Module Objectives:

• Know the nature and background

of the particular specialized
industry;
• Learn the overview, statistics,
and updates of the specialized
industry in the Philippine setting;
• Identify the different audit
considerations and trends for the
industry.
Nature, Background, and
Overview of Specialized Industry
Power Industry
Module Objectives:
• Know the nature and background of the particular specialized industry;
• Learn the overview, statistics, and updates of the specialized industry in the Philippine setting;
• Identify the different audit considerations and trends for the industry. Nature, Background, and
Overview of Specialized Industry Power Industry
1. 1936: NPC (National Power electricity transmission between
Corporation) was established. It played different regions were gradually
a significant role in power generation removed.
and distribution in the Philippines.
The National Power Corporation (NPC) is a 7. October 2005: Inter-regional grid
government-owned organization responsible for cross subsidy was completely removed
generating electricity in the Philippines. It was (specific date not mentioned). This
established to ensure that the country has a signifies the completion of the process
stable supply of electricity for homes,
started in 2002.
businesses, and industries. NPC operates large
power plants and facilities to produce electricity
on a national scale. Its main goal is to meet the 8. June 2006: The Wholesale Electricity
growing demand for electricity and provide Spot Market (WESM) was launched.
reliable power to the people of the Philippines. This market allowed for the trading of
electricity between generators and
2. July 1990: The Build - Operate - distributors, promoting efficiency and
Transfer (BOT) Law was passed. This law fair pricing.
allowed private companies to build,
operate, and eventually transfer These events mark significant
infrastructure projects like power milestones in the evolution and reform of the
plants. power industry in the Philippines, aiming for
greater efficiency, competition, and reliability in
3. 1993: The Electric Power Crisis Act the supply of electricity.
was enacted. These likely addressed
issues related to power supply and
demand during a crisis period.

4. May 1994: The Build - Operate -

Transfer Law was amended, possibly to
refine its provisions or address
emerging challenges in the power
industry.

5. June 2001: The EPIRA (Electric Power

Industry Reform Act) was passed. This
act aimed to restructure and privatize
the power industry, introducing
competition and efficiency measures.

6. June 2002: Inter-regional grid cross

subsidy was phased out. This means
that the subsidies provided for
 The electric power industry started in the Philippines as a private sector-led industry in 1890 and
remained so until the late 1960s; the government pursued rural electrification through the cooperative
business model starting in 1969; the monopoly of generation by the National Power Corporation (NPC)
started in 1973; and then the re-entry of private sector in the generation sector through independent
owner producers (IPPs) started in 1987. Prior to the 2001 restructuring under the Electric Power
Industry Reform Act (“EPIRA”), the electric power industry had a vertically integrated generation and
transmission sector through the NPC and wholesale power purchases from the IPPs were predominantly
through the NPC (see diagram below). Distribution utilities were local monopolies in their respective
service areas.

3. Cooperative business model: Cooperative organizations are owned and

1. **Electric Power Industry**: This refers to the sector responsible for generating, operated by the people who use their services. In the context of the electric
transmitting, and distributing electricity to consumers. power industry, cooperative business models involve local communities
2. **Private Sector-led Industry**: This means that initially, private companies were
coming together to form cooperatives that manage and operate electricity
primarily responsible for developing and operating electricity-related services.
3. **Rural Electrification**: This is the process of bringing electricity to rural or remote distribution systems. An example would be the establishment of electric
areas where it might not have been available before. cooperatives in rural areas, where residents collectively own and manage
4. **Cooperative Business Model**: This is a way of organizing a business where the the distribution of electricity.
ownership and control are shared among the people who use its services or work there.
In the context of rural electrification, it means that communities came together to own 4. Monopoly of generation: This means that the generation of electricity
and operate their electricity systems.
was controlled by a single entity, in this case, the National Power
5. **Monopoly**: This means having exclusive control over a particular service or
product. In this case, it refers to the National Power Corporation having sole control Corporation (NPC). The NPC had exclusive control over the production of
over electricity generation. electricity in the Philippines during a certain period, which limited
6. **Generation**: This refers to the process of producing electricity. competition in the generation sector.
7. **Transmission**: This is the movement of electricity from where it's generated to
where it's distributed to consumers. 5. Independent Power Producers (IPPs): These are private companies that
8. **Independent Power Producers (IPPs)**: These are private companies that generate
generate electricity independently of government-owned utilities like the
electricity independent of government-owned utilities.
9. **Restructuring**: This means making significant changes to the organization or
NPC. IPPs typically operate power plants and sell electricity to utilities or
operation of an industry. In this context, it refers to changes in how the electric power directly to consumers. An example of an IPP in the Philippines is the Quezon
industry is organized and operated. Power Plant, which is owned and operated by a private company and sells
10. **Electric Power Industry Reform Act (EPIRA)**: This is a law enacted in the electricity to distribution utilities.
Philippines in 2001 aimed at restructuring and privatizing the country's electric power
industry. 6. Electric Power Industry Reform Act (EPIRA): This is a law enacted in 2001
11. **Vertically Integrated**: This means that one company is involved in multiple
stages of the production and distribution process. In this case, it refers to the National
in the Philippines aimed at restructuring the electric power industry to
Power Corporation being involved in both electricity generation and transmission. promote competition, efficiency, and reliability. The EPIRA introduced
12. **Wholesale Power Purchases**: This refers to buying electricity in large quantities, reforms such as the privatization of power assets, deregulation of the
typically to supply to consumers or distribute through a network. industry, and the creation of regulatory bodies to oversee the sector.
13. **Distribution Utilities**: These are companies responsible for delivering electricity The Electric Power Industry Reform Act (EPIRA) in 2001
to consumers through the local power grid.
14. **Local Monopolies**: This means that within their specific service areas,
changed the industry significantly. Before EPIRA, NPC handled both
distribution utilities have exclusive control over providing electricity to consumers. generation and transmission of electricity. After EPIRA, the industry
was restructured, and generation and transmission were separated.
Independent power producers (IPPs) sold electricity directly to the
1. Private sector-led industry: This means that the electric power industry
market.
was primarily driven and operated by private companies rather than the
government. For instance, private companies were responsible for
Understanding these terms and events is essential because they highlight
establishing power plants and providing electricity to consumers. An
the evolution of the electric power industry in the Philippines, including the
example would be the Manila Electric Company (Meralco), which was one
transition from a primarily private-sector-driven model to a more
of the earliest private companies involved in providing electricity in the
diversified and competitive market structure. It also shows how
Philippines.
government policies and regulations have shaped the industry over time,
impacting electricity access, pricing, and reliability for consumers.
2. Rural electrification: In the late 1960s, the government began electrifying
rural areas using a cooperative business model. This means that groups of people *the electric power industry in the Philippines has
in rural areas worked together to bring electricity to their communities. An evolved from being led by private companies to a mix of government
example would be the installation of power lines and transformers in and private involvement. Over time, there have been changes in how
rural villages to provide electricity for households and businesses. electricity is generated, distributed, and sold, with the aim of

improving efficiency and accessibility. *

 On August 14, 1969, Republic Act 6038 created the National Electrification Administration
(NEA) and laid the groundwork for accelerated electrification in the countryside. The law provided a
framework for rural electrification through not-for-profit cooperatives as a business model and loans
and technical assistance from the NEA. In 1972, then President Ferdinand Marcos imposed Martial
Law and shortly thereafter, the Marcos administration seized the assets of Meralco.
In 1969, Republic Act 6038 established the National Electrification 4. Not-for-Profit Cooperatives: These are organizations that work to provide
Administration (NEA) in the Philippines to speed up bringing electricity to services, in this case, electricity, without aiming to make a profit. The goal is
rural areas. The law introduced a plan for rural electrification using not-for- to benefit the community rather than individual gain.
profit cooperatives and financial aid from the NEA. In 1972, during Martial 5. Martial Law (1972): This was a period when President Ferdinand Marcos
Law, President Ferdinand Marcos took control of Meralco's assets. imposed strict military control over the Philippines. It led to increased
government power and, in this context, the administration took control of
1. Republic Act 6038 (August 14, 1969): This law was created to form the the assets (properties and operations) of Meralco.
National Electrification Administration (NEA) and speed up the provision of 6. Seizure of Meralco Assets: Meralco, a major electric company, had its
electricity in rural areas of the Philippines. It established a plan for rural properties and operations taken over by the government during Martial
electrification using non-profit cooperatives as the business model. NEA Law. This means the government assumed control and ownership of
provided loans and technical help to make this happen. Meralco's assets.
2. National Electrification Administration (NEA): NEA is an organization
formed by Republic Act 6038 to oversee and support the electrification of Understanding these terms is important because they explain how the
rural areas. It helps set up cooperatives and provides financial and technical government took steps to bring electricity to rural areas by creating the
assistance to make sure electricity reaches the countryside. NEA and using a cooperative model. The mention of Martial Law and the
3. Accelerated Electrification in the Countryside: This means making sure seizure of Meralco's assets highlights significant historical events and
that rural areas get access to electricity quickly. The focus is on bringing government actions during that time.
power to places outside of cities and towns, improving the quality of life for
people living in the countryside.

After almost one and a half decades of government dominance in the electric power industry, in
1986, the administration of then president Corazon Aquino reverted Meralco to private ownership. The
administration then decided not to operate the Bataan Nuclear Power Plant “for reasons of safety and
economy” (EO 55 s. 1986). In 1987, Aquino issued Executive Order (EO) 215 reversing the policy of
granting generation monopoly to NPC and entertained proposals from independent power producers
(IPPs) for build-operate-transfer (BOT) and build-own-operate (BOO) arrangements for new generating
capacity. EO 215 s. 1987 amended PD 40 to specifically allow the private sector to generate electricity
and categorically state that "the generation of electricity, unlike the transmission and distribution of
electricity, is not a natural monopoly and can be undertaken by more than one entity." The first BOT
contract for a power plant was then signed in 1989 by the NPC and Hopewell Energy Management, Ltd
1. Reversion of Meralco to private ownership (1986): After 4. Amendment of PD 40 (Presidential Decree 40): EO 215
about 15 years of government control, President Corazon amended PD 40 to allow the private sector to generate
Aquino's administration returned Meralco, the major electricity. It stated that unlike transmission and
electricity provider, to private ownership. This means that distribution, electricity generation was not a natural
Meralco was no longer managed by the government but monopoly and could be done by multiple entities.
by private individuals or companies. 5. First BOT contract for a power plant (1989): The NPC
2. Decision not to operate the Bataan Nuclear Power Plant signed the first BOT contract for a power plant in 1989
(1986): President Aquino's administration chose not to with Hopewell Energy Management, Ltd. This contract
operate the Bataan Nuclear Power Plant due to concerns allowed Hopewell to build, operate, and eventually
about safety and cost-effectiveness. Despite being built, transfer the power plant back to the government.
the plant was never put into operation. In simpler terms, during President Aquino's
3. Executive Order 215 (1987): President Aquino issued EO administration, Meralco returned to private ownership,
215, which changed the policy regarding electricity the Bataan Nuclear Power Plant was not used due to
generation. It reversed the monopoly that the National safety and cost concerns, and the government opened up
Power Corporation (NPC) had on generating electricity. electricity generation to private companies through BOT
Instead, the government started considering proposals and BOO arrangements. This marked a significant shift
from independent power producers (IPPs) for new power towards private involvement in the generation of
plants. These producers could operate under build- electricity in the Philippines.
operate-transfer (BOT) or build-own-operate (BOO)
arrangements.
 To facilitate the privatization process, the EPIRA provided for the creation of the Power
Sector Assets and Liabilities Management Corporation (PSALM) to take over all existing generation
assets and liabilities of the NPC. PSALM was also tasked to use the revenue generated to pay the
outstanding debt of the NPC. Furthermore, Executive Order No. 215 series of 1987, which allows private
sector to generate electricity, classifies four types of generating plants: (1) co-generation units or the
simultaneous generation of both electricity and heat from the same fuel, (2) electric generating plants
intending to sell their production to the grids, (3) electric generating plants intended primarily for the
internal use of the owner, and (4) electric generating plants outside the NPC grids.

*Privatization, in simple terms, means transferring ownership - Electric generating plants for selling to the
and control of something from the government to private grids: These plants generate electricity to sell to the main
individuals or companies. electricity grids for distribution to consumers.
1. Power Sector Assets and Liabilities Management - Electric generating plants for internal use:
Corporation (PSALM): To make privatization easier, the These plants primarily generate electricity for their
Electric Power Industry Reform Act (EPIRA) created owner's own use, such as factories or large businesses.
PSALM. Its job was to take over all the power generation - Electric generating plants outside NPC grids:
assets and debts of the National Power Corporation (NPC). These plants are located outside the main electricity grids
PSALM was also responsible for using the money earned to controlled by the NPC.
pay off NPC's outstanding debts.
2. Executive Order No. 215 (1987): This order, issued in In simpler terms, the government set up PSALM to manage
1987, allowed the private sector to generate electricity in the transfer of power generation assets and debts from
the Philippines. It classified four types of power plants the NPC to facilitate privatization. Executive Order No. 215
based on their purpose and how they operate: defined different types of power plants and allowed the
- Co-generation units: These plants produce private sector to generate electricity, paving the way for
both electricity and heat from the same fuel source
more competition and private involvement in the power
simultaneously.
industry.

The latest EPIRA status report released by the Department of Energy (DOE), which covers November 2014 to April
2015 period, highlights the privatization of the remaining generation assets, particularly the Power Barges (PBs) 101-
104 as well as the transfer of contract to an Independent Power Producer Administrator (IPPA) of Unified Leyte
Geothermal Power Plant (ULGPP) for the Bulk Energy. As of June 2015 4, the privatization level of NPC generating
facilities has reached 89.7%, following the successful bid of Naga Power Plant Complex in March 2014. Meanwhile, the
proposed closing and turn-over schedule of Angat Hydro-electric Power Plant to Korean Water Resources, Inc. was
officially done in October of the same year. Another entity established by the EPIRA is the Energy Regulatory
Commission (ERC). Its main task is to promote competition, encourage market development, and enforce regulations
in the newly restructured market. This is because, contrary to PD 40, power generation under the EPIRA was not
considered a public utility operation, as stated in Section 6 of RA 9136 otherwise known as EPIRA Act of 2001. This
made the generation sector of the industry competitive and opens to other players in the market. Under the EPIRA,
any person or entity engaged in generation and supply shall not be required to apply for a national franchise;
provided that it secures a certificate of compliance from the ERC. Thus, the industry changed in tranches and was
restructured as illustrated by the diagram below

promote competition, develop the market, and enforce

1. Privatization of Generation Assets: The government regulations in the newly restructured energy market. Unlike
sold off its remaining power generation assets, including Power before, under the EPIRA, power generation is not considered a
Barges 101-104, to private companies. The Unified Leyte public utility operation, allowing for a competitive market where
Geothermal Power Plant contract was transferred to an various players can participate. Entities engaged in generation and
Independent Power Producer Administrator (IPPA) for bulk supply need a certificate of compliance from the ERC instead of a
energy. By June 2015, about 89.7% of the National Power national franchise.
Corporation's (NPC) generation facilities were privatized, including
the Naga Power Plant Complex. Additionally, the Angat Hydro- In simpler terms, the government sold most of its
electric Power Plant was scheduled to close and be turned over to power generation assets to private companies, making the
Korean Water Resources, Inc. in October of the same year. industry more competitive. The Energy Regulatory Commission
2. Energy Regulatory Commission (ERC): The EPIRA also was established to ensure fair competition and enforce rules in
established the Energy Regulatory Commission (ERC). Its role is to the restructured energy market. This change allowed different
companies to enter the industry without needing a national
franchise, promoting a more dynamic and competitive energy
sector.
 includes retail supply (selling electricity to end-
users), distribution (the physical infrastructure
like power lines), and the regulated aspect of
ensuring fair and efficient distribution.

5. Consumers: There are two main types of

consumers: contestable and captive.
Contestable consumers are those who can
choose their electricity supplier if their
consumption is above a certain threshold.
1. Generation: This refers to how electricity is Captive consumers don't have a choice and
produced. It can come from different sources must buy electricity from their designated
such as privatized power generation companies supplier.
(Gencos), independent power producers (IPPs)
under the National Power Corporation (NPC),
distribution utilities' (DU) IPPs, or a company's
own generation facilities. The legend signifies energy transactions,
indicating the flow of electricity from
2. Pool (WESM): WESM stands for Wholesale generation to consumption, while --> represents
Electricity Spot Market. It's where electricity is the physical flow of power through transmission
traded among power producers, distributors, lines.
and large consumers.
In simple terms, the diagram illustrates how
3. Transmission: Once electricity is generated, it electricity moves from generation sources
needs to be transmitted across long distances to through trading markets, transmission lines,
reach various areas. This involves system distribution networks, and finally to consumers,
control and the physical transmission of with different entities involved at each stage.
electricity through high-voltage lines.

4. Distribution/ Supply: This involves the final

stage of delivering electricity to consumers. It
To briefly discuss the phases the power industry’s supply chain:
1. Power Generation - Power generation in the Philippines is not considered as a public
utility operation, which means interested parties do not need to secure a congressional
franchise to operate a power generation company. However, power generation is
regulated by the Energy Regulatory Commission (ERC) who must issue a certificate of
compliance to interested parties to ensure that the standards set forth in the Electric
Power Industry Reform Act of 2001 (EPIRA) are followed. The ERC is also responsible for
determining any power abuse or anti-competitive behavior. Electricity in the Philippines
is produced from various sources such as coal, oil, natural gas, biomass, 55
hydroelectric, solar, wind, and geothermal sources. The allocation of electricity
production can be seen in the table below
*Hydro (15%): Hydroelectric power
plants, which generate electricity using flowing
water, contribute 15%.
*Biomass (1%): Biomass power plants,
which use organic materials like agricultural
residues or organic waste to generate
electricity, contribute 1%.
*Solar (4%): Solar power plants, which
utilize sunlight to generate electricity through
photovoltaic cells, contribute 4%.
This diagram represents the breakdown of * Wind (2%): Wind power plants,
electricity production in the Philippines as of which harness wind energy to generate
the first half of 2020, categorized by different electricity using wind turbines, contribute 2%.
sources of energy.
5. Coal (41%): Coal-fired power plants
Here's a breakdown of the key points: contribute the largest share, accounting for 41%
of the total electricity production in the
1. Installed Capacity: This refers to the total Philippines. These plants burn coal to generate
amount of electricity that can be generated by electricity.
power plants in the country.
2. Natural Gas (13%): This indicates that 13% of The diagram provides insights into the diversity
the electricity produced in the Philippines of energy sources used for electricity generation
comes from power plants fueled by natural gas. in the Philippines, with a significant portion
3. Oil-Based (17%): Oil-based power plants coming from both renewable and non-
contribute 17% to the country's electricity renewable sources. It highlights the country's
production. These plants use oil as their primary reliance on coal for electricity production, as
fuel source. well as the growing contribution of renewable
4. Renewable Energy (RE) - 29%: Renewable energy sources such as geothermal, hydro,
energy sources contribute 29% to the total solar, biomass, and wind power.
electricity production in the Philippines. This
category includes various renewable sources:
*Geothermal (7%): Geothermal power
plants, which harness energy from heat stored
beneath the earth's surface, contribute 7%.
 Power Generation:

 Definition: Power generation is the process of producing electricity, and in the

Philippines, it's not considered a public utility operation.
 Regulation: The Energy Regulatory Commission (ERC) oversees power generation and
ensures compliance with standards set by the Electric Power Industry Reform Act of
2001 (EPIRA). Interested parties need a certificate of compliance from the ERC.
 Sources: Electricity in the Philippines comes from various sources like coal, oil, natural
gas, biomass, hydroelectric, solar, wind, and geothermal energy.

Types of source of energy are enumerated

below: b. Non-conventional sources – solar, wind,
a. Conventional sources – coal, gas, oil, biogas (from organic wastes), and bagasse
hydropower, and nuclear power; and (byproduct of sugarcane)
These are traditional sources like These are newer, environmentally
coal, gas, oil, hydropower, and nuclear friendly sources such as solar, wind, biogas
power. (from organic wastes), and bagasse (a
byproduct of sugarcane)

2. Power Transmission – this is

a common carrier business (i.e.
regulated by the
2. Power Transmission – this is
a common carrier business (i.e.
regulated by the
2. Power Transmission – this is a common carrier business (i.e. regulated by the government, serves
its franchise area without discrimination, responsible for any losses incurred during delivery). It is regulated by the
ERC who has rate-making powers and the final say in the valuation of transmission assets. Pursuant to the Electric
Power Industry Reform Act (EPIRA) and the Transmission Development Plan or TDP, maintenance and operations
of the nationwide transmission system was subjected to competitive public bidding conducted by the Power Sector
Assets and Liabilities Management (PSALM). The National Grid Corporation of the Philippines (NGCP) was the
highest bidder. It assumed control of the national transmission system from the National Transmission
Corporation (TransCo), whom assumed the same function from the now defunct National Power Corporation (by
way of RA 9511 enacting congressional franchise for a total of 50 years.
1. Power Transmission: This refers to the process of delivering
electricity from power plants to distribution centers and
eventually to homes, businesses, and other consumers. It's like PSALM stands for Power Sector Assets and Liabilities
the highway system for electricity, ensuring it gets from where it's Management. It's an organization responsible for managing the
generated to where it's needed. assets and liabilities of the power sector in the Philippines. Its
2. Common Carrier Business: Power transmission is considered a main tasks include privatizing government-owned power assets,
common carrier business. This means it's regulated by the managing financial obligations, and ensuring the efficient
government and must serve its designated area without transition to a competitive power industry. PSALM plays a crucial
discrimination. It's responsible for any losses or issues that occur role in implementing reforms and restructuring initiatives in the
during the delivery of electricity. Philippine power sector.
3. Regulation by the ERC: The Energy Regulatory Commission 6. National Grid Corporation of the Philippines (NGCP): The NGCP
(ERC) is the government body responsible for regulating power won the bidding process and assumed control of the national
transmission. It has the authority to set rates for transmission transmission system. It took over from the National Transmission
services and to determine the value of transmission assets. Corporation (TransCo), which had assumed the same function
4. Transmission Development Plan (TDP): The Transmission from the now-defunct National Power Corporation.
Development Plan is a strategic plan for maintaining and In simpler terms, power transmission is the process of delivering
improving the nationwide transmission system. It's based on the electricity, regulated by the government to ensure fairness and
requirements set by the Electric Power Industry Reform Act reliability. The ERC oversees this process, setting rates and valuing
(EPIRA). assets. The NGCP won the bid to manage the national
5. Competitive Bidding for Maintenance and Operations: transmission system, taking over from previous entities
Maintenance and operations of the transmission system are responsible for this task. This ensures that electricity gets safely
subject to competitive public bidding, as outlined in the EPIRA and and efficiently from power plants to consumers across the
the TDP. The bidding process is conducted by the Power Sector country.
Assets and Liabilities Management (PSALM).
 a. The National Grid Corporation of the Philippines (NGCP) is the transmission system
operator for three grids constituting the Philippine grid and as a franchise holder, it is in charge of
operating, maintaining, and developing the country's state-owned power grid. The Philippine
transmission system is composed of three grids, the Luzon Grid, Visayas Grid, and
Mindanao Grid. One characteristic of the grids is that most bulk generation sites are found far
from the load centers, necessitating use of long-distance transmission lines.

1. NGCP as Transmission System Operator: The NGCP is the 3. Bulk Generation Sites and Load Centers: In the Philippines,
organization responsible for managing the transmission most power generation sites are located far away from
system in the Philippines. It operates three grids that the areas where electricity is most needed, known as
make up the Philippine grid. As a franchise holder, it is load centers. This geographical distribution requires
responsible for operating, maintaining, and improving the the use of long-distance transmission lines to transport
country's power grid. electricity from the generation sites to the load
centers.
2. Three Grids in the Philippines: The Philippine transmission
system consists of three main grids: In simpler terms, the NGCP operates and maintains the
- Luzon Grid transmission system in the Philippines, which consists
- Visayas Grid of three main grids: Luzon, Visayas, and Mindanao.
- Mindanao Grid Due to the distance between power generation sites
These grids are like networks that help distribute electricity and areas where electricity is used the most, long
across different regions of the country. transmission lines are necessary to transport electricity
efficiently across the country.

b. Functions:
i. Operations and Maintenance - NGCP's task is to ensure that the country's transmission assets are in
optimal condition to convey safe, quality, and reliable electricity.
ii. System Operations - NGCP acts as System Operator that balances the supply and demand of power to
maintain the quality of electricity that flows through the grid.
iii. Planning and Engineering - NGCP ensures that the grid is prepared whenever new plants come
online and when the demand for power in a certain area increases by anticipating these scenarios and
constructing new facilities.
NGCP's job is to keep the transmission system running smoothly and efficiently. It makes sure there's
enough electricity for everyone, keeps the quality of electricity high, and plans for future changes in the electricity
system. This ensures that people can rely on having electricity when they need it

3. Power distribution - The

circulation of electricity to end-
users is a controlled common
3.Power distribution - The circulation of electricity to end-users is a controlled common carrier business
requiring a national franchise. The power to grant national franchises is exclusively vested to the Congress of the
Philippines. Distribution of electric power to all end-users or consumers of electricity may be handled by private
distribution utilities, cooperatives, local government units presently undertaking this function and other duly
authorized entities, under the regulation of the ERC.
A distribution utility has the task to provide distribution services and connections to its system for any end-user
within its franchise area, as there are different distribution utilities available for different areas, consistent with the
distribution code. They are required to provide open and non-discriminatory access to its distribution system to all
users.

1. Power Distribution: This is the process of delivering electricity from the 4. Entities Involved: Distribution of electricity can be managed by private
transmission system to end-users, like homes, businesses, and industries. distribution utilities, cooperatives, local government units, and other
authorized entities.
2. Controlled Common Carrier Business: Power distribution is regulated
by the government and operates as a common carrier business. This means it 5. Regulation by the ERC: The Energy Regulatory Commission (ERC)
must serve its designated area without discrimination and is responsible for oversees the distribution of electricity. It sets rules and regulations to ensure
any issues during delivery. fair and reliable distribution to consumers.

3. National Franchise Requirement: Anyone distributing electricity to In simple terms, power distribution involves delivering electricity to homes
end-users needs a national franchise, which is granted exclusively by the and businesses. Those distributing electricity need permission from the
Congress of the Philippines. government, and various entities, including private companies and
cooperatives, can handle distribution. The process is regulated by the ERC to
ensure fairness and reliability.

A distribution utility has the task to provide distribution services and connections to its

Retail rates charged by distribution utilities are subject to regulation of the ERC under the principle of full
recovery, that is, distribution utilities subdivide their retail rate into two distinct categories, namely pass
through charges and wheeling charges. Pass through charge follows the principle of full economic
recovery where a distribution utility may pass on all the charges it incurred in the distribution of power
such as the price of the power, transmission charge, systems loss charge, etc. to its customers. The
wheeling charge is an additional premium charged to the customer akin to a mark-up on the cost of power
acquired by the distribution utility. The wheeling charge follows the principle of reasonable return on base
(RORB) which allows the distribution utility to operate viably as determined by the ERC

- Retail Rates Regulation: The prices charged by - Wheeling Charges: This is an additional fee, similar
distribution utilities for electricity are regulated by to a markup, that the distribution utility charges
the Energy Regulatory Commission (ERC). customers. It ensures the utility can operate and
make a reasonable profit, as determined by the ERC
- Principle of Full Recovery: Distribution utilities using the Reasonable Return on Base (RORB)
break down their retail rates into two parts – pass- principle.
through charges and wheeling charges – to ensure
they can cover all their costs. In simple terms, the government regulates the
prices distribution utilities charge for electricity. The
- Pass-Through Charges: These cover all the costs utilities divide their rates into pass-through charges
the distribution utility incurs in getting electricity to (covering all their costs) and wheeling charges
customers. This includes the cost of power, (allowing them to make a reasonable profit),
transmission charges, system loss charges, and ensuring fair and transparent pricing for customers.
more.

a. Electric Cooperatives (“ECs”) are entities owned by the member-

consumers within the vicinity covered by the said entity. These are
controlled by a Board of Directors elected by member-consumers and
their management and operations supervised by the National
Electrification Administration.
- Ownership by Member-Consumers: The member-consumers
- Electric Cooperatives (ECs): These are organizations that provide who live in the areas served by the electric cooperatives are the
electricity to communities. They are owned by the people who owners of these cooperatives. They have a say in how the
use the electricity in the areas where the cooperatives operate. cooperatives are run and make decisions about their operations.
- Board of Directors: The operations of the electric cooperatives
are overseen by a Board of Directors. This board is elected by the In simpler terms, electric cooperatives are owned by the people
member-consumers and represents their interests in the who use electricity in their communities. They elect a Board of
management of the cooperative. Directors to manage the cooperatives, and their operations are
- Supervision by National Electrification Administration (NEA): supervised by the National Electrification Administration to ensure
The National Electrification Administration supervises and they provide reliable and affordable electricity services to their
regulates the management and operations of electric members.
cooperatives. It ensures that the cooperatives are operating
efficiently and serving the needs of their member-consumers
effectively.
 b. Private Distribution Utilities (“PDUs”) are electric distribution
companies that are owned by private entities. As of 2018, if ranked
based on output, the main distribution utilities across the country
include the following Private Distribution

Utilities
(“PDUs”)
In simpler terms, private distribution utilities are businesses that deliver electricity, and
they are owned by private companies. The main ones are determined based on their
output or the amount of electricity they distribute, and they play a significant role in
providing power across the country.

The Manila Electric Company (“MERALCO”), the largest electric distribution

utility in the Philippines, has the 24th highest weighted average retail tariffs
among 46 countries. As compared to its neighboring countries, Philippines has
higher electricity costs due to:
1. Lack of Subsidies; and
2. High Intrinsic Cost of Supply and Transmission due to:
a. Dependence on expensive imported fossil fuel for generating electricity and
no tax or tariff relief given for fuel imports used for power generation;

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b. Relatively low generating capacity of the Philippines. The current supply of
electricity is forecasted to be overtaken by the demand of the country;
c. Relatively small and fragmented grid size result into transmission losses, no
economies of scale, and inefficient operations; and
d. As an archipelago, there are geographic challenges of transmission. The
Philippines relies on submarine cables to interconnect the islands.
C. Municipality Unit (“MUs") are entities that are owned by the local government.
 The local government officials, who are elected by the end-users within the
municipality, regulates, controls, and manages the utilities.
electricity generation. No tax or tariff relief is
given for fuel imports used in power generation.
b. Relatively Low Generating Capacity: The
country's current electricity supply may not
keep up with the increasing demand.
c. Small and Fragmented Grid Size: The grid
system in the Philippines is relatively small and
fragmented, leading to transmission losses, lack
of economies of scale, and inefficient
operations.
d. Geographic Challenges: The Philippines
Manila Electric Company (MERALCO): This is consists of many islands, which presents
the largest electricity distribution company in challenges for transmitting electricity.
the Philippines. It's ranked 24th globally for Submarine cables are used to connect the
having higher-than-average electricity prices islands.
among 46 countries.
- Municipality Units (MUs): These are entities
Reasons for Higher Electricity Costs in the owned by local governments. Elected local
Philippines: government officials regulate, control, and
1. Lack of Subsidies: Unlike some other manage these utilities, ensuring that they
countries, the Philippines doesn't provide provide reliable and affordable electricity
subsidies to lower electricity costs for services to residents.
consumers.
In simple terms, MERALCO is the biggest
2. High Intrinsic Cost of Supply and electricity distributor in the Philippines but
Transmission: faces challenges due to high costs of fuel,
a. Dependence on Expensive Imported Fossil inadequate infrastructure, and geographic
Fuel: The Philippines relies heavily on expensive barriers. Municipality Units, managed by
imported fossil fuels like oil and coal for elected officials, regulate utilities at the local
level to ensure quality service for residents.