03 SEPTEMBER 2019

OPPOSITION TO HOUSE BILL 407 OR THE

BICOL LIGHT AND POWER CORPORATION FRANCHISE

The Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) OPPOSES AND
CONDEMNS to the highest degree possible the passage of House Bill No. 407 (as refiled,
House Bill No. 5664, 17th Congress) introduced by Rep. Luis Raymund Villafuerte, which
seeks to grant the Bicol Light and Power Corporation (Bicol Light) a franchise to construct,
establish, operate and maintain for commercial purposes and in the public interest, a
distribution system for the conveyance of electric power to the end-users in the towns of Baao,
Balatan, Bato, Buhi, Bula, Nabua, and the City of Iriga, Province of Camarines Sur.

We summarize our submission as follows:

1. The existing franchise of CASURECO III shall be respected as the EPIRA

guarantees categorically to allow to its full term. This amounts to a contract which
the Constitution protects under the non-impairment clause from being impaired
by the passage of a subsequent law.

2. Granting Bicol Light and Power Corporation a legislative franchise to operate an

area where an existing distribution utility operates is a violation of Republic Act
No. 9136 or the Electric Power Industry Reform Act of 2001 (EPIRA). It is also
clearly stated in Section 41(c) of the “National Electrification Administration Act”
that as assistance of the NEA to electric cooperatives, “…no franchise for service
shall be granted to any other person within any area or portion for which a
cooperative holds a franchise”

3. House Bill No. 407 gives undue delegation of legislative power to the Energy
Regulatory Commission.

4. Bicol Light and Power Corporation cannot offer cheaper and more affordable
energy cost; instead, it will only charge the consumers a higher rate.

5. Bicol Light and Power Corporation and its declared Directors and Officers do not
have any track record as an electric distribution utility; while CASURECO III has
shown colossal improvement in the past year.

6. Bicol Light and Power Corporation’s contention that CASURECO III is an

underperforming electric cooperative is far from the status of the electric
cooperative now.
“United we stand, divided we fall.”

2nd Floor, PNB Building, No. 92 West Avenue, Quezon City, Philippines
Telephone Nos.: 374-2538 / 374-1198 / 374-1199 / 372-4913 / Fax No. 374-2513
Website: www.philreca.org; e-mail address: core@philreca.org
I. THE EXISTING FRANCHISE OF CASURECO III SHALL BE RESPECTED AS THE
EPIRA GUARANTEES CATEGORICALLY TO ALLOW TO ITS FULL TERM.

The Camarines Sur III Electric Cooperative, Inc. (CASURECO III) was issued a
Certificate of Franchise by the National Electrification Administration (NEA) on 06
June 1979. Thus, CASURECO III’s franchise to operate as a public utility is still
effective for ten (10) more years.

The existing franchise of CASURECO III is categorically guaranteed its full term under
Section 26 of R.A. No. 9136 or the EPIRA. This, in turn, is protected by the Constitution
under the non- impairment clause from being impaired by the passage of a subsequent
law. Section 41, subsection (c) of the “National Electrification Administration Act” or
R.A 6038 the nature of the repealing clause of the substitute bill granting the franchise
applied for the Bicol Light and Power Corp. should be clarified as not repealing the
existing franchise of CASURECO III consistent with the Constitution, EPIRA, and
NEA Reform Act.

II. GRANTING BICOL LIGHT AND POWER CORPORATION A LEGISLATIVE

FRANCHISE TO OPERATE IN AN AREA WHERE AN EXISTING
DISTRIBUTION UTILITY OPERATES IS A VIOLATION OF REPUBLIC ACT NO.
9136 OR THE ELECTRIC POWER INDUSTRY REFORM ACT OF 2001 (EPIRA), RA
6038 OR THE NATIONAL ELECTRIFICATION ADMINISTRATION ACT, AND
ARTICLE XII (NATIONAL ECONOMY AND PATRIMONY), SECTION 11 OF
THE PHILIPPINE CONSTITUTION.

Distribution is one of the major traditional sectors of the electric power industry
distinguished from Generation, Transmission, and Supply. The distribution sector is
governed by Republic Act 9136 also known as the Electric Power Industry Reform Act
or “EPIRA”, to wit:

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. 1

1 Sec. 22 of Republic Act 9136 also known as the Electric Power Industry Reform Act or “EPIRA”.
“United we stand, divided we fall.”

2nd Floor, PNB Building, No. 92 West Avenue, Quezon City, Philippines
Telephone Nos.: 374-2538 / 374-1198 / 374-1199 / 372-4913 / Fax No. 374-2513
Website: www.philreca.org; e-mail address: core@philreca.org
To understand this regulatory framework further, we provide the definition of some
related key terms under the same law:

1. Distribution of Electricity refers to the conveyance of electric power by a

distribution utility through its distribution system;

2. 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 sub transmission system or generator connection
and the point of connection to the premises of the end-user;

3. Franchise Area refers to a geographical area exclusively assigned or granted

to a distribution utility for distribution of electricity; [emphasis supplied]

4. Distribution Utility refers to any electric cooperative, private corporation,

government owned utility or existing local government unit which has an
exclusive franchise-to-operate a distribution system in accordance with this
Act. [emphasis supplied]

This “exclusive franchise-to-operate a distribution system” granted to a distribution

utility stems from the physical fact that the distribution of electricity is a natural
monopoly. In an article published in Electricity Policy website and Electricity Daily
newsletter, the benefits of having a natural monopoly is provided:

[I]n a given a natural monopoly, policy makers can provide lower

cost power to consumers by awarding a legal monopoly to such a
single firm, while regulating its prices to only recover its costs.
This combination of an exclusive right to serve together with
cost-based regulation allowed the utility to achieve the low cost
made possible by its economies of scale and scope, but prevented it
from charging the above-cost prices that result from an unfettered
monopoly.2 [emphasis supplied]

This shows that it is more efficient and cost effective when one centralized utility will
be tasked to distribute electricity to its end-users rather than competing utilities
constructing redundant poles and discriminating service from their respective
customers or clients.

2Corneli, S. and Kihm, S. “Will distributed energy end the utility natural monopoly?” published both at Electricity Policy
website www.ElectricityPolicy.com and the newsletter Electricity Daily. (June 2016)
“United we stand, divided we fall.”

2nd Floor, PNB Building, No. 92 West Avenue, Quezon City, Philippines
Telephone Nos.: 374-2538 / 374-1198 / 374-1199 / 372-4913 / Fax No. 374-2513
Website: www.philreca.org; e-mail address: core@philreca.org
The Philippines in adopting the EPIRA follows a similar regulatory framework as
what was described earlier – and for good reason: to protect the interest of the end
consumers.

In his dissertation on Philippine Energy Law, Dr. Cagampang-De Castro points out
that: “the distribution business is a natural monopoly with a captive market.”3 In his
book, he states that:

[The natural monopoly of transmission/distribution of electricity]

has the same reason as to why there is no competition for building
and operating farm-to-market roads: (a) one access point from point
A to point B is sufficient, assuming the road can handle the traffic
or the [distribution/transmission] line can carry the necessary
voltage; and (b) economies-of-scale make infrastructure building
more efficient - it is better to install far reaching
(distribution/transmission) lines than to duplicate them.

It is also clearly stated in Section 41(c) of the “National Electrification

Administration Act” that as assistance of the NEA to electric cooperatives, “…no
franchise for service shall be granted to any other person within any area or portion
for which a cooperative holds a franchise”.

III. HOUSE BILL 407 GIVES UNDUE DELEGATION OF LEGISLATIVE POWER

TO THE ENERGY REGULATORY COMMISSION (ERC)

It is very clear in Section 27 of the EPIRA that the Franchising Power in the Electric
Power Sector or the power to grant franchises to persons engaged in the transmission
and distribution of electricity shall be vested exclusively in the Congress to the
Philippines. However, this bill in question, HB 407 Section 3, gives ERC or any
government agency having jurisdiction over the grantee's operation the power to
expand to surrounding areas, not originally covered by the franchise area, whenever
public interest so requires.

What is the significance then of giving a "franchise area" when franchisee can extend
its area of coverage? How can a covered franchise area be granted to another
applicant?

3 Cagampang-De Castro, JA; JSD. “Philippine Energy Law” Central Book Supply, Inc. First Edition. 2012. Page 424.
“United we stand, divided we fall.”

2nd Floor, PNB Building, No. 92 West Avenue, Quezon City, Philippines
Telephone Nos.: 374-2538 / 374-1198 / 374-1199 / 372-4913 / Fax No. 374-2513
Website: www.philreca.org; e-mail address: core@philreca.org
We see, therefore, that by granting an exclusive franchise to operate a distribution
system, the State prevents consumers bearing the exorbitant prices which will result
from the recovery costs of building several electric posts and installation of wires
when only one set of poles and wires is sufficient.

Further, following Section 3 of the proposed bill, it could only be surmised that the
sole purpose is to expand their powers in the future and possibly take over all
franchise areas in Bicol Region.

IV. BICOL LIGHT AND POWER CORPORATION CANNOT OFFER CHEAPER

AND MORE AFFORDABLE ELECTRICITY AND ENERGY COST; INSTEAD, IT
WILL ONLY CHARGE THE CONSUMERS A HIGHER RATE.

The distribution rates of ECs, being non-stock and non-profit in character, are
naturally cheaper compared to private electric distribution utilities because all its
income is solely used for its operation and nothing is earmarked by way of dividends
to its members.

Bicol Light and Power Corporation either wishes to usurp control over CASURECO
III and its exclusive franchise-to-operate CASURECO III’s distribution system or
wishes to build its own distribution system. The first option shows a clear disregard
of the legal framework provided for under the EPIRA while the second option reflects
deficiency in applying and understanding Economic principles.

During the 17th Congress, a hearing was conducted concerning the said House Bill
sponsored in the House of Representatives by Congressman Luis Raymund
Villafuerte at the Senate Committee on Public Services chaired by Sen. Grace Poe. In
the same hearing Engr. Leogario Galang, Jr. categorically stated that there should be
two distribution utilities in one area, rates will increase and more or less will be
doubled. Moreover, power rates will increase resulting from inclusion of profit
margins and recovery – both of the cost of development and maintenance of
infrastructures as well as the cost of operation/ management of companies;

If, on one hand, Bicol Light and Power Corporation intends to replace CASURECO III
and take over CASURECO III’s distribution system, Bicol Light and Power
Corporation appears to be disregarding the legal guarantee granted to CASURECO
III by the EPIRA to possess its franchise up to its full term, which is still up to 10 years
from now.

“United we stand, divided we fall.”

2nd Floor, PNB Building, No. 92 West Avenue, Quezon City, Philippines
Telephone Nos.: 374-2538 / 374-1198 / 374-1199 / 372-4913 / Fax No. 374-2513
Website: www.philreca.org; e-mail address: core@philreca.org
There would be an inherent physical and economic constraints such as the duplicate
of distribution systems and redundant facilities which will be recovered from
consumers resulting to extremely high electrical rates.

The remaining option for Bicol Light and Power Corporation is for it to build its own
distribution system. And this reflects poor grasp of principles in Economics. As
explained earlier, distribution utilities are natural monopolies because of the necessity
of keeping costs low.

Bicol Light and Power Corporation, if granted a franchise as a distribution utility, will
then construct duplicate distribution system and redundant facilities to serve the same
customers. The resulting cost of this duplication and the provision for the distribution
utility’s profit will be recovered from its customers in the form of electric distribution
rates. And surely, this would not be cheap.

V. BICOL LIGHT AND POWER CORPORATION AND ITS DECLARED

DIRECTORS AND OFFICERS DO NOT HAVE ANY TRACK RECORD AS AN
ELECTRIC DISTRIBUTION UTILITY; WHILE CASURECO III HAS RECOVERED
FROM BEING AN “AILING COOPERATIVE” AND HAS SHOWN COLOSSAL
IMPROVEMENT IN THE PAST YEAR DURING ITS REHABILITATION

Bicol Light and Power Corporation was only incorporated and registered with the
Securities and Exchange Commission (SEC) in 2014 and does not have any track
record as an electric distribution utility. Further, none of its declared Directors and
Officers have shown any experience in the management and operations of an electric
distribution utility. How can you give a legislative franchise to a corporation which
doesn’t even have enough experience to manage such a public utility? The success of
distribution of electricity cannot be a matter of trial-and-error. The business should be
run by officers with technical experiences.

CASURECO III, on the other hand, holds a 50-year franchise to operate as a public
utility and is still effective for the next 10 years and will only expire thereafter.
CASURECO III and the 120 electric cooperatives nationwide have only one primary
objective – to supply low-cost electricity to their member-consumers including and
especially those living in the farthest parts of the country.

The PSALM provided for minimum track record and qualification for those entities
that participated in the bidding to operate and maintain the transmission assets of the

“United we stand, divided we fall.”

2nd Floor, PNB Building, No. 92 West Avenue, Quezon City, Philippines
Telephone Nos.: 374-2538 / 374-1198 / 374-1199 / 372-4913 / Fax No. 374-2513
Website: www.philreca.org; e-mail address: core@philreca.org
National Transmission Corporation, which is a public utility. The same should be with
any other entity applying for a franchise to operate any public utility in this country.

According to Section 43(b) of the Philippine Distribution Code provides that the ERC
promulgate and enforce a National Grid Code and a Distribution Code which shall
include, but not be limited to: (a) Performance Standards for TRANSCO O & M
Concessionaire, distribution utilities and suppliers, and (b) Financial Capability
Standards for the generating companies, the TRANSCO, distribution utilities and
suppliers. The Act also mandates the ERC to enforce compliance to the Grid Code, the
Distribution Code, and the Market Rules, and to impose fines and penalties for
violations of their provisions. The law prescribes the minimum financial capability
standard for distribution and supply of electricity and there is no showing that the
Bicol Light and Power Corp. satisfies the said minimum requirement.

The information on the corporation especially its corporate structure, incorporators,

and stockholders, including its financial statement which should satisfy the minimum
requirements provided in the Philippine Distribution Code.

VI. BICOL LIGHT AND POWER CORPORATION’S CONTENTION THAT

CASURECO III IS AN UNDERPERFORMING ELECTRIC COOPERATIVE IS FAR
FROM THE STATUS OF THE ELECTRIC COOPERATIVE NOW.

While CASURECO III has been classified before as an “underperforming

cooperative”, it has reached significant milestones and achieved substantial
improvements since the National Electrification Administration (NEA) took over the
management of the cooperative in February 2017. The cooperative’s turn around
began when the NEA designated in February 2017 the new members of the board of
directors who immediately put into action NEA’s Task Force Duterte Rinconada
Power agenda.

A year after implementing significant reforms and initiatives, CASURECO III was able
to achieve high percentage of reliability rating and robust fiscal positioning. From a
record high of 19.23% systems loss before the takeover of NEA in February 2017, the
new set of board of directors and officers was able to reduce the losses to 11.62% as of
July 31, 2019. Moreover, with the improvement in financial status that CASURECO
III has been enjoying, they can now afford to pay their monthly financial obligation
to different agencies. Furthermore, it is also evident how better the performance of
CASURECO III is as of July 31, 2019. The table below illustrates the performance of

“United we stand, divided we fall.”

2nd Floor, PNB Building, No. 92 West Avenue, Quezon City, Philippines
Telephone Nos.: 374-2538 / 374-1198 / 374-1199 / 372-4913 / Fax No. 374-2513
Website: www.philreca.org; e-mail address: core@philreca.org
the CASURECO III as compared to one of the best performing electric cooperative
(Triple A) as determined by NEA.

Table 1. Comparison of data of CASURECO III and a TRIPLE A Electric Cooperative

TRIPLE A
CASURECO III Electric Cooperative
Status of Payment Current Current
Average Systems Rate (Php/kWh) 10.97 10.04
Average Power Rate (Php/kWh) 6.91 6.40
Unbundled Rate for Residential 10.3202 9.9318
Customer
Systems Loss 11.62% 7.05%
Collection Efficiency 97% 98%
SAIDI 9.03 10.68
SAIFI 0.75 0.72
Source: http://www.nea.gov.ph

These substantial improvements of CASURECO III as of July 31, 2019 evidently shows
how the said electric cooperative was able to draw near and catch up with the
performance of a TRIPLE A Electric Cooperative from a bereaved set back since the
take-over of NEA in February 2017. Such contention of Bicol Light and Power
Corporation that CASUREO III is an underperforming electric cooperative is bereft of
merit.

ELECTRIC COOPERATIVES HAS THE NOBLE MANDATE, AS PARTNERS OF

THE GOVERNMENT, OF TOTAL ELECTRIFICATION OF THE COUNTRY

To conclude, Presidential Decree no. 269, as amended by RA no. 10531 also known as
the “National Electrification Administration Reform Act” provides, among others,
that the obligation of electric cooperatives is not only to supply, promote, and
encourage the fullest use of electric distribution service on an area coverage basis but
also to pursue the noble mandate, as partners of the government, of total electrification
of the country.

###

“United we stand, divided we fall.”

2nd Floor, PNB Building, No. 92 West Avenue, Quezon City, Philippines
Telephone Nos.: 374-2538 / 374-1198 / 374-1199 / 372-4913 / Fax No. 374-2513
Website: www.philreca.org; e-mail address: core@philreca.org