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COVER SHEET
S.E.C. Registration Number
P H I N M A E N E R G Y C O R P O R A T I O N A N D
S U B S I D I A R I E S
(Company’s Full Name)
L E V E L 1 1 P H I N M A P L A Z A 3 9 P L A Z A
D R I V E R O C K W E L L C E N T E R M A K A T I (Business address: No. Street City / Town / Province)
ATTY. ALAN T. ASCALON Contact Person Company Telephone Number
1 2 3 1 1 7 - A (^0 4 1 ) Month Day FORM TYPE Month Day
Fiscal Year Annual Meeting
Not Applicable (Secondary License Type, If Applicable)
Dept. Requiring this Doc. Amended Articles Number/Section
Total Amount of Borrowings 3,191 - -
Total No. of Stockholders Domestic Foreign
----------------------------------------------------------------------------------------------------------------------------------------------------------- To be accomplished by SEC Personnel concerned
File Number LCU
Document ID CASHIER
S T A M P S
Remarks: Please use BLACK ink for scanning purposes.
SEC Number 39274
File Number
PHINMA ENERGY CORPORATION
(formerly Trans-Asia Oil and Energy Development Corporation)
(Company’s Full Name)
Level 11 Phinma Plaza, 39 Plaza Drive, Rockwell Center, Makati City
(Company’s Address)
(Telephone Number)
2018 December 31
(Fiscal Year ending) (month & day)
17-A
(Form Type)
______________________________________________________________
Amendment Designation (If Applicable)
December 2018
(Period Ended Date)
______________________________________________________________
(Secondary License Type and File Number)
- State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within sixty (60) days prior to the date of filing. If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided the assumptions are set forth in this Form.
N/A
- Check whether the issuer has filed all documents and reports required to be filed by Section 17 of the Code subsequent to the distribution of securities under a plan confirmed by a court or the Commission.
N/A
TABLE OF CONTENTS
Page No.
PART I BUSINESS AND GENERAL INFORMATION
Item 1 Business 1
Item 2 Properties 37
Item 3 Legal Proceedings 38
Item 4 Submission of Matters to a Vote of Security Holders 45
PART II FINANCIAL INFORMATION
Item 5 Market for Issuer's Common Equity and Related
Stockholder Matters 46
Item 6 Management's Discussion and Analysis or Plan of Operation 49
Item 7 Financial Statements 59
Item 8 Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 59
PART III CONTROL AND COMPENSATION INFORMATION
Item 9 Directors and Executive Officers of the Issuer 60
Item 10 Executive Compensation 69
Item 11 Security Ownership of Certain Beneficial Owners
and Management 73
Item 12 Certain Relationships and Related Transactions 74
PART IV CORPORATE GOVERNANCE
Item 13 Corporate Governance 79
PART V EXHIBITS AND SCHEDULES
Item 14 Exhibits and Reports on SEC Form 17-C 80
SIGNATURES 95
Aside from the WESM, the Company also sourced electricity from contracted capacities with KEPCO SPC Power Corporation. In 2018, the Company’s total generation capacity was 644. megawatts (MW) from 639.4 MW in 2017.
The Company does not have any foreign sales.
Transactions With and Dependence on Related Parties
PHINMA Power Generation Corporation (PPGC)
On April 10, 2014, PHINMA Power Generation Corporation (“PPGC”), formerly Trans-Asia Power Generation Corporation, purchased the shares of One Subic Power Generation Corp. (“OSPGC”), the lessee and operator of the 116 MW Subic Diesel Generator Power Plant (the “Subic Power Plant”). OSPGC has an existing Power Administration and Management Agreement (PAMA) with PHINMA Energy under which PHINMA Energy is given the right to administer and manage the net output of the Subic Power Plant in consideration of energy fees to be paid by PHINMA Energy to OSPGC. The Agreement commenced on December 26, 2012 and shall be effective throughout the term of the lease of the Subic Power Plant from the owner, Subic Bay Metropolitan Authority (SBMA).
The acquisition of OSPGC expanded PPGC’s existing generation portfolio, adding to the 52MW Bunker C-Fired power plant in Bulacan serving Holcim’s cement plant.
On June 2, 2017, the SEC approved the amendment of the company’s Articles of Incorporation which changed its name from Trans-Asia Power Generation Corporation to PHINMA Power Generation Corporation.
In 2018, PPGC generated 53 GWh of electricity.
CIP II Power Corporation (CIPP)
In December 2010, CIP II Power Corporation’s (“CIPP”) Board of Directors approved the transfer of its power plant from Laguna to Bacnotan, La Union, adjacent to the Holcim Cement Plant. Actual groundbreaking began on April 2011. The Plant was commissioned on December 21, 2012 and commenced commercial operations in January
The new location of the Plant not only allowed it to serve the requirements of the adjacent Holcim cement plant, but also to sell power to the WESM and PHINMA Energy, with the total energy sales of CIPP reaching 10.50 GWh for the period January to June
- Thereafter, CIPP and PHINMA Energy entered into a PAMA, where PHINMA Energy pays CIPP energy fees for its entire capacity.
In 2018, CIPP produced 11 GWh of electricity.
Guimaras Power Plant (GPP)
PHINMA Energy had an Electricity Supply Agreement (ESA) with Guimaras Electric Cooperative Inc. (GUIMELCO) which was signed on November 12, 2003 and subsequently amended on July 26, 2004 and renewed on March 27, 2015. Under the ESA, PHINMA Energy agreed to construct, operate and maintain a 3.4MW bunker Coal fired power plant in Guimaras. The power plant sells electricity primarily to GUIMELCO at the rate approved by the Energy Regulatory Commission (ERC). Installation of the power plant and construction of related facilities were completed in February 2005. Commercial operations commenced on June 26, 2005.
On April 29, 2016, GUIMELCO and the Corporation filed a joint application for approval of the Contract for the Sale of Electricity (CSE) between GUIMELCO and the Corporation with the ERC. Until the CSE is approved by the ERC, the 3.4MW Guimaras Power Plant (“GPP”) has yet to supply power to GUIMELCO. However, the Company supplied peaking power to GUIMELCO on a limited basis, upon the request of GUIMELCO and the local government.
On December 27, 2017, Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN Law) was signed into law. The TRAIN Law, includes, among others, the inclusion of additional excise taxes on fuel. The TRAIN Law modifies the fuel computation and electricity fee structure under the CSE, which would result to GUIMELCO shouldering additional and increased electricity fees and the need for the conduct of another Competitive Selection Process and re-application with the ERC. Thus, on March 21, 2018, the parties executed a Termination Agreement, which terminated the CSE.
The Corporation has decided to close the Power Plant effective June 1, 2018 due to the termination of the CSE with GUIMELCO.
In 2018, a total of 2 GWh of electricity was sold to GUIMELCO.
South Luzon Thermal Energy Corporation (SLTEC)
South Luzon Thermal Energy Corporation (“SLTEC”) is a joint venture between the Company, AC Energy Holdings, Inc.of the Ayala group, and Axia Power Holdings Corporation of the Marubeni group. PHINMA Energy is the largest shareholder in SLTEC with a 45% interest, followed by Ayala with 35%, and Marubeni with 20%.
SLTEC provides reliable baseload power from its 2 x 135MW Coal-fired Power Plant in Calaca, Batangas utilizing cleaner coal technology herein referred to as Circulating Fluidized Bed (CFB) for negligible emissions and minimal environmental impact.
The construction, testing and commissioning of the 1st^ unit of SLTEC CFB Coal- fired Power Plant was completed during the 1st half of 2015. Commercial operations was achieved by April 24, 2015, in time for the summer months with historical peaks for heightened demand and tight supply. The 2nd^ unit started its commercial operations in February 21, 2016.
SLTEC experienced a significant setback with the shutdown of Unit 2 beginning June 2018 due to turbine technical issues. Coming from a total plant blackout due to grid failure, the unit failed to start after several attempts. With Unit 2 out of service for the rest of the year, gross generation fell by 31% to 1,400 GWh.
Maibarara Geothermal, Inc. (MGI)
Maibarara Geothermal, Inc. (“MGI”), a joint venture between PetroGreen Energy Corporation (65%), PNOC Renewable Corporation (10%), and the Company (25%), was incorporated and registered with the SEC on August 11, 2010. It is currently operating a 20 MW geothermal plant in the Maibarara geothermal field in Santo Tomas, Batangas, which commenced commercial operations in February 2014. The field was discovered by Philippine Geothermal, Inc. in the 1980s. MGI is the first renewable energy undertaking to be declared commercial by the government under the Renewable Energy Act of 2008.
In March 2018, MGI began commercial operation of the 12 MW Line 2 expansion of its geothermal plant. The new line was successfully synchronized to the Luzon grid on March 9, 2018, marking its first export of power to the grid.
Power Barge 101, 102 and 103
The Company executed a deed of sale on 12 August 2015 to finalize the sale and transfer of Power Barges 101, 102, and 103, from the Power Sector Assets and Liabilities Management (PSALM) Corporation, for a purchase price of P420 million. PB 101 and PB 102, located in Barrio Obrero, Iloilo City , declared commercial operations in February 2016. The Company entered into an Ancillary Services Procurement Agreement with the National Grid Corporation of the Philippines (NGCP) which was recently approved by the ERC. PB 103 is currently located in a Cebu and has not started commercial operations yet.
In 2018, PB 101 and 102 produced 11 GWh of electricity.
Electricity Supply Business
Aside from contracting its own capacities as well as purchasing power from other suppliers, the Company also engages in electricity trading which revolves around buying electricity from and selling electricity to the WESM.
The Company has been buying from the WESM to supply all or a portion of its customers’ electricity supply requirements. When prices are lower at the WESM than its own cost of generation, the Company purchases power from the spot market and sells it to its customer at an agreed price stipulated in their bilateral contracts. On the other hand, if WESM prices are higher than own plants’ cost of generation, and it has excess generating capacity, it sells power to the WESM.
Trading revenues have been a source of revenue for the Company since 2008. The Company’s management believes that the electricity supply business will continue to represent a major portion of the Company’s revenues for the foreseeable future. The Company’s management believes that its ownership of its generation plants and electricity supply agreements assures the Company of a reasonable off take volume and price, and presents the Company with opportunities to realize gains from electricity trading and bilateral contracts.
Future Projects
Solar Energy
PHINMA Energy continued to develop both grid-connected and off-grid solar projects last year. In 2018, the company completed technical and feasibility studies and received necessary permits for a 45MW solar service contract in Padre Garcia, Batangas. Aside from this, pre-development activities such as yield assessment, environmental impact study and system impact study are underway and are expected to be completed within the year for the 45MW solar service contract in Bugallon, Pangasinan.
PHINMA sister company Union Galvasteel Corporation also formally joined PHINMA Energy in 2018 as a 50% partner in PHINMA Solar Energy Corporation, a joint venture developing smaller scale rooftop solar products. In late 2018, PHINMA Solar completed its first solar rooftop installation for affiliate PHINMA - Cagayan de Oro College. Several more solar projects for PHINMA affiliates, such as PHINMA University of Pangasinan and the PHINMA Amihan Center for Renewable Energy at the San Lorenzo Wind Farm, external customers were subsequently completed in early 2019.
Wind Energy PHINMA R.E. is currently in advanced stages of development of another 40MW wind farm in Guimaras and is also in the early stages of development of a 150MW wind farm in Cagayan. The Company also plans to begin initial assessment this year on three more wind service contracts around the country with a combined total capacity of 140MW.
Distribution of Product
Electricity sales have been sold at the prevailing ERC approved rates for electric cooperatives and at market-determined prices for bilateral contracts. The WESM is another default market where electricity purchases are settled based on market or spot rates. Delivery of the product are coursed through transmission lines currently owned by NGCP and to a certain extent, the electric cooperatives and distribution utilities in exchange for wheeling charges.
Competition
PHINMA Energy’s GPP, PPGC, CIPP and OSPGC compete with other power generating companies in supplying power to the Company's customers. With the full implementation of the Electric Power Industry Reform Act (EPIRA) and its purpose of establishing a transparent and efficient electricity market via more competition, a substantial number of the Company's customers may choose to buy power from third party suppliers. In addition, the implementation of open access could have a material adverse impact to the Company's results of operations and financial condition.
The move towards a more competitive environment, as set forth by EPIRA, could result in the emergence of new and numerous competitors. There will be some competitors that may have a competitive advantage over the Company due to greater financial resources, more extensive operational experience, and thus be more successful than the Company in acquiring existing power generation facilities or in obtaining financing for and the construction of new power generation facilities.
The power generation facilities of GPP, PPGC, CIPP and OSPGC operate on diesel and bunker fuel. While these are more reliable than hydroelectric plants, their high cost of electricity production render these less competitive to baseload plants such as coal, geothermal and natural gas facilities of its competitors. In addition, R.A. 10963 or the TRAIN Law increased the excise tax rates of lubricating oil, diesel fuel and bunker fuel oil, among others, that are used for the power plants, may have material impact to the operations of the Company.
To manage this, the Company and its power generating units constantly monitor the trends in the global oil market. It increases fuel inventory when prices are forecasted to increase to mitigate and manage cost. The Company is also looking into other projects that can reduce cost of inputs and produce electricity in a more competitive manner. For these projects, the Company has maintained healthy liquidity and credit ratios.
Dependence on Suppliers
Disruptions in the supply of fuel could result to substantial reduction in production or increased operating cost, and may have adverse effects on the Company’s financial performance and financial position. Any delay in fuel deliveries or disruptions in fuel supply may also result in unplanned plant shutdowns. In 2018, the Company purchased Bunker C fuel for its power generation business from reliable suppliers SL Harbor Bulk Terminal Corporation and PTT Philippines Corporation to limit its dependence on a single supplier.
To avoid disruptions in fuel supply, long term contracts with the fuel suppliers were executed. In case of temporary fuel shortage along the supply chain, the oil companies will prioritize deliveries to the Company’s plants.
In the event of force majeure events, however, everyone including the Company will be adversely affected. To mitigate this risk, the Company executes long term fuel supply contracts, and maintains safe and strategic inventory levels of fuel to ensure continuous electricity production. Furthermore, if any of the major suppliers fails to deliver, the Company may buy fuel from other vendors. With the establishment of good relationships with other fuel suppliers, PHINMA Energy can also obtain competitive alternative sources and arrange for the timely delivery of fuel.
Product and Distribution
The principal products of petroleum production are crude oil and natural gas. Crude oil is usually sold at market price in its natural state at the wellhead after removal of water and sediments, if any. Depending on the location of the oil field, the oil produced may be transported via offshore tankers and/or pipeline to the refinery. On the other hand, natural gas may be flared, reinjected to the reservoir for pressure maintenance, or sold, depending on the volume of reserves and other considerations. Natural gas is commonly transported by pipeline. However, if the deposit is very large and the market is overseas, the gas may be liquefied into liquefied natural gas (LNG) and transported using specialized tankers.
Competition
While competition for market of petroleum does not have a significant bearing in the operations of the Company, PHINMA Energy’s competitors compete on two fronts, namely: 1) petroleum acreage and 2) investment capital.
DOE awards petroleum contracts to technically and financially capable companies on a competitive bidding basis. Thus, the Company competes with foreign firms and local exploration companies such as PNOC Exploration Corporation, The Philodrill Corporation, Oriental Petroleum and Minerals Corporation, and Petroenergy Resources Corporation for acquisition of prospective blocks. While there is competition in the acquisition of exploration rights, the huge financial commitments associated therewith also provide opportunities for partnership, especially between local and foreign companies. Under a service contract, a substantial financial incentive is given to consortia with at least 15% aggregate Filipino equity. Thus, many foreign firms invite local exploration companies to join their venture to take advantage of said benefit and vice versa.
PHINMA Energy and other listed companies also compete for risk capital in the securities market. This may be in the form of initial public offerings, rights offerings, upward change in capitalization and other vehicles. These domestic companies may also seek full or partial funding of projects from foreign companies through farm-out of interest (dilution of equity in exchange for payment of certain financial obligations).
PHINMA Energy is a recognized player in the local petroleum industry. The Company is comparatively financially robust and has low level of debt. The technical expertise of its staff is recognized by its foreign partners and the DOE. In view of these strengths, PHINMA Energy remains a significant competitor in the local exploration and production industry.
Regulatory Framework
The Company’s petroleum and mineral exploration business is subject to the following laws, rules and regulations:
P.D. 87, as amended, or The Oil Exploration and Development Act of 1972
P.D. 87, as amended, declares that the policy of the State is to hasten the discovery and production of indigenous petroleum through utilization of government and/or private resources, local and foreign, under arrangements calculated to yield maximum benefit to the Filipino people and revenues to the Philippine government and to assure just returns to participating private enterprises, particularly those that will provide services, financing, and technology and fully assume all exploration risks. The government may undertake petroleum exploration and production or may indirectly undertake the same through Service Contracts. Under a service contract, service and technology are furnished by a contractor for which it would be entitled to a service fee of up to 40%
of net production proceeds. Where the Government is unable to finance petroleum exploration or in order to induce the contractor to exert maximum efforts to discover and produce petroleum, the service contract would stipulate that, if the contractor furnishes service, technology and financing, the proceeds of the sale of the petroleum produced under the service contract would be the source of payment of the service fee and the operating expenses due the contractor. Operating expenses are deductible up to 70% of gross production proceeds. If, in any year, the operating expenses exceed 70% of gross proceeds from production, the unrecovered expenses may be recovered from the operations of succeeding years. Intangible exploration costs may be reimbursed in full, while tangible exploration costs (such as capital expenditures and other recoverable capital assets) are to be depreciated for a period of five (5) or ten (10) years. Any interest or other consideration paid for any financing approved by the Government for petroleum development and production would be reimbursed to the extent of 2/3 of the amount, except interest on loans or indebtedness incurred to finance petroleum exploration.
Aside from reimbursing its operating expenses, a contractor with at least 15% Filipino participation is allowed to recover a Filipino participation incentive allowance equivalent to a maximum of 7.5 % of the gross proceeds from the crude oil produced in the contract area. Incentives to service contractors include (i) exemption from all taxes except income tax which is paid out of Government's share, (ii) exemption from all taxes and duties on importation of machinery, equipment, spare parts and materials for petroleum operations, (iii) repatriation of investments and profits and (iv) free market determination of crude oil prices. Finally, a subcontractor is subject to special income tax rate of eight percent (8%) of gross Philippine income while foreign employees of the service contractor and the subcontractor are subject to a special tax rate of 15 % on their Philippine income.
A service contract has a maximum exploration period of 10 years and a maximum development and production period of 40 years. Signature bonus, discovery bonus, production bonus, development allowance and training allowance are payable to the Government. Other pertinent laws and issuances include P.D. 1857, a law amending certain sections of P.D. 87, as amended, offering improved fiscal and contractual terms to service contractors with special reference to deepwater oil exploration; DOE Circular No. 2009-04-0004, a circular that establishes the procedures for the Philippine Contracting Rounds; DOE Circular No. 2003-05-006, a circular that provides the guidelines to the financial and technical capabilities of a viable petroleum exploration and production company; Executive Order No. 66 issued in 2002 which designated the DOE as the lead government agency in developing the natural gas industry; and DOE Circular 2002-08-005, a circular setting the interim rules and regulations governing the transmission, distribution and supply of natural gas.
Under P.D. 87, as amended, every service contractor that produces petroleum is authorized to dispose of same either domestically or internationally, subject to supplying the domestic requirements of the country on a pro-rata basis. There is a ready market for oil produced locally inasmuch as imported oil which comprised about 34 % of the Philippines’ primary energy mix in year
- Heavy dependence on foreign oil supply is not expected to change significantly over the next 10 years. On a case to case basis, the Government has allowed the export of locally produced crude oil in the past. The domestic natural gas industry is at the nascent stage, with supply coming from a single offshore field. Domestic gas production accounted for about seven percent (7%) of the country’s primary energy mix in year 2010. The Government is actively promoting the use of natural gas for power, industry, commercial and transport applications, owing to environmental considerations and the need to diversify energy supply.
R.A. 8371 or The Indigenous Peoples’ Rights Act of 1997
R.A. 8371 or “The Indigenous Peoples’ Rights Act of 1997” requires the free and prior informed consent of IPs who will be affected by any resource exploration. Under the IPRA, IPs is granted certain preferential rights to their ancestral domains and all resources found therein. Ancestral domains are defined as areas generally belonging to IPs, subject to property rights within ancestral domains already existing or vested upon the effectivity of the IPRA, comprising lands, inland waters, coastal areas, and natural resources, held under a claim of ownership, occupied or
and the community’s welfare. An entity that complies with the EIS System is issued an Environmental Compliance Certificate (ECC), which is a document certifying that, based on the representations of the project proponent, the proposed project or undertaking will not cause significant negative environmental impacts and that the project proponent has complied with all the requirements of the EIS System.
To strengthen the implementation of the EIS System, Administrative Order No. (“AO”) 42 was issued by the Office of the President of the Philippines in 2002. It provided for the streamlining of the ECC application processing and approval procedures. Pursuant to AO 42, the DENR promulgated DENR AO 2003-30, also known as the Implementing Rules and Regulations for the Philippine EIS System (“IRR”), in 2003.
Under the IRR, in general, only projects that pose potential significant impact to the environment would be required to secure ECCs. In determining the scope of the EIS System, two factors are considered, namely: (i) the nature of the project and its potential to cause significant negative environmental impacts, and (ii) the sensitivity or vulnerability of environmental resources in the project area.
Specifically, the criteria used for determining projects to be covered by the EIS System are as follows:
a. Characteristics of the project or undertaking -
i. size of the project;
ii. cumulative nature of impacts compared to other projects;
iii. use of natural resources;
iv. generation of wastes and environment-related nuisance; and
v. environment-related hazards and risk of accidents.
b. Location of the project -
i. vulnerability of the project area to disturbances due to its ecological importance, endangered or protected status;
ii. conformity of the proposed project to existing land use, based on approved zoning or on national laws and regulations; and
iii. relative abundance, quality and regenerative capacity of natural resources in the area, including the impact absorptive capacity of the environment.
c. Nature of the potential impact -
i. geographic extent of the impact and size of affected population;
ii. magnitude and complexity of the impact; and
iii. likelihood, duration, frequency, and reversibility of the impact.
The ECC of a project not implemented within five (5) years from its date of issuance is deemed expired. The proponent must apply for a new ECC if it intends to pursue the project. The reckoning date of project implementation is the date of ground-breaking, based on the proponent's work plan as submitted to the EMB.
Petroleum service contractors are mandated to comply with all environmental laws and rules and regulations in all phases of exploration and production operations. ECCs or certificates of non- coverage, if applicable, are obtained from the Environmental Management Bureau of the DENR in coordination with the DOE.
The exploration, production and sale of oil and mineral deposits and power generation are subject to extensive national and local laws and regulations. The Company and its subsidiaries may incur substantial expenditures to comply with these laws and regulations, which may include permitting costs, adoption and implementation of anti-pollution equipment, methods and procedures, and payment of taxes and royalties.
Under these laws, the Company could be subject to claims for personal injury or property damages, including damages to natural resources, which may result from the impact of the Company’s operations. Failure to comply with these laws may also result in the suspension or termination of the Company’s operations and subject it to administrative, civil and criminal penalties. Moreover, these laws could be modified or reinterpreted in ways that substantially increase the Company’s costs of compliance. Any such liabilities, penalties, suspensions, terminations or regulatory changes could have a material adverse effect on the Company’s financial condition and results of operations. PHINMA Energy’s power supply and generation business is subject to the following laws, rules and regulations:
R.A. 9136 or The Electric Power Industry Reform Act of 2001 (EPIRA)
The power generation business of PHINMA Energy is governed by R.A. 9136 or the Electric Power Industry Reform Act of 2001. The enactment of the EPIRA has been a significant event in the Philippine energy industry. The EPIRA has three main objectives, namely: (i) to promote the utilization of indigenous, new and renewable energy resources in power generation, (ii) to cut the high cost of electric power in the Philippines, bring down electricity rates and improve delivery of power supply and (iii) to encourage private and foreign investment in the energy industry. The EPIRA triggered the implementation of a series of reforms in the Philippine power Industry. The two major (2) reforms are the restructuring of the electricity supply industry and the privatization of the National Power Corporation (NPC). The restructuring of the electricity industry calls for the separation of the different components of the power sector namely, generation, transmission, distribution and supply. On the other hand, the privatization of the NPC involves the sale of the state- owned power firm’s generation and transmission assets (e.g., power plants and transmission facilities) to private investors. These two (2) reforms are aimed at encouraging greater competition and at attracting more private-sector investments in the power industry. A more competitive power industry will, in turn, result in lower power rates and a more efficient delivery of electricity supply to end-users.
Power generation is not considered a public utility operation under the EPIRA. Thus, a franchise is not needed to engage in the business of power generation. Nonetheless, no person or entity may engage in the generation of electricity unless such person or entity has complied with the standards, requirements and other terms and conditions set by the ERC and has received a Certificate of Compliance (COC) from the ERC to operate the generation facilities. A COC is valid for a period of five (5) years from the date of issuance. In addition to the COC requirement, a generation company must comply with technical, financial and environmental standards. A generation company must ensure that all of its facilities connected to the Grid meet the technical design and operational criteria of the Philippine Grid Code and the Philippine Distribution Code promulgated by the ERC. The ERC has also issued the “Guidelines for the Financial Standards of Generation Companies,” which set the minimum financial capability standards for generation companies. Under the guidelines, a generation company is required to meet a minimum annual interest cover ratio or debt service coverage ratio of 1.5x throughout the period covered by its COC. For COC applications and renewals, the guidelines require the submission to the ERC of, among other things, comparative audited financial statements, a schedule of liabilities, and a five-year financial plan. For the duration of the COC, the guidelines also require a generation company to submit to the ERC audited financial statements and forecast financial statements for the next two (2) fiscal years, among other documents. The failure by a generation company to submit the
- Set a Lifeline Rate for the Marginalized End-Users.
- Promulgate rules and regulations prescribing the qualifications of Suppliers which shall include, among other things, their technical and financial capability and credit worthiness.
- Determine the electricity End-users comprising the Contestable and Captive Markets.
- Verify the reasonable amounts and determine the manner and duration for the full recovery of stranded debts and stranded contract costs of NPC and the distribution utilities.
- Handle consumer complaints and ensure promotion of consumer interests.
- Act on applications for cost recovery and return on Demand-Side Management (DSM) projects.
- Fix user fees to be charged by TransCo for ancillary services to all electric power industry participants or self-generating entities connected to the Grid.
- Review power purchase contracts between Independent Power Producers (IPP) and NPC, including the distribution utilities.
- Monitor and take measures to discourage/penalize abuse of market power, cartelization and any anti-competitive or discriminatory behavior by any electric power industry participant.
- Review and approve the terms and conditions of service of the TransCo or any distribution utility and any changes therein.
- Determine, fix and approve a universal charge to be imposed on all electricity end-users.
- Test, calibrate and seal electric watt-hour meters.
- Implement pertinent provisions of R.A. No. 7832 or the Anti-Pilferage of Electricity Law.
- Fix and regulate the rate schedule or prices of piped gas to be charged by duly the ERC is headed by a Chairperson together with four Commissioners.
Privatization of National Power Corporation (NPC) and creation of Power Sector Assets and Liabilities Management Corporation (PSALM)
Another major reform under the EPIRA is the privatization of the NPC which involves the sale of the state-owned power firm’s generation and transmission assets ( e.g ., power plants and transmission facilities) to private investors. Government-owned NPC had been solely responsible for the total electrification of the country since 1936.
Under the EPIRA, the NPC generation and transmission facilities, real estate properties and other disposable assets, as well as its power supply contracts with IPPs were privatized. Two weeks after the EPIRA was signed into law, the PSALM, a government-owned and controlled corporation, was formed to help NPC sell its assets to private companies. The exact manner and mode by which these assets would be sold would be determined by the PSALM. The PSALM was tasked to manage the orderly sale, disposition and privatization of the NPC, with the objective of liquidating all of the NPC’s financial obligations and stranded contract costs in an optimal manner.
Birth of the National Grid Corporation of the Philippines (NGCP)
Another entity created by the EPIRA was the National Transmission Corporation (TransCo), which would assume all of the electricity transmission functions of the NPC. In December 2007, TransCo was privatized through a management concession agreement. The management and operation of TransCo’s nationwide power transmission system was turned over to a consortium called NGCP composed of Monte Oro Grid Resources Corporation, Calaca High Power Corporation and the State Grid Corporation of Hong Kong Ltd. The approved franchise of NGCP was for 50 years.
Thus, with the creation of the PSALM and NGCP to which the assets and debts of the NPC were transferred, the NPC was left with only the operation of Small Power Utilities Group or SPUG
- a functional unit of the NPC created to pursue missionary electrification function.
Retail Competition and Open Access (RCOA)
The EPIRA mandates the implementation of open access to distribution network so that the benefits of competition in the generation/supply sector could really trickle down to the qualified consumers. The implementation of the retail competition and open access paves the way to the creation of the new segment in the power industry which is the Retail Electricity Suppliers (RES).
Retail competition and open access is a condition wherein contestable customers ( i.e ., industries, commercial establishments and residential users) can exercise freedom to choose their respective retail electricity supplier which could offer the most reasonable cost and provide the most efficient service. In other words, the ultimate objective of the open access reform is to provide consumer satisfaction through customer choice and empowerment.
Based on EPIRA, there are five (5) conditions for declaring the implementation of RCOA. These are (i) the establishment of the WESM, (ii) the approval of unbundled transmission and distribution wheeling charges, (iii) the initial implementation of the cross subsidy removal scheme, (iv) the privatization of at least 70% of the total generating assets of the NPC in Luzon and Visayas and (v) the transfer of the management and control of at least 70% of the total energy output of power plants under contract with the NPC to the IPP administrators.
The status of the conditions to retail competition and open access are as follows:
EPIRA Requirement Status
- Establishment of the WESM Completed
- Approval of unbundled transmission & distribution wheeling charges Completed
- Initial implementation of the cross subsidy removal scheme Completed
- Privatization of at least 70% of the total generating asset capacity of NPC in Luzon
Completed
- Privatization of management & control of at least 70% of the total energy output of power plant under contract with NPC to the IPPA.
Completed
With the purpose of ensuring quality, reliable and affordable electricity under a regime of free and fair competition, the DOE and the ERC issued the following circulars and resolutions to promote customer choice and foster competition in the electricity supply sector:
a) DOE Circular No. DC2015-06-0010, series of 2010 - Providing Policies to Facilitate the Full Implementation of Retail Competition and Open Access (RCOA) in the Philippine Electric Power Industry (“DOE Circular”) ;
b) ERC Resolution No. 05, Series of 2016 - A Resolution Adopting the 2016 Rules Governing the Issuance of Licenses to Retail Electricity Suppliers (RES) and Prescribing the Requirements and Conditions Therefor (“ERC Resolution No. 5”);
c) ERC Resolution No. 10, Series of 2016 - A Resolution Adopting the Revised Rules for Contestability (“ERC Resolution No. 10”);
d) ERC Resolution No. 11, Series of 2016 - A Resolution Imposing Restrictions on the Operations of Distribution Utilities and Retail Electricity Suppliers in the Competitive Retail Electricity Market (“ERC Resolution No. 11”);
e) ERC Resolution No. 28, Series of 2016 - Revised Timeframe for Mandatory Contestability, Amending Resolution No. 10, Series of 2016 entitled Revised Rules for Contestability (“ERC Resolution No. 28”);
The above resolutions/circulars required electricity end-users with an average monthly peak demand of at least one megawatt (1MW) to secure retail supply contracts with licensed retail electricity suppliers on or before February 26, 2017 while electricity end-users with an average
