26 January 2022
Philippines

Public utility providers and consumers have found something to celebrate as the Philippine Senate approved the draft amendments to Commonwealth Act No. 146 (“CA 146”), or the Public Service Law. The amendments espoused in Senate Bill No. 2094 shall open the doors to many foreign investors who wish to participate in the Philippine public service industry.

The amending bill has the following salient points:

  • Public utility is now expressly defined. Under Senate Bill No. 2094, a public utility is defined as a public service that operates, manages or controls for public use seven enterprises including 1) distribution or transmission of electricity, 2) petroleum and petroleum products pipeline transmission or distribution systems, 3) water pipeline distribution systems and wastewater pipeline systems, 4) airports, 5) seaports, 6) public utility vehicles, and 7) expressways and tollways.
  • The President may recommend to classify a public service as a public utility. The President of the Philippines, upon the recommendation of the National Economic and Development Authority (“NEDA”), may propose to the Philippine Congress[1] to classify a public service as a public utility, provided it meets the following criteria:
    • the person or legal entity regularly supplies and directly transmits and distributes to the public through a network a commodity or service of public consequence;
    • the commodity or service is a natural monopoly that needs to be regulated when the common good so requires;
    • the commodity or service is necessary for the maintenance of life and occupation of the public; and
    • the commodity or service is obligated to provide adequate service to the public on demand.
  • There is an additional requirement for entities operating and managing critical infrastructures. Under Senate Bill No. 2094, a critical infrastructure refers to systems and assets, whether physical or virtual, so vital to the Philippines that the incapacity or destruction of such systems or assets would have debilitating impact on national security. Previously, there was no law expressly defining a critical infrastructure, but under Senate Bill No. 2094, telecommunications, air carriers, domestic shipping, and railways and subways will be classified as such. To protect the public, these industries are mandated to act on complaints or service interruptions within one day from their receipt of the complaint. They are also required to submit a monthly report detailing the service interruptions that occurred, the complaints sent to them by their customers and the actions they have taken.
  • The government is bestowed powers to review and intervene in transactions involving foreign control of critical infrastructures. The President or the National Security Council (“NSC”) may call on the review of any investment activity such as merger, acquisition, or takeover that could result in foreign control of a business or entity considered as critical infrastructure in order to determine the investment activity’s effects on national security. A party to a covered transaction may, however, request the NSC to conduct a review of such transaction. Conditions may be imposed to mitigate any threat to the national security arising from the covered transaction, but the President may take any appropriate action including suspension of such transaction that threatens or impairs the national security of the Philippines subject to certain conditions.
  • Entities controlled or owned by foreign governments cannot invest in any public service classified as critical infrastructure. The prohibition applies to any entity controlled by or acting on behalf of foreign governments or foreign state-owned enterprises. This addresses the ever changing geopolitical landscape, but it should be noted that the prohibition applies only to investments made after the effective date of the bill, if passed into law.
  • Foreign nationals may invest in public services classified as critical infrastructure subject to reciprocity rules. A foreign national is not allowed to own more than 40% of capital in a public service engaged in the operation and management of critical infrastructure unless the country of such foreign national extends the same privilege to Philippine nationals as may be provided by foreign law, treaty or international agreement.

In sum, Senate Bill No. 2094 provides that all public utilities are public service, but not all public services are public utilities. Meanwhile, a critical infrastructure may either be a public service or a public utility.

Currently, the bill is being harmonised with its counterpart from the House of Representatives. Once the representatives of the Senate and the House of Representatives are able to resolve the disagreeing provisions of the bills, the consolidated version will be sent to the President of the Philippines for final action before it becomes a law.[2]

Implications for business in the Philippines

The most significant changes that Senate Bill No. 2094 seeks to introduce to the almost 90-year old CA 146 and the interpretation of the 1987 Philippine Constitution are the opening up of some public utilities to foreign investors and the recognition of the importance of certain industries in the country’s security.

The 1987 Philippine Constitution imposes a foreign ownership limitation to entities operating public utilities. In particular, the operation of public utilities is limited to Filipino citizens or corporations or associations organised under Philippine laws at least 60% of whose capital is owned by such citizens. A confusion has been hanging over this limitation because the 1987 Philippine Constitution does not define a public utility. To remedy this, the Philippine Supreme Court and many other regulators have referred to CA 146 to define public utility, and have, most of the time, used the term interchangeably with “public service.” CA 146 defines public service[3] in broad terms, but the defining features of a public service (and hence, a public utility) comprise of a service or commodity regularly supplied to the public for a fee. By defining public utility in express terms, there is now a clear understanding about when the foreign limitation in the 1987 Philippine Constitution should be applied. Thus, unless a public service is explicitly categorised as a public utility, there is no foreign ownership limitation applicable to a public service enterprise.

While this is all good news, businesses should be mindful that there are certain aspects and operations of public utilities that are still exclusive to Filipinos or subject to foreign ownership limitation. For example, in the energy sector, the bill classifies the distribution or transmission of electricity as public utility for which the maximum foreign ownership is 40%. Other aspects of the energy sector, like energy generation, are fully open to foreign investors.  Nevertheless, the 1987 Philippine Constitution limits the exploration, development and utilisation of natural resources to Filipinos or corporations with at least 60% of whose capital is owned by Filipinos, which means, the generation of energy from natural or renewable resources, such as wind, hydro and geothermal energy, is still subject to foreign equity limitation of 40%. Similarly, the operation and management of mass media is still exclusive to Filipinos, despite not being classified as a public utility under the bill.

In addition to the specific foreign ownership prohibitions found in other laws, businesses should be aware of the overarching regulatory powers of the state when it comes to public utilities. For instance, during the election period, the Commission of Elections may regulate the enjoyment or utilisation of all franchises or permits for the operation of media of communication or information, transportation and other public utilities, including all grants, concessions and special privileges granted to them in the interest of promoting peaceful and orderly elections. Further, in times of emergency and when the public interest requires, the government may temporarily take over or direct the operation of any privately owned public utility.

The passage of Senate Bill No. 2094, and with the anticipated approval of the President, will foster more competitions in the public service industry, which will hopefully trickle down to the benefit of the consumers. As the public is directly and substantially impacted by the operations of public utilities, businesses in these sectors should expect the government to exercise extensive and robust actions to regulate them.

If you have any questions or require any additional information, please contact Felix Sy or Reeneth B. Santos of Insights Philippines Legal Advisors (a member of ZICO Law).

This alert is for general information only and is not a substitute for legal advice.

[1] Composed of the Senate and the House of Representatives

[2] The President may either sign the bill or exercise his veto power. The bill may also lapse into law after the expiration of 30 days from receipt thereof without any action from the President.

[3] Under CA 146, 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 use 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 whatever 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 railway, marine repair shop, 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.”