such limitation, however, shall not prejudice contracts entered into
prior to the effectivity of this Act. An associated firm with respect to another
entity refers to any person which, alone or together any other person, directly or
indirectly, through one or more intermediaries, controls, is controlled by, or is
under common control with, such entity; and

(c) For the first five (5) years from the establishment of the wholesale
electricity spot market, no distribution utility shall source more than 90% of its
total demand from bilateral power supply contracts: PROVIDED, THAT NO
BILATERAL POWER SUPPLY CONTRACT SHALL BE ENTERED INTO
EXCEPT PURSUANT TO AN OPEN, COMPETITIVE AND TRANSPARENT
BIDDING SUPERVISED BY THE ERC: PROVIDED FURTHER, THAT
AFTER THE FIRST FIVE (5) YEARS FROM THE ESTABLISHMENT OF
THE WHOLESALE ELECTRICITY SPOT MARKET, THE ERC SHALL.
ISSUE GUIDELINES GOVERNING BILATERAL POWER SUPPLY
CONTRACTS TO ENSURE INCREASED USAGE OF WHOLESALE
ELECTRICITY SPOT MARKET.



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For purposes of this Section, the grid basis shall consist of three (3)
separate grids, namely Luzon, Visayas and Mindanao. The ERC shall have the
authority to modify or amend this definition of a grid when two or more of the
three separate grids become sufficiently interconnected to constitute a single grid
or as conditions may otherwise permit.

Exceptions from these limitations shall be allowed for isolated grids that
are not connected to the high voltage transmission system. Except as otherwise
provided for in this Section, any restriction on ownership and/ or control between
or within sectors of the electricity industry may be imposed by ERC only insofar
as the enforcement of the provisions of this Section is concerned.

The ERC shall, within one (1) year from the effectivity of this Act,
promulgate rules and regulations to ensure and promote competition, encourage
market development and customer choice and discourage’ penalize abuse of
market power, cartelization and any anti-competitive or discriminatory behavior,
in order to further the intent of this Act and protect the public interest. Such rules
and regulations shall define the following:

(a) the relevant markets for purposes of establishing abuse or misuse of monopoly or
market position;

(b) areas of isolated grids; and

(©) the periodic reportorial requirements of electric power industry participants as
may be necessary to enforce the provisions of this section.

The ERC shall, motu proprio, monitor and penalize any market 5 power abuse
or anti-competitive or discriminatory act or behavior by any participant in the electric
power industry, Upon finding that a market participant has engaged in such act or
behavior, the ERC shall stop and redress the same. Such remedies shall, without
limitation, include the imposition of price controls, issuance of injunctions,
requirement of divestment or disgorgement of excess profits an imposition of fines
and penalties pursuant to this Act.

‘The ERC shall, within one (1) year from the effectivity of this Act,
promulgate rules and regulations providing for a complaint procedure that, without

limitation, provides the accused party with notice and an opportunity to be heard.”

SEC. 11. Section 68 of the Act is hereby amended to read as follows:

"SEC. 68. Review of IPP Contracts - An inter-agency committee chaired by
the Secretary of Finance AND CO-CHAIRED BY THE SECRETARY OF
ENERGY, with [the Secretary of the Department of Justice and] the Director General
of the National Economic and Development Authority AND FOUR (4)
INTERNATIONAL ENERGY EXPERTS TO BE APPOINTED BY THE

12



PRESIDENT as members thereof is hereby created upon the effectivity of this Act.
The Committee shall immediately undertake a thorough ARMS-LENGTH Review of
all IPP contracts ENTERED INTO BY NPC AND ANY DISTRIBUTION UTILITY.
In cases where such contracts are found to have provisions which are grossly
disadvantageous, or onerous to the Government OR THE END- USERS, the
Committee shall RENEGOTIATE THE CONTRACTS WITH THE IPPS, IN
ADDITION TO CAUSING [cause] the appropriate government agency to file an
action under the arbitration clauses provided in said contracts or INITIATING
[initiate] any appropriate action’ under Philippine laws. The PSALM Corporation
shall diligently seek to reduce stranded costs, if any; PROVIDED, THAT ANY
REDUCTION IN CONTRACT COST AS A RESULT OF ANY REVIEW OR
RENEGOTIATION BY THE COMMITTEE SHALL TRANSLATE DIRECTLY
INTO LOWER UNIVERSAL CHARGES FOR THE END-USER."

SEC. 12. Separability Clause. - If any provision of this Act is held to be

unconstitutional or invalid, the same shall not affect the remainder thereof.
SEC. 13. Repealing Clause. --- All \aws, presidential decrees, executive orders, rules
and regulations, and part thereof, which are inconsistent with the provisions of this Act,

are hereby repealed or modified accordingly.

SEC. 14. Effectivity, —- This Act shall take effect fifteen (15) days after publication

in the Official Gazette or two (2) newspapers of general circulation.

Approve.