CONSTITUTIONAL LIMITATIONS ON PUBLIC UTILITIES

* Nationality
* Exclusivity
* Term-limit
* Amendments to franchises
* Take-over power
* Privatization of state-owned public utilities

ARTICLE XII (12) NATIONAL ECONOMY & PATRIMONY

Section 6. The use of property bears a social function, and all economic
agents shall contribute to the common good. Individuals and private groups,
including corporations, cooperatives, and similar collective organizations,
shall have the right to own, establish, and operate economic enterprises,
subject to the duty of the State to promote distributive justice and to
intervene when the common good so demands.

Section 11. No franchise, certificate, or any other form of authorization for

the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of
the Philippines, at least sixty per centum of whose capital is owned by such
citizens; nor shall such franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. Neither shall any such
franchise or right be granted except under the condition that it shall
besubject to amendment, alteration, or repeal by the Congress when the
common good so requires. The State shall encourage equity participation in
public utilities by the general public. The participation of foreign investors in
the governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers
of such corporation or association must be citizens of the Philippines.

* In terms of nationality, place of incorporation test must be complied with.

* Public utilities must be incorporated here in the Philippines, not abroad.
The constitution is clear.
* The industry of public utilities is considered a nationalized industry (kung
san may foreign ownership limitations)
* GAMBOA v TEVES — what we only look into are the shareholders who
own 60% of the voting shares.
* Pursuant to the Gamboa case, the commission issued SEC MC No. 8, s. of
2013, which was upheld by the SC in Roy v. Herbosa.
* Then, SEC MEM08-13 — In addition to the requirement of Gamboa v Teves
—>
* CORPORATE LAYERING

Section 17. In times of national emergency, when the public interest so

requires, the State may, during the emergency and under reasonable terms
prescribed by it, temporarily take over or direct the operation of any
privately-owned public utility or business affected with public interest.

Section 18. The State may, in the interest of national welfare or defense,
establish and operate vital industries and, upon payment of just
compensation, transfer to public ownership utilities and other private
enterprises to be operated by the Government.

Section 19. The State shall regulate or prohibit monopolies when the public
interest so requires. No combinations in restraint of trade or unfair
competition shall be allowed.

CA 146 — AS AMENDED [Public Service Act]

SEC 13. (b) The term "public service" includes every person that now or
hereafter may own, operate, manage, or control in the Philippines, for hire or
compensation, with general or limited clientele, whether permanent,
occasional or accidental, and done for general business purposes, any
common carrier, railroad, street railway, traction railway, sub-way motor
vehicle, either for freight or passenger, or both with or without fixed route
and whether may be its classification, freight or carrier service of any class,
express service, steamboat or steamship line, pontines, ferries, and water
craft, engaged in the transportation of passengers or freight or both,
shipyard, marine railways, marine repair shop, [warehouse] wharf or dock, ice
plant, ice-refrigeration plant, canal, irrigation system, gas, electric light,
heat and power water supply and power, petroleum, sewerage system,
wire or wireless communications system, wire or wireless broadcasting
stations and other similar public services: Provided, however, That a
person engaged in agriculture, not otherwise a public service, who owns a
motor vehicle and uses it personally and/or enters into a special contract
whereby said motor vehicle is offered for hire or compensation to a
third party or third parties engaged in agriculture, not itself or themselves a
public service, for operation by the latter for a limited time and for a specific
purpose directly connected with the cultivation of his or their farm, the
transportation, processing, and marketing of agricultural products of such
third party or third parties shall not be considered as operating a public
service for the purposes of this Act.

(c) The word "person" includes every individual, co-partnership, joint-

stock company or corporation, whether domestic or foreign, their lessees,
trustees, or receivers, as well as any municipality, province, city,
government-owned or controlled corporation, or agency of the
Government of the Philippines, and whatever other persons or entities that
may own or possess or operate public services. (As amended by Com. Act
454 and RA No. 2677)

SECTION 14. The following are exempted from the provisions of the
preceding section: (a) Warehouses; (b) Vehicles drawn by animals and bancas
moved by oar or sail, and tugboats and lighters; (c) Airships within the
Philippines except as regards the fixing of their maximum rates on freight
and passengers; (d) Radio companies except with respect to the fixing of
rates; (e) Public services owned or operated by any instrumentality of the
National Government or by any government-owned or controlled
corporation, except with respect to the fixing of rates. (As amended by Com.
Act 454, RA No. 2031, and RA No. 2677 )

PD 666. PROVIDING FOR INCENTIVES TO THE SHIPBUILDING AND

SHIP REPAIR INDUSTRY — shipping plays a vital role in the economic
development and growth of the country.

Section 1. Shipbuilding and ship repair yards duly registered with the
Maritime Industry Authority shall be entitled to the following incentive
benefits:

(D) Registration required but not as Public Utility. The business of

constructing and repairing vessels or parts thereof shall not be considered a
public utility and no Certificate of Public Convenience shall be required
therefor. However, no shipyard, graving dock, marine railways or marine
repair shop and no person or enterprise shall engage in the construction
and/or repair of any vessel, or any phase or part thereof, without a valid
Certificate of Registration and license for this purpose from the Maritime
Industry Authority, except those owned or operated by the Armed Forces of
the Philippines or by foreign governments pursuant to a treaty or agreement.

RA 9136 — Electric Power Industry Reform Act of 2001

SEC. 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.

“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;

[JG SUMMIT v CA]

1. By nature, a shipyard is not a public utility.
— SERVES A LIMITED CLIENTELE, AND HAS THE DISCRETION TO WHOM
TO SERVE.
* Its NATURE dictates that it serves a limited clientele whom it may choose
to serve at its discretion.
* While it offers its facilities to whoever may wish to avail of its services, a
shipyard is not legally obliged to render its services indiscriminately to the
public.
* It has NO legal obligation to render the services sought by each and every
client.
* The fact that it publicly offers its services does not give the public a legal
right to demand that such services be rendered.
* The test/criterion, therefore, in determining if a service is a public utility, is
whether the public may enjoy it by right or only by permission — Public
use is not synonymous with public interest.
* The term "public utility" implies PUBLIC USE (use by the public) (it is not
confined to privileged individuals, but is open to the indefinite public) and
SERVICE TO THE PUBLIC.

NOTE: A public utility requires a franchise, aside from a certificate of public

necessity and convenience, for its operation, while a public service which is
not a public utility requires only a certificate of public convenience.

[TATAD v GARCIA]
1. RAILWAY — engaged in the transportation of passengers or freight or
both is a public service.
* The Constitution, in no uncertain terms, requires a franchise for the
operation of a public utility.
* However, it does not require a franchise before one can own the facilities
needed to operate a public utility so long as it does not operate them to
serve the public.
* One can own said facilities without operating them as a public utility, or
conversely, one may operate a public utility without owning the
facilities used to serve the public. The devotion of property to serve the
public may be done by the owner or by the person in control thereof who
may not necessarily be the owner thereof.
NON-EXCLUSIVE NATURE OF FRANCHISES ONLY MEANS NA HINDI
PWEDE NA IKAW LANG MAGOPERATE NG PUB UT. SA ISANG CERTAIN
AREA/INDUSTRY. PH DOESN’T ABIDE TO MONOPOLIES. THE SPIRIT OF
OUR PH CONSTI IS A FREE MARKET.

Monopolies are not per se prohibited by the Constitution but may be

permitted to exist to aid the government in carrying on an enterprise or to
aid in the performance of various services and functions in the interest of the
public. As monopolies are subject to abuses that can inflict severe prejudice
to the public, they are subject to a higher level of State regulation than
an ordinary business undertaking. [Agan v Piatco]
TERM LIMIT
Section 11 of Article XII of the 1987 Constitution states that: “No franchise,
certificate, or any other form of authorization for the operation of a public
utility shall be granted… for a longer period than fifty years.”

The 50 year limitation under the constitution pertains to the franchise itself,
and not to the grantee. For renewal, the congress has once again the
discretion to fix the term of the franchise as long as the term will not exceed
to the 50 year limitation.

What is not allowed is for the congress to grant a single franchise of a period
that exceeds 50 years. Congress can issue multiple franchises that
collectively can exceed 50 years as long as the individual franchises will not
exceed 50 years.

How do we determine the nationality of a corporation? Laws and jurisprudence

would provide the following tests:

Incorporation Test – It is determined by the place of incorporation regardless of the

nationality of its stockholders.
Domiciliary Test – It is determined by the principal place of business of the corporation.
Control Test – It is determined by the nationality of the controlling stockholders or
members. This test is applied in times of war.
Grandfather Rule – Nationality is attributed to the percentage of equity in
the corporation used in nationalized or partly nationalized area. As further
defined by Dean Cesar Villanueva, the Grandfather Rule is “the method by
which the percentage of Filipino equity in a corporation engaged in
nationalized and/or partly nationalized areas of activities, provided for under
the Constitution and other nationalization laws, is computed, in cases where
corporate shareholders are present, by attributing the nationality of the
second or even subsequent tier of ownership to determine the nationality of
the corporate shareholder.”
1. Said rule is applied specifically in cases where the corporation has
corporate stockholders with alien stockholdings, otherwise, if the rule is
not applied, the presence of such corporate stockholders could
2. Diminish the effective control of Filipinos.

WHEN TO APPLY THE GRANDFATHER RULE:

* We use it if there are corporate shareholders in a corporation / corporate layering /
juridical persons
* the corporation’s Filipino equity falls below the constitutional threshold of 60 percent or;
* there exists a “doubt” as to the Filipino to Foreign equity

A domestic stock corporation whose activity involves the exploration, development and
utilization of natural resources is considered as a partly nationalized activity.

SEC MC No. 8-2013 uses the two-tiered test in determining compliance

with the required percentage of Filipino ownership. Under the two-tiered
test,
the 60% required Filipino ownership shall be applied to both:
a) the total number of outstanding shares of stock entitled to vote in the
election of directors; and
b) the total number of outstanding shares of stock, whether or not entitled
to vote in the election of directors.

There are two acknowledged tests in determining the nationality of a

corporation which has corporate stockholders, to wit: (i) the Control Test;
and (ii) the Grandfather Rule.

The control test has been defined in the (Narra Case): “Shares belonging
to corporations or partnerships, at least sixty percent (60%) of the
capital of which is owned by Filipino citizens, shall be considered as of
Philippine nationality.” This is a straightforward approach since there is no
need to further trace the ownership of the 60% (or more) Filipino
stockholdings of an investing corporation. Hence, a corporation which is at
least 60% Filipino-owned is already considered as a Filipino corporation.
Grandfather rule is defined as the method by which the percentage of
Filipino equity in a corporation engaged in nationalized and/or partly
nationalized areas of activities provided for under the constitution and other
nationalization laws is computed, in cases where corporate shareholders
are present, by attributing the nationality of the second or even subsequent
tier of ownership to determine the nationality of the corporate shareholder.

Under this rule, the Filipino ownership of the investing corporation and
the investee corporation are combined to determine the percentage of
Filipino ownership.

The grandfather rule is only applicable when the 60 percent-40 percent

Filipino-foreign equity ownership is in “doubt” or when there is non-
compliance with the provisions of the constitution with respect to
nationality restriction.

In the NARRA CASE, it was explained that even if the 60-40 Filipino-foreign
equity ratio is apparently met by the investing or investee corporation, a
resort to the grandfather rule is necessary if doubt exists as to the locus
of the “beneficial ownership” and “control.” The “doubt” refers to,
“various indicia that the ‘beneficial ownership’ and ‘control’ of the
corporation do not, in fact, reside in Filipino shareholders but in foreign
stakeholders.”

The SC, in its resolution in the Narra case, explained that even if the 60-40
Filipino-foreign equity ratio is apparently met by the investing or investee
corporation, a resort to the grandfather rule is necessary if doubt exists
as to the locus of the “beneficial ownership” and “control.” The “doubt”
refers to, “various indicia that the ‘beneficial ownership’ and ‘control’ of the
corporation do not, in fact, reside in Filipino shareholders but in foreign
stakeholders.”
In order to determine the corporate nationality threshold of a
corporation having corporate stockholders, in compliance with the 60
percent-40 percent Filipino-foreign ownership requirement under the 1987
Constitution, it is believed that the control test is still the prevailing
mode. It is only in case of doubt, based on facts and circumstances of the
case, that the grandfather rule shall be applied.
 TAKE-OVER POWER

Public Utilities; Police Power; Temporary Takeover of Business Affected

with Public Interest; When the government temporarily takes over a
business affected with public interest pursuant to Article XII, Section 17 of
the Constitution, it is not required to compensate the private entity-
owner of the said business as there is no transfer of ownership,
whether permanent or temporary, and the private entity-owner
affected by the temporary takeover cannot, likewise, claim just
compensation for the use of the said business and its properties as the
temporary takeover by the government is in exercise of its police power
and not of its power of eminent domain.— The above provision
pertains to the right of the State in times of national emergency, and in
the exercise of its police power, to temporarily take over the operation
of any business affected with public interest. In the1986 Constitutional
Commission, the term “national emergency” was defined to include threat
from external aggression, calamities or national disasters, but not strikes
“unless it is of such proportion that would paralyze government service.”

The duration of the emergency itself is the determining factor as to how long
the temporary takeover by the government would last. The temporary
takeover by the government extends only to the operation of the
business and not to the ownership thereof. As such the government is not
required to compensate the private entity-owner of the said business as
there is no transfer of ownership, whether permanent or temporary.
The private entity-owner affected by the temporary takeover cannot,
likewise, claim just compensation for the use of the said business and
its properties as the temporary takeover by the government is in exercise of
its police power and not of its power of eminent domain.

In times of emergency, our Constitution reasonably demands that

we repose a certain amount of faith in the basic integrity and
wisdom of theChief Executive but, at the same time, it obliges
him to operate within carefully prescribed procedural limitations.

— FRANCHISES ARE ALWAYS SUBJECT TO AMENDMENT.