Republic Act No.

9136
Electric Power Industry Reform Act (EPIRA) of 2001

Table of Contents
Chapter 1: TITLE AND DECLARATION OF POLICY
Section 1: Short Title
Section 2: Declaration of Policy
Section 3: Scope
Section 4: Definition of Terms
Chapter 2: ORGANIZATION AND OPERATION OF THE ELECTRIC POWER INDUSTRY
Section 5: Organization
Section 6: Generation Sector
Section 7: Transmission Sector
Section 8: Creation of the National Transmission Company
Section 9: Functions and Responsibilities.
Section 10: Corporate Powers of the TRANSCO.
Section 11: TRANSCO Board of Directors.
Section 12: Powers and Duties of the Board.
Section 13: Board Meetings.
Section 14: Board Per Diems and Allowances.
Section 15: Quorum.
Section 16: Powers of the President of TRANSCO.
Section 17: Exemption from the Salary Standardization Law.
Section 18: Profits.
Section 19: Transmission Charges.
Section 20: TRANSCO Related Businesses.
Section 21: TRANSCO Privatization.
Section 22: Distribution Sector.
Section 23: Functions of Distribution Utilities.
Section 24: Distribution Wheeling Charge.
Section 25: Retail Rate.
Section 26: Distribution Related Businesses.
Section 27: Franchising Power in the Electric Power Sector.
Section 28: De-Monopolization and Shareholding Dispersal.
Section 29: Supply Sector.
Section 30: Wholesale Electricity Spot Market.
Section 31: Retail Competition and Open Access.
Section 32: NPC Stranded Debt and Contract Cost Recovery.
Section 33: Distribution Utilities Stranded Contract Costs Recovery.
Section 34: Universal Charge.
Section 35: Royalties, Returns and Tax Rates for Indigenous Energy Resources.
Section 36: Unbundling of Rates and Functions.
Chapter 3: ROLE OF THE DEPARTMENT OF ENERGY
Section 37: Powers and Functions of the DOE.
Chapter 4: REGULATION OF THE ELECTRIC POWER INDUSTRY
Section 38: Creation of the Energy Regulatory Commission.
Section 39: Compensation and Other Emoluments for ERC Personnel.
Section 40: Enhancement of Technical Competence.
Section 41: Promotion of Consumer Interests.
Section 42: Budget of the ERC.
Section 43: Functions of the ERC.
Section 44: Transfer of Powers and Functions.
Section 45: Cross Ownership, Market Power Abuse and Anti-Competitive Behavior.
Section 46: Fines and Penalties.
Chapter 5: PRIVATIZATION OF THE ASSETS OF THE NATIONAL POWER
CORPORATION
Section 47: NPC Privatization.
Section 48: National Power Board of Directors.
Chapter 6: POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT
Section 49: Creation of Power Sector Assets and Liabilities Management Corporation.
Section 50: Purpose and Objective, Domicile and Term of Existence.
Section 51: Powers.
Section 52: Power Sector Assets and Liabilities Management Corporation, Meetings, Quorum
and Voting.
Section 53: Powers of the President of PSALM Corp.
Section 54: Exemption from the Salary Standardization Law.
Section 55: Property of the PSALM Corp.
Section 56: Claims Against the PSALM Corp.
Chapter 7: PROMOTION OF RURAL ELECTRIFICATION
Section 57: Conversion of Electric Cooperatives.
Section 58: Additional Mandate of the National Electrification Administration (NEA).
Section 59: Alternative Electric Service for Isolated Villages.
Section 60: Debts of Electric Cooperatives.
Chapter 8: GENERAL PROVISIONS
Section 61: Reportorial Requirements.
Section 62: Joint Congressional Power Commission.
Section 63: Separation Benefits of Officials and Employees of Affected Agencies.
Section 64: Fiscal Prudence.
Section 65: Environmental Protection.
Section 66: Benefits to Host Communities.
Section 67: NPC Offer of Transition Supply Contracts.
Section 68: Review of IPP Contracts
Section 69: Renegotiation of Power Purchase and Energy Conversion Agreements between
Government Entities.
Section 70: Missionary Electrification.
Section 71: Electric Power Crisis Provision
Section 72: Mandated Rate Reduction.
Section 73: Lifeline Rate
Section 74: Cross Subsidies
Chapter 9: FINAL PROVISIONS
Section 75: Statutory Construction
Section 76: Education and Protection of End Users.
Section 77: Implementing Rules and Regulations.
Section 78: Injunction and Restraining Order.
Section 79: Separability Clause
Section 80: Applicability and Repealing Clause
Section 81: Effectivity Clause

Chapter 1: TITLE AND DECLARATION OF POLICY

Section 1: Short Title

This Act shall be known as the "Electric Power Industry Reform Act of 2001". It shall hereinafter
be referred to as the Act.

Section 2: Declaration of Policy

It is hereby declared the policy of the State:

To ensure and accelerate the total electrification of the country;

To ensure the quality, reliability, security and affordability of the supply of electric power;
To ensure transparent and reasonable prices of electricity in a regime of free and fair competition
and full public accountability to achieve greater operational and economic efficiency and
enhance the competitiveness of Philippine products in the global market;
To enhance the inflow of private capital and broaden the ownership base of the power
generation, transmission and distribution sectors;
To ensure fair and non-discriminatory treatment of public and private sector entities in the
process of restructuring the electric power industry;
To protect the public interest as it is affected by the rates and services of electric utilities and
other providers of electric power;
To assure socially and environmentally compatible energy sources and infrastructure;
To promote the utilization of indigenous and new and renewable energy resources in power
generation in order to reduce dependence on imported energy;
To provide for an orderly and transparent privatization of the assets and liabilities of the National
Power Corporation (NPC);
To establish a strong and purely independent regulatory body and system to ensure consumer
protection and enhance the competitive operation of the electricity market; and
To encourage the efficient use of energy and other modalities of demand side management.

Section 3: Scope
This Act shall provide a framework for the restructuring of the electric power industry, including
the privatization of the assets of NPC, the transition to the desired competitive structure, and the
definition of the responsibilities of the various government agencies and private entities.

Section 4: Definition of Terms

"Aggregator" refers to a person or entity, engaged in consolidating electric power demand of
end-users in the contestable market, for the purpose of purchasing and reselling electricity on a
group basis;
"Ancillary Services" refer to those services that are necessary to support the transmission of
capacity and energy from resources to loads while maintaining reliable operation of the
transmission system in accordance with good utility practice and the Grid code to be adopted in
accordance with this Act;
"Captive Market" refers to electricity end-users who do not have the choice of a supplier of
electricity, as may be determined by the Energy Regulatory Commission (ERC) in accordance
with this Act;
"Central Dispatch" refers to the process of issuing direct instructions to electric power industry
participants by the grid operator to achieve the economic operation and maintenance of quality,
stability, reliability and security of the transmission system;
"Co-Generation Facility" refers to a facility which produces electrical an/or mechanical energy
and forms of useful thermal energy such as heat or steam which are used for industrial
commercial heating or cooling purposes through the sequential use of energy;
"Commission" refers to the decision-making body of the ERC composed of a Chairman and four
(4) members as provided under Section 38 hereof;
"Concession Contract" refers to the award by the government to a qualified private entity of the
responsibility for financing, operating, expanding, maintaining and managing specific
Government-owned assets;
"Contestable Market" refers to the electricity end-users who have a choice of a supplier of
electricity, as may be determined by the ERC in accordance with this Act;
"Customer Service Charge" refers to the component in the retail rate intended for the cost
recovery of customer-related services including, but not limited to, meter reading, billing
administration and collection;
"Demand Side Management" refers to measures undertaken by distribution utilities to encourage
end-users in the proper management of their load to achieve efficiency in the utilization of fixed
infrastructures in the system;
"Department of Energy" or "DOE" refers to the government agency created pursuant to Republic
Act No. 7638 whose expanded functions are provided herein;
"Department of Finance" or "DOF" refers to the government agency created pursuant to
Executive Order No. 127;
"Distribution Code" refers to a compilation of rules and regulations governing electric utilities in
the operation and maintenance of their distribution systems which includes, among others, the
standards for service and performance, and defines and establishes the relationship of the
distribution systems with the facilities or installations of the parties connected thereto;
"Distribution of Electricity" refers to the conveyance of electric power by a distribution utility
through its distribution system pursuant to the provisions of this Act;
"Distribution System" refers to the system of wires and associated facilities belonging to a
franchised distribution utility extending between the delivery points on the transmission or
subtransmission system or generator connection and the point of connection to the premises of
the end-user;
"Distribution Wheeling Charge" refers to the cost or charge regulated by the ERC for the use of a
distribution system and/or the availment of related services;
"Distribution Utility" refers to any electric cooperative, private corporation, governmentowned
utility or existing local government unit which has an exclusive franchise to operate a
distribution system in accordance with this Act;
"Electric cooperative" refers to a distribution utility organized pursuant to Presidential Decree
No. 269, as amended, or as otherwise provided in this Act;
"Electric Power Industry Participant" refers to any person or entity engaged in the generation,
transmission, distribution or supply of electricity;
"End-user" refers to any person or entity requiring the supply and delivery of electricity for its
own use;
"Energy Regulatory Board" or "ERB" refers to the independent, quasi-judicial regulatory body
created under Executive Order No. 172, as amended;
"Energy Regulatory Commission" or "ERC" refers to the regulatory agency created herein; (w)
"Franchise Area" refers to a geographical area exclusively assigned or granted to a distribution
utility for distribution of electricity;
"Generation Company" refers to any person or entity authorized by the ERC to operate facilities
used in the generation of electricity;
"Generation of Electricity" refers to the production of electricity by a generation company or a
co-generation facility pursuant to the provisions of this Act;
"Grid" refers to the high voltage backbone system of interconnected transmission lines,
substations and related facilities;
"Grid Code" refers to the set of rules and regulations governing the safe and reliable operation,
maintenance and development of the high voltage backbone transmission system and its related
facilities;
"Independent Power Producer" or "IPP" refers to an existing power generating entity which is
not owned by NPC;
"Inter-Class Cross Subsidy" refers to an amount charged by distribution utilities to industrial and
commercial end-users as well as to other subsidizing customer sectors in order to reduce
electricity rates of other customer sectors such as the residential end-users, hospitals, and
streetlights;
"Inter-Regional Grid Cross Subsidy" refers to an amount embedded in the electricity rates of
NPC charged to its customers located in a viable regional grid in order to reduce the electricity
rates in a less viable regional grid;
"Intra- Regional Grid Cross Subsidy" refers to an amount embedded in the electricity rates of
NPC charged to distribution utilities and non-utilities with higher load factor and/or delivery
voltage in order to reduce the electricity rates charged to distribution utilities with lower load
factor and/or delivery voltage located in the same regional grid;
"IPP Administrator" refers to qualified independent entities appointed by PSALM Corporation
who shall administer, conserve and manage the contracted energy output of NPC IPP contracts;
"Isolated Distribution System" refers to the backbone system of wires and associated facilities
not directly connected to the national transmission system; (hh) "Lifeline Rate" refers to the
subsidized rate given to low-income captive market end-users who cannot afford to pay at full
cost;
"National Electrification Administration " or "NEA" refers to the government agency created
under Presidential Decree No. 269, as amended, and whose additional mandate is further set
forth herein;
"National Power Corporation" or "NPC" refers to the government corporation created under
Republic Act No. 6395, as amended;
"National Transmission Corporation or "TRANSCO" refers to the corporation organized
pursuant to this Act to acquire all the transmission assets of the NPC;
"Open Access" refers to the system of allowing any qualified person the use of transmission,
and/or distribution system, and associated facilities subject to the payment of transmission and/or
distribution retail wheeling rates duly approved by the ERC;
"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;
"Power Development Program" or "PDP" refers to the indicative plan for managing electricity
demand through energy-efficient programs and for the upgrading, expansion, rehabilitation,
repair and maintenance of power generation and transmission facilities, formulated and updated
yearly by the DOE in coordination with the generation, transmission and distribution utility
companies;
"Power Sector Assets and Liabilities Management Corporation" or "PSALM Corp." refers to the
corporation created pursuant to Section 49 hereof;
"Privatization" refers to the sale, disposition, change and transfer of ownership and control of
assets and IPP contracts from the Government or a government corporation to a private person or
entity;
"Renewable Energy Resources" refers to energy resources that do not have an upper limit on the
total quantity to be used. Such resources are renewable on a regular basis and the renewable rate
is rapid enough to consider availability over an indefinite time. These include, among others,
biomass, solar, wind, hydro and ocean energy;
"Restructuring" refers to the process of reorganizing the electric power industry in order to
introduce higher efficiency, greater innovation and end-user choice. It shall be understood as
covering a range of alternatives enhancing exposure of the industry to competitive market forces;
"Retail Rate" refers to the total price paid by end-users consisting of the charges for generation,
transmission and related ancillary services, distribution, supply and other related charges for
electric service;
"Small Power Utilities Group" or "SPUG" refers to the functional unit of NPC created to pursue
missionary electrification function;
"Stranded contract costs of NPC or distribution utility" refer to the excess of the contracted cost
of electricity under eligible contracts 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;
"Stranded Debts of NPC" refer to any unpaid financial obligations of NPC which have not been
liquidated by the proceeds from the sales and privatization of NPC assets;
"Subtransmission Assets" refer to the facilities related to the power delivery service below the
transmission voltages and based on the functional assignment of assets including, but not limited
to step-down transformers used solely by load customers, associated switchyard/substation,
control and protective equipment, reactive compensation equipment to improve customer power
factor, overhead lines, and the land such facilities/ equipment are located. These include NPC
assets linking the transmission system and the distribution system which are neither classified as
generation nor transmission;
"Supplier" refers to any person or entity authorized by the ERC to sell, broker, market or
aggregate electricity to the end-users;
"Supplier's Charge" refers to the charge imposed by electricity suppliers for the sale of electricity
to end-users, excluding the charges for generation, transmission and distribution wheeling;
"Supply of Electricity" means the sale of electricity by a party other than a generator or a
distributor in the franchise area of a distribution utility using the wires of the distribution utility
concerned;
"Transmission Charge" refers to the regulated cost or charges for the use of a transmission
system which may include the availment of ancillary services;
"Transmission Development Plan" or "TDP" refers to the program for managing the transmission
system through efficient planning for the expansion, upgrading, rehabilitation, repair and
maintenance, to be formulated by DOE and implemented by the TRANSCO pursuant to this Act;
"Transmission of Electricity" refers to the conveyance of electricity through the high voltage
backbone system; and
"Universal Charge" refers to the charge, if any, imposed for the recovery of the stranded cost and
other purposed pursuant to Section 34 hereof.
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Chapter 2: ORGANIZATION AND OPERATION OF THE ELECTRIC POWER INDUSTRY
Section 5: Organization
The electric power industry shall be divided into four (4) sectors, namely: generation,
transmission, distribution and supply.

Section 6: Generation Sector

Generation of electric power, a business affected with public interest, shall be competitive and
open.

Upon the effectivity of this Act, any new generation company shall, before it operates, secure
from the Energy Regulatory Commission (ERC) a certificate of compliance pursuant to the
standards set forth in this Act, as well as health, safety and environmental clearances from the
appropriate government agencies under existing laws.

Any law to the contrary notwithstanding, power generation shall not be considered a public
utility operation. For this purpose, any person or entity engaged or which shall engage in power
generation and supply of electricity shall not be required to secure a national franchise.

Upon implementation of retail competition and open access, the prices charged by a generation
company for the supply of electricity shall not be subject to regulation by the ERC except as
otherwise provided in this Act.

Pursuant to the objective of lowering electricity rates to end-users, sales of generated power by
generation companies shall be value added tax zero-rated.

The ERC shall, in determining the existence of market power abuse or anti-competitive behavior,
require from generation companies the submission of their financial statements.

Section 7: Transmission Sector

The transmission of electric power shall be regulated common electricity carries business,
subject to the ratemaking powers of the ERC.
The ERC shall set the standards of the voltage transmission that shall distinguish the
transmission from the subtransmission assets. Pending the issuance of such new standards, the
distinction between the transmission and subtransmission assets shall be as follows: 230 kilovolts
and above in the Luzon grid, 69 kilovolts and above in the Visayas and in the isolated
distribution systems, and 138 kilovolts and above in the Mindanao Grid: Provided, That for the
Visayas and the isolated distribution system, should the 69 kilovolt line not form part of the main
transmission grid and be directly connected to the substation of the distribution utility, it shall
form part of the subtransmission system.

Section 8: Creation of the National Transmission Company

There is hereby created a National Transmission Corporation, hereinafter referred to as
TRANSCO, which shall assume the electrical transmission function of the National Power
Corporation (NPC), and have the powers and functions hereinafter granted. The TRANSCO shall
assume the authority and responsibility of NPC for the planning, construction and centralized
operation and maintenance of its high voltage transmission facilities, including grid
interconnections and ancillary services.

Within six (6) months from the effectivity of this Act, the transmission and subtransmission
facilities of NPC and all other assets related to transmission operations, including the nationwide
franchise of NPC for the operation of the transmission system and the grid, shall be transferred to
the TRANSCO. The TRANSCO shall be wholly owned by the Power Sector Assets and
Liabilities Management Corporation (PSALM Corp.).

The subtransmission functions and assets shall be segregated from the transmission functions,
assets and liabilities for transparency and disposal: Provided, That the subtransmission assets
shall be operated and maintained by TRANSCO until their disposal to qualified distribution
utilities which are in a position to take over the responsibility for operating, maintaining,
upgrading, and expanding said assets. All transmission and subtransmission related liabilities of
NPC shall be transferred to and assumed by the PSALM Corp.

TRANSCO shall negotiate with and thereafter transfer such functions, assets, and associated
liabilities to the qualified distribution utility or utilities connected to such subtransmission
facilities not later than two (2) years from the effectivity of this Act or the start of open access,
whichever comes earlier: Provided, That in the case of electric cooperatives, the TRANSCO
shall grant concessional financing over a period of twenty (20) years: Provided, however, That
the installment payments to TRANSCO for the acquisition of subtransmission facilities shall be
given first priority by the electric cooperatives out of the net income derived from such facilities.
The TRANSCO shall determine the disposal value of the subtransmission assets based on the
revenue potential of such assets.

In case of disagreement in valuation, procedures, ownership participation and other issues, the
ERC shall resolve such issues.

The take over by a distribution utility of any subtransmission asset shall not cause a diminution
of service and quality to the end-users. Where there are two or more connected distribution
utilities, the consortium or juridical entity shall be formed by and composed of all of them and
thereafter shall be granted a franchise to operate the subtransmission asset by the ERC.

The subscription rights of each distribution utility involved shall be proportionate to their load
requirements unless otherwise agreed by the parties.

Aside from the PSALM Corp., TRANSCO and connected distribution utilities, no third party
shall be allowed ownership or management participation, in whole or in part, in such
subtransmission entity.

The TRANSCO may exercise the power of eminent domain subject to the requirements of the
Constitution and existing laws. Except as provided herein, no person, company or entity other
than the TRANSCO shall own any transmission facilities.

Prior to the transfer of the transmission functions by NPC to TRANSCO, and before the
promulgation of the Grid Code, ERC shall ensure that NPC shall provide to all electric power
industry participants open and non-discriminatory access to its transmission system. Any
violation thereof shall be subject to the fines and penalties imposed herein.

Section 9: Functions and Responsibilities.

Upon the effectivity of this Act, the TRANSCO shall have the following functions and
responsibilities:

Act as the system operator of the nationwide electrical transmission and subtransmission system,
to be transferred to it by NPC;
Provide open and non-discriminatory access to its transmission system to all electricity users;
Ensure and maintain the reliability, adequacy, security, stability and integrity of the nationwide
electrical grid in accordance with the performance standards for the operations and maintenance
of the grid, as set forth in a Grid Code to be adopted and promulgated by the ERC within six (6)
months from the effectivity of this Act;
Improve and expand its transmission facilities, consistent with the Grid Code and the
Transmission Development Plan (TDP) to be promulgated pursuant to this Act, to adequately
serve generation companies, distribution utilities and suppliers requiring transmission service
and/or ancillary services through the transmission system: Provided, That TRANSCO shall
submit any plan for expansion or improvement of its facilities for approval by the ERC;
Subject to technical constraints, the grid operator of the TRANSCO shall provide central
dispatch of all generation facilities connected, directly or indirectly, to the transmission system in
accordance with the dispatch schedule submitted by the market operator, taking into account
outstanding bilateral contracts; and
TRANSCO shall undertake the preparation of the TDP.
In the preparation of the TDP, TRANSCO shall consult the other participants of the electric
power industry such as the generation companies, distribution utilities, and the electricity end-
users. The TDP shall be submitted to the DOE for integration with the Power Development
Program and the Philippine Energy Plan, provided for in Republic Act No. 7638 otherwise
known as `the Department of Energy Act of 1992".
A generation company may develop and own or operate dedicated point-to-point limited
transmission facilities that are consistent with the TDP: Provided, That such facilities are
required only for the purpose of connecting to the transmission system, and are used solely by
the generating facility, subject to prior authorization by the ERC: Provided, further, That in the
event that such assets are required for competitive purposes, ownership of the same shall be
transferred to the TRANSCO at a fair market price: Provided, finally, That in the case of
disagreement on the fair market price, the ERC shall determine the fair market value of the asset.

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Section 10: Corporate Powers of the TRANSCO.
As a corporate entity, TRANSCO shall have the following corporate powers:

To have continuous succession under its corporate name until otherwise provided by law;
To adopt and use a corporate seal and to change, alter or modify the same, if necessary;
To sue and be sued;
To enter into a contract and execute any instrument necessary or convenient for the purpose for
which it is created;
To borrow funds from any source, whether private or public, foreign or domestic, and issue
bonds and other evidence of indebtedness: Provided. That in the case of the bond issues, it shall
be subject to the approval of the President of the Philippines upon recommendation of the
Secretary of Finance: Provided, further, That foreign loans shall be obtained in accordance with
existing laws, rules and regulations of the Bangko Sentral ng Pilipinas;
To maintain a provident fund which consists of contributions made by both the TRANSCO and
its officials and employees and their earnings for the payment of benefits to such officials and
employees or their heirs under such terms and conditions as it may prescribe;
To do any act necessary or proper to carry out the purpose for which it is created, or which, from
time to time, may be declared by the TRANSCO Board as necessary, useful, incidental or
auxilliary to accomplish its purposes and objectives; and,
Generally, to exercise all the powers of a corporation under the corporation law insofar as they
are not inconsistent with this Act.
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Section 11: TRANSCO Board of Directors.
All the powers of the TRANSCO shall be vested in and exercised by a Board of Directors. The
Board shall be composed of a Chairman and six (6) members. The Secretary of the Department
of Finance (DOF) shall be the ex officio Chairman of the Board. The other members of the
TRANSCO Board shall include the Secretary of the Department of Energy (DOE), the Secretary
of the Department of Environment and Natural Resources (DENR), the President of TRANSCO,
and three (3) members to be appointed by the President, each representing Luzon, Visayas and
Mindanao.

The members of the Board so appointed by the President of the Philippines shall serve for a term
of six (6) years, except that any person appointed to fill-in a vacancy shall serve only the
unexpired term of his/her predecessor in office. All members of the Board shall be
professionals of recognized competence and expertise in the fields of engineering , finance,
economics, law or business management. No member of the Board or any of his relatives within
the fourth civil degree of consanguinity or affinity shall have any interest, either as investor,
officer or director, in any generation company or distribution utility or other entity engaged in
transmitting, generating and supplying electricity specified by ERC.

Section 12: Powers and Duties of the Board.

The following are the powers of the Board:

To provide strategic direction for TRANSCO, and formulate medium and long-term strategies
pursuant to the vision, mission, and objectives of TRANSCO;
To develop and adopt policies and measures for the efficient and effective management and
operation of TRANSCO;
To organize, re-organize, and determine the organizational structure and staffing patterns of
TRANSCO; abolish and create offices and positions; fix the number of its officers and
employees; transfer and re-align such officers and personnel; fix their compensation, allowance,
and benefits;
To fix the compensation of the President of TRANSCO and to appoint and fix the compensation
of other corporate officers;
For cause, to suspend or remove any corporate officer appointed by the Board;
To adopt and set guidelines for the employment of personnel on the basis of merit, technical
competence, and moral character; and
Any provisions of the law to the contrary notwithstanding, to write-off bad debts.

Section 13: Board Meetings.

The Board shall meet as often as may be necessary upon the call of the Chairman of the Board or
by a majority of the Board members.

Section 14: Board Per Diems and Allowances.

The members of the Board shall receive per diem for each regular or special meeting of the
board actually attended by them, and, upon approval of the Secretary of the Department of
Finance, such other allowances as the Board may prescribe.

Section 15: Quorum.

The presence of at least four (4) members of the Board shall constitute a quorum, which shall be
necessary for the transaction of any business. The affirmative vote of a majority of the members
present in a quorum shall be adequate for the approval of any resolution, decision or order,
except when the Board shall otherwise agree that a greater vote is required.

Section 16: Powers of the President of TRANSCO.

The President of TRANSCO shall be appointed by the President of the Philippines. In the
absence of the Chairman, the President shall preside over board meetings.

The President of TRANSCO shall be the Chief Executive Officer of TRANSCO and shall have
the following powers and duties:

To execute and administer the policies and measures approved by the Board, and take
responsibility for the efficient discharge of management functions;
To oversee the preparation of the budget of TRANSCO;
To direct and supervise the operation and internal administration of TRANSCO and, for this
purpose, may delegate some or any of his administrative responsibilities and duties to other
officers of TRANSCO;
Subject to the guidelines and policies set up by the Board, to appoint and fix the number and
compensation of subordinate officials and employees of TRANSCO; and for cause, to remove,
suspend, or otherwise discipline any subordinate employee of TRANSCO;
To submit an annual report to the Board on the activities and achievements of TRANSCO at the
close of each fiscal year and upon approval thereof, submit a copy to the President of the
Philippines and to such other agencies as may be required by law;
To represent TRANSCO in all dealings and transactions with other offices, agencies, and
instrumentalities of the Government and with all persons and other entities, private or public,
domestic or foreign; and
To exercise such other powers and duties as may be vested in him by the Board from time to
time.

Section 17: Exemption from the Salary Standardization Law.

The salaries and benefits of employees in the TRANSCO shall be exempt from Republic Act.
No. 6758 and shall be fixed by the TRANSCO Board.

Section 18: Profits.

The net profit, if any, of TRANSCO shall be remitted to the PSALM Corp. not later than ninety
(90) days after the immediately preceding quarter.

Section 19: Transmission Charges.

The transmission charges of the TRANSCO shall be filed with and approved by the ERC
pursuant to Paragraph (f) of Section 43 hereof.

Section 20: TRANSCO Related Businesses.

TRANSCO may engage in any related business which maximizes utilization of its assets:
Provided, That a portion of the net income derived from such undertaking utilizing assets which
form part of the rate base shall be used to reduce transmission wheeling rates as determined by
the ERC. Such portion of net income used to reduce the transmission wheeling rates shall not
exceed fifty percent (50%) of the net income derived from such undertaking.

Separate accounts shall be maintained for each business undertaking to ensure that the
transmission business shall neither subsidize in any way such business undertaking nor encumber
its transmission assets in any way to support such business.

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Section 21: TRANSCO Privatization.
Within six (6) months from the effectivity of this Act, the PSALM Corp. shall submit a plan for
the endorsement by the Joint Power Commission and the approval of the President of the
Philippines. The President of the Philippines thereafter shall direct PSALM Corp. to award in
open competitive bidding, the transmission facilities, including grid interconnections and
ancillary services to a qualified party either through an outright sale or a concession contract.
The buyer/concessionaire shall be responsible for the improvement, expansion, operation, and/or
maintenance of its transmission assets and the operation of any related business. The award shall
result in maximum present value of proceeds to the national government. In case a concession
contract is awarded, the concessionaire shall have a contract period of twenty-five (25) years,
subject to review and renewal for a maximum period of another twenty-five (25) years.

In any case, the awardee shall comply with the Grid code and the TDP as approved. The sale
agreement/concession contract shall include, but not limited to, the provision for performance
and financial guarantees or any other covenants which the national government may require.
Failure to comply with such obligations shall result in the imposition of appropriate sanctions or
penalties by the ERC.

The awardee shall be financially and technically capable, with proven domestic and./or
international experience and expertise as a leading transmission system operator. Such
experience must be with a transmission system of comparable capacity and coverage as the
Philippines.

Section 22: Distribution Sector.

The distribution of electricity to end-users shall be a regulated common carrier business
requiring a national franchise. Distribution of electric power to all end-users may be undertaken
by private distribution utilities, cooperatives, local government units presently undertaking this
function and other duly authorized entities, subject to regulation by the ERC.

Section 23: Functions of Distribution Utilities.

A distribution utility shall have the obligation to provide distribution services and connections to
its system for any end-user within its franchise area consistent with the distribution code. Any
entity engaged therein shall provide open and non-discriminatory access to its distribution
system to all users.

Any distribution utility shall be entitled to impose and collect distribution wheeling charges and
connection fees from such end-users as approved by the ERC.

A distribution utility shall have the obligation to supply electricity in the least cost manner to its
captive market, subject to the collection of retail rate duly approved by the ERC.

To achieve economies of scale in utility operations, distribution utilities may, after due notice and
public hearing, pursue structural and operational reforms such as but not limited to, joint actions
between or among the distribution utilities, subject to the guidelines issued by the ERC. Such
joint actions shall result in improved efficiencies, reliability of service, reduction of costs and
compliance to the performance standards prescribed in the IRR of this Act.

Distribution utilities shall submit to the ERC a statement of their compliance with the technical
specifications prescribed in the Distribution Code and the performance standards prescribed in
the IRR of this Act. Distribution utilities which do not comply with any of the prescribed
technical specifications and performance standards shall submit to the ERC a plan to comply,
within three (3) years, with said prescribed technical specifications and performance standards.
The ERC shall, within sixty (60) days upon receipt of such plan, evaluate the same and notify the
distribution utility concerned of its action. 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.

Distribution utilities shall prepare and submit to the DOE their annual distributions developments
plans. In the case of electric cooperatives, such plans shall be submitted through the National
Electrification Administration.

Distribution utilities shall provide universal service within their franchise, over a reasonable time
from the requirement thereof, including unviable areas, as part of their social obligations, in a
manner that shall sustain the economic viability of the utility, subject to the approval by the ERC
in the case of private or government-owned utilities. To this end, distribution utilities shall
submit to the DOE their plans for serving such areas as part of their distribution development
plans. Areas which a franchised distribution utility cannot or does not find viable may be
transferred to another distribution utility, if any is available, who will provide the service, subject
approval by ERC. In cases where franchise holders fail and/or refuse to service any area within
their franchise territory and allowed another utility to service the same, then the status quo shall
be respected.

Distribution utilities may exercise the power of eminent domain subject to the requirements of
the Constitution and existing laws.

Section 24: Distribution Wheeling Charge.

The distribution wheeling charges of distribution utilities shall be filed with and approved by the
ERC pursuant to Paragraph (f) of Section 43 hereof.

Section 25: Retail Rate.

The retail rates charged by distribution utilities for the supply of electricity in their captive
market shall be subject to regulation by the ERC based on the principle of full recovery of
prudent and reasonable economic costs incurred, or such other principles that will promote
efficiency as may be determined by the ERC.

Every distribution utility shall identify and segregate in its bills to end-users the components of
the retail rate, as defined in this Act.

Section 26: Distribution Related Businesses.

Distribution utilities may, directly or indirectly, engage in any related business undertaking
which maximizes the utilization of their assets: Provided, That a portion of the net income
derived from such undertaking utilizing assets which form part of the rate base shall be used to
reduce its distribution wheeling charges as determined by the ERC. Provided, further, That such
portion of net income used to reduce their distribution wheeling charges shall not exceed fifty
percent (50%) of the net income derived from such undertaking: Provided, finally, That separate
accounts are 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 27: Franchising Power in the Electric Power Sector.
The power to grant franchises to persons engaged in the transmission and distribution of
electricity shall be vested exclusively in the Congress of the Philippines and all laws inconsistent
with this Act particularly, but not limited to, Section 43 of PD 269, otherwise known as the
"National Electrification Decree", are hereby deemed repealed or modified accordingly:
Provided, That all existing franchises shall be allowed to their full term: Provided, further, That
in the case of electric cooperatives, renewals and cancellations shall remain with the National
Electrification Commission under the National Electrification Administration for five (5) more
years after the enactment of this Act.

Section 28: De-Monopolization and Shareholding Dispersal.

In compliance with the constitutional mandate for dispersal of ownership and de-monopolization
of public utilities, the holdings of persons, natural or juridical, including directors, officers,
stockholders and related interests, in a distribution utility and their respective holding companies
shall not exceed twenty-five (25%) percent of the voting shares of stock unless the utility or the
company holding the shares or its controlling stockholders are already listed in the Philippine
Stock Exchange (PSE): Provided, That controlling stockholders of small distribution utilities are
hereby required to list in the PSE within five (5) years from the enactment of this Act if they
already own the stocks. New controlling stockholders shall undertake such listing within five (5)
years from the time they acquire ownership and control. A small distribution company is one
whose peak demand is equal to or less than Ten megawatts (10MW).

The ERC shall, within sixty (60) days from the effectivity of this Act, promulgate the rules and
regulations to implement and effect this provision.

This Section shall not apply to electric cooperatives.

Section 29: Supply Sector.

The supply sector is a business affected with public interest. Except for distribution utilities and
electric cooperatives with respect to their existing franchise areas, all suppliers of electricity to
the contestable market shall require a license from the ERC.

For this purpose, the ERC shall promulgate rules and regulations prescribing the qualifications of
electricity suppliers which shall include, among other requirements, a demonstration of their
technical capability, financial capability, and creditworthiness: Provided, That the ERC shall
have authority to require electricity suppliers to furnish a bond or other evidence of the ability of
a supplier to withstand market disturbances or other events that may increase the cost of
providing service.

Any law to the contrary notwithstanding , supply of electricity to the contestable market shall not
be considered a public utility operation.

For this purpose, any person or entity which shall engage in the supply of electricity to the
contestable market shall not be required to secure a national franchise. The prices to be charged
by suppliers for the supply of electricity to the contestable market shall not be subject to
regulation by the ERC.

Electricity suppliers shall be subject to the rules and regulations concerning abuse of market
power, cartelization, and other anti-competitive or discriminatory behavior to be promulgated by
the ERC.

In its billings to end-users, every supplier shall identify and segregate the components of its
supplier's charge, as defined herein.

Section 30: Wholesale Electricity Spot Market.

Within one (1) year from the effectivity of this Act, the DOE shall establish a wholesale
electricity spot market composed of the wholesale electricity spot market participants. The
market shall provide the mechanism for identifying and setting the price of actual variations from
the quantities transacted under contracts between sellers and purchasers of electricity.

Jointly with the electric power industry participants, the DOE shall formulate the detailed rules
for the wholesale electricity spot market. Said rules shall provide the mechanism for determining
the price of electricity not covered by bilateral contracts between sellers and purchasers of
electricity users. The price determination methodology contained in said rules shall be subject to
the approval of ERC. Said rules shall also reflect accepted economic principles and provide a
level playing field to all electric power industry participants. The rules shall provide, among
others, procedures for:

Establishing the merit order dispatch instructions for each time period;
Determining the market-clearing price for each time period;
Administering the market, including criteria for admission to and termination from the market
which includes security or performance bond requirements, voting rights of the participants,
surveillance and assurance of compliance of the participants with the rules and the formation of
the wholesale electricity spot market governing body;
Prescribing guidelines for the market operation in system emergencies; and
Amending the rules.
The wholesale electricity spot market shall be implemented by a market operator in accordance
with the wholesale electricity spot market rules. The market operator shall be an autonomous
group, to be constituted by DOE, with equitable representation from electric power industry
participants, initially under the administrative supervision of the TRANSCO. The market
operator shall undertake the preparatory work and initial operation of the wholesale electricity
spot market. Not later than one (1) year after the implementation of the wholesale electricity spot
market, an independent entity shall be formed and the functions, assets and liabilities of the
market operator shall be transferred to such entity with the joint endorsement of the DOE and the
electric power industry participants. Thereafter, the administrative supervision of the TRANSCO
over such entity shall cease.

Subject to the compliance with the membership criteria, all generating companies, distribution
utilities, suppliers, bulk consumers/end-users and other similar entities authorized by the ERC
shall be eligible to become members of the wholesale electricity spot market.
The ERC may authorize other similar entities to become eligible as members, either directly or
indirectly, of the wholesale electricity spot market. All generating companies, distribution
utilities, suppliers, bulk consumers/end-users and other similar entities authorized by the ERC,
whether direct or indirect members of the wholesale electricity spot market, shall be bound by
the wholesale electricity spot market, shall be bound by the wholesale electricity spot market
rules with respect to transactions in that market.

NEA may, in exchange for adequate security and a guarantee fee, act as a guarantor for purchases
of electricity in the wholesale electricity spot market by any electric cooperative or small
distribution utility to support their credit standing consistent with the provisions hereof. For this
purpose, the authorized capital stock of NEA is hereby increased to Fifteen billion pesos
(P15,000,000,000.00)

All electric cooperatives which have outstanding uncollected billings to any local government
unit shall report such billings to NEA which shall, in turn, report the same to the Department of
Budget and Management (DBM) for collection pursuant to Executive Order 190 issued on
December 21, 1999.

The cost of administering and operating the wholesale electricity spot market shall be recovered
by the market operator through a charge imposed to all market members: Provided, That such
charge shall be filed with and approved by the ERC.

In cases of national and international security emergencies or natural calamities, the ERC is
hereby empowered to suspend the operation of the wholesale electricity spot market or declare a
temporary wholesale electricity spot market failure.

Section 31: Retail Competition and Open Access.

Any law to the contrary notwithstanding, retail competition and open access on distribution wires
shall be implemented not later than three (3) years upon the effectivity of this Act, subject to the
following conditions:

Establishment of the wholesale electricity spot market;

Approval of unbundled transmission and distribution wheeling charges;
Initial implementation of the cross subsidy removal scheme;
Privatization of at least seventy (70%) percent of the total capacity of generating assets of NPC
in Luzon and Visayas; and
Transfer of the management and control of at least seventy percent (70%) of the total energy
output of power plants under contract with NPC 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 one megawatt (1MW) for the preceding twelve
(12) months to be the contestable market. Two (2) years thereafter, the threshold level for the
contestable market shall be reduced to seven hundred fifty kilowatts (750kW). At this level,
aggregators shall be allowed to supply electricity to end-users whose aggregate demand within a
contiguous area is at least seven hundred fifty kilowatts (750kW). Subsequently and every year
thereafter, the ERC shall evaluate the performance of the market. On the basis of such
evaluation, it shall gradually reduce 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 five (5) years upon the effectivity of this Act.

Section 32: NPC Stranded Debt and Contract Cost Recovery.

Stranded debt of NPC shall refer to any unpaid financial obligations of NPC.

Stranded contract costs of NPC shall refer to the excess of the contracted cost of electricity under
eligible IPP contracts of NPC 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 national government shall directly assume a portion of the financial obligations of NPC in
an amount not to exceed Two hundred billion pesos (P200,000,000,000,00)

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 NPC at
the time they were contracted. The ERC shall take into consideration all factors that affect the
total cost of NPC 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:
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; and
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:

Payment for the stranded debts in excess of the amount assumed by the National Government
and stranded contract costs of NPC and as well as qualified stranded contract costs of
distribution utilities resulting from the restructuring of the industry;
Missionary electrification;
The equalization of the taxes and royalties applied to indigenous or renewable sources of energy
vis-a-vis imported energy fuels;
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 NPC under existing
arrangements; and
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 (15th) 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.

The PSALM Corp., as administrator of the fund, shall create a Special Trust Fund which 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, NPC shall file with the ERC its revised
rates. The rates of NPC 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 NPC 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.

Chapter 3: ROLE OF THE DEPARTMENT OF ENERGY

Section 37: Powers and Functions of the DOE.
In addition to its existing powers and functions, the DOE is hereby mandated to supervise the
restructuring of the electricity industry. In pursuance thereof, Section 5 of RA 7638 otherwise
known as "The Department of Energy Act of 1992" is hereby amended to read as follows:
Formulate policies for the planning and implementation of a comprehensive program for the
efficient supply and economical use of energy consistent with the approved national economic
plan and with the policies on environmental protection and conservation and maintenance of
ecological balance, and provide a mechanism for the integration, rationalization, and
coordination of the various energy programs of the Government;
Develop and update annually the existing Philippine Energy Plan, hereinafter referred to as `The
Plan', which shall provide for an integrated and comprehensive exploration, development,
utilization, distribution, and conservation of energy resources, with preferential bias for
environment-friendly, indigenous, and low-cost sources of energy. The plan shall include a
policy direction towards the privatization of government agencies related to energy, deregulation
of the power and energy industry, and reduction of dependency on oil-fired plants. Said Plan
shall be submitted to Congress not later than the fifteenth day of September and every year
thereafter;
Prepare and update annually a Power Development Program (PDP) and integrate the same into
the Philippine Energy Plan. The PDP shall consider and integrate the individual or joint
development plans of the transmission, generation, and distribution sectors of the electric power
industry, which are submitted to the Department: Provide, however, That the ERC shall have
exclusive authority covering the Grid Code and the pertinent rules and regulations it may issue;
Ensure the reliability, quality and security of supply of electric power;
Following the restructuring of the electricity sector, the DOE shall, among others:
Encourage private sector investments in the electricity sector and promote development of
indigenous and renewable energy sources;
Facilitate and encourage reforms in the structure and operations of distribution utilities for
greater efficiency and lower costs;
In consultation with other government agencies, promote a system of incentives to encourage
industry participants, including new generating companies and end-users to provide adequate and
reliable electric supply; and
Undertake in coordination with the ERC, NPC, NEA and the Philippine Information Agency
(PIA), information campaign to educate the public on the restructuring of the electricity sector
and privatization of NPC assets.
Jointly with the electric power industry participants, establish the wholesale electricity spot
market and formulate the detailed rules governing the operations thereof;
Establish and administer programs for the exploration, transportation, marketing, distribution,
utilization, conservation, stockpiling, and storage of energy resources of all forms, whether
conventional or non-conventional;
Exercise supervision and control over all government activities relative to energy projects in
order to attain the goals embodied in Section 2 of RA 7638;
Develop policies and procedures and, as appropriate, promote a system of energy development
incentives to enable and encourage electric power industry participants to provide adequate
capacity to meet demand including, among others, reserve requirements;
Monitor private sector activities relative to energy projects in order to attain the goals of the
restructuring , privatization, and modernization of the electric power sector as provided for under
existing laws: Provided, That the Department shall endeavor to provide for an environment
conducive to free and active private sector participation and investment in all energy activities;
Assess the requirements of, determine priorities for, provide direction to, and disseminate
information resulting from energy research and development programs for the optimal
development of various forms of energy production and utilization technologies;

Formulate and implement programs, including a system of providing incentives and penalties,
for the judicious and efficient use of energy in all energy-consuming sectors of the economy;
Formulate and implement a program for the accelerated development of non-conventional energy
systems and the promotion and commercialization of its applications;
Devise ways and means of giving direct benefit to the province, city, or municipality, especially
the community and people affected, and equitable preferential benefit to the region that hosts the
energy resource and/or the energy-generating facility: Provided, however, That the other
provinces, cities, municipalities, or regions shall not be deprived of their energy requirements;
Encourage private enterprises engaged in energy projects, including corporations, cooperatives,
and similar collective organizations, to broaden the base of their ownership and thereby
encourage the widest public ownership of energy-oriented corporations;

Formulate such rules and regulations as may be necessary to implement the objectives of this
Act; and
Exercise such other powers as may be necessary or incidental to attain the objectives of this Act.
Back to Table of Contents
Chapter 4: REGULATION OF THE ELECTRIC POWER INDUSTRY
Section 38: Creation of the Energy Regulatory Commission.
There is hereby created an independent, quasi-judicial regulatory body to be named the Energy
Regulatory Commissions (ERC). For this purpose, the existing Energy Regulatory Board (ERB)
created under Executive Order No. 172, as amended, is hereby abolished.

The Commission shall be composed of a Chairman and four (4) members to be appointed by the
President of the Philippines. The Chairman and the members of the Commission shall be natural-
born citizens and residents of the Philippines, persons of good moral character, at least thirty-five
(35) years of age, and of recognized competence in any of the following fields: energy, law,
economics, finance, commerce, or engineering, with at least three (3) years actual and
distinguished experience in their respective fields of expertise: Provided, That out of the four (4)
members of the Commission, at least one (1) shall be a member of the Philippine Bar with at
least ten (10) years experience in the active practice of law, and one (1) shall be a certified public
accountant with at least ten (10) years experience in active practice.

Within three (3) months from the creation of the ERC, the Chairman shall submit for the
approval by the President of the Philippines the new organizational structure and plantilla
positions necessary to carry out the powers and functions of the ERC.

The Chairman of the Commission, who shall be a member of the Philippine Bar, shall act as the
Chief Executive Officer of the Commission.

All members of the Commission shall have a term of seven (7) years: Provided, That for the first
appointees, the Chairman shall hold office for seven (7) years, two (2) members shall hold office
for five (5) years and the other two (2) members shall hold office for three (3) years; Provided,
further, That appointment to any future vacancy shall only be for the unexpired term of the
predecessor: Provided, finally, That there shall be no reappointment and in no case shall any
member serve for more than seven (7) years in the Commission.

The Chairman and members of the Commission shall assume office of the beginning of their
terms: Provided, That, if upon the effectivity of this Act, the Commission has not been
constituted and the new staffing pattern and plantilla positions have not been approved and
filled-up, the current Board and existing personnel of ERB shall continue to hold office.

The existing personnel of the ERB, if qualified, shall be given preference in the filling up of
plantilla positions created in the ERC, subject to existing civil service rules and regulations.

Members of the Commission shall enjoy security of tenure and shall not be suspended or
removed from office except for just cause as specified by law.

The Chairman and members of the Commission or any of their relatives within the fourth civil
degree of consanguinity or affinity, legitimate or common law, shall be prohibited from holding
any interest whatsoever, either as investor, stockholder, officer or director, in any company or
entity engaged in the business of transmitting, generating, supplying or distributing any form of
energy and must, therefore, divest through sale or legal disposition of any and all interests in the
energy sector upon assumption of office.

The presence of at least three (3) members of the Commission shall constitute a quorum and the
majority vote of two (2) members in a meeting where a quorum is present shall be necessary for
the adoption of any rule, ruling, order, resolution, decision, or other act of the Commission in the
exercise of its quasi-judicial functions: Provided, That in fixing rates and tariffs, an affirmative
vote of three (3) members shall be required.

Section 39: Compensation and Other Emoluments for ERC Personnel.

The compensation and other emoluments for the Chairman and members of the Commission and
the ERC personnel shall be exempted from the coverage of Republic Act No. 6758, otherwise
known as the "Salary Standardization Act". For this purpose, the schedule of compensation of the
ERC personnel, except for the initial salaries and compensation of the Chairman and members of
the Commission, shall be submitted for approval by the President of the Philippines. The new
schedule of compensation shall be implemented within six (6) months from the effectivity of this
Act and may be upgraded by the President of the Philippines as the need arises: Provided, That in
no case shall the rate be upgraded more than once a year.

The Chairman and members of the Commission shall initially be entitled to the same salaries,
allowances and benefits as those of the Presiding Justice and Associate Justices of the Supreme
Court, respectively. The Chairman and the members of the Commission shall, upon completion
of their term or upon becoming eligible for retirement under existing laws, be entitled to the
same retirement benefits and the privileges provided for the Presiding Justice and Associate
Justices of the Supreme Court, respectively.

Section 40: Enhancement of Technical Competence.

The ERC shall establish rigorous training programs for its staff for the purpose of enhancing the
technical competence of the ERC in the following areas: evaluation of technical performance and
monitoring of compliance with service and performance standards, performance-based rate-
setting reform, environmental standards and such other areas as will enable the ERC to
adequately perform its duties and functions.

Section 41: Promotion of Consumer Interests.

The ERC shall handle consumer complaints and ensure the adequate promotion of consumer
interests.

Section 42: Budget of the ERC.

The amount of One hundred fifty million pesos (P150,000,000.00) is hereby allocated from the
existing budget of the ERB for the initial operation of the ERC. Any balance shall initially be
sourced from the Office of the President of the Philippines. Thereafter, the annual budget of the
ERC shall be included in the regular or special appropriations.

Section 43: Functions of the ERC.

The ERC shall promote competition, encourage market development, ensure customer choice
and penalize abuse of market power in the restructured electricity industry. In appropriate cases,
the ERC is authorized to issue cease and desist order after due notice and hearing. Towards this
end, it shall be responsible for the following key functions in the restuctured industry:

Enforce the implementing rules and regulations of this Act;

Within six (6) months from the effectivity of this Act, promulgate and enforce, in accordance
with law, a National Grid Code and a Distribution Code which shall include, but not limited to,
the following:
Performance standards for TRANSCO O & M Concessionaire, distribution utilities and
suppliers: Provided, That in the establishment of the performance standards, the nature and
function of the entities shall be considered; and
Financial capability standards for the generating companies, the TRANSCO, distribution utilities
and suppliers: Provided, further, That such standards are set to ensure that the electric power
industry participants meet the minimum financial standards to protect the public interest.
Determine, fix, and approve, after due notice and public hearings the universal charge, to be
imposed on all electricity end-users pursuant to Section 34 hereof.
Enforce the rules and regulations governing the operations of the electricity spot market and the
activities of the spot market operator and other participants in the spot market, for the purpose of
ensuring a greater supply and rational pricing of electricity;
Determine the level of cross subsidies in the existing retail rate until the same is removed
pursuant to Section 74 hereof;
Amend or revoke, after due notice and hearing, the authority to operate of any person or entity
which fails to comply with the provisions hereof, the IRR or any order or resolution of the ERC.
In the event a divestment is required, the ERC shall allow the affected party sufficient time to
remedy the infraction or for an orderly disposal, but in no case exceed twelve (12) months from
the issuance of the order;
In the public interest, establish and enforce a methodology for setting transmission and
distribution wheeling rates and retail rates for the captive market of a distribution utility, taking
intro 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 on rate base (RORB) to enable the entity to operate viably. The ERC may
adopt alternative forms of internationally-accepted rate-setting methodology as it may deem
appropriate. The rate-setting methodology so adopted and applied must ensure a reasonable price
of electricity. The rates prescribed shall be non-discriminatory. To achieve this objective and to
ensure the complete removal of cross subsidies, the cap on the recoverable rate of system losses
prescribed in Section 10 of Republic Act No. 7832, is hereby amended and shall be replaced by
caps which shall be determined by the ERC based on load density, sales mix, cost of service,
delivery voltage and other technical considerations it may promulgate. The ERC shall determine
such form or rate-setting methodology, which shall promote efficiency. In case the rate setting
methodology used is RORB, it shall be subject to the following guidelines:
For purposes of determining the rate base, the TRANSCO or any distribution utility may be
allowed to revalue its eligible assets not more than once every three (3) years by an independent
appraisal company: Provided, however, That ERC may give an exemption in case of unusual
devaluation: Provided, further, That the ERC shall exert efforts to minimize price shocks in order
to protect the consumers;
Interest expenses are not allowable deductions from permissible return on rate base;
In determining eligible cost of services that will be passed on to the end-users, the ERC shall
establish minimum efficiency performance standards for the TRANSCO and distribution utilities
including systems losses, interruption frequency rates, and collection efficiency;
Further, in determining rate base, the TRANSCO or any distribution utility shall not be allowed
to include management inefficiencies like cost of project delays not excused by force majeure,
penalties and related interest during construction applicable to these unexcused delays; and
Any significant operating costs or project investments of the TRANSCO and distribution utilities
which shall become part of the rate base shall be subject to verification by the ERC to ensure that
the contracting and procurement of the equipment, assets and services have been subjected to
transparent and accepted industry procurement and purchasing practices to protect the public
interest.
Three (3) years after the imposition of the universal charge, ensure that the charges of the
TRANSCO or any distribution utility shall bear no cross subsidies between grids, within grids, or
between classes of customers, except as provided herein;
Review and approve any changes on the terms and conditions of service of the TRANSCO or
any distribution utility;
Allow the TRANSCO to charge user fees for ancillary services to all electric power industry
participants or self-generating entities connected to the grid. Such fees shall be fixed by the ERC
after due notice and public hearing;
Set a lifeline rate for the marginalized end-users;
Monitor and take measures in accordance with this Act to penalize abuse of market power,
cartelization, and anti-competitive or discriminatory behavior by any electric power industry
participant;
Impose fines or penalties for any non-compliance with or breach of this Act, the IRR of this Act
and the rules and regulations which it promulgates or administers;
Take any other action delegated to it pursuant to this Act;
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
reports available to any interested party upon payment of a charge which reflects the printing
costs. The ERC shall publish all its decisions involving rates and anticompetitive cases in at least
one (1) newspaper of general circulation, and/or post electronically and circulate to all interested
electric power industry participants copies of its resolutions to ensure fair and impartial
treatment;
Monitor the activities in the generation and supply of the electric power industry with the end in
view of promoting free market competition and ensuring that the allocation or pass through of
bulk purchase cost by distributors is transparent, non-discriminatory and that any existing
subsidies shall be divided pro-rata among all retail suppliers;
Act on applications for or modifications of certificates of public convenience and/or necessity,
licenses or permits of franchised electric utilities in accordance with law and revoke, review and
modify such certificates, licenses or permits in appropriate cases, such as in cases of violations of
the Grid Code, Distribution Code and other rules and regulations issued by the ERC in
accordance with law;
Act on applications for cost recovery and return on demand side management projects;
In the exercise of its investigative and quasi-judicial powers, act against any participant or player
in the energy sector for violations of any law, rule and regulation governing the same, including
the rules on cross-ownership, anti-competitive practices, abuse of market positions and similar or
related acts by any participant in the energy sector or by any person, as may be provided by law,
and require any person or entity to submit any report or data relative to any investigation or
hearing conducted pursuant to this Act;
Inspect, on its own or through duly authorized representatives, the premises, books of accounts
and records of any person or entity at any time, in the exercise of its quasi-judicial power for
purposes of determining the existence of any anti-competitive behavior and/or market power
abuse and any violation of rules and regulations issued by the ERC;
Perform such other regulatory functions as are appropriate and necessary in order to ensure the
successful restructuring and modernization of the electric power industry, such as, but not limited
to, the rules and guidelines under which generation companies, distribution utilities which are
not publicly listed shall offer and sell to the public a portion not less than fifteen percent (15%)
of their common shares of stocks: Provided, however, That generation companies, distribution
utilities or their respective holding companies that are already listed in the PSE are deemed in
compliance. For existing companies, such public offering shall be implemented not later than
five (5) years from the effectivity of this Act. New companies shall implement their respective
public offerings not later than five (5) years from the issuance of their certificate of compliance;
and
The ERC shall have the original and exclusive jurisdiction over all cases contesting rates, fees,
fines and penalties imposed by the ERC in the exercise of the above mentioned powers,
functions and responsibilities and over all cases involving disputes between and among
participants or players in the energy sector.
All notices of hearings to be conducted by the ERC for the purpose of fixing rates or fees shall
be published at least twice for two successive weeks in two (2) newspapers of nationwide
circulation.

Section 44: Transfer of Powers and Functions.

The powers and functions of the Energy Regulatory Board not inconsistent with the provisions of
this Act are hereby transferred to the ERC. The foregoing transfer of powers and functions shall
include all applicable funds and appropriations, records, equipment, property and personnel as
may be necessary.

Section 45: Cross Ownership, Market Power Abuse and Anti-Competitive Behavior.
No participant in the electricity industry or any other person may engage in any anti-competitive
behavior including, but not limited to, cross-subsidization, price or market manipulation, or other
unfair trade practices detrimental to the encouragement and protection of contestable markets.

No generation company, distribution utility, or its respective subsidiary or affiliate or stockholder

or official of a generation company or distribution utility, or other entity engaged in generating
and supplying electricity specified by ERC within the fourth civil degree of consanguinity or
affinity, shall be allowed to hold any interest, directly or indirectly, in TRANSCO or its
concessionaire. Likewise, the TRANSCO, or its concessionaire or any of its stockholders or
officials or any of their relatives within the fourth civil degree of consanguinity or affinity, shall
not hold any interest, whether directly or indirectly, in any generation company or distribution
utility. Except for ex officio government-appointed representatives, no person who is an officer
or director of the TRANSCO or its concessionaire shall be an officer or director of any
generation company, distribution utility or supplier.

An "affiliate" means any person which, alone or together with any other person, directly or
indirectly, through one or more intermediaries, controls, is controlled by, or is under common
control with another person. 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.

To promote true market competition and prevent harmful monopoly and market power abuse, the
ERC shall enforce the following safeguards:

No company or related group can own, operate or control more than thirty percent (30%) of the
installed generating capacity of a grid and/or twenty-five percent (25%) of the national installed
generating capacity. "Related group" includes a person's business interests, including its
subsidiaries, affiliates, directors or officers or any of their relatives by consanguinity or affinity,
legitimate or common law, within the fourth civil degree;
Distribution utilities may enter into bilateral power supply contracts subject to review by the
ERC: Provided, That such review shall only be required for distribution utilities whose markets
have not reached household demand level. For the purpose of preventing market power abuse
between associated firms engaged in generation and distribution, no distribution utility shall be
allowed to source from bilateral power supply contracts more than fifty percent (50%) of its total
demand from an associated firm engaged in generation but such limitation, however, shall not
prejudice contracts entered into prior to the effectivity of this Act. An associated firm with
respect to another entity refers to any person which, alone or together with any other person,
directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under
common control with, such entity; and
For the first five (5) years from the establishment of the wholesale electricity spot market, no
distribution utility shall source more than ninety percent (90%) of its total demand from bilateral
power supply contracts.
For purposes of this Section, the grid basis shall consist of three (3) separate grids, namely
Luzon, Visayas and Mindanao. The ERC shall have the authority to modify or amend this
definition of a grid when two or more of the three separate grids become sufficiently
interconnected to constitute a single grid or as conditions may otherwise permit.
Exceptions from these limitations shall be allowed for isolated grids that are not connected to the
high voltage transmission system. Except as otherwise provided for in this Section, any
restriction on ownership and/or control between or within sectors of the electricity industry may
be imposed by ERC only insofar as the enforcement of the provisions of this Section is
concerned.

The ERC shall, within one (1) year from the effectivity of this Act., promulgate rules and
regulations to ensure and promote competition, encourage market development and customer
choice and discourage/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 define the following:

the relevant markets for purposes of establishing abuse or misuse of monopoly or market
position;
areas of isolated grids; and
the periodic reportorial requirements of electric power industry participants as may be necessary
to enforce the provisions of this Section.
The ERC shall, motu proprio, monitor and penalize any market power abuse or anti-competitive
or discriminatory act or behavior by any participant in the electric power industry. Upon finding
that a market participant has engaged in such act or behavior, the ERC shall stop and redress the
same. Such remedies shall, without limitation, include the imposition of price controls, issuance
of injunctions, requirement of divestment or disgorgement of excess profits and imposition of
fines and penalties pursuant to this Act.

The ERC shall, within one (1) year from the effectivity of this Act, promulgate rules and
regulations providing for a complaint procedure that, without limitation, provides the accused
party with notice and an opportunity to be heard.

Section 46: Fines and Penalties.

The fines and penalties that shall be imposed by the ERC for any violation of or non-compliance
with this Act or the IRR shall range from a minimum of fifty thousand pesos (P50,000.00) to a
maximum of Fifty million pesos (P50,000,000.00).

Any person who is found guilty of any of the prohibited acts pursuant to Section 45 hereof shall
suffer the penalty of prision mayor and fine ranging from Ten thousand pesos (P10,000.00) to
Ten million pesos (P10,000,000.00), or both, at the discretion of the court.

The members of the Board of Directors of the juridical companies participating in or covered in
the generation companies, the distribution utilities, the TRANSCO or its concessionaire or
supplier who violate the provisions of this Act may be fined by an amount not exceeding double
the amount of damages caused by the offender or by imprisonment of one (1) year or two (2)
years or both at the discretion of the court. This rule shall apply to the members of the Board
who knowingly or by neglect allows the commission or omission under the law.

If the offender is a government official or employee, he shall, in addition, be dismissed from the
government service with prejudice to reinstatement and with perpetual or temporary
disqualification from holding any elective or appointive office.

If the offender is an alien, he may, in addition to the penalties prescribed, be deported without
further proceedings after service of sentence.

Any case which involves question of fact shall be appealable to the Court of Appeals and those
which involve question of law shall be directly appealable to the Supreme Court.

The administrative sanction that may be imposed by the ERC shall be without prejudice to the
filing of a criminal action, if warranted.

To ensure compliance with this Act, the penalty of prision correccional or a fine ranging from
Five thousand pesos (P5,000.00) to Five million pesos (P5,000,000.00), or both, at the discretion
of the court, shall be imposed on any person, including but not limited to the president, member
of the Board, Chief Executive Officer or Chief Operating Officer of the corporation, partnership,
or any other entity involved, found guilty of violating or refusing to comply with any provision
of this Act or its IRR, other than those provided herein.

Any party to an administrative proceeding may, at any time, make an offer to the ERC,
conditionally or otherwise, for a consented 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 be used as evidence against any
party for any other purpose 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, nor as a waiver to
file any warranted criminal actions.

In addition, Congress may, upon recommendation of the DOE and/or ERC, revoke such
franchise or privilege granted to the party who violated the provisions of this Act.

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Chapter 5: PRIVATIZATION OF THE ASSETS OF THE NATIONAL POWER
CORPORATION
Section 47: NPC Privatization.
Except for the assets of SPUG, the generation assets, real estate, and other disposable assets as
well as IPP contracts of NPC shall be privatized in accordance with this Act. Within six (6)
months from the effectivity of this Act, the PSALM Corp shall submit a plan for the endorsement
by the Joint Congressional Power Commission and the approval of the President of the
Philippines, on the total privatization of the generation assets, real estate, other disposable assets
as well as existing IPP contracts of NPC and thereafter, implement the same, in accordance with
the following guidelines, except as provided for in Paragraph (f) herein:

The privatization value to the National Government of the NPC generation assets, real estate,
other disposable assets as well as IPP contracts shall be optimized;
The participation by Filipino citizens and corporations in the purchase of NPC assets hall be
encouraged:
In the case of foreign investors, at least seventy-five percent (75%) of the funds used to acquire
NPC-generation assets and IPP contracts shall be inwardly remitted and registered with the
Bangko Sentral ng Pilipinas.

The NPC plants and/or IPP contracts assigned to IPP Administrators, its related assets and
assigned liabilities, if any, shall be grouped in a manner which shall promote the viability of the
resulting generation companies (gencos), ensure economic efficiency, encourage competition,
foster reasonable electricity rates and create market appeal to optimize returns to the government
from the sale and disposition of such assets in a manner consistent with the objectives of this Act.
In the grouping of the generation assets and IPP contracts of NPC, the following criteria shall be
considered:
A sufficient scale of operations and balance sheet strength to promote the financial viability of
the restructured units;
Broad geographical groupings to ensure efficiency of operations but without the formation of
regional companies or consolidation of market power;
Portfolio of plants and IPP contracts to achieve management and operational synergy without
dominating any part of the market or of the load curve; and
Such other factors as may be deemed beneficial to the best interest of the National Government
while ensuring attractiveness to potential investors.
All assets of NPC shall be sold in an open and transparent manner through public bidding, and
the same shall apply to the disposition of IPP contracts;
In cases of transfer of possession, control, operation or privatization of multi-purpose hydro
facilities, safeguards shall be prescribed to ensure that the national government may direct water
usage in cases of shortage to protect potable water, irrigation, and all other requirements imbued
with public interest;
The Agus and the Pulangui complexes in Mindanao shall be excluded from among the generation
companies that will be initially privatized. Their ownership shall be transferred to the PSALM
Corp. and both shall continue to be operated by the NPC. Said complexes may be privatized not
earlier than ten (10) years from the effectivity of this Act, and except for Agus III, shall not be
subject to Build-Operate-Transfer (B-O-T), Build-Rehabilitate-OperateTransfer (B-R-O-T) and
other variations thereof pursuant to Republic Act No. 6957, as amended by Republic Act No.
7718. The privatization of Agus and Pulangui complexes shall be left to the discretion of
PSALM Corp. in consultation with Congress;
The steamfield assets and generating plants of each geothermal complex shall not be sold
separately. They shall be combined and each geothermal complex shall be sold as one package
through public bidding. The geothermal complexes covered by this requirement include, but are
not limited to, Tiwi-Makban, Leyte A and B (Tongonan), Palinpinon, and Mt. Apo;
The ownership of the Caliraya-Botokan-Kalayaan (CBK) pump storage complex shall be
transferred to the PSALM Corporation;
Not later than three (3) years from the effectivity of this Act, and in no case later than the initial
implementation of open access, at least seventy percent (70%) of the total capacity of generating
assets of NPC and of the total capacity of the power plants under contract with NPC located in
Luzon and Visayas shall have been privatized: Provided, That any unsold capacity shall be
privatized not later than eight (8) years from the effectivity of this Act; and
NPC may generate and sell electricity only from the undisposed generating assets and IPP
contracts of PSALM Corp. and shall not incur any new obligations to purchase power through
bilateral contracts with generation companies or other suppliers.

Section 48: National Power Board of Directors.

Upon the passage of this Act, Section 6 of R.A. 6395, as amended, and Section 13 of RA 7638,
as amended, referring to the composition of the National Power Board of Directors, are hereby
repealed and a new Board shall be immediately organized. The new Board shall be composed of
the Secretary of Finance as Chairman, with the following as members: the Secretary of Energy,
the Secretary of Budget and Management, the Secretary of Agriculture, the DirectorGeneral of
the National Economic and Development Authority, the Secretary of Environment and Natural
Resources, the Secretary of Interior and Local Government, the Secretary of the Department of
Trade and Industry, and the President of the National Power Corporation.

Chapter 6: POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT

Section 49: Creation of Power Sector Assets and Liabilities Management Corporation.
There is hereby created a government-owned and -controlled corporation to be known as the
"Power Sector Assets and Liabilities Management Corporation", hereinafter referred to as the
"PSALM Corp.", which shall take ownership of all existing NPC generation assets, liabilities,
IPP contracts, real estate and all other disposable assets. All outstanding obligations of the NPC
arising from loans, issuances of bonds, securities and other instruments of indebtedness shall be
transferred to and assumed by the PSALM Corp. within one hundred eighty (180) days from the
approval of this Act.

Section 50: Purpose and Objective, Domicile and Term of Existence.

The principal purpose of the PSALM Corp. is to manage the orderly sale, disposition, and
privatization of NPC generation assets, real estate and other disposable assets, and IPP contracts
with the objective of liquidating all NPC financial obligations and stranded contract costs in an
optimal manner.

The PSALM Corp. shall have its principal office and place of business within Metro Manila.

The PSALM Corp. shall exist for a period of twenty five (25) years from the effectivity of this
Act, unless otherwise provided by law, and all assets held by it, all moneys and properties
belonging to it, and all its liabilities outstanding upon the expiration of its term of existence shall
revert to and be assumed by the National Government.

Section 51: Powers.

The Corporation shall, in the performance of its functions and for the attainment of its objective,
have the following powers:
To formulate and implement a program for the sale and privatization of the NPC assets and IPP
contracts and the liquidation of NPC debts and stranded contract costs, such liquidation to be
completed within the term of existence of the PSALM Corp.;
To take title to and possession of, administer and conserve the assets transferred to it; to sell or
dispose of the same at such price and under such terms and conditions as it may deem necessary
or proper, subject to applicable laws, rules and regulations;
To take title to and possession of the NPC IPP contracts and to appoint, after public bidding in
transparent and open manner, qualified independent entities who shall act as the IPP
Administrators in accordance with this Act;
To calculate the amount of the stranded debts and stranded contract costs of NPC which shall
form the basis for ERC in the determination of the universal charge;
To liquidate the NPC stranded contract costs utilizing proceeds from sales and other property
contributed to it, including the proceeds from the universal charge;
To adopt rules and regulations as may be necessary or proper for the orderly conduct of its
business or operations;
To sue and be sued in its name;
To appoint or hire, transfer, remove and fix the compensation of its personnel: Provided,
however, That the Corporation shall hire its own personnel only if absolutely necessary, and as
far as practicable, shall avail itself of the services of personnel detailed from other government
agencies;
To own, hold, acquire, or lease real and personal properties as may be necessary or required in
the discharge of its functions;
To borrow money and incur such liabilities, including the issuance of bonds, securities or other
evidences of indebtedness utilizing its assets as collateral and/or through the guarantees of the
National Government: Provided, however, That all such debts or borrowings shall have been
paid off before the end of its corporate life;
To restructure existing loans of NPC;
To collect, administer, and apply NPC's portion of the universal charge; and
To restructure the sale, privatization or disposition of NPC assets and IPP contracts and/or their
energy output based on such terms and conditions which shall optimize the value and sale prices
of said assets.

Section 52: Power Sector Assets and Liabilities Management Corporation, Meetings, Quorum
and Voting.
The Corporation shall be administered, and its powers and functions exercised, by a Board of
Directors which shall be composed of the Secretary of Finance as the Chairman, the Secretary of
Budget and Management, the Secretary of the Department of Energy, the Director-General of the
National Economic and Development Authority, the Secretary of the Department of Justice, the
Secretary of the Department of Trade and Industry and the President of the PSALM Corp. as ex
officio members thereof.

The Board of Directors shall meet regularly and as frequently as may be necessary to enable it to
discharge its functions and responsibilities. The presence at a meeting of four (4) members shall
constitute a quorum, and the decision of the majority of three (3) members present at a meeting
where there is quorum shall be the decision of the Board of Directors.
Section 53: Powers of the President of PSALM Corp.
The President of PSALM Corp. shall be appointed by the President of the Philippines. In the
absence of the Chairman, the President shall preside over Board meetings.

The PSALM Corp. President shall be the Chief Executive Officer of PSALM Corp. and shall
have the following powers and duties:

To execute and administer the policies and measures approved by the Board, and take
responsibility for the efficient discharge of management functions;
To oversee the preparation of the budget of PSALM Corp.;
To direct and supervise the operation and internal administration of PSALM Corp. and, for this
purpose, may delegate some or any of his administrative responsibilities and duties to other
officers of PSALM Corp;
Subject to the guidelines and policies set up by the Board, to appoint and fix the number and
compensation of subordinate officials and employees of PSALM Corp; and for cause, to remove,
suspend, or otherwise discipline any subordinate employee of PSALM Corp;
To submit an annual report to the Board on the activities and achievements of PSALM Corp. at
the close of each fiscal year and upon approval thereof, submit a copy to the President of the
Philippines and to such other agencies as may be required by law;
To represent PSALM Corp. in all dealings and transactions with other offices, agencies, and
instrumentalities of the Government and with all persons and other entities, private or public,
domestic or foreign; and
To exercise such other powers and duties as may be vested in him by the Board from time to
time.

Section 54: Exemption from the Salary Standardization Law.

The salaries and benefits of employees in the PSALM Corp. shall be exempt from Republic Act
No. 6758 and shall be fixed by the PSALM Corp. Board.

Section 55: Property of the PSALM Corp.

The following funds, assets, contributions and other property shall constitute the property of the
PSALM Corp.:

The generation assets, real estate, IPP contracts, other disposable assets of NPC, proceeds from
the sale or disposition of such assets and the residual assets from B-O-T, R-O-T, and other
variations thereof;
Transfers from the National Government;
Proceeds from loans incurred to restructure or refinance NPC's transferred liabilities: Provided,
however, That all borrowings shall be fully paid for by the end of the life of the PSALM Corp.;
Proceeds from the universal charge allocated for stranded contract costs and the stranded debts of
NPC;
Net profit of NPC;
Net profit of TRANSCO;
Official assistance, grants, and donations from external sources; and
Other sources of funds as may be determined by PSALM Corp. necessary for the
abovementioned purposes.
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Section 56: Claims Against the PSALM Corp.
The following shall constitute the claims against the PSALM Corp.:

NPC liabilities transferred to the PSALM Corp.;

Transfers from the national government;
New loans; and
NPC stranded contract costs.
Chapter 7: PROMOTION OF RURAL ELECTRIFICATION

Section 57: Conversion of Electric Cooperatives.

Electric cooperatives are hereby given the option to convert into either stock cooperative under
the Cooperatives Development Act or stock corporation under the Corporation Code. Nothing
contained in this Act shall deprive electric cooperatives of any privilege or right granted to them
under Presidential Decree No. 269, as amended, and other existing laws.

Section 58: Additional Mandate of the National Electrification Administration (NEA).

NEA shall develop and implement programs:

To prepare electric cooperatives in operating and competing under the deregulated electric
market within five (5) years from the effectivity of this Act, specifically in an environment of
open access and retail wheeling;
To strengthen the technical capability and financial viability of rural electric cooperatives; and
To review and upgrade regulatory policies with a view to enhancing the viability of rural electric
cooperatives as electric utilities.
NEA shall continue to be under the supervision of the DOE and shall exercise its functions under
Presidential Decree No. 269, as amended by Presidential Decree No. 1645 insofar as they are
consistent with this Act.

Section 59: Alternative Electric Service for Isolated Villages.

The provision of electric service in remote and unviable villages that the franchised utility is
unable to service for any reason shall be opened to other qualified third parties.

Section 60: Debts of Electric Cooperatives.

Upon the effectivity of this Act, all outstanding financial obligations of electric cooperatives to
NEA and other government agencies incurred for the purpose of financing the rural
electrification program shall be assumed by the PSALM Corp. in accordance with the program
approved by the President of the Philippines within one (1) year from the effectivity of this Act
which shall be implemented and completed within three (3) years from the effectivity of this Act.
The ERC shall ensure a reduction in the rates of electric cooperatives commensurate with the
resulting savings due to the removal of the amortization payments of their loans. Within five (5)
years from the condonation of debt, any electric cooperative which shall transfer ownership or
control of its assets, franchise or operations thereof shall repay PSALM Corp. the total debts
including accrued interests thereon.
Chapter 8: GENERAL PROVISIONS
Section 61: Reportorial Requirements.
The DOE shall take the necessary measures to ensure that the provisions of this Act are properly
implemented, and shall submit to the Power Commission a semiannual report on the
implementation of this Act, on or before the last week of April and October of each year.

Section 62: Joint Congressional Power Commission.

Upon the effectivity of this Act, a congressional commission, hereinafter referred to as the
"Power Commission", is hereby constituted. The Power Commission shall be composed of
fourteen (14) members with the chairmen of the Committee on Energy of the Senate and the
House of Representatives and six (6) additional members from each House, to be designated by
the Senate President and the Speaker of the House of Representatives, respectively. The minority
shall be entitled to pro rata representation but shall have at least one (1) representative in the
Power Commission.

The Commission shall, in aid of legislation, perform the following functions, among others:

Set the guidelines and overall framework to monitor and ensure the proper implementation of
this Act;
Endorse the initial privatization plan within one (1) month from submission of such plan to the
Power Commission by PSALM Corp. for approval by the President of the Philippines;
To ensure transparency, require the submission of reports from government agencies concerned
on the conduct of public bidding procedures regarding privatization of NPC generation and
transmission assets;
Review and evaluate the performance of the industry participants in relation to the objectives and
timelines set forth in this Act;
Approve the budget for the programs of the Power Commission and all disbursements therefrom,
including compensation of all personnel;
Submit periodic reports to the President of the Philippines and Congress;
Determine inherent weaknesses in the law and recommend necessary remedial legislation or
executive measures; and
Perform such other duties and functions as may be necessary to attain its objectives.
In furtherance hereof, the Power Commission is hereby empowered to require the DOE, ERC,
NEA, TRANSCO, generation companies, distribution utilities, suppliers and other electric power
industry participants to submit reports and all pertinent data and information relating to the
performance of their respective functions in the industry. Any person who willfully and
deliberately refuses without just cause to extend the support and assistance required by the Power
Commission to effectively attain its objectives shall, upon conviction, be punished by
imprisonment of not less than one (1) year but not more than six (6) years or a fine of not less
than Fifty thousand pesos (P50,000.00) but not more than Five hundred thousand pesos
(P500,000.00) or both at the discretion of the court.

The Power Commission shall adopt its internal rules of procedures; conduct hearings and receive
testimonies, reports and technical advice; invite or summon by subpoena ad testificandum any
public official, private citizen or any other person to testify before it, or require any person by
subpoena duces tecum to produce before it such records, reports, documents or other materials as
it may require; and generally require all the powers necessary to attain the purposes for which it
is created. The Power Commission shall be assisted by a secretariat to be composed of personnel
who may be seconded from the Senate and the House of Representatives and may retain
consultants. The secretariat shall be headed by an executive director who has sufficient
background and competence on the policies and issues relating to electricity industry reforms as
provided in this Act. To carry out its powers and functions, the initial sum of twenty- five million
pesos (P25,000,000.00) shall be charged against the current appropriations of the Senate.
Thereafter, such amount necessary for its continued operation shall be included in the annual
General Appropriations Act.

The Power Commission shall exist for period of ten (10) years from the effectivity of this Act
and may be extended by a joint concurrent resolution.

Section 63: Separation Benefits of Officials and Employees of Affected Agencies.

National government employees displaced or separated from the service as a result of the
restructuring of the electricity industry and privatization of NPC assets pursuant to this Act, shall
be entitled to either a separation pay and other benefits in accordance with existing laws, rules or
regulations or be entitled to avail of the privileges provided under a separation plan which shall
be one and one-half month salary for every year of service in the government: Provided,
however, That those who avail of such privilege shall start their government service anew if
absorbed by any government-owned successor company. In no case shall there be any diminution
of benefits under the separation plan until the full implementation of the restructuring and
privatization.

Displaced or separated personnel as a result of the privatization, if qualified, shall be given

preference in the hiring of the manpower requirements of the privatized companies.

The salaries of employees of NPC shall continue to be exempt from the coverage of Republic
Act No. 6758, otherwise known as "The Salary Standardization Act".

With respect to employees who are not retained by NPC, the government, through the
Department of Labor and Employment, shall endeavor to implement re-training, job counseling,
and job placement programs.

Section 64: Fiscal Prudence.

To promote the prudent management of government resources, the creation of new positions and
the levels of or increase in salaries and all other emoluments and benefits of TRANSCO and
PSALM Corp. personnel shall be subject to the approval of the President of the Philippines. The
compensation and all other emoluments and benefits of the officials and members of the Board
of the TRANSCO and PSALM Corp. shall be subject to the approval of the President of the
Philippines.

Section 65: Environmental Protection.

Participants in the generation, distribution and transmission sub-sectors of the industry shall
comply with all environmental laws, rules, regulations and standards promulgated by the
Department of Environment and Natural Resources including, in appropriate cases, the
establishment of an environmental guarantee fund.

Section 66: Benefits to Host Communities.

The obligations of generation companies and energy resource developers to communities hosting
energy generating facilities and/or energy resource developers as defined under Chapter II,
Sections 289 to 294 of the Local Government Code and Section 5(i) of Republic Act No. 7638
and their implementing rules and regulations and applicable orders and circulars consistent with
this Act shall continue: Provided, That the obligations mandated under Chapter II, Section 291 of
Republic Act No. 7160, shall apply to privately-owned corporations or entities utilizing the
national wealth of the locality.

To ensure the effective implementation of the reduction in cost of electricity in the communities
where the source of energy is located, the mechanics and procedures prescribed in the
Department of the Interior and Local Government (DILG)-DOE Circulars No. 95-01 and 98-01
dated October 31, 1995 and September 30, 1998, respectively and other issuances related thereto
shall be pursued.

Towards this end, the fund generated from the eighty percent (80%) of the national wealth tax
shall, in no case, be used by any local government unit for any purpose other than those for
which it was intended.

In case of any violation or noncompliance by any local government official of any provision
thereof, the DILG shall, upon prior notice and hearing, order the project operator, through the
DOE, to withhold the remittance of the royalty payment to the host community concerned
pending completion of the investigation. The unremitted funds shall be deposited in a
government bank under a trust fund.

Section 67: NPC Offer of Transition Supply Contracts.

Within six (6) months from the effectivity of this Act, NPC shall file with the ERC for its
approval a transition supply contract duly negotiated with the distribution utilities containing the
terms and conditions of supply and a corresponding schedule of rates, consistent with the
provisions hereof, including adjustments and/or indexation formulas which shall apply to the
term of such contracts. The term of the transition supply contracts shall not extend beyond one
(1) year from the introduction of open access. Such contracts shall be based on the projected
demand of such utilities less any of their currently committed quantities under eligible IPP
contracts as defined in Section 33 hereof: Provided, That the total generation capacity of such
signed transition supply contracts shall not exceed the level of NPC owned, controlled or
committed capacity as of the effectivity of this Act. Such transition supply contracts shall be
assignable to the NPC successor generating companies.

Within six (6) months from the date of submission of the transition supply contract by NPC, the
ERC shall notify NPC of their approval of the rates contained therein.
The ERC shall maintain a record of the contract terms and rates offered by NPC. Likewise, the
ERC shall update monthly, the rates using the appropriate adjustment and/or indexation formula.

Notwithstanding the provisions of Section 25 hereof, the rates charged by a distribution utility
for the generation component of the supply of electricity in their distribution retail supply rate
shall, for the term of the transition supply contracts, not exceed the transition supply contract
rates, as updated monthly. The recovery of costs incurred by a distribution utility for any
generation component in excess of the transition supply contract rates shall be disallowed by the
ERC, except for eligible contracts as defined under Section 33 hereof: Provided, That such
limitation on the recovery of generation component costs by a distribution utility shall apply only
to the equivalent quality and quantity of electricity still available to the distribution utility from
NPC.

Section 68: Review of IPP Contracts

An inter-agency committee chaired by the Secretary of Finance, with the Secretary of the
Department of Justice and the Director General of the National Economic Development
Authority as members thereof is hereby created upon the effectivity of this Act. The Committee
shall immediately undertake a thorough review of all IPP contracts. In cases where such
contracts are found to have provisions which are grossly disadvantageous, or onerous to the
Government, the Committee shall cause the appropriate government agency to file an action
under the arbitration clauses provided in said contracts or initiate any appropriate action under
Philippine laws. The PSALM Corporation shall diligently seek to reduce stranded costs, if any.

Section 69: Renegotiation of Power Purchase and Energy Conversion Agreements between
Government Entities.
Within three (3) months from the effectivity of this Act, all power purchase and energy
conversion agreements between the PNOC-Energy Development Corporation (PNOC-EDC) and
NPC, including but not limited to the Palimpinon, Tongonan and Mt. Apo Geothermal
complexes, shall be reviewed by the ERC and the terms thereof amended to remove any hidden
costs or extraordinary mark-ups in the cost of power or steam above their true costs. All amended
contracts shall be submitted to the Joint Congressional Power Commission for approval. The
ERC shall ensure that all savings realized from the reduction of said mark-ups shall be passed on
to all end-users.

Section 70: Missionary Electrification.

Notwithstanding the divestment and/or privatization of NPC assets, IPP contracts and spun-off
corporations, NPC shall remain as a National Government-owned and -controlled corporation to
perform the missionary electrification function through the Small Power Utilities Group (SPUG)
and shall be responsible for providing power generation and its associated power delivery
systems in areas that are not connected to the transmission system. The missionary electrification
function shall be funded from the revenues from sales in missionary areas and from the universal
charge to be collected from all electricity end-users as determined by the ERC.

Section 71: Electric Power Crisis Provision

Upon the determination by the President of the Philippines of an imminent shortage of the supply
of electricity, Congress may authorize, through a joint resolution, the establishment of additional
generating capacity under such terms and conditions as it may approve.

Section 72: Mandated Rate Reduction.

Upon the effectivity of this Act, residential end-users shall be granted a rate reduction from NPC
rates of thirty centavos per kilowatt-hour (P0.30/kWh). Such reduction shall be reflected as a
separate item in the consumer billing statement.

Section 73: Lifeline Rate

A socialized pricing mechanism called a lifeline rate for the marginalized end-users shall be set
by the ERC, which shall be exempted from the cross subsidy phase-out under this Act for a
period often (10) years, unless extended by law. The level of consumption and the rate shall be
determined by the ERC after due notice and hearing.

Section 74: Cross Subsidies

Cross subsidies within a grid between grids and / or classes of customers shall be phased out in a
period not exceeding three (3) years from the establishment by the ERC of a universal charge
which shall be collected form all electricity end-users. Such level of cross subsidies shall be
made transparent and identified separately in the billing statements provided to end-users by the
suppliers.

The ERC may extend the period for the removal of cross subsidies for a maximum period of one
(1) year upon finding that cessation of such mechanism would have a material adverse effect
upon the public interest, particularly the residential end-user; or would have an immediate,
irreparable, and adverse financial effect on distribution utility.

Chapter 9: FINAL PROVISIONS

Section 75: Statutory Construction

This Act shall, unless the context indicates otherwise, be construed in favor of the establishment,
promotion, preservation of competition and people empowerment so that the widest participation
of the people, whether directly or indirectly, is ensured. With respect to NPC's debts and IPP and
related contracts, nothing in this Act shall be construed as: (1) an implied waiver of any right,
action or claim, against any person or entity, of NPC or the Philippine Government arising from
or relating to any such contracts; or (2) a conferment of new or better rights to creditors and IPP
contractors in addition to subsisting rights granted by the NPC or the Philippine Government
under existing contracts.

Section 76: Education and Protection of End Users.

End-users shall be educated about the implementation of retail access and its impact on end-users
and on the proper use of electric power. Such education shall include, but not limited to, the
existence of competitive electricity suppliers, choice of competitive electricity services, regulated
transmission and distribution services, systems reliability, aggregation, market, itemized billing,
stranded cost, uniform disclosure requirements, low-income bill payment, energy conservation
and safety measures.

The DOE, in coordination with the NPC, NEA, ERC and the Office of Press Secretary-
Philippine Information Agency (OPS-PIA), shall undertake an information campaign to educate
the public on the restructuring of the electric power industry and privatization of NPC.

Section 77: Implementing Rules and Regulations.

The DOE shall, in consultation with relevant government agencies, the electric power industry
participants, non-government organization and end-users, promulgate the Implementing Rules
and Regulation (IRR) of the Act within six (6) months from the effectivity of this Act, subject to
the approval by the Power Commission.

Section 78: Injunction and Restraining Order.

The implementation of the provisions of the Act shall not be restrained or enjoined except by an
order issued by the Supreme Court of the Philippines.

Section 79: 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.

Section 80: Applicability and Repealing Clause

The applicability provisions of Commonwealth Act No. 146, as amended, otherwise known as
the "Public Service Act"; Republic Act 6395, as amended, revising the charter of NPC;
Presidential Decree 269, as amended, referred to as the National Electrification Decree; Republic
Act 7638, otherwise known as the "Department of Energy Act of 1992"; Executive Order 172, as
amended, creating the ERB; Republic Act 7832 otherwise known as the "Anti-Electricity and
Electric Transmission Lines / Materials Pilferage Act of 1994", shall continue to have full force
and effect except insofar as they are inconsistent with this Act.

The provision with respect to electric power of Section 11(c) of Republic Act 7916, as amended,
and Section 5(f) of Republic Act 7227, are hereby repealed or modified accordingly.

Presidential Decree No. 40 and all laws, decrees, rules and regulations, or portion thereof,
inconsistent with this Act are hereby repealed or modified accordingly.

Section 81: Effectivity Clause

This Act shall take effect on the fifteenth day following its publication in at least two (2) national
paper of general circulation.