Defining the future of public utilities

The United Nations Conference on Trade and Development published a World Investment Report on June 2017 showing that out of 104 economies, including the Philippines, transportation ranked as the industry most affected by restrictions on foreign direct investment.

The five most-affected industries are transportation, media, electricity, telecommunications and mining, oil and gas.

Legal limbo over our economic future

Of these five industries, a majority (transportation, electricity and telecommunications) are considered “public utilities” in the Philippines. This is because the term “public utilities” is interpreted with reference to “public service” as provided in Commonwealth Act No. 146, more commonly known as the “Public Service Act.”

Under this law, a public service is said to include:

[E]very 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[.]

Despite some legal antecedents (e.g. NAPOCOR vs. Court of Appeals in 1997 and JG Summit Holdings, Inc. vs. Court of Appeals in 2003), the definition of “public utility” is still wanting in clarity. The definition itself is a source of confusion in the interpretation and application of the law—with serious economic consequences.

...the definition of “public utility” is still wanting in clarity. The definition itself is a source of confusion in the interpretation and application of the law—with serious economic consequences.

These consequences are the result of our constitutional prohibitions on foreign participation in “public utilities” (undefined). Under Section 11, Article XII of the 1987 Constitution, “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.”  

Aside from the limitations on foreign ownership, public utilities are also subject to other constitutional restrictions such as:

• limitations on foreign management;
• non-exclusivity;
• maximum limit of fifty (50) years;
• amendment, alteration, or repeal by Congress when the common good so requires;
• temporary take-over and operation of public utilities during times of national emergency when public interest so requires;
• in the interest of national welfare or defense, establishment and operation of vital industries and transfer to public ownership utilities and other private enterprises to be operated by the Government upon payment of just compensation;
• supervision or regulation of the enjoyment or utilization of franchises or permits for the operation of public utilities during election period.

New solutions from the House and Senate

On Sept. 8, 2017, the House of Representatives approved on third reading House Bill 5828 which seeks to provide a clear definition of a public utility. Meanwhile, five bills have been filed in the Senate which also seek to amend the Public Service Act.

These bills are of the same view that a public utility should be clearly defined as a “person that operates, manages, and controls the distribution and transmission of electricity, and water pipeline distribution system or sewerage pipeline system for public purpose.” This list can only be changed by a subsequent law, subject to some criteria.

Investments and job creation

Data from the Labor Force Survey show that while unemployment and underemployment are generally improving, it still remains high. Unemployment in July 2017 inched higher to 5.6 percent, compared to 5.4 percent in the previous year. By sector, services still accounted for over half of the labor force.

Thus, non-government groups such as CitizenWatch Philippines and the Foundation for Economic Freedom have expressed their support for the legislative reform measure. At CitizenWatch, we stress that the ambiguous interpretation and application of the law have prevented the utilities sector from seizing its potential to attract investments, create high-quality jobs, and consequently drive economic growth.

By way of example, several industries, notably the telecommunications and airline industries, were opened to more competition during the administration of former President Fidel Ramos. The economic growth and job creation resulting from the removal of major barriers to competition and investment demonstrated the economic potential that the monopolies had long suppressed.

The economic growth and job creation resulting from the removal of major barriers to competition and investment demonstrated the economic potential that the monopolies had long suppressed.

Taking the UNCTAD Report and the proposed amendments to the Public Service Act into account, only the distribution and transmission in the electricity industry, as opposed to the whole of three industries (transportation, electricity and telecommunications), will fall under the definition of a “public utility” and will thus be subjected to the constitutional limitations.

The opportunity to accelerate reforms through the amendments to the Public Service Act will help create more and better jobs for the 2.37 million Filipinos who are currently unemployed. By considering the operation of public utilities as one of the priorities for investment liberalization measures, the government clearly defines its plan to cater to industry players and potential investors, hopefully towards a more competitive and vibrant public service sector.

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Atty. Hannah Viola is a convenor and legal counsel of CitizenWatch Philippines and a fellow of the Stratbase ADR Institute.