Distribution Sector

Section 1. Guiding Principles

• a) As per Section 22, the Distribution of Electricity to End-users shall be a regulated common carrier business, requiring a national franchise.

“Distribution franchise” is the privilege of a DU to convey electric power through its Distribution System in a given geographical area granted by the Congress of the Republic of the Philippines.

The Distribution of Electricity is a business affected with public interest. (b) The following rules shall apply to the Distribution of Electricity.

Section 2. Scope of Application.

This Rule shall apply to an entity that owns, operates, or Controls one or more Distribution Systems such as but not limited to: (a) ECs; (b) Privately-Owned DUs; (c) Local Government Unit Owned-and-Operated Distribution Systems; (d) Entities duly authorized to operate within the EZs; and (e) Other duly authorized entities engaged in the Distribution of Electricity.

Section 3. Ownership Limitation.

(a) A DU and any of its subsidiaries, Affiliates, stockholders, directors, officers or their relatives within the fourth civil degree of consanguinity or affinity, legitimate or common law, shall not hold any interest, directly or indirectly, in the TRANSCO or its Buyer or Concessionaire, or the IMO. (b) The holdings of any Person, natural or juridical, including its directors, officers, stockholders, and their related interests in a DU and their respective holding companies shall not exceed twenty-five percent (25%) of the total voting shares of stock. This shall not apply to a DU or the company holding the shares or its controlling stockholders whose shares are listed in the PSE.

Implementation of this provision shall be in accordance with the rules and regulations issued by ERC. This section shall not apply to ECs in accordance with Section 28. (c) A DU shall be required to sell to the public a portion of not less than fifteen percent (15%) of its common shares of stock not later than five (5) years from the effectivity, except those DUs or its respective holding companies listed in the PSE, subject to the rules and regulations of the ERC to be issued for this purpose.

Section 4. (a) Obligations of a DU. A DU shall provide distribution services and connections to its systems for any End-user within its Franchise Area consistent with the Distribution Code. Any existing End-user within the Franchise Area of a DU that is connected to TRANSCO facilities shall be served by the franchised Distribution Utility upon acquisition of the subtransmission facilities: Provided, however, That the DU which acquired the subtransmission facilities shall be paid by the End-user the corresponding subtransmission rates or wheeling charge imposed by NAPOCOR in accordance with its contract to the End-user as approved by ERC. (b) A DU shall structurally and functionally unbundle its distribution business activities and rates from its wires, generation and supply businesses. A DU shall comply with Rule 10 on Structural and Functional Unbundling of Electric Power Industry Participants. (c) A DU shall provide open and non-discriminatory access to its Distribution System to all End-users, including Suppliers and Aggregators. (d) A DU shall comply with the technical specifications and financial standards prescribed in the Distribution Code and the performance standards prescribed in these Rules. To this end, ERC shall issue submission requirements for DUs to comply with the technical specifications, financial and the performance standards after the effectivity of these Rules and the Distribution Code. (i) A DU shall submit to ERC a statement of compliance. (ii) A DU that does not comply with the technical specifications, performance standards and financial capability standards as prescribed in the Distribution Code shall submit to ERC a plan to comply within three (3) years therewith. The ERC shall, within sixty (60) days from receipt of such plan, evaluate the same and notify the DU concerned of its action. (iii) A DU is required to implement the ERC- approved plan to comply with the said technical specifications prescribed in the Distribution Code and the performance standards of these Rules within three (3) years from the approval of said plan. (iv) Failure by the DU to submit a feasible and credible plan or failure to implement the same shall serve as ground for the imposition of appropriate sanctions, fines or penalties as may be prescribed by ERC. (e) A DU shall comply with the requirements in the Grid Code, WESM Rules and all applicable laws. (f) A DU shall provide universal service within its Franchise Area, over a reasonable time, including Unviable Areas, as part of its social obligations. This obligation shall be performed in a manner that shall allow such DUs to collect different rates in Unviable Areas to sustain its economic viability, subject to approval by the ERC.

• (g) A DU shall file with the ERC its petition to allow another DU to provide electricity to areas that it does not find viable, pursuant to Section 6 of this Rule.
• h) A DU shall supply electricity in the least cost manner to the Captive Market within its Franchise Area, subject to the collection of Retail Rates duly approved by ERC. (i) A DU shall file for review and approval by the ERC its unbundled rates reflecting the true costs of service pursuant to Rule 15 on Unbundling of Rates, and the proposal for the removal of cross subsidies among the customers it serves pursuant to Rule 16 on Removal of Cross Subsidies. (j) A DU shall file with the ERC its petition on the Lifeline Rate to be applied to its Marginalized End-users, pursuant to Rule 20 on Lifeline Rate. (k) A DU shall recover Stranded Contract Costs under eligible contracts approved by ERB as of 31 December 2000, subject to review by ERC pursuant to Rule 17 on Stranded Debts and Contract Costs Recovery. (l) A DU shall collect on a monthly basis from all End- users a Universal Charge set by ERC, to be remitted to PSALM on or before the fifteenth (15 th ) of the succeeding month, net of any amount due to the DU. (m) A DU shall identify and segregate in its customer billing statements the components of the Retail Rate. (n) A DU shall comply with Rule 11 on Cross Ownership, Market Abuse and Anti-Competitive Behavior. (o) A DU shall file for review and approval by the ERC any changes in the terms and conditions of services to its Franchise Areas. (p) A DU shall prepare and submit to the DOE an annual 5-year distribution development plan not later than the fifteenth (15 th ) of March of every year, for integration with the PDP and PEP. In the case of the ECs, such plans shall be submitted through NEA for review and consolidation. To this end, NEA shall submit to the DOE the National Electric Cooperatives Distribution Development Plan not later than the 15 th of March of every year. (q) A DU shall pay a franchise tax only on its distribution wheeling and Captive Market supply revenues. To this end, the DOF shall issue the necessary guidelines. (r) A DU shall comply with the reportorial requirements as may be prescribed by the ERC and the DOE. Page 30 of 100(s) A DU that fails to comply with any of these obligations shall be subject to fines and penalties as imposed by the ERC.

Section 5. Privileges of a DU

• a) A DU shall be entitled to impose and collect Distribution Wheeling Charges and connection fees, Retail Rates and other charges as approved by the ERC from the End-user and other qualified customers. (b) A DU may exercise the power of eminent domain subject to the requirements of the Constitution and existing laws. (c) A DU may, directly or indirectly, engage in any related business undertaking that maximizes the utilization of its assets: Provided, That quality of service shall not deteriorate pursuant to the standards provided in the Grid Code and Distribution Code and Rule 10 on Structural and Functional Unbundling of Electric Power Industry Participants. To this end, the DU shall submit to the ERC the appropriate documents to effect the following: (i) A portion of the net annual income derived from such undertaking utilizing assets which form part of the rate base shall be used to reduce its Distribution Wheeling Charges: Provided, That, such portion shall not exceed fifty percent (50%) of the net income derived from such undertaking. (ii) Separate accounts shall be maintained for each business undertaking to ensure that the distribution business shall neither subsidize in any way such business undertaking nor encumber its distribution assets in any way to support such business.

Section 6. Provision of Service in Unviable Areas.

• a) Unenergized areas that a DU does not find viable may be transferred to another DU, if any is available, which will provide the service, subject to approval by ERC.

In cases where a DU failed or refused to service any area within its Franchise Area and allows another utility to service the same, the arrangements between the DUs shall not affect their respective Franchise Areas. The ERC shall issue the appropriate guidelines to implement this provision.

• b) In remote and Unviable Areas where the DU is unable to serve for any reason as authorized by ERC in accordance with the Act, the areas shall be opened to other qualified third parties that may provide the service pursuant to Rule 14 on Provision of Electricity by Qualified Third Parties.

Section 7. Structural and Operational Reforms Between and Among DUs.

• a) As per Section 23, the ERC shall issue the appropriate guidelines for the structural and operational reforms of a Distribution Utility. Such reforms shall include, but not limited, to merger, consolidation, integration, bulk procurement and joint ventures. (b) With respect to ECs, the DOE through NEA shall facilitate and encourage reforms in the structure and operations of a Distribution Utility for greater efficiency and lower costs.

• c) As per Section 57, ECs are given the option to convert into Stock Cooperatives under the CDA or Stock Corporations under the Corporation Code. Nothing contained in the Act shall deprive ECs of any privilege or right granted to them under Section 39 of Presidential Decree No. 269, as amended, and other existing laws. The conversion and registration of ECs shall be implemented in the following manner:

  • i) ECs shall, upon approval of a simple majority of the required number of turnout of voters as provided in the Guidelines in the Conduct of Referendum (Guidelines), in a referendum conducted for such purpose, be converted into a Stock Cooperative or Stock Corporation and thereafter shall be governed by the Cooperative Code of the Philippines or the Corporation Code, as the case may be. The NEA, within 6 months from the effectivity of these Rules, shall promulgate the guidelines in accordance with Section 5 of PD 1645.

• ii) ECs converted into Stock Corporations shall be registered with the SEC in accordance with the Corporation Code, while those converted into Stock Cooperatives, shall be registered with the CDA: Provided, however, That the ECs which opt to remain as non-Stock Cooperatives shall continue to be registered with the NEA and shall be governed by the provisions of Presidential Decree No. 269, as amended.

• iii) An EC heretofore converted, regardless of the corporate form, or its successor entity, shall retain its franchise rights: Provided, further, That its operations shall be regulated by the ERC and other Government instrumentalities insofar as practicable and consistent with the Act.

Section 8. Franchise for a DU.

• a) As per Section 27, a franchise to a Person intending to engage in Distribution of Electricity shall be granted exclusively by the Congress of the Philippines.
• b) All existing franchises shall be allowed to their full term.
• c) In the case of ECs, renewals and cancellations of franchise shall remain with the National Electrification Commission (NEC) under the NEA for 5 more years after the effectivity.