Retail Competition and Open Access

Section 31. Retail Competition and Open Access

Retail competition and open access on distribution wires shall be implemented not later than 3 years upon the effectivity of this Act, subject to the following conditions:

• Establishment of WESM
• Approval of unbundled transmission and distribution wheeling charges
• Initial implementation of the cross subsidy removal scheme
• Privatization of at least 70% of the total capacity of generating assets of NAPOCOR in Luzon and Visayas
• Transfer of the management and control of at least 70% of the total energy output of power plants under contract with NAPOCOR 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 1MW for the preceding 12 months to be the contestable market.

2 years afterwards, the threshold level for the contestable market shall be reduced to 750kW.

At this level, aggregators shall be allowed to supply electricity to end-users whose aggregate demand within a contiguous area is at least 750kW.

The ERC shall gradually reduce the 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 5 years upon the effectivity of this Act.

Section 32. NAPOCOR Stranded Debt and Contract Cost Recovery

Stranded debt of NAPOCOR are its unpaid financial obligations.

Stranded contract costs of NAPOCOR are the excess of the contracted cost of electricity under eligible IPP contracts of NAPOCOR over the actual selling price of the contracted energy output of such contracts in the market.

Such contracts shall have been approved by the ERB as of December 31, 2000.

The government shall directly assume up to 200b pesos of NAPOCOR debt.

The ERC shall verify the reasonable amounts and determine the manner and duration for the full recovery of stranded debt and 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.

The ERC shall, at the end of the first year of the implementation of stranded cost recovery and every year thereafter, conducts a review to determine whether there is under-recovery or over-recovery and adjust (tune-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.

Section 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 NAPOCOR at the time they were contracted. The ERC shall take into consideration all factors that affect the total cost of NAPOCOR IPP generation projects, including direct or indirect subsidies or incentives provided by the Government.

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 (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.

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 this account shall be used to reduce the electricity rates to the end-users.

Section 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 NAPOCOR and as well as qualified stranded contract costs of distribution utilities resulting from the restructuring of the industry;
• 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 (P0.0025/kWh), which shall accrue to an environmental fund to be used solely for watershed rehabilitation and management. Said fund shall be managed by NAPOCOR under existing arrangements
• 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-bypassable 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 (15 th ) 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.

PSALM will administer the fund as the Special Trust Fund. This 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.

Section 35. Royalties, Returns and Tax Rates for Indigenous Energy Resources

The provisions of Section 79 of Commonwealth Act No. 137 (C.A. No. 137) and any law to the contrary notwithstanding, the President of the Philippines shall reduce the royalties, returns and taxes collected for the exploitation of all indigenous sources of energy, including but not limited to, natural gas and geothermal steam, so as to effect parity of tax treatment with the existing rates for imported coal, crude oil, bunker fuel and other imported fuels.

To ensure lower rates for end-users, the ERC shall forthwith reduce the rates of power from all indigenous sources of energy.

Section 36. Unbundling of Rates and Functions

Within six (6) months from the effectivity of this Act, NAPOCOR shall file with the ERC its revised rates. The rates of NAPOCOR shall be unbundled between transmission and generation rates and the rates shall reflect the respective costs of providing each service.

Inter-grid and intra-grid cross subsidies for both the transmission and the generation rates shall be removed in accordance with this Act.

Within six (6) months from the effectivity of this Act, each distribution utility shall file its revised rates for the approval by the ERC. The distribution wheeling charge shall be unbundled from the retail rate and the rates shall reflect the respective costs of providing each service. For both the distribution retail wheeling and supplier’s charges, inter-class subsidies shall be removed in accordance with this Act.

Within six (6) months from the date of submission of revised rates by NAPOCOR and each distribution utility, the ERC shall notify the entities of their approval.

Any electric power industry participant shall functionally and structurally unbundle its business activities and rates in accordance with the sectors as identified in Section 5 hereof. The ERC shall ensure full compliance with this provision.