Del Callar & Partners

Law Offices

Unit 9D Cyril C. del Callar Telephone: (632)-6969234

Belvedere Tower Katherine Marie G. Hernandez (632)-6969237
San Miguel Avenue Ferdinand V. Menguito Fax: (632) 6969131
Ortigas Center Jose Moises F. Salonga
Pasig City 1600
PHILIPPINES

___________________________________________________________________________________

July 9, 2013

Attention: Mizuho Asia Partners Pte Ltd

This opinion is written at the behest of Mizuho Asia Partners, who seek clarification
regarding the question below.

This document is confidential and proprietary. It shall be treated as attorney work-

product, which shall not be subject to discovery.

This document is ten pages long and should be read and understood in its entirety.

Query: Whether or not a 100% foreign-owned corporation can own and operate a
biomass power plant in the Philippines?

Introduction

The American occupation of the Philippines brought about numerous moves to

industrialize the islands. One of the very first laws enacted was the establishment of
the National Power Corporation (NAPOCOR) in 1936. Under NAPOCOR, all aspects
of the energy business was vertically integrated under one monolithic entity.
NAPOCOR, being government empowered, ran generation plants, owned and
maintained the transmission facilities, and up to a certain point in time, managed the
distribution utilities.

The energy business was run only by the state. No other parties, Filipino or
otherwise, were allowed to engage in the business of power. It was only in the
1950s-60s that private Filipino entities were given the nod to run small electric
distribution utilities under a special congressional franchise. The Manila Railroad
Company (Meralco), a private corporation organized under the laws of New Jersey,
was allowed to put up electrical transmission lines for the use of railways and their
business.1 Despite this small break through, the generation, transmission, and
distribution remained a vertical structure. This was the prevalent structure not only in
Asia, but the world: a vertically integrated system that was without competition.

Then President Ferdinand E. Marcos issued Presidential Decree No. 40, which
established the basic policies of the electric power industry which sought the
electrification of the whole islands. The law allowed private entities to enter the
distribution business of the electric power generated by the NAPOCOR and gave the

1 Act No. 1510 (Meralco Charter)

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Unit 9D Cyril C. del Callar Telephone: (632)-6969234

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Pasig City 1600
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State the power to determine privately-owned generating facilities permitted to

remain in operation within a grid set up by the NAPOCOR.2

The 1987 Philippine Constitution

There was some encouragement for the private sector to enter the electric power
industry, albeit in limited fashion. The Philippine Freedom Constitution, which passed
in 1987, provided guidelines on the activities where private corporations can come in
by identifying the activity areas where the private sector, whether an individual or
corporation, local or foreign, can come in. There are specific provisions in the
Constitution that identify the areas/activities reserved for Filipino citizens. Article XII
of the Constitution in particular, provides the areas/activities where foreigners and
Filipinos can jointly participate.

Part of Section 2, Article XII (National Economy and Patrimony) of the 1987
Constitution states:

“All lands of the public domain, waters, minerals, coal, petroleum, and
other mineral oils, all forces of potential energy, fisheries, forests, or
timber, wildlife, flora and fauna, and other natural resources are owned
by the State. With the exception of agricultural lands, all other natural
resources shall not be alienated. The exploration, development, and
utilization of natural resources shall be under the full control and
supervision of the State. The State may directly undertake such activities,
or it may enter into co-production, joint venture, or production-sharing
agreements with Filipino citizens, or corporations or associations at least
sixty per centum of whose capital is owned by such citizens...” (emphasis
added)

The enumeration of the resources under this Section all pertain to natural resources,
thus, inline with the sprit and intention of the above Section, “all forces of potential
energy” likewise refer to those that are naturally occurring resources. There is a rule
in statutory construction called “ejusdem generis” which basically says that when an
enumeration of persons or things with particular and specific meaning is followed by
general words, such general words are to be construed as applying only to persons
or things of the same kind or class as those specifically mentioned. Therefore, the
restriction on ownership should only apply to forces of potential energy that come
from the State’s natural resources and does not extend to non-naturally occurring
resources such as plastics, trash/garbage, glass, and other non-natural materials.

The same section of the Constitution also provides a limitation on the participation for
the operation of a public utility to citizens of the Philippines or corporations or
associations organized under the laws of the Philippines, at least sixty per centum of

2 Presidential Decree No. 40

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Unit 9D Cyril C. del Callar Telephone: (632)-6969234

Belvedere Tower Katherine Marie G. Hernandez (632)-6969237
San Miguel Avenue Ferdinand V. Menguito Fax: (632) 6969131
Ortigas Center Jose Moises F. Salonga
Pasig City 1600
PHILIPPINES

___________________________________________________________________________________

whose capital is owned by such citizens. Thus, from the foregoing section, the
exploitation, development, and utilization of natural resources and the operation of
public utilities are exclusively reserved for Filipino citizens, individuals and
corporations alike. Conversely, activities which do not involve either of the two areas
are open for foreign participation.

Executive Order No. 215 (Act Amending P.D. 40 and Allowing the Private Sector
to Generate Electricity)

Executive Order No. 215 was issued in1987 by Corazon C. Aquino during the late
80’s as a response to the worsening black outs. The inadequacy of the public sector
in addressing the electricity problem and the recognition of the valuable participation
of the private sector in economic development were reflected in this law. Section 1
allows private corporations, cooperatives, or similar associations to construct and
operate the following types of electric generating plants, to wit:

a) Cogeneration units, defined as production of electric energy and forms

of useful thermal energy (such as heat or steam), used for industrial,
commercial, heating or cooling purposes through sequential use of
energy;
b) Electric generating plants, intending to sell their production to the grids,
consistent with the developmental plans formulated by the National
Power Corporation;
c) Electric generating plants, intended primarily for the internal use of the
owner, which also plans to sell excess production to the grids; and
d) Electric generating plants, outside the National Power Corporation
grids, intending to sell directly or indirectly to end users.”

It is clear in the above provisions that there was no intention for the law to limit the
participation in the generation of electricity per se to Filipino citizens and
corporations. The citizenship limitation, when it comes to the generation of electricity,
again goes back to the question of whether or not the generation will require the use
of natural resources. Thus, other means of generating electricity that do not utilize
natural resources are open to private investment, whether local or foreign.

Republic Act No. 7042 (Foreign Investments Act 1991)

Republic Act No. 7042 or the Foreign Investments Act of 1991 (“FIA”) seeks “to
attract, promote, and welcome productive investments from foreign individuals,
partnerships, corporations, and governments including their political subdivisions, in
activities which significantly contribute to national industrialization and socioeconomic
development to the extent that foreign investment is allowed in such activity by the
Constitution and relevant laws.” Under this law, the activities which do not allow any
foreign equity includes: mass media, “practice of all professions including, but not
limited to, engineering, medicine, accountancy, architecture, customs brokerage,
 Del Callar & Partners
Law Offices

Unit 9D Cyril C. del Callar Telephone: (632)-6969234

Belvedere Tower Katherine Marie G. Hernandez (632)-6969237
San Miguel Avenue Ferdinand V. Menguito Fax: (632) 6969131
Ortigas Center Jose Moises F. Salonga
Pasig City 1600
PHILIPPINES

___________________________________________________________________________________

geology, and agriculture,” retail trade enterprises with a paid-up capital of less than
US$2.5 million,” “private security agencies,” and “small-scale mining.” Power
generation is not included in the list. Furthermore, the list of activities that may be
related to power generation that has a limitation on having forty percent (40%)
foreign equity includes: “exploration, development, and utilization of natural
resources,” “operation and management of public utilities,” and “acting as project
proponent and facility operator of a build-operate-transfer project requiring a public
utilities franchise.” Consistent with Article XII of the 1987 Constitution, the Foreign
Investment Act does not allow foreign investments only in power generation that
will require the use of natural resources and acting as project proponents and
facility operators of a Build-Operate and Transfer (B-O-T) project involving public
utilities. The prohibition is not attached to the activity of power generation per se.

Hence, during the 1990 Philippine energy crisis, came the influx of multi-national
power firms. Marubeni Corporation, and J-power/Sumitomo of Japan, and IMPSA of
of Argentina all came to the Philippines to participate in the energy sector under the
B-O-T Scheme. Under this regime, most corporations opted to find local business
partners to comply with the foreign equity caps, since such projects involved large
scale generation of power through hydropower, geothermal, and coal-fired power
plants, which utilized the use of the country’s natural resources. The idea behind the
B-O-T Scheme was for the Government of the Philippines, through the National
Power Corporation, to own the foreign-built power facilities once the BOT period has
expired. During this time, the electric power industry was not yet open to competition
and was still vertically integrated under the control of the Government. Thus, the
different foreign companies were just allowed to “operate” these facilities in
accordance with the terms and conditions of the B-O-T agreement.

Electric Power Industry Reform Act (EPIRA) of 2001 (Republic Act No. 9136)

The decade of the 90s introduced the Philippines to global power players. With the
passage of Republic Act No. 9136, otherwise known as the “Electric Power Industry
Reform Act” (EPIRA), different foreign corporations were able to construct power
facilities all through out the country. However, it was also during this period that
numerous scandals and intrigues rocked the power industry sector. There was a lot
of clamor for transparency and more private participation in the power industry. A call
for the restructuring of the power industry through the mode of privatization was
pushed and heralded to be the solution to the Philippine quest for energy security.

Philippine legislators realized that the generation business is capital intensive. To

facilitate the energy investments, an unorthodox statement regarding the power
industry was inserted. The EPIRA law explicitly states that power generation
shall not be considered a public utility operation, ergo, opening the opportunity to
non-Philippine subjects, whether individuals or corporations, to join in the power
generation industry. Hence, although power generation is arguably a business
affected with public interest, Section 6 of the EPIRA specifically states: “any law to
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Law Offices

Unit 9D Cyril C. del Callar Telephone: (632)-6969234

Belvedere Tower Katherine Marie G. Hernandez (632)-6969237
San Miguel Avenue Ferdinand V. Menguito Fax: (632) 6969131
Ortigas Center Jose Moises F. Salonga
Pasig City 1600
PHILIPPINES

___________________________________________________________________________________

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” (emphasis supplied). The foregoing provision is not only
consistent with the limitations provided under Article XII of the 1987 Constitution, but
again highlights the prohibition pertains to the use of natural resources and the
operating a public utility business.

It is also important to note that under Section 2 of Republic Act No. 9136 , which
provides the thrust of the law, mentions the following: (a) enhance the inflow of
private capital and broaden the ownership base of power generation, transmission,
and distribution sectors; (g) to assure socially and environmentally compatible energy
sources and infrastructure; and (h) to promote the utilization of indigenous and new
and renewable energy sources in power generation in order to reduce dependence
on imported energy. Note that, again, there is no distinction between foreign and
local capital.

The EPIRA, as early as 2001, mentions the development of renewable energy

sources. Under the law, Section 4 defines renewable energy sources as “energy
sources that do not have the 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.” The sources of renewable energy
therefore, can either be from natural resources, such as water, and non-natural, such
as garbage/trash from biomass. This short paragraph will be the basis of legislation
tackling Renewable Energy.

Renewable Energy Act of 2008 (Republic Act No. 9513)

Republic Act No. 9513, otherwise known as the Renewable Energy Act of 2008,
does not restrict the nationality of entities or persons, natural or juridical, who may be
awarded a renewable energy service contract. However, the Department of Energy
(DOE) included in the law’s Implementing Rules and Regulations (IRR) that only
Philippine nationals, either Filipinos or corporations at least sixty percent (60%) of
which capital is owned by Filipinos, may harness RE resources. Particularly, Section
6(a) states that any natural or juridical person, whether local or foreign, may apply for
RE contracts provided:

“1. For RE Contract both during the Pre-Development and

Development/Commercial Stages covering all RE resources and
including hybrid systems, the RE applicant must be Filipino or, if a
corporation, must be a Filipino corporation at least sixty percent
(60%) of its capitalization must be owned by Filipinos and duly
registered with the Securities and Exchange Commission (SEC)...”
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Law Offices

Unit 9D Cyril C. del Callar Telephone: (632)-6969234

Belvedere Tower Katherine Marie G. Hernandez (632)-6969237
San Miguel Avenue Ferdinand V. Menguito Fax: (632) 6969131
Ortigas Center Jose Moises F. Salonga
Pasig City 1600
PHILIPPINES

___________________________________________________________________________________

The above provision is specific that only Filipinos and Filipino corporations may apply
for RE Contract during Pre-Development and Development/Commercial stages.
However, under DOE Circular DC2009-007-011 (Guidelines Governing a
Transparent and Competitive System of Awarding Renewable Energy Service/
Operating Contracts and Providing for the Registration Process of Renewable
Energy Developers), particularly under Part 2 (Special Provisions) C (Biomass
Sector) Section 25 (Biomass Operating Contract), it states that RE Developers of
biomass, biogas, and methane-capture from organic wastes need not enter into a
Pre-Development Service Contract due to the peculiar conditions and realities
attendant to developing or utilizing non-naturally occurring resources. Thus, for
biomass energy, merely an operating contract is required. As far as the DOE is
concerned, there is a difference between a RE Service Contract, which is specifically
limited to Filipino persons and corporations, and a RE Operating Contract, which
does not seem to have any nationality restrictions. The distinction between a Service
Contract for renewable energy and an Operating Contract for biomass energy takes
into consideration that not all RE sources come from natural resources. It is indeed
quite absurd if the law will apply the restrictions on the utilization of natural resources
for power generation to the use of non-natural resources for power generation. Such
will be contrary to the spirit and intention of Article XII of the 1987 Constitution as well
as the policy of the State with regard to power generation as seen in the previous
laws discussed above.

The difference between service and operating contracts are stark. Service contracts
are written contractual obligations with the state for the development and of
Philippine natural resources. The regime is not unique for Renewable Energy
developers as this scheme was only borrowed from permits and grants to explore
and exploit Philippine oil and gas fields. The service contract methodology implies
that:
1.There is a Philippine national resource to be developed;
2. There is a need to use this resource for a certain industry.

Moreover, since the use of Philippine natural resources are reserved for Philippine
subjects, it mandates that holders of service contracts must be Filipinos.

On the other hand, operating contracts are written contracts with the state for the
management and safe operation of industries that use materials that may be of value
to the state or commerce. Such materials may be coal, for example, which is
considered to be a natural resource. Other materials that fall in this category are rice
hulls, corn husks, municipal waste, et cetera. The operating contract implies that:

1. There is an need to operate industry that uses materials which may have
value to the state or commerce.
2. That the state reserves the right to regulate and oversee said industry.
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Law Offices

Unit 9D Cyril C. del Callar Telephone: (632)-6969234

Belvedere Tower Katherine Marie G. Hernandez (632)-6969237
San Miguel Avenue Ferdinand V. Menguito Fax: (632) 6969131
Ortigas Center Jose Moises F. Salonga
Pasig City 1600
PHILIPPINES

___________________________________________________________________________________

3.That the materials used for such industry have already been extracted
though a service contract, if it is a natural resource, or by common gathering and
sorting, in the case of non natural resources.

The above interpretation is consistent given the number of foreign corporations which
have been awarded operating contracts such as Marubeni, Kepco, and the most
recent is K-water, a Korean corporation which was awarded the operation and
maintenance of Angat Dam, a key multi-purpose dam that ensures irrigation to
nearby agricultural settlements, water supply and peaking hydro power. The use of
water for irrigation, supply and power through the Angat Dam, at first glance, maybe
interpreted as an instance that requires a service contract; ergo reserved for
Philippine corporations. The Philippine Supreme Court settled the matter in a
decision that delineates what is a service and operating contract; what are reserved
for Philippine corporations and what is not.

This landmark decision is tackled below.

IDEALS et. al. versus PSALM et. al: K-water Angat Dam Issues (2012)

K-Water, a corporation one hundred percent (100%) Korean owned, acquired the
Angat Hydro Electric Power Plant (AHEPP), despite the fact that under Presidential
Decree No. 1067 (Water Code of the Philippines), water rights may be granted to
citizens of the Philippines and juridical persons who are qualified to exploit and
develop water resources,3 which is a natural resource. The Supreme Court
explained that “in the power generation activity, K-Water will utilize water that was
already extracted from the river and impounded in the dam. This process of
generating electric power from the dam entering the power plant thus does not
constitute appropriation within the meaning of natural resource utilization in the
Constitution and the Water Code.”4 The Supreme Court further explained that “with
respect to foreign investors, the nationality issue had been framed in terms of the
character of the power generation process itself, i.e., whether the activity amounts to
utilization of natural resources within the meaning of Sec. 2, Art. XII of the
Constitution.”5 The Supreme Court cited several Department of Justice (DOJ)
Opinions to clarify the matter.

As early as DOJ Opinion No. 173, Series of 1984, the DOJ already stated that the
nationality requirement provided in the Water Code refers to the “extraction of water

3 Article 15, P.D. No. 1067

4Initiatives for Dialogue and Empowerment Through Alternative Legal Services, Inc. (IDEALS), et. al., v.
Power Sector Assets and Liabilities Management Corporation (PSALM), et. al, G.R. No. 192088, 09
October 2012, page 37.

5 Ibid., page 39.

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Unit 9D Cyril C. del Callar Telephone: (632)-6969234

Belvedere Tower Katherine Marie G. Hernandez (632)-6969237
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Ortigas Center Jose Moises F. Salonga
Pasig City 1600
PHILIPPINES

___________________________________________________________________________________

form its natural source (Art. 9, P.D. No. 1067). Once removed therefrom, they
cease to be part of the natural resources of the country and are subject of
ordinary commerce and may be acquired by foreigners...”6

DOJ Opinion No. 14, Series of 1995 clarified that the nationality requirement imposed
in the Water Code pertains to the privilege “to appropriate and use water” which
means “the extraction of water directly from its natural source. Once removed from its
natural source the water ceases to be part of natural resources of the country and
may be subject to ordinary commerce and may even be acquired by foreigners.” This
DOJ Opinion emphasized that a foreign entity may utilize water after it has been
removed from its natural source by a qualified person, natural or juridical.7

DOJ Opinion No. 122, Series of 1998 reiterated that meaning of the word “natural” to
refer to “that which is produced without aid of stop, valves, slides, and other
supplementary means. . . the water that is used by the power plant could not enter
the intake gate without dam, which is a man-made structure. Such being the case,
the source of the water that enters the power plant is of artificial character rather than
natural...”8

DOJ Opinion No. 52, Series of 2005 stated that “while both waters and geothermal
steam are, undoubtedly ‘natural resources’ within the meaning of Section 2,
Article XII of the present Constitution, hence, their exploitation, development, and
utilization should be limited to Filipino citizens or corporations or associations at least
sixty per centum of the capital of which is owned by Filipino citizens, the utilization
thereof can be opened even to foreign nationals, after the same have been
extracted from the source by qualified persons or entities. The rationale is
because, since they no longer form part of the natural resources of the country, they
become subject to ordinary commerce.”9

In the above case, the Supreme Court ruled that although the water rights remain
with the NAPOCOR, the operation of the hydropower facilities can be undertaken by
the foreign corporation K-Water since it will “utilize the waters not directly from the
river, but waters that was diverted or collected from the Angat Dam for hydropower
generation.” 10As such, the same does not amount to “utilization of natural resources”
within the meaning of the Section 2, Article XII of the 1987 Constitution.

6 Ibid.

7 Ibid.

8 Ibid., page 40.

9 Ibid., page 41.

10 Ibid., page 48.

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Law Offices

Unit 9D Cyril C. del Callar Telephone: (632)-6969234

Belvedere Tower Katherine Marie G. Hernandez (632)-6969237
San Miguel Avenue Ferdinand V. Menguito Fax: (632) 6969131
Ortigas Center Jose Moises F. Salonga
Pasig City 1600
PHILIPPINES

___________________________________________________________________________________

Given that the above case of IDEALS et. al. versus PSALM et. al is the latest
pronouncement of the Supreme Court that tackles the topic of utilization of natural
resources for power generation, all previous pronouncements on the matter that are
inconsistent with this decision are moot. This case law makes it clear that a foreign
corporation can legally operate a biomass power plant in the Philippines provided
that what will be used as fuel for such power plants is not considered as a “natural
resource” within the meaning of Section 2, Article XII of the 1987 Constitution. Thus,
all nationality limitations that are attached in the utilization of natural resources do not
apply in such an instance. Furthermore, power generation is not classified as a public
utility that is reserved for Filipino individuals and corporations.

Conclusion: Mizuho and Simfoni Global Intentions

In the case of Mizuho and Simfoni Global, it seeks to apply for an Operating Contract
to run a biomass power plant in the Philippines. Its situation is no different from other
foreign corporations which are currently engaged in power generation activities in the
electric power industry. For instance Marubeni, which is a Japanese corporation, lists
in its website its IPP projects to include the following: (a) 345MW San Roque Multi-
Purpose Hydro Plant (50% of which is owned by Marubeni); (b) 735MW Pagbilao
Coal-Fired Plant; (c) 1218MW Sual Coal-Fired Plant, and the (d) 1251MW Ilijan
Natural-Gas Fired Plant. The San Roque Power Corporation (SRPC), which owns
the operation and maintenance contract for the San Roque Multi-Purpose Dam
Project in Pangasinan, is jointly owned by Marubeni Corporation and Kansai Power
International Corporation, both are foreign corporations. Also, Team Energy
Corporation, a joint venture company of Marubeni Corporation and Tokyo Electric
Power Corporation, owns and operates the 1,218 MW Sual Power Station also in
Pangasinan province and the 735MW Pagbilao Power Station in Quezon province;
and it likewise owns a twenty percent (20%) stake in the natural gas-fired Ilijan Power
Station in Batangas. Aside from Marubeni, other foreign corporations engaged in the
electric power industry is the Korean Electric Power Corporation (KEPCO), which
provides twelve percent (12%) of the total installed generation capacity in the
country. According to KEPCO’s website, its assets include the Ilijan Combined-Cycle
Power Plant, the Naga Power Plant Complex, and the Cebu Circulating Fluidized
Bed Combustion (CFBC) Power Plant (60% is owned by KEPCO). All are currently
participating in the electric generation business.

The arguments presented above clearly justify the entrance of the client in the
Philippine energy sector.

Given the recent Supreme Court pronouncements, our research suggests that there
is no impediment to own, without restriction on capital source, biomass generation
facilities. Moreover, the client may use its planed corporate structuring scheme as
intimated to us without fear.
 Del Callar & Partners
Law Offices

Unit 9D Cyril C. del Callar Telephone: (632)-6969234

Belvedere Tower Katherine Marie G. Hernandez (632)-6969237
San Miguel Avenue Ferdinand V. Menguito Fax: (632) 6969131
Ortigas Center Jose Moises F. Salonga
Pasig City 1600
PHILIPPINES

___________________________________________________________________________________

To summarize and synthesize the different laws and orders mentioned above, the
client only needs to understand the following:

1. Power generation, according to Philippine law, is not a public utility;

2. Hence, the business of power generation is not a nationalized industry, wherein

there are strict local capitalization requirements.

3. 100% foreign ownership of power generation assets are allowed in Philippine Law;

4. The intention of the client to put up a biomass facility does not require a service
contract because it is covered under the regime of operation contracts.

5. According to the Philippine Supreme Court, materials used for generating power
whether, considered national resources or not, once extracted becomes a non-
national resource.

6. Hence, the use of coal, rice hulls, corn husks, biogas, municipal waste, even water
for that matter, do not require service contracts: an operating contract will suffice.

Therefore, foreign corporations, who wish to own biomass generation assets in the
Philippines may do so because they are not engaged in a public utility and they are
not exploiting natural resources.

Caveat

During the course of our study, we came across a Department of Energy Circular
circa 2009 issued by then Secretary Angelo Reyes that seeks to award service and
operating contracts, alike, to Philippine subjects. This is perhaps the root of all
confusion amongst energy practitioners, giving the knee-jerk answer that only Filipino
corporations can engage in biomass projects.

The Department of Energy was very keen and interested in our legal opinion, and in
fact, wishes for a copy of the salient portions of this document in order to clarify and
harmonize, if necessary, the disjointed pronouncements of the the Department and
Supreme Court .

Should there be a need to liaise with the Department of Energy, our office is will to
undertake such endeavor.

For the Firm,

Jose Moises F. Salonga