CHAPTER II ORGANIZATION AND OPERATION OF THE ELECTRIC POWER

INDUSTRY

SEC. 5. Organization.
The electric power industry is divided into four (4) sectors: generation, transmission,
distribution, and supply.

SEC. 6. Generation Sector

• Objective: Promote open, competitive electricity generation while adhering to health,
safety, and environmental standards.
• Requirement: Generation companies must obtain a Certificate of Compliance from the
ERC before operation. They are exempt from requiring a national franchise.
• Regulation: Financial oversight by ERC ensures no market power abuse. Sales to
distribution utilities are VAT zero-rated to lower electricity costs.

SEC. 7. Transmission Sector

• Objective: Ensure the reliable delivery of electricity through a regulated transmission
system under ERC's jurisdiction.
• Requirement: ERC sets voltage standards to classify transmission and subtransmission
assets.

SEC. 8. Creation of the National Transmission Company (TRANSCO)

• Objective: TRANSCO manages transmission functions, including the operation and
expansion of high-voltage networks.
• Provision: Subtransmission assets are temporarily operated by TRANSCO until transferred
to distribution utilities.

SEC. 9. Functions and Responsibilities of TRANSCO

• Objective: Maintain a secure and efficient nationwide transmission system and provide
equitable access to all electricity users.
• Requirements: Expansion follows the Grid Code and Transmission Development Plan
(TDP). TRANSCO also acts as the grid operator and central dispatcher.

SEC. 10. Corporate Powers of TRANSCO

• Objective: Allow TRANSCO to enter contracts, borrow funds, and operate related
businesses for asset optimization.
• Requirement: Related businesses must maintain separate accounts from transmission
operations.
SEC. 11. TRANSCO Board of Directors
• Objective: Ensure governance through a seven-member board representing government and
regional stakeholders.
• Composition: Includes Secretaries of DOF, DOE, and DENR, the TRANSCO President,
and three regional appointees.

SEC. 12. Powers and Duties of the Board

• Objective: Provide strategic direction and governance for TRANSCO, ensuring its efficient
and effective management.
• Powers:

 Formulate medium- and long-term strategies aligned with TRANSCO's vision and
mission.
 Develop policies for effective management and operations.
 Organize and restructure the organization, including creating or abolishing positions
and determining staffing patterns.
 Fix compensation and benefits for officers and employees, including the President of
TRANSCO.
 Appoint, suspend, or remove corporate officers as necessary.
 Establish guidelines for merit-based employment practices.
 Write off bad debts, notwithstanding contrary provisions of the law.

SEC. 13. Board Meetings

• Objective: Ensure regular and timely decision-making for TRANSCO.
• Provision: Meetings are held as necessary, convened by the Chairman or a majority of
Board members.

SEC. 14. Board Per Diems and Allowances

• Objective: Compensate Board members for their time and participation.
• Provision: Members receive per diems for meetings attended and additional allowances
subject to Department of Finance approval.

SEC. 15. Quorum

• Objective: Define the conditions for valid decision-making by the Board.
• Requirement: A quorum requires at least four members. Decisions require a majority vote
of those present, unless a greater vote is agreed upon.

SEC. 16. Powers of the President of TRANSCO

• Objective: Oversee and execute the day-to-day management of TRANSCO.
• Appointment: The President is appointed by the President of the Philippines and acts as
Chief Executive Officer.
• Duties:

 Implement Board-approved policies and measures.

 Oversee budget preparation and internal administration.
 Delegate administrative duties to subordinate officers as needed.
 Appoint, compensate, and discipline subordinate officials and employees following
Board guidelines.
 Submit annual activity reports to the Board and other government agencies.
 Represent TRANSCO in dealings with government agencies and private or public
entities.
 Perform other duties assigned by the Board.

SEC. 17. Exemption from Salary Standardization Law

• Objective: Enable competitive compensation for TRANSCO employees.
• Provision: Salaries are exempt from RA 6758 and determined by the Board.

SEC. 20. TRANSCO Related Businesses

• Objective: Leverage assets for additional revenue to lower transmission rates.
• Requirement: At least 50% of net income from related businesses must reduce
transmission charges.

SEC. 21. TRANSCO Privatization

• Objective: Facilitate privatization of TRANSCO through asset sale or concession contracts.
• Requirement: Concessionaires must comply with technical and financial qualifications and
operate under the Grid Code.

SEC. 22. Distribution Sector

• Objective: Regulate electricity distribution through licensed utilities, ensuring equitable
service delivery.
• Requirement: Distribution utilities must meet ERC performance standards and provide
non-discriminatory access.

SEC. 23. Functions of Distribution Utilities

• Objective: Ensure efficient electricity supply and universal access, especially in unviable
areas.
• Requirement: Utilities must submit development plans to DOE and implement operational
reforms for efficiency.
SEC. 24. Distribution Wheeling Charge
 Objective: Distribution utilities must file their distribution wheeling charges with the Energy
Regulatory Commission (ERC) for approval, ensuring that the charges are fair and reasonable.

SEC. 25. Retail Rate

 Objective: The retail rates for electricity charged by distribution utilities in their captive market are
regulated by the ERC based on full recovery of reasonable and prudent costs, ensuring efficiency and
transparency.
 Requirement: Distribution utilities must break down and identify the components of the retail rate in
their bills to end-users.

SEC. 26. Distribution Related Businesses

 Objective: Distribution utilities may engage in related businesses that optimize the use of their assets.
However, the income from these businesses must be used to reduce distribution wheeling charges,
capped at 50% of the net income derived from such activities.
 Requirement: Utilities must maintain separate accounts for each business to prevent cross-
subsidization.

SEC. 27. Franchising Power in the Electric Power Sector

 Objective: The Philippine Congress holds exclusive power to grant franchises for electricity
transmission and distribution, repealing any inconsistent laws.
 Provision for Electric Cooperatives: Electric cooperatives will continue to have their franchises
managed by the National Electrification Commission (NEC) for five more years after the enactment
of this law.

SEC. 28. De-Monopolization and Shareholding Dispersal

 Objective: To promote the dispersal of ownership and prevent monopolies in the electric power sector,
no person or entity may hold more than 25% of voting shares in a distribution utility, unless it is listed
on the Philippine Stock Exchange (PSE).
 Specifics for Small Utilities: Small utilities (with a peak demand of 10 MW or less) must list on the
PSE within five years of this Act’s enactment if they are controlled by a single entity.
 Electric Cooperatives: This provision does not apply to electric cooperatives.

SEC. 29. Supply Sector

 Objective: Suppliers of electricity to the contestable market (those allowed to choose their suppliers)
must obtain a license from the ERC.
 Pricing: Pricing for the supply of electricity in the contestable market is not regulated by the ERC, but
suppliers must follow rules against anti-competitive behavior.
 Billing Transparency: Suppliers must identify and segregate the components of their charges in their
bills to end-users.

SEC. 30. Wholesale Electricity Spot Market (WESM)

 Objective: Establish a Wholesale Electricity Spot Market within one year of the Act’s effectivity,
where prices are determined by market conditions for electricity transactions not covered by bilateral
contracts.
 Rules and Operation: The Department of Energy (DOE), with industry participants, will create
detailed rules for the market's operation, which will be implemented by a market operator under DOE’s
supervision initially.

SEC. 31. Retail Competition and Open Access

 Objective: Implements retail competition and open access, allowing consumers with a monthly
peak demand of at least 1 MW to choose their electricity supplier.
 Gradual Rollout: After two years, the threshold will decrease to 750 kW, and over time, it will be
expanded to include households.
 Electric Cooperatives: Retail competition for cooperatives will begin five years after the Act’s
enactment.

SEC. 32. NPC Stranded Debt and Contract Cost Recovery

  Objective: The National Power Corporation (NPC) will recover stranded debts and stranded
contract costs. The government will assume up to ₱200 billion of NPC’s obligations.
 Recovery Process: The ERC will oversee the recovery process for stranded debts and contract costs,
which will be paid by consumers over 15-25 years.

SEC. 33. Distribution Utilities Stranded Contract Costs Recovery

 Objective: Allows distribution utilities to recover stranded contract costs (excess costs of electricity
contracts). The ERC will review these costs and approve recovery methods, ensuring they are
reasonable.
 Mitigation: Utilities must take steps to mitigate stranded costs, such as renegotiating contracts with
Independent Power Producers (IPPs).

SEC. 34. Universal Charge

 Objective: A universal charge will be levied on all electricity end-users for the following purposes:
o Payment for stranded debts and contract costs of NPC and distribution utilities.
o Missionary electrification in remote areas.
o Equalizing taxes and royalties for indigenous vs. imported energy sources.
o Environmental charge for watershed management.
o Cross-subsidies for up to three years.
 Collection and Management: The charge is non-bypassable and must be collected monthly by
distribution utilities, with the funds administered by PSALM Corporation.

SEC. 35. Royalties, Returns, and Tax Rates for Indigenous Energy Resources
 Objective: The President is authorized to reduce royalties, returns, and taxes on indigenous energy
resources (e.g., geothermal, natural gas) to align them with the tax rates for imported energy fuels (e.g.,
coal, crude oil).
 Effect: The ERC will reduce the electricity rates from indigenous sources to benefit end-users.

SEC. 36. Unbundling of Rates and Functions

 Objective: Requires NPC and distribution utilities to file unbundled rates with the ERC, separating
charges for generation, transmission, and distribution to reflect the actual costs of each service.
 Cross-subsidies: The unbundling will eliminate inter-grid and inter-class subsidies, ensuring fair and
transparent pricing.