Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City, Metro Manila

SIXTEENTH CONGRESS
First Regular Session

House BillNo.__1521

INTRODUCED BY HON. MARCELINO “MARCY” R. TEODORO

EXPLANATORY NOTE

The bill hopes to promote the role of natural gas as an environment-friendly and
economically efficient source of energy by creating favorable conditions for establishing a
Downstream Natural Gas Industry that will accelerate the expansion of natural gas service for
the benefits of all segments of the nation's population and all sectors of its economy. It further
seeks to ensure the safety, quality, reliability, security and affordability of the transmission,
distribution and supply of natural gas.

This proposal is in response to the incontrovertible facts that human activities have a
significant contribution to global warming; thus, world governments are now taking steps to
reduce carbon emissions. Scientific studies on how to mitigate global warming and research
on the viability of alternative sources of energy are encouraged and funded; the use of clean
and renewable energy sources are promoted, and compliance is rewarded by incentives.

It is the State's responsibility to judiciously manage its energy resources for the benefit
of the present and future generations. This way, the country's economic growth will not be
detrimental to our environment.

In the light of the foregoing, passage of this bill is earnestly sought.

fick Ja——~
MARCELINO “MARCY” R. TEQDORO

Representative
4* District, Marikina City


Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City, Metro Manila

SIXTEENTH CONGRESS
First Regular Session

House Bill No. 1521

INTRODUCED BY HON. MARCELINO “MARCY” R. TEODORO

AN ACT
ORDAINING THE DEVELOPMENT OF THE DOWNSTREAM NATURAL
GAS INDUSTRY, CONSOLIDATING FOR THE PURPOSE ALL LAWS
RELATING TO THE TRANSMISSION, DISTRIBUTION AND SUPPLY
OF NATURAL GAS AND FOR OTHER PURPOSES

Be it enacted by the Senate and the House of Representatives of the Republic of the
Philippines in Congress assembled:

CHAPTER |
TITLE AND DECLARATION OF POLICY

SECTION 1. Short Title. - This Act shall be known as the "Downstream Natural Gas Industry
Development Act”.

SEC. 2. Declaration of Policy. - It is hereby declared the policy of the State:

(a) To promote the role of natural gas as a socially-acceptable, environment-friendly and
economically efficient source of energy by creating favorable conditions for establishing a
Downstream Natural Gas Industry for the benefit of all segments of the nation's population
and all sectors of its economy;

(b) To ensure the safety, quality, reliability and security of the transmission, distribution and
supply of natural gas;

(c) To ensure transparent and reasonable rates and prices of natural gas transmission,
distribution and supply in a regime of open and fair competition and full public accountability
that will promote greater operational and economic efficiency and the enhanced
competitiveness of the Philippine products in the global market;

(d) To encourage the inflow of private capital in providing the infrastructure and services
necessary to support an expanded role of natural gas in the nation's energy supply;

(e) To protect the public interest as it is affected by the quality of, and rates charged for, the
transmission, distribution and supply of natural gas and related services;

(f) To assure the development of a Downstream Natural Gas Industry Infrastructure that is
socially-acceptable and compliant with existing environmental laws;

(g) To ensure that the Downstream Natural Gas Industry shall be regulated in a manner that
will ensure the quality, reliability, distribution and supply of natural gas, encourage private
investment in the Downstream Natural Gas Industry and promote the efficient and competitive
operation thereof;

(h) To develop the necessary trades, technical expertise and skills to support the Downstream
Natural Gas Industry;

(i) To facilitate the development of end-uses of natural gas that promotes fuel diversity and
compliance with existing environmental laws including, but not limited to, the use of natural
gas as a motor vehicle fuel; and

() To encourage equity participation in gas transmission utilities and gas distribution utilities
by the private sector.

SEC. 3. Scope. - This Act shall provide a framework for the development of a Downstream


Natural Gas Industry and its transition from an emerging to a mature industry status and
competitive natural gas market, and define the responsibilities of various government
agencies and private entities in furtherance of this national goal.

All activities of the Department of Energy (DOE) and the Energy Regulatory Commission
(ERC) relevant to the development and regulation of the Downstream Natural Gas Industry
shall be in accordance with this Act.

SEC. 4, Definition of Terms. - As used in this Act, the following terms shall have the
following meanings:

(a) "Captive market":
+ with respect to the transmission of natural gas, refers to natural gas end-users who
do not have a choice of a gas transmission utility;

+ with respect to the distribution of natural gas, refers to natural gas end-users who do
not have a choice of a gas distribution utility;

+ with respect to the supply of natural gas, refers to natural gas end-users who do not
have a choice of supplier of natural gas or other economically competitive energy
substitute;

(b) "Congress" refers to the Congress of the Republic of the Philippines;

(c) "Contestable market" is a market that is not a captive market;

(d) "Delivery" refers to the transmission or distribution of natural gas and the supply of natural

gas, at wholesale or retail;

(e) "Department of Energy" or "DOE" refers to the government agency created pursuant to

Republic Act No. 7638, as amended

(f) "Department of Environment and Natural Resources" or "DENR refers to the government

agency created pursuant to Executive Order Nos. 192 and 292, as amended;

(g) "Distribution" refers to the conveyance of natural gas by a gas distribution utility through its

gas distribution system;

(h) "Downstream Natural Gas Industry" refers to the transmission, distribution and supply of

natural gas and related activities, such as, but not limited to, processing, storing,

regassification, interconnection, measurement and/ or metering;

(i) "End-user" refers to any person that will receive delivery of natural gas for its own us

(j) "Energy Regulatory Commission" or "ERC" refers to the independent quasi-judicial

regulatory agency created pursuant to Republic Act No. 9136, otherwise known as the

"Electric Power Industry Reform Act of 2001", whose expanded functions are provided in this

Act;

(k) "Franchise" refers to the right, privilege and authority issued by Congress authorizing a

person to engage in the transmission of natural gas and/ or distribution of natural gas within a

specific

geographical area;

(|) "Franchise area" refers to a geographical area assigned or granted under a franchise;

(m) "Gas Distribution Code" refers to the code to be formulated by the DOE pursuant to

Section 5(g) of this Act that sets the technical performance standards for operating gas

distribution utilities and the minimum financial standards for gas distribution systems;

(n) "Gas distribution system" refers to the system of pipelines and related facilities extending

from the delivery points where the gas distribution system receives the natural gas to the

point of connection to the premises of the end-user;

(0) "Gas distribution utility" refers to any person that has a franchise to operate a gas

distribution system;

(p) "Gas supply contract" refers to a contract between a supplier and a purchaser for the

supply of natural gas;

(a) "Gas Transmission Code" refers to the code to be developed by the DOE pursuant to

Section 5(g) of this Act that sets the technical performance standards for operating gas

transmission systems and the minimum financial standards for gas transmission utilities;

(r) "Gas transmission system" refers to the system of high pressure pipelines, storage and

related facilities that are used to transport natural gas from the interconnection with gathering

facilities, liquefied natural gas (LNG) regassification facilities or other gas transmission
systems to gas distribution systems, other gas transmission systems or end-users;



(s) "Gas transmission utility" refers to any person that has a franchise to operate or intending
to operate a gas transmission system except own-use pipelines;
(t) "Gathering facilities" refers to natural gas pipelines and related facilities used to gather gas
in the field and bring it to a location for processing or for delivery at an interconnection with
the gas transmission system. The terms" gather" and" gathering" shall be construed
accordingly;
(u) "Infrastructure development period" refers to the period prescribed in Chapter IV of this
Act;
(v) "Joule" refers to the unit of energy or work done when the point of application of a force of
one Newton Is displaced a distance of one meter in the direction of the force. It is also equal
to one wattsecond;
(w) "Large end-user" refers to an end-user whose aggregate annual natural gas consumption
is one thousand (1,000) gigajoules (gross heating value) or greater, as may be determined by
the ERC;
(x) "LNG' refers to liquefied natural gas";
(y) "Natural gas" refers to hydrocarbons, obtained initially from subsurface reservoirs,
primarily methane, which, at atmospheric temperature and pressure, is in a gaseous phase.
The term "natural gas" shall include LNG;
(z) "Permit" refers to an authorization issued by the DOE, initially, for the construction,
operation, expansion and modification of gas transmission systems, gas distribution systems
and for the supply
of natural gas;
(aa) "Person" refers to a natural or juridical person, as the case may be, including the national
and local government of the Republic of the Philippines, its agencies and instrumentalities,
and government-owned and -controlled corporations;
(bb) "Petroleum operations" refers to searching for and obtaining petroleum within the
Philippines through drilling and pressure or suction or the like, and all other operations
incidental thereto. It includes the transportation, storage, handling and sale (whether for
export or for domestic consumption) of petroleum so obtained but does not include any:

(1) transportation of petroleum outside the Philippines:

(2) processing or refining at a refinery; or

(3) any transaction in the products so refined;
(cc) "Philippine Energy Plan" or "PEP" refers to the overall energy program formulated and
updated yearly by the DOE and submitted to Congress pursuant to Republic Act No. 7638,
as amended;
dd) "Service contract" refers to the award granted by the Philippine government to a qualified
person to engage in the exploration, development and utilization of natural resources *rough
joint venture, co-production, production-sharing or other similar arrangement with the State
pursuant to Article XII, Section 2 of the Constitution, including service contracts under
Presidential Decree No. 87, as amended;
(ee) "Supplier" refers to any person authorized by the DOE, initially, to engage in the supply of
natural gas;
(Ef) "Supply" refers to the domestic trading and/ or sale of natural gas for wholesale or retail;
(gg) "Transmission" refers to the transportation of natural gas through a gas transmission
system; and
(hh) "Unbundled service" refers to the pricing of the energy value of natural gas separately
from the rates charged for natural gas transmission or distribution.

CHAPTER II
POWERS AND FUNCTIONS OF THE DOE AND THE ERC

SEC. 5. Powers and Functions of the DOE. - In addition to its existing powers and
functions, the DOE shall have the overall responsibility of supervising and monitoring the
development of the Downstream Natural Gas Industry and regulation of the construction and
operation of natural gas pipelines and related facilities for the transmission, distribution and
supply of natural gas. Towards this end, the DOE shall have the following-powers and
functions:

(a) Prepare and periodically update a Downstream Natural Gas Industry Development Plan


(DNCIDP) and integrate the same into the PEP. The DNCIDP shall consider and integrate the
individual or joint development plans of the Downstream Natural Gas Industry participants
pursuant to this Act, which are submitted to the DOE. Appropriate mechanisms shall be
provided to protect the confidentiality of any information that is commercially or competitively
sensitive. The DOE shall publish an initial draft of the plan and undertake public consultations
thereon prior to its adoption;

(b) Issue permits for the construction, operation and maintenance of pipelines and related
facilities for the transmission, distribution and/or supply of natural gas;

(c) Establish standards setting forth the characteristics for classifying pipeline and pipeline-
related facilities either as gas transmission systems or gas distribution systems. These
characteristics may include both the physical characteristics related to the diameter, size and
pressure of pipeline facilities, and the functional characteristics of such facilities;

(d) Before the end of April of each year, submit to the Office of the President and Congress an
annual report;

(e) Ensure the safety, reliability, quality and security of supply of natural gas. Consistent with
the development of the Downstream Natural Gas Industry, the DOE shall, among others:
(i) Encourage private sector investments in the Downstream Natural Gas Industry and
promote the development of domestic markets for natural gas;
(ii) In consultation with the Downstream Natural Gas Industry participants and other
government agencies, promote a system of incentives to encourage industry
participants, including new producers and end-users, to provide adequate and reliable
supply of natural gas; and
(ii!) Undertake, in coordination with other governmental agencies, as appropriate, an
information campaign to educate the public on the benefits of developing the
Downstream Natural Gas Industry and the potential for utilizing natural gas as a
source of energy.
(f) Within six months from the effectivity of this Act, develop plans and programs to encourage
market development and customer choice;

(g) Within twelve (12) months from the effectivity of this Act, the DOE shall, preparatory to the
holding of public consultations with the Downstream Natural Gas Industry participants, draft
the Gas Transmission and Distribution Codes which shall contain, among others, the
following
(i) Technical performance standards for gas transmission and distribution utilities:
Provided, That in the establishment of the performance standards, the nature and
function of the entities shall be considered; and
(ii) Minimum financial capability standards for gas transmission and distribution utilities:
Provided, That such standards are set to ensure that the Downstream Natural Gas
Industry participants meet the minimum financial standards to protect the public
interest.

Within eighteen (18) months from the effectivity of this Act, the DOE shall, in
consultation with the Downstream Natural Gas Industry participants, issue the final Gas
Transmission and Distribution Codes.

(h) By order, revoke, after due notice and hearing, the permit of any person that fails to
comply with the rules and regulations promulgated pursuant to this Act, the Gas Transmission
Code, the Gas Distribution Code, or any requirement of this Act. The DOE shall allow such
persons sufficient time to remedy the violation of or for an orderly disgorgement, when
applicable, but in no case shall such remediation period exceed twelve (12) months from the
date of issuance of the order;

(i) Encourage private enterprises in the Downstream Natural Gas Industry to broaden their
ownership base and promote widest public ownership thereof;


()) Formulate, in consultation with the Downstream Natural Gas Industry participants, the rules
and regulations as may be necessary to implement the objectives of this Act;

(k) Exercise original and exclusive jurisdiction over all cases contesting permits, nonprice
regulation, fees, fines and penalties imposed by it in the exercise of the abovementioned
powers and functions; and

(I) Exercise such other powers and functions as may be necessary or incidental to attain the
objectives of this Act. Subject to existing rules and regulations, the DOE is hereby authorized
to create offices and appoint personnel thereto as may be necessary to efficiently and
effectively perform its functions as stipulated in this Act.

SEC. 6. Powers and Functions of the ERC. - In addition to its existing powers and
functions, the ERC shall have the sole regulatory responsibility for establishing the rates and
related terms and conditions of service for the transmission, distribution and supply of natural
gas to the extent that such activities are regulated pursuant to the requirements set forth in
this Act. It shall:
(a) Within one year from the effectivity of this Act, promulgate, upon due notice and
public consultation, rules and regulations to promote competition and prohibit/ 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:

(i) Define the relevant product and geographic markets for purposes of
establishing anti-competitive conduct;
(ii) Provide criteria to determine the relevant market structure; and
(iii) Establish the periodic reportorial requirements of the Downstream Natural
Gas Industry participants as may be necessary to enforce the provisions of this
section.
(b) In the public interest, establish and enforce a methodology for setting transmission,
distribution and supply rates, taking into account all relevant Considerations, including
the efficiency or inefficiency of the regulated entities. The rates must be such as to
allow the recovery of just and reasonable costs and a reasonable return to enable the
entity to operate viably. The ERC may, upon due notice and public consultation, adopt
internationally accepted rate setting methodology. The rate setting methodology so
adopted and applied shall promote efficiency and ensure a reasonable price or tariff.
The rates prescribed shall be nondiscriminatory;
(c) Apply administrative procedures that will ensure the constitutional right to due
process;
(d) Before the end of April of each year, submit to the Office of the President of the
Philippines and Congress, copy furnished the DOE, an annual report containing such
matters or cases which have been filed before or referred to it during the preceding
year, the actions and proceedings undertaken and its decision or resolution in each
case. The ERC shall make copies of such report available to any interested party upon
payment of a charge which reflects the printing costs;
(e) Publish in newspapers of general circulation all its decisions involving rates and
anti-competitive cases; and
(f) Exercise such other powers as may be necessary or incidental to attain the
objectives of this Act.

Subject to existing rules and regulations, the ERC is hereby authorized to create
offices and appoint personnel thereto as may be necessary to efficiently and effectively
perform its functions as stipulated in this Act.

CHAPTER III
ORGANIZATION AND OPERATION OF THE DOWNSTREAM
NATURAL GAS INDUSTRY

SEC 7. Organization. - For purposes of this Act, the Downstream Natural Gas Industry shall


be divided into three sectors, namely: transmission of natural gas, distribution of natural gas
and supply of natural gas.

SEC 8. Regulation of Transmission, Distribution and Supply Sectors. - The transmission,
distribution and supply of natural gas are businesses affected with public interest and the
regulation of these businesses as provided for in this Act is hereby deemed necessary in the
public interest.

SEC 9. Franchise Requirement. -
(a) Transmission and distribution of natural gas declared public utility operations. - The
transmission and distribution of natural gas as provided for in this Act are hereby declared to
be public utility operations, requiring a franchise;
(b) Franchise. - Any person that seeks to operate for commercial purposes a gas transmission
system or gas distribution system shall be required to obtain a franchise, any law to the
contrary notwithstanding. The franchise requirement shall apply with respect to all gas
transmission systems and gas distribution systems, regardless of the size or pressure of the
pipeline. The foregoing, notwithstanding, this franchise requirement shall not apply to:
(i) Holders of service contracts which authorizes the construction and operation of
facilities for the transmission of natural gas only to the extent that such facilities are:
(1) for own use;
(2) used to transport natural gas from the point of extraction or production to the
processing or gathering facility; and
(8) used to provide service to existing customers or such person under a gas
supply contract entered into prior to the effectivity of this Act, which gas supply
contract shalll not be affected by the enactment of this Act.

However, the operation of any pipeline facility used to serve or deliver natural
gas to third persons, whether or not such facility was, prior to such operation,
previously utilized only as a gathering facility, shall require a franchise.

(ii) Operators of pipeline facilities to transport natural gas for their own use: Provided,
however, That such operators shall secure a permit from the DOE as provided herein;
and

(iil) Operators of related facilities that are operated independently from the pipeline.
The franchise so granted shall include a provision that shall honor and protect the forty
percent (40%) share of local government units (LGUs) from the proceeds of the gross
collection derived by the national government from its share in any co-production, joint
venture or production-sharing agreement in the utilization and development of the
national wealth within their territorial jurisdiction, pursuant to Article X, Section 7 of the
Constitution and Section 290 of Republic Act No. 7160, otherwise known as the Local
Government Code of 1991, as amended. The share of the LGU concerned shall be
included automatically in the General Appropriations Act following the year the revenue
was generated,

(c) Prior regulatory approvals. -The grantee of such franchise shall also be required to secure
from the DOE a permit as provided herein, and to secure from the appropriate government
agencies all other regulatory approvals, licenses, permits and authorizations applicable to
such grantee under existing laws. The DOE shall not unreasonably withhold or delay the
grant of any permit, and may not reopen any legislative determination in the review and grant
of any franchise.

SEC. 10. Philippine Ownership Requirement. - As required under Article XII, Section 11 of
the Constitution of the Republic of the Philippines, no franchise, certificate, or any other form
of authorization of a public utility shall be granted except to citizens of the Philippines or to-
corporations or associations organized under the laws of the Philippines at least sixty percent
(60%) of whose capital is owned by such citizens.

SEC. 11. Third Party Access. -


(a) Third Party Access Obligation. - Gas transmission systems and gas distribution systems
excluding those constructed and operated for own use or as part of gathering facilities of
service contractors shall be available for nondiscriminatory access by third party users which
may include parties to a service contract, suppliers and customers, with due regard to the
economic viability of the operation of such facilities. Such operators shall negotiate in good
faith with third party users the provisions and terms of access in accordance with the
guidelines to be promulgated by the DOE;

(b) Available Capacity. - Third party access obligations shall apply only to the available
capacity of the gas transmission systems and gas distribution systems as determined by
subtracting from the design capacity of the gas transmission systems and gas distribution
systems the volume of capacity that is:

(i) Used by the owner or operator to serve his own customer; and/ or

(ii) Allocated to third parties under transportation contracts. Nondiscriminatory third
party access shall be available to users by contract with the gas transmission or gas
distribution utility. If the gas transmission or gas distribution utility with available
capacity refuses service to a user or offers discriminatory service, the affected party
may request for the intervention of the ERC. The gas transmission or gas distribution
utility shall be required to file proof that capacity was not available when service was
denied.

Gas transmission utilities shall not be obligated to undertake, nor may the DOE require,
the expansion of an existing gas transmission system to serve additional customers or
the sizing of a gas transmission system for the purpose of increasing capacity to serve
load in excess of the load proposed to be served by the gas transmission ulility.
However, in situations where no entity is interested to build additional transmission
capacity in any franchise area, the DOE may conduct a public bidding and award the
same to the lowest bidder.

(c) Deferment of Third Party Access Obligation. - As may be provided in the permit, the
implementation of third party access to gas transmission systems and gas distribution
systems may be deferred where, upon the determination by the DOE:
(i) It can be demonstrated that such deferment is necessary to enable the efficient
planning of the infrastructure and aggregation of the initial demand necessary to justify
investments in the gas transmission systems and gas distribution systems; or
(ii) Itis in the interest of the customers served by the gas transmission system and gas
distribution system to ensure stability of supply.

In either case, the DOE may not defer implementation of third party access for a period
longer than three years after completion of construction in the case of gas transmission
systems and five years after completion of construction in the case of gas distribution
systems: Provided, however, That the deferment period may be extended on
reasonable grounds.

(d) Approved Access Conditions for Gas Transmission Utilities and Gas Distribution Utilities. -
Prior to the conduct of negotiations with third parties, a gas transmission utility and a gas
distribution utility shall request the DOE to approve its access conditions in accordance with
the third party access guidelines to be promulgated by the DOE in consultation with the
industry participants.

SEC. 12. Environmental Protection. - Gas transmission utilities, gas distribution utilities and
suppliers shall comply with all environmental laws, rules, regulations and standards
promulgated by the Department of Environment and Natural Resources (DENR) and other
appropriate governmental agencies.

CHAPTER IV
NATURAL GAS TRANSMISSION SECTOR


SEC. 13. Permit. No person or entity shall undertake the construction, operation and
maintenance of a natural gas transmission system unless it has secured a franchise:
Provided, however, That for a period not exceeding five years after the effectivity of this Act,
the DOE may issue a provisional permit with a maximum term of two years, renewable twice
for a maximum cumulative term not exceeding six years for the continued operation of a gas
transmission system constructed prior to and in operation as of the date of effectivity of this
‘Act: Provided, further, That during the same period, the DOE may issue a permit for the
expansion, extension or modification of a natural gas transmission system.

The DOE shall issue a public notice of all permit applications and afford interested parties
reasonable opportunity to comment upon such applications. The DOE shall issue a permit
upon its determination that the construction, ownership, control, installation, operation and
maintenance of the gas transmission system would be consistent with; the policy declarations
contained in this Act: Provided, however, That if a permit is sought for new service that would
be provided within the franchise area of a gas distribution utility, the DOE shall consider the
economic effects of granting such a permit upon the gas distribution utility and its customers.

SEC. 14. Terms and Conditions of Permits. - In issuing a permit, the DOE shall have the
power to impose such reasonable terms and conditions as the public interest may require.
‘Among such conditions shall be the requirement that the permit holder complies in full with
the Gas Transmission Code promulgated by the DOE pursuant to Section 5(g) of this Act

SEC. 15. Fees. - The DOE shall have the authority to prescribe and collect fees and charges
relating to the issuance and/ or review of permits, supervision and regulation of gas
transmission systems

SEC. 16. Abandonment of Gas Transmission Systems. - No holder of a permit for the
construction, installation, operation or maintenance of a gas transmission system shall
abandon or withdraw from service any portion of such gas, transmission system without
obtaining prior authorization from the DOE, which determination shall be made within one
hundred eighty (180) days from the filing of the application for abandonment. Such
abandonment shall be done in accordance with existing laws.

SEC. 17. Gas Transmission Code Compliance. - All gas transmission utilities shall ensure
the safety,- reliability, adequacy, security, stability and integrity of their gas transmission
systems in accordance with the technical specifications and performance standards set forth
in the Gas Transmission Code to be promulgated by the DOE. Each gas transmission utility
shall submit to the DOE a statement of its compliance with such technical specifications and
performance standards prescribed in the Gas Transmission Code. Any gas transmission utility
that does not comply with any of the prescribed technical specifications or performance
standards shall include in such statement of compliance an undertaking to comply with said
technical specifications and performance standards within a reasonable time as may be
necessary to ensure safety and reliability, or prevent environmental harm. The DOE shall,
within sixty (60) days upon receipt of such plan, evaluate the same and notify the gas
transmission utility concerned of its decision thereon. Failure to submit a feasible and credible
plan and/ or failure to implement the same shall serve as grounds for the imposition of
appropriate sanctions, fines or penalties pursuant to Section 37 of this Act.

SEC. 18. ERC Rate Regulation of Gas Transmission Utilities. - Gas Transmission Rate.
Except as otherwise provided during the infrastructure development period, the ERC shall
review and approve the rates, charges and other amounts proposed to be charged by the gas
transmission utilities as provided under Section 31 of this Act. Where such rates are
applicable to services provided to captive markets, the ratemaking methodology to be applied
by the ERC shall be based on the principle of full recovery of prudent and reasonable costs
incurred, including a reasonable retum on rate base that is consistent with the
encouragement of private investment and goal of developing a Downstream Natural Gas
Industry infrastructure, or such other principles that will promote the determination of just and
reasonable rates. Where a rate applicant successfully demonstrates that its rates will be


applicable to contestable markets, the ERC shall have the authority to permit negotiated
rates.

CHAPTER VI
DISTRIBUTION SECTOR

SEC. 19. Permit. - No person or entity shall undertake the construction, operation and
maintenance of a natural gas distribution system unless it has secured a franchise: Provided,
however, That for a period not exceeding five years after the effectivity of this Act, the DOE
may issue a provisional permit with a maximum term of two years, renewable twice for a
maximum cumulative term not exceeding six years for the continued operation of a gas
distribution system constructed prior to and in operation as of the date of effectivity of this Act
Provided, further, That during the same period, the DOE may issue a permit for the
expansion, extension or modification of a natural gas distribution system.

The DOE shall issue a public notice of all permit applications and afford interested parties an
opportunity to comment on such applications. The DOE shall issue a permit upon its
determination that the construction, ownership, control, installation, operation and
maintenance of the gas distribution systems would be consistent with the policy declarations
contained in this Act: Provided, however, That if a permit is sought for new service that would
be provided within the franchise area of another gas distribution utility, the DOE shall
consider the economic effects of granting such a permit upon the gas distribution utility and its
customers.

SEC. 20. Terms and Conditions of Permits. - In issuing a permit, the DOE shall have the
power to impose such reasonable term and conditions to a permit as the public interest may
require. Among such conditions shall be the requirement that the permit holder comply in full
with the Gas Distribution Code promulgated by the DOE pursuant to Section 5(g) of this Act.

SEC. 21. Fees. - The DOE shall have the authority to prescribe and collect fees and charges
relating to the issuance and/or review of permits, supervision and regulation of gas
distribution systems.

SEC. 22. Abandonment of Gas Distribution Systems. - No holder of a permit for the
construction, installation, operation or maintenance of a gas distribution system shall abandon
or withdraw from service any portion of such gas distribution system without obtaining prior
authorization from the DOE, which determination shall be made within one hundred eighty
(180) days from the filing of the application for abandonment. Such abandonment shall be
done in accordance with existing laws

SEC 23. Gas Distribution Code Compliance. - All gas distribution utilities shall be required
to ensure and maintain the safety, reliability, adequacy, security, stability and integrity of their
gas distribution systems in accordance with the performance standards set forth in the Gas
Distribution Code to be promulgated by the DOE. Each gas distribution utility shall submit to
the DOE a statement of its compliance with the technical specifications prescribed in the Gas
Distribution Code and the performance standards prescribed in the implementing rules and
regulations promulgated by the DOE pursuant to Section 41 of this Act. A gas distribution
utility that fails to comply with any of the prescribed technical specifications or performance
standards shall include within such statement of compliance a plan for achieving compliance
with the said technical specifications and performance standards within a reasonable time as
may be necessary to ensure safety and reliability, or prevent environmental harm. The DOE
shall, within sixty (60) days from receipt of such plan, evaluate the same and notify the gas
distribution utility concemed of its decision thereon. Failure to submit a feasible and credible
plan and/ or failure to implement the same shall serve as grounds for the imposition of
appropriate sanctions, fines or penalties pursuant to Section 37 of this Act.

SEC 24. Gas Distribution Rate. - Except as provided for during the infrastructure
development period, the distribution rates charged by gas distribution utilities shall be subject
to regulation by the ERC based on the principle of full recovery of prudent and reasonable


economic costs incurred, including a reasonable return on rate base that is consistent with the
encouragement of private investment and goal of developing the Downstream Natural Gas
Industry infrastructure, or such other principles that will promote the determination of just and
reasonable rates by the ERC. Where a rate applicant successfully demonstrates that its rates
will be applicable to contestable markets, the ERC shall have the authority to permit
negotiated rates.

SEC 25. Functions of Gas Distribution Utilities. - All gas distribution utilities shall have the
following functions:

(a) Obligation to provide distribution services and connections to its gas distribution system
for any end-user within the area covered by its permit consistent with the Gas Distribution
Code. Any gas distribution, utility engaged therein shall provide nondiscriminatory access to
its gas distribution system to suppliers and/or end-users entitled to retail access under
Section 28 of Chapter VII of this Act. Any gas distribution utility shall be entitled to impose and
collect from such suppliers and/or end-users distribution charges and connection fees as
approved by the ERC after due notice and hearing;

(b) Ensure the safety, reliability, adequacy, security, stability and integrity of their gas
distribution systems in accordance with the technical specifications and performance
standards set forth in the Gas Distribution Code to be promulgated by the DOE pursuant to
Section 5(g) of this Act. Each gas distribution utility shall submit to the ERC a statement of its
compliance with such technical specifications and performance standards. Any gas
distribution utility that fails to comply with any of the prescribed technical specifications or
performance standards shall include in such statement of, compliance an undertaking to
comply with said technical specifications and performance standards within a reasonable time
as may be necessary to ensure safety and reliability, or prevent environmental harm. The
ERC shall, within sixty (60) days upon receipt of such plan, evaluate the same and notify the
gas distribution utility concemed of its decision thereon. Failure to submit a feasible and
credible plan and/or failure to implement the same shall serve as grounds for the imposition
of appropriate sanctions, fines or penalties pursuant to Section 37 of this Act;

(c) Provide universal service within the area covered by its permit except as provided herein.
Compliance with the universal service obligation shall be addressed as part of the annual
development and maintenance plan of a gas distribution utility. A gas distribution utility shall
be obliged to develop and maintain an efficient system for the distribution of natural gas at the
reasonable request of end-users within its franchise area including:
(i) The installation of pipes where the connection to the end- user is within twenty-five
(25) meters of the gas distribution system; or
(ii) Increasing the capacity of existing gas distribution systems: Provided, however,
That no new service shall be required if such service would not be economically viable.
A determination by a gas distribution utility that it cannot viably serve a portion of its
franchise area shall be subject to review by the ERC upon filing of a complaint by the
requesting end-user.

The obligation of the gas distribution utility to provide universal access involves both an
obligation to connect end-users within twenty-five (25) meters from the main pipeline
and an obligation to supply such end-users, to the extent the distribution utility is the
sole gas supplier. Upon implementation of third party access, the utility shall be
relieved of its obligation to supply end-users eligible for retail access as defined in the
guidelines to be promulgated by the DOE, but not its obligation to provide connection
to its distribution system to such end-users. Whether or not the gas distribution utility is
the sole gas supplier in the area, prices charged by the said utility for the supply of gas
shall be negotiated for the contestable market and regulated by the ERC for the captive
market; and

(d) Submit annually to the ERC its plan for maintaining and developing its gas distribution
system in compliance with the obligations prescribed in this Act


CHAPTER VII
SUPPLY SECTOR

SEC. 26. Permit Requirement. - Any law to the contrary notwithstanding, no person may
engage in any supply activity unless it has obtained a permit from the DOE, initially: Provided,
however, That a gas transmission utility or gas distribution utility that has secured a permit as
such pursuant to Section 9(c) of this Act and that supplies natural gas to its own customers
shall not be required to secure a separate permit to engage in its supply activity. For this
purpose, the DOE shall promulgate rules and regulations prescribing the qualifications of
suppliers which shall include, among other requirements, a demonstration of their technical
capability, financial capability, creditworthiness and compliance with safety standards. The
DOE shall have the authority to require suppliers to furnish a bond or other evidence of their
ability to withstand market disturbances or other events that may increase the cost of
providing service.

SEC. 27. Supplier Rate and Service Regulation. -

(a) The rates and service of suppliers to captive markets shall be regulated by the ERC; and
(b) The rates and service of suppliers to contestable markets shall not be subject to regulation
by the ERC Provided, however, That suppliers shall be subject to the rules and regulations
concerning abuse of market power, cartelization and other anti-competitive or discriminatory
behavior promulgated by the ERC.

(c) The supply of natural gas for electric generation and large end-users is hereby deemed to
be a contestable market. In all other cases, suppliers shall bear the burden of demonstrating
that a market is contestable.

SEC. 28. Conditions for Retail Access to Gas Distribution Systems. - Following the
infrastructure development period, retail access to gas distribution systems shall be available
to large end-users meeting criteria set forth in the rules and regulations promulgated by the
ERC pursuant to this Act. The ERC shall determine when retail access may be available to
other end-users or classes of end-users, giving consideration to relevant factors including
whether such end-users or class of end-users constitute a contestable market-end the
financial consequences of any assets potentially stranded by expanding retail access

CHAPTER VIII
TAXATION

SEC. 29. Taxes. - Gas transmission utilities, gas distribution utilities and suppliers of natural
gas shall be subject to the payment of all taxes, duties, fees or charges and other impositions
under the National Internal Revenue Code (NIRC) of 1997, as amended, and other applicable
laws: Provided, however, That, in recognition of the substantial investments needed for the
construction, operation and maintenance of gas transmission and gas distribution systems,
gas transmission utilities and gas distribution utilities shall, upon prior endorsement by the
DOE and approval by the Board of Investments, be entitled to income tax holiday and such
other incentives granted to pioneer enterprises under the Omnibus Investment Code, as
amended, The commodity price of gas shall be the only component of the gas retail rate
which shall be subject to excise taxes under Republic Act No. 8424, otherwise known as the
Comprehensive Tax Reform Law.

SEC. 30. Withdrawal of Exemptions. - Any law to the contrary notwithstanding, to achieve
the declared policies of this Act, particularly in relation to the promotion of fair and
nondiscriminatory treatment of public and private sector entities in the development of the
Downstream Natural Gas Industry infrastructure, all existing tax exemptions applicable to
persons engaged in the transmission or the distribution of natural gas; insofar as such
exemptions relate to revenues derived from the transmission or the distribution of natural gas,
shall be deemed revoked upon the effectivity of this Act.


CHAPTER IX
RATEMAKING REQUIREMENTS AND PROCEDURES

SEC. 31. Requirements and Procedures of the ERC. - (a) Just and reasonable rates and
charges. - All rates and charges for transmission, distribution or supply of natural gas to the
captive market and all rules and regulations affecting or pertaining to such rates or charges
shall be just and reasonable. Any such rate or charge that is not just and reasonable is hereby
declared to be unlawful;

(b) Undue preferences and unreasonable rates and charges are prohibited. - No gas
transmission utility, gas distribution utility or supplier shall, with respect to the transmission,
distribution or supply of natural gas to the captive market: (1) make or grant any undue
preference or advantage, or (2) maintain any unreasonable difference in rates, charges,
service, facilities, or in any other respect, between locations or between classes of service;

(c) Filing of rate schedules. - Under such rules and regulations as the ERC may prescribe,
after due notice and public consultation, the ERC may require reports or documents from gas
transmission utilities, gas distribution utilities or suppliers to the captive market showing all
rates and charges for the transmission, distribution or supply of natural gas to the captive
market and the classifications, practice and regulations affecting such rates, charges, and
classifications and services: Provided, That the ERC shall provide appropriate mechanisms to
protect the confidentiality of any information that is commercially or competitively sensitive;
and

(d) Changes in rate and charges. - Within thirty (30) days upon filing for an adjustment in
rates, the ERC shall issue an order accepting, rejecting or setting for hearing such
adjustment. The ERC may, upon the filing of an application therefor or at any stage thereafter,
with or without prior hearing, on the basis of supporting papers duly verified or authenticated
and with such notice to the affected parties and opportunity for such parties to make such
submissions as the ERC determines to be appropriate in the circumstances, grant provisional
relief fixing interim rates for the transmission of natural gas or distribution of natural gas or
supply of natural gas to the captive market applicable during the pendency of the hearing on
the application, on motion of a party in the case or on its own initiative, without prejudice to a
final decision after hearing, should the ERC find that the pleadings, together with such
affidavits, documents and other evidences which may be submitted in support of the motion,
substantially support the provisional order. The final order fixing the applicable rates shall
provide for over- or under-recovery of costs occasioned by the application of ERC - approved
interim rates, At any hearing involving rates adjustment, the burden of proof to show that the
increased rates are just and reasonable shall be upon the gas transmission utility, gas
distribution utility or supplier to the captive market.

CHAPTER X
PROMOTION OF COMPETITION

SEC. 32. Anti-Competitive Behavior. - No gas transmission utility, gas distribution utility or
‘supplier, or affiliate thereof, may engage in any anti-competitive behavior or abuse of market
power including, but not limited to:
(a) Agreements, decisions and concerted practices of persons or associations of
persons to fix prices and/ or fix output; and
(b) Other practices and/ or conduct by a person or groups of persons that restrict,
prevent or distort competition such as, but not limited to, predatory pricing and
practices, excessive pricing, bundling and other vertical restraints, denial of access to
essential facilities on fair terms, discriminatory conditions on transactions that restrict,
prevent or distort competition.

SEC 33. Measures to Promote Competition. - Subject to the provisions of relevant laws, the
ERC shall adopt measures and/ or corresponding remedies to promote competition following
an investigation of the relevant circumstances and a definitive finding of:

(a) Price and/ or output fixing; or


(b) Other practices/conduct that are the subject of investigation restrict and/ or prevent
and/ or distort competition.

Such remedies shall, without limitation, include the imposition of price controls,
issuance of injunctions or disgorgement of excess profits and imposition of
administrative fines and penalties pursuant to this Act

SEC 34. Functional and Structural Unbundling. - When prevailing market conditions so
require, any Downstream Natural Gas Industry participant shall functionally and structurally
unbundle its business activities and rates in accordance with the sectors as identified in
Section 7 hereof. The ERC shall ensure full compliance with this provision

SEC 35. Complaint Procedures. - The ERC shall, within one year from the effectivity of this
Act, promulgate rules and regulations providing for a complaint procedure that, without
limitation provides the party alleged to have engaged in anti-competitive or abusive activities
with notice and an opportunity to be heard

SEC 36. Affiliated Suppliers. - In order to prevent anti-competitive conduct, service
contractors, gas transmission utilities and gas distribution utilities that own or control affiliates
that are suppliers shall conduct their business as follows:

(a) No preference will be given to the affiliated supplier over other persons through
contracting for available capacity, scheduling, balancing, curtailment priority or tariffs;

(b) Marketing information provided to the affiliated supplier will be provided to any non-
affiliated supplier that is a competitor or potential competitor;

(c) Employees of the affiliated supplier shall, to the maximum extent possible, function
independently in making business decisions; and

(d) Books of accounts and records of the affiliated supplier shall be maintained separately.

As used herein, “affiliate” refers to any person or entity which, alone or together with any
other person or entity, directly or indirectly, through one or more intermediaries, controls, or is
controlled by another person or entity. As used herein," control" shall mean the power to
direct or cause the direction of the management policies of a person by contract, agency or
otherwise.

SEC. 37. Administrative Fines and Penalties. -

(a) The administrative fines and penalties that may be imposed by the ERC or the DOE, as
the case may be, for any violation of or noncompliance with this Act or its implementing rules
and regulations shall range from a minimum of Fifty thousand pesos (P 50,000.00) to a
maximum of Fifty million pesos (P 50,000,000.00);

(b) Any person who is found to have engaged in any of the prohibited acts pursuant to Section
34 of this Act shall suffer the administrative penalty or fine ranging from Ten thousand pesos
(P 10,000.00) to Ten million pesos (P 10,000.000.00), at the discretion of the ERC or the
DOE, as the case may be;

(c) The members of the board of directors or any person that violates the provisions of this Act
may be fined by an amount not exceeding double the amount of damages caused by the
offender at the discretion of the ERC or the DOE, as the case may be. This rule shall apply to
the members of the Board who, knowingly or by neglect, allow the commission or omission
under the law;

(d) Any party to an administrative proceeding may, at any time, make an offer to the ERC or
the DOE, as the case may be, conditionally or otherwise, for a consent decree, voluntary
compliance or desistance and other settlement of the case. The offer and any or all of the
ultimate facts upon which the offer is based shall be considered for settlement purposes only
and shall not constitute an admission by the party making the offer of any violation of the
laws, rules, regulations, orders and resolutions of the ERC or the DOE, as the case may be,
nor as a waiver to file any warranted criminal actions; and

(e) Congress may, upon recommendation of the ERC or the DOE, as the case may be,
revoke such franchise or privilege granted to the party found in violation of the provisions of


this Act.

CHAPTER XI
ANTI-PILFERAGE AND ANTI-THEFT PROVISIONS

SEC. 38. Pilferage. - It is hereby declared unlawful for any person to:

(a) Tap, make or cause to be made any connection with any gas transmission system or gas
distribution system without previous authority or consent of the gas transmission utility or gas
distribution utility concemned;

(b) Tamper, install or use tampered meters or any other device which interferes with proper or
accurate registry or metering of natural gas flows or otherwise results in its diversion in a
manner whereby natural gas is stolen or wasted;

(c) Damage or destroy any natural gas meter, equipment, pipeline or conduit or any part of a
gas transmission system or gas distribution system or allow any of them to be so damaged or
destroyed as to interfere with the proper or accurate metering of natural gas flows; and

(d) Knowingly use or receive the direct benefit of natural gas delivery service obtained
through any of the acts mentioned in paragraphs (a), (b) and (c) above.

SEC. 39. Theft of Equipment and Materials. - It is hereby declared unlawful for any person
to:

(a) Cut, saw, slice, separate, split, severe, smelt or remove any portion of a gas transmission
system or gas distribution system, including pipeline materials and meters, from any
installation or place of installation or any other place or site where it may be rightfully or
lawtully stored, deposited, kept, stocked, inventoried, situated or located, without the consent
of the gas transmission utility or gas distribution utility concemed, whether or not the act is
done for profit or gain;

(b) Take, carry away or remove or transfer, with or without the use of a motor vehicle or other
means of conveyance, load, carry, ship or move from one place to another, whether by land,
air or sea, any portion of a gas transmission system or gas distribution system, including
pipeline materials or meters, from any installation or place of installation, or any place or site
where it may be rightfully or lawfully stored, deposited, kept, stocked, inventoried, situated or
located without the consent of the gas transmission utility or gas distribution utility concerned,
whether or not the act is done for profit or gain; and

(c)\store, possess or otherwise keep in his premises, custody or control, without lawful
purpose, any portion of a gas transmission system or gas distribution system, including
pipeline materials or meters, without the consent of the gas transmission utility or gas
distribution utility concerned, whether or not the act is done for profit or gain

SEC. 40. Penalties. -

(a) Violation of Section 38. - The penalty of prision mayor or a fine ranging from Ten thousand
pesos (P 10,000.00) to Twenty thousand pesos (20,000.00) or both, at the discretion of the
court, shall be imposed on any person found guilty of violating Section 38 of this Act.

(b) Violation of Section 39. - The penalty of reclusion temporal or a fine ranging from Fifty
thousand pesos (P50,000.00) to One hundred thousand pesos (PI00,000.00) or both, at the
discretion of the court, shall be imposed on any person found guilty of violating Section 39 of
this Act.

(c) Provision common to violations of Sections 38 and 39 hereof. - If the violation of Section
38 or Section 39 of this Act is committed by, or in connivance with, an officer or employee of
the gas transmission utility or gas distribution utility concerned, such officer or employee shall,
upon conviction, be punished with a penalty one degree higher than the penalty provided
herein, and forthwith be dismissed and perpetually disqualified from employment in any public
or private utility or service company and from holding any public office.

If the violation of Section 38 or Section 39 of this Act is committed by a partnership,
firm, corporation, association or any other legal entity, including a government-owned or
-controlled corporation, the penalty shall be imposed on the president, manager and each of


the officers thereof who shall have knowingly permitted, failed to prevent or was otherwise
responsible for the commission of the offense.

CHAPTER XII
FINAL PROVISIONS

SEC 41. Implementing Rules and Regulations. - The DOE shall, in consultation with the
ERC, appropriate government agencies, the Downstream Natural Gas Industry participants,
nongovernmental organizations and end-users, promulgate implementing rules and
regulations (IRR) within six months from the effectivity of this Act

SEC 42. Separability Clause. - If for any reason, any provision of this Act is declared
unconstitutional or invalid, the other parts or provisions hereof which are not affected thereby
shall continue to be in full force and effect.

SEC. 43. Non-retroactivity, Applicability and Repealing Clause. - The provisions of
Republic Act No. 387, otherwise known as the Petroleum Act of 1949, as amended, insofar as
said provisions relate to the transmission and distribution of natural gas by pipeline
concessionaires or other concessionaires, as such terms are defined in the Petroleum Act of
1949, section 11 (b) thereof obligating the Philippine government to grant pipeline concession
for the transmission and distribution of natural gas under specified circumstance, are hereby
repealed or amended. The provision of Presidential Decree 87, as amended, insofar as the
provision thereof relate to the transmission and distribution of natural gas by service
contractors, are hereby amended. All other laws, decrees, executive orders, rules and
regulations, circulars or other governmental issuances referring to the transmission,
distribution, or supply of natural gas, or otherwise authorizing any governmental or other
entity to issue licenses, permits, certificates or other authorization for the transmission,
distribution, or supply of natural gas, are hereby repealed or amended accordingly. Further, all
other laws, decrees, executive orders, rules, regulations, circulars or other governmental
issuances defining the term “Natural Gas” are hereby amended such that the definition of
Natural gas in this Act shall be deemed the definitions of “Natural Gas” for purpose of the said
laws, decrees, executive orders, rules, regulations, circulars or other governmental issuances.
Notwithstanding the foregoing, nothing in this Act shall be deemed to revoke or otherwise
modify existing concession granted under the Petroleum Act of 1949, as amended, certificate
of public convenience or certificate of public convenience and necessity granted pursuant to
the Public Service Law, as amended, specific congressional franchise for the transmission,
distribution or supply of natural gas or other administrative or regulatory permit or contract,
with concession, certificate, franchise, permit or contract be allowed to its full term but may
not be renewed except pursuant to the provisions of this Act.

SEC 44, Effectivity Clause. - This Act shall take effect on the fifteenth (15th) day following its
publication in the Official Gazette and in at least two national newspapers of general
circulation

Approved,