Electric Power Industry Reform Act of 2001

Section 5

The electric power industry shall be divided into four (4) sectors, namely: generation; transmission; distribution and supply.

Section 6

Generation of electric power shall be competitive and open. Upon the effectivity of this Act, any new generation company shall, before it operates, secure from the Energy Regulatory Commission a certificate of compliance pursuant to the standards set forth in this Act, as well as health, safety and environmental clearances from the appropriate government agencies under existing laws. Any law to 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 local or national franchise. Upon implementation of retail competition and open access, the prices charged by a generation company for supply of electricity shall not be subject to regulation by the ERC except as otherwise provided in this Act Pursuant to the objective of lowering electricity rates to end-users, sales of generated power by generation companies shall be value added tax zero-rated. The ERC shall, in determining the existence of market power abuse or anti-competitive behavior, require from generation companies the submission of their individual pricing formulas as well as their financial statements.

Section 7

The transmission of electric power shall be a regulated common electricity carrier business, subject to the ratemaking powers of the ERC. The ERC shall set the standards of the voltage transmission that shall distinguish the transmission from the subtransmission assets. Pending the issuance of such new standards, the distinction between the transmission and subtransmission assets shall be as follows: 230 kilovolts and above in the Luzon Grid, 69 kilovolts and above in the Visayas and in the isolated distribution systems, and 138 kilovolts and above in the Mindanao Grid: Provided, That for the Visayas and the isolated distribution system, should the 69 kilovolt line not form part of the main transmission grid and be directly connected to the substation of the distribution utility, it shall form part of the subtransmission system.

Section 8

There is hereby created a National Transmission Corporation, hereinafter referred to as TRANSCO, which shall assume the electrical transmission function of the National Power Corporation, and have the powers and functions hereinafter granted. The TRANSCO shall assume the authority and responsibility of NPC for the planning, construction and centralized operation and maintenance of its high voltage transmission facilities, including grid interconnections and ancillary services. Within six (6) months from the effectivity of this Act, the transmission and subtransmission facilities of NPC and all other assets related to transmission operations, including the nationwide franchise of NPC for the operation of the transmission system and the grid, shall be transferred to the TRANSCO. The TRANSCO shall be wholly owned by the Power Sector Assets and Liabilities Management Corporation (PSALM Corp.). The subtransmission functions and assets shall be segregated from the transmission functions, assets and liabilities for transparency and disposal: Provided, That the subtransmission assets shall be operated and maintained by TRANSCO until their disposal to qualified distribution utilities which are in a position to take over the responsibility for operating, maintaining, upgrading, and expanding said assets. All transmission and subtransmission related liabilities of NPC shall be transferred to and assumed by the PSALM Corp. TRANSCO shall negotiate with and thereafter transfer such functions, assets, and associated liabilities to the qualified distribution utility or utilities connected to such subtransmission facilities not later than two (2) years from the effectivity of this Act or the start of open access, whichever comes earlier: Provided, That in the case of electric cooperatives, the TRANSCO shall grant concessional financing over a period of twenty (20) years: Provided, however, That the installment payments to TRANSCO for the acquisition of subtransmission facilities shall be given first priority by the electric cooperatives out of the net income derived from such facilities. The TRANSCO shall determine the disposal value of the subtransmission assets based on the revenue potential of such assets. In case of disagreement in valuation, procedures, ownership participation and other issues, the ERC shall resolve such issues. The take over by a distribution utility of any subtransmission asset shall not cause a diminution of service and quality to the end-users. Where there are two or more connected distribution utilities, the consortium or juridical entity shall be formed by and composed of all of them which has been granted a franchise to operate the subtransmission asset by the ERC. The subscription rights of each distribution utility involved shall be proportionate to their load requirements unless otherwise agreed by the parties. Aside from the PSALM Corp., TRANSCO and connected distribution utilities, no third party shall be allowed ownership or management participation, in whole or in part, in such subtransmission entity. The TRANSCO may exercise the power of eminent domain subject to the requirements of the Constitution and existing laws. Except as provided herein, no person, company or entity other than the TRANSCO shall own any transmission facilities. Prior to the transfer of the transmission functions by NPC to TRANSCO, and before promulgation of the Grid Code, ERC shall ensure that NPC shall provide to all electric power industry participants open and non-discriminatory access to its transmission system. Any violation thereof shall be subject to the fines and penalties imposed herein.

Section 9

Upon the effectivity of this Act, the TRANSCO shall have the following functions and responsibilities: (a) Act as the system operator of the nationwide electrical transmission and subtransmission system, to be transferred to it by NPC; (b) Provide open, equal and non-discriminatory access to its transmission system to all electricity users; (c) Ensure and maintain the reliability, adequacy, security, stability and integrity of the nationwide electrical grid in accordance with the performance standards for the operation and maintenance of the grid, as set forth in a Grid Code to be adopted and promulgated by the ERC within six (6) months from the effectivity of this Act; (d) Improve and expand its transmission facilities, consistent with the Grid Code and the Transmission Development Plan (TDP) to be promulgated pursuant to this Act, to adequately serve generation companies, distribution utilities and suppliers requiring transmission service and/or ancillary services through the transmission system: Provided, That TRANSCO shall submit any plan for expansion or improvement of its facilities for approval by the ERC; (e) Subject to technical constraints, the grid operator of the TRANSCO shall provide central dispatch of all generation facilities connected, directly or indirectly, to the transmission system in accordance with the dispatch schedule submitted by the market operator, taking into account outstanding bilateral contracts; and (f) TRANSCO shall undertake the preparation of the TDP. In the preparation of the TDP, TRANSCO shall consult the other sectors of the power industry such as the generation companies, distribution utilities, and the electricity end-users. The TDP shall be submitted to the DOE for integration with the Power Development Program and the National Energy Plan, provided for in Republic Act No. 7638 otherwise known as "the Department of Energy Act of 1992". A generation company may develop and own or operate dedicated point-to-point limited transmission facilities that are consistent with the TDP: Provided, That such facilities are required only for the purpose of connecting to the transmission system, and are used solely by the generating facility, subject to prior authorization by the ERC: Provided, further, That in the event that such assets are required for competitive purposes, ownership of the same shall be transferred to the TRANSCO at a fair market price: Provided, finally, That in case of disagreement on the fair market price, the ERC shall determine the fair market value of the asset.

Section 10

As a corporate entity, TRANSCO shall have the following corporate powers: (a) To have continuous succession under its corporate name until otherwise provided by law; (b) To adopt and use a corporate seal and to change, alter or modify the same, if necessary; (c) To sue and be sued; (d) To enter into a contract and execute any instrument necessary or convenient for the purpose for which it is created; (e) To borrow funds from any source, whether private or public, foreign or domestic, and issue bonds and other evidence of indebtedness: Provided, That in the case of the bond issues, it shall be subject to the approval of the President of the Philippines upon recommendation of the Secretary of Finance: Provided, further, That foreign loans shall be obtained, for and in behalf of TRANSCO, in accordance with law and the rules and regulations of the Bangko Sentral ng Pilipinas; (f) To maintain a provident fund which consists of contributions made by both the TRANSCO and its officials and employees and their earnings for the payment of benefits to such officials and employees or their heirs under such terms and conditions as it may prescribe; (g) To do any act necessary or proper to carry out the purpose for which it is created, or which, from time to time, may be declared by the TRANSCO Board as necessary, useful, incidental or auxiliary to accomplish its purposes and objectives; and, (h) Generally, to exercise all the powers of a corporation under the corporation law insofar as they are not inconsistent with this Act.

Section 11

All the powers of the TRANSCO shall be vested in and exercised by a Board of Directors. The Board shall be composed of a Chairman and six (6) members. The Secretary of the Department of Finance (DOF) shall be the ex-officio Chairman of the Board. The other members of the TRANSCO Board shall include the Secretary of the Department of Energy (DOE), the Secretary of the Department of Environment and Natural Resources (DENR), the President of TRANSCO, one member each representing Luzon, Visayas and Mindanao. The members of the Board shall be appointed by the President of the Philippines and shall serve for a term of six (6) years, except that any person appointed to fill-in a vacancy shall serve only the unexpired term of his/her predecessor in office. All members of the Board shall be professionals of recognized competence and expertise in the fields of engineering, finance, economics, law or business management. No member of the Board or any of his relatives within the fourth civil degree of consanguinity or affinity shall have any interest, either as investor, officer or director, in any generation company or distribution utility or other entity engaged in transmitting, generating and supplying electricity specified by ERC.

Section 12

The following are the powers of the Board: (a) To provide strategic direction for TRANSCO, and formulate medium and long-term strategies pursuant to the vision, mission, and objectives of TRANSCO; (b) To develop and adopt policies and measures for the efficient and effective management and operation of TRANSCO; (c) To organize, re-organize, and determine the organizational structure and staffing pattern of TRANSCO; abolish and create offices and positions; fix the number of its officers and employees; transfer and re-align such officers and personnel; fix their compensation, allowance, and benefits; (d) To fix the compensation of the President of TRANSCO and to appoint and fix the compensation of other corporate officers; (e) For cause, to suspend or remove any corporate officer appointed by the Board; (f) To adopt and set guidelines for the employment of personnel on the basis of merit, technical competence, and moral character; and (g) Any provisions of the law to the contrary notwithstanding, to write-off bad debts.

Section 13

The Board shall meet as often as may be necessary upon the call of the Chairman of the Board or by a majority of the Board members.

Section 14

The members of the Board shall receive per diem for each regular or special meeting of the Board actually attended by them, and, upon approval of the Secretary of the Department of Finance, such other allowances as the Board may prescribe.

Section 15

The presence of at least four (4) members of the Board shall constitute a quorum, which shall be necessary for the transaction of any business. The affirmative vote of a majority of the members present in a quorum shall be adequate for the approval of any resolution, decision or order except when the Board shall agree that a greater vote is required.

Section 16

The President of TRANSCO shall be appointed by the President of the Philippines. In the absence of the Chairman, the President shall preside over Board meetings. The TRANSCO President shall be the Chief Executive Officer of TRANSCO. The President of TRANSCO shall have the following powers and duties: (a) To execute and administer the policies and measures approved by the Board, and take responsibility for the efficient discharge of management functions; (b) To oversee the preparation of the budget of TRANSCO; (c) To direct and supervise the operation and internal administration of TRANSCO and, for this purpose, may delegate some or any of his administrative responsibilities and duties to other officers of TRANSCO (d) Subject to the guidelines and policies set up by the Board, to appoint and fix the number and compensation of subordinate officials and employees of TRANSCO; and for cause, to remove, suspend, or otherwise discipline any subordinate employee of TRANSCO (e) To submit an annual report to the Board on the activities and achievements of TRANSCO at the close of each fiscal year and upon approval thereof, submit a copy to the President of the Philippines and to such other agencies as may be required by law (f) To represent TRANSCO in all dealings and transactions with other offices, agencies, and instrumentalities of the Government and with all persons and other entities, private or public, domestic or foreign; and (g) To exercise such other powers and duties as may be vested in him by the Board from time to time.

Section 17

The salaries and benefits of employees in the TRANSCO shall be exempt from Republic Act No. 6758 and shall be fixed by the TRANSCO Board.

Section 18

The net profit, if any, of TRANSCO shall be remitted to the PSALM Corp. not later than thirty (30) days after the immediately preceding quarter.

Section 19

The transmission charges of the TRANSCO shall be filed with and approved by the ERC pursuant to paragraph (f) of Section 43 hereof.

Section 20

TRANSCO may engage in any related business which maximizes utilization of its assets: Provided, That a portion of the net income derived from such undertaking utilizing assets which form part of the rate base shall be used to reduce transmission wheeling rates as determined by the ERC. Such portion of net income used to reduce the transmission wheeling rates shall not exceed fifty percent (50%) of the net income derived from such undertaking. Separate accounts shall be maintained for each business undertaking to ensure that the transmission business shall neither subsidize in any way such business undertaking nor encumber its transmission assets in any way to support such business.

Section 21

The TRANSCO shall award, in open competitive bidding, a concession contract to a qualified party for the operation, maintenance, improvement and expansion of its transmission assets and the operation of any related business for a period of twenty-five (25) years, subject to review and renewal for a maximum period of another twenty-five (25) years. The contract shall include, but not limited to, the provision for performance and financial guarantees or any other covenants which may be required in order to fulfill the obligations of the concession contract. The TRANSCO O & M Concessionaire shall comply with the Grid Code and the TDP as approved. Failure to comply with such obligations shall result in the imposition of appropriate sanctions or penalties by the ERC: Provided, however, That in cases of major or serious economic and/or technical reasons, TRANSCO O & M Concessionaire may seek authority from the ERC to defer any expansion or improvement. The concessionaire shall be financially and technically capable, with proven domestic and/or international experience and expertise as a leading transmission system operator under a competitive electric power industry structure. The experience of the strategic partner must be with a transmission system of equal, if not greater, capacity and coverage as the Philippines.

Section 22

The distribution of electricity to end-users shall be a regulated common carrier business requiring a 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.

Section 23

A distribution utility shall have the obligation to provide distribution services and connections to its system for any end-user within its franchise area consistent with the distribution code. Any entity engaged therein shall provide open and non-discriminatory access to its distribution system to all users. Any distribution utility shall be entitled to impose and collect distribution retail wheeling charges and connection fees from such end-users as approved by the ERC. A distribution utility shall have the obligation to supply electricity in the least cost manner to its captive market, subject to the collection of distribution retail supply rate duly approved by the ERC. To achieve economies of scale in utility operations, distribution utilities may, after due notice and public hearing, pursue structural and operational reforms such as but not limited to, joint actions between or among the distribution utilities, subject to the guidelines issued by the ERC. Such joint actions shall result in improved efficiencies, reliability of service, reduction of costs and compliance to the performance standards prescribed in the IRR of this Act. Distribution utilities shall submit to the ERC a statement of their compliance with the technical specifications prescribed in the Distribution Code and the performance standards prescribed in the IRR of this Act. Distribution utilities which do not comply with any of the prescribed technical specifications and performance standards shall submit to the ERC a plan to comply, within three (3) years, with said prescribed technical specifications and performance standards. The ERC shall, within sixty (60) days upon receipt of such plan, evaluate the same and notify the distribution utility concerned of its action. Failure to submit a feasible and credible plan and/or failure to implement the same shall serve as grounds for the imposition of appropriate sanctions, fines or penalties. Distribution utilities shall prepare and submit to the DOE their annual distribution development plans. In the case of electric cooperatives, such plans shall also be submitted through the National Electrification Administration. Distribution utilities shall provide universal service within their franchise, including unviable areas, as part of their social obligations in a manner that shall sustain the economic viability of the utility, subject to the approval by the ERC in the case of private or government-owned utilities. Areas which a franchised distribution utility cannot or does not find viable may be transferred to another distribution utility, if any is available, who will provide the service, subject to approval by ERC. In cases where franchise holders fail and/or refuse to service any area within their franchise territory and allowed another utility to service the same, then the status quo shall be respected. To this end, distribution utilities shall submit to the DOE their plans for serving such areas as part of their distribution development plans. In cases of major or serious economic and/or technical reasons, the distribution utility shall seek prior authority from the ERC to defer such expansion or improvement. Distribution utilities may exercise the power of eminent domain subject to the requirements of the constitution and existing laws.

Section 24

The retail wheeling rates of distribution utilities shall be filed with and approved by the ERC pursuant to paragraph (f) of Section 43 hereof.

Section 25

The rates charged by distribution utilities for the supply of electricity in their captive market shall be subject to regulation by the ERC based on the principle of full recovery of prudent and reasonable economic costs incurred, or such other principles that will promote efficiency as may be determined by the ERC. Every distribution utility shall identify and segregate in its bills to end-users the components of the distribution retail supply rate, as defined in this Act.

Section 26

Distribution utilities may, directly or indirectly, engage in any related business undertaking which maximizes the utilization of their assets: Provided, That a portion of the net income derived from such undertaking utilizing assets which form part of the rate base shall be used to reduce its distribution retail wheeling charges as determined by the ERC: Provided, further, That such portion of net income used to reduce their distribution retail wheeling charges shall not exceed fifty percent (50%) of the net income derived from such undertaking: Provided, finally, That separate accounts are maintained for each business undertaking to ensure that the distribution business shall neither subsidize in any way such business undertaking nor encumber its distribution assets in any way to support such business.

Section 28

In compliance with the constitutional mandate for dispersal of ownership and de-monopolization of public utilities, the holdings of persons, natural or juridical, including directors, officers, stockholders and related interests, in a generation company, distribution utility and their respective holding companies shall not exceed fifteen (15%) percent of the voting shares of stock unless the utility or the company holding the shares or its controlling stockholders are already listed in the Philippine Stock Exchange (PSE): Provided, That controlling stockholders of small distribution utilities are required to list in the PSE within five (5) years from the enactment of this Act if they already own the stocks. New controlling stockholders shall undertake such listing within five (5) years from the time they acquire ownership and control. A small distribution company is one whose peak demand is One hundred megawatts (100MW) or less. The ERC shall, within sixty (60) days from the effectivity of this Act, promulgate the rules and regulations to implement and effect this provision.

Section 29

The supply of electricity to the contestable market shall require a license from the ERC, except for distribution utilities and electric cooperatives with respect to their existing franchise areas. 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 local or 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. Electricity suppliers shall be subject to the rules and regulations concerning abuse of market power, cartelization, and other anti-competitive or discriminatory behavior to be promulgated by the ERC. In its billings to end-users, every supplier shall identify and segregate the components of its supply charge, as defined herein.

Section 30

Within one (1) year from the effectivity of this Act, the DOE shall establish a wholesale electricity spot market composed of the wholesale electricity spot market participants. The market shall provide the mechanism for identifying and setting the price of actual variations from the quantities transacted under contracts between sellers and purchasers of electricity. Jointly with the electric power industry participants, the DOE shall formulate the detailed rules for the wholesale electricity spot market. Said rules shall provide the mechanism for determining the price of electricity not covered by bilateral contracts between sellers and purchasers of electricity users. The price determination methodology contained in said rules shall be subject to the approval of ERC. Said rules shall also reflect accepted economic principles and provide a level playing field to all electric power industry participants. The rules shall provide, among others, procedures for: (a) Establishing the merit order dispatch instructions for each time period; (b) Determining the market-clearing price for each time period; (c) Administering the market including criteria for admission to and termination from the market which includes security or performance bond requirements, voting rights of the participants, surveillance and assurance of compliance of the participants with the rules and the formation of the wholesale electricity spot market governing body; (d) Prescribing guidelines for the market operation in system emergencies; and (e) Amending the rules. The wholesale electricity spot market shall be implemented by a market operator in accordance with the wholesale electricity spot market rules. The market operator shall be an autonomous group, to be constituted by DOE, with equitable representation from electric power industry participants, initially under the administrative supervision of the TRANSCO. The market operator shall undertake the preparatory work and initial operation of the wholesale electricity spot market. Not later than one (1) year after the implementation of the wholesale electricity spot market, an independent entity shall be formed and the functions, assets and liabilities of the market operator shall be transferred to such entity with the joint endorsement of the DOE and the electric power industry participants. Thereafter, the administrative supervision of the TRANSCO over such entity shall cease. Subject to the compliance with the membership criteria, all generating companies, distribution utilities, suppliers, bulk consumers/end-users and other similar entities authorized by the ERC shall be eligible to become members of the wholesale electricity spot market. The ERC may authorize other similar entities to become eligible as members of the wholesale electricity spot market either directly or indirectly. All generating companies, distribution utilities, suppliers, bulk consumers/end-users and other similar entities authorized by the ERC, whether direct or indirect members of the wholesale electricity spot market, shall be bound by the wholesale electricity spot market rules with respect to transactions in that market. NEA may, in exchange for adequate security and a guarantee fee, act as a guarantor for purchases of electricity in the wholesale electricity spot market by any electric cooperative or small distribution utility to support their credit standing consistent with the provisions hereof. For this purpose, the authorized capital stock of NEA is hereby increased to Ten billion pesos (P10,000,000,000.00). All electric cooperatives which have outstanding uncollected billings to any local government unit shall report such billings to NEA which shall, in turn, report the same to the Department of Budget and Management (DBM) for collection pursuant to Executive Order 190 issued on December 21, 1999. The cost of administering and operating the wholesale electricity spot market shall be recovered by the market operator through a charge applied to all market members: Provided, That such charge shall be filed with and approved by the ERC. In cases of national and international security emergencies or natural calamities, the ERC is hereby empowered to suspend the operation of the wholesale electricity spot market or declare a temporary wholesale electricity spot market failure.

Section 31

Retail competition and open access on distribution wires shall be implemented not later than three (3) years upon the effectivity of this Act subject to compliance with the following conditions precedent: (a) Establishment of the wholesale electricity spot market; (b) Approval of unbundled transmission and distribution retail wheeling charges; (c) Initial implementation of the cross subsidy removal scheme; and (d) Privatization of at least 70% of the total capacity of generating assets of NPC and of the total capacity of the power plants under contract with NPC in Luzon and Visayas. Upon the initial implementation of open access, the ERC shall allow all electricity end-users located in Luzon with a maximum demand of at least two megawatts (2MW) to be the contestable market. For the Visayas and Mindanao areas, the initial threshold level shall be one and a quarter megawatts (1.25MW). However, the ERC shall, on January 1, 2004, reduce the maximum demand for the contestable market in Luzon to one megawatt (1MW) for at least two (2) years and Seven hundred fifty kilowatts (750kW) for the Visayas and Mindanao areas. Thereafter, the ERC shall determine a threshold level when open access shall apply to all distribution utilities. In the case of electric cooperatives, retail competition and open access shall be implemented not earlier than five (5) years upon the effectivity of this Act.

Section 32

Stranded debt of NPC shall refer to any unpaid financial obligations of NPC which have not been liquidated by the proceeds from sales and privatization of NPC assets. Stranded contract costs of NPC shall refer to the excess of the contracted cost of electricity under eligible IPP contracts of NPC over the actual selling price of such contracts in the market. Such contracts shall have been accredited by the DOE or NPC and approved by the ERB as of the effectivity of this Act. The national government shall, in exchange for the equivalent amount of the equity of NPC, directly assume a portion of the financial obligations of NPC in an amount not to exceed Two Hundred Billion Pesos (P200,000,000,000.00). For this purpose, the capital stock of NPC shall be increased to Three hundred billion pesos (P300,000,000,000.00) common shares which shall be divided into Three billion (3,000,000,000.00) shares with a par value of One hundred pesos (P100.00) per share. The ERC shall verify the reasonable amounts and determine the manner and duration for the full recovery of stranded debt and stranded contract costs as defined herein: Provided, That the duration for such recovery shall not be shorter than fifteen (15) years nor longer than twenty-five (25) years. The ERC shall, at the end of the first year of the implementation of stranded cost recovery and every year thereafter, conduct a review to determine whether there is under-recovery or over-recovery and adjust (true-up) the level of stranded cost recovery charge accordingly. The NPC and PSALM shall have the duty to mitigate all potential stranded contract costs of NPC.

Section 33

Stranded contract costs of distribution utilities shall refer to the excess of the contracted cost of electricity under eligible contracts of such utilities over the actual selling price of such contracts in the market. Such contracts shall have been accredited by the DOE or NPC and approved by the ERB as of the effectivity of this Act. Within one (1) year from the start of open access, any distribution utility that intends to seek recovery of stranded contract costs shall file notice of such intent with the ERC together with an estimate of such obligations, including the present value thereof and such other supporting data as may be required by the ERC. Any distribution utility that does not file within the date specified shall not be eligible for such recovery. Any distribution utility which opts to recover stranded cost shall have a duty to mitigate its potential stranded contract costs by making reasonable best efforts to: (a) reduce the costs of its existing contracts with IPPs; and (b) submit to an annual earnings review by the ERC and use its earnings above its authorized rate of return to reduce the book value of contracts until the end of the stranded cost recovery period. Other mitigating measures which are reasonably known and generally accepted within the electric power industry shall be utilized. The ERC shall not require the distribution utility to take a loss to reduce stranded contract costs or divest assets, unless the divestiture is imposed as a penalty as provided herein. The relevant distribution utility shall submit to the ERC quarterly reports showing the amount of stranded costs recovered and the balance remaining to be recovered. The ERC shall verify the reasonable amounts and determine the manner and duration for the full recovery of stranded contract costs as defined herein: Provided, That the duration for such recovery shall not be shorter than fifteen (15) years nor longer than twenty-five (25) years. The ERC shall, at the end of the first year of the implementation of stranded cost recovery and every year thereafter, conduct a review to determine whether there is under-recovery or over recovery and adjust (true-up) the level of stranded cost recovery charge accordingly.

Section 34

Within one (1) year from the effectivity of this Act, a universal charge to be determined, fixed and approved by the ERC, shall be imposed on all electricity end-users for the following purposes: (a) Payment for the stranded debts and stranded contract costs of NPC and qualified distribution utilities resulting from the restructuring of the industry; (b) Missionary electrification; (c) The equalization of the taxes and royalties applied to indigenous or renewable sources of energy vis-à-vis imported energy fuels; (d) An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour (P0.0025/kWh), which shall accrue to an environmental fund to be used solely for watershed rehabilitation and management. Said fund shall be managed by NPC under existing arrangements; and (e) A charge to account for all forms of cross-subsidies for a period not exceeding three (3) years. The universal charge shall be a non-bypassable charge which shall be passed on and collected from all end-users on a monthly basis by the distribution utilities. Collections by the distribution utilities and the TRANSCO in any given month shall be remitted to the PSALM Corp. on or before the fifteenth (15 th ) of the succeeding month, net of any amount due to the distribution utility. Any end-user or self-generating entity not connected to a distribution utility shall remit its corresponding universal charge directly to the TRANSCO. The PSALM Corp., as administrator of the fund, shall create a Special Trust Fund which shall be disbursed only for the purposes specified herein in an open and transparent manner. All amounts collected for the universal charge shall be distributed to the respective beneficiaries within a reasonable period to be provided by the ERC.

Section 35

The provision of Section 79 of Commonwealth Act No. 137 (C.A. No. 137) and any law to the contrary notwithstanding, the royalties, returns and taxes collected for the exploitation of all indigenous sources of energy, including but not limited to, natural gas and geothermal steam, shall be adjusted so as to effect parity of tax treatment with the existing rates for imported coal, crude oil, bunker fuel and other imported fuels. To ensure that the adjustment of tax rates and royalties shall result in lower rates for end-users, the Department of Finance shall, within sixty (60) days from the effectivity of this Act, issue the rules and regulations thereof. Consistent with this objective, the ERC shall forthwith revise the rates of power from all indigenous sources of energy.

Section 36

Within six (6) months from the effectivity of this Act, NPC shall file with the ERC its revised rates. The rates of NPC shall be unbundled between transmission and generation rates and the rates shall reflect the respective costs of providing each service. Inter-grid and intra-grid cross subsidies for both the transmission and the generation rates shall be removed in accordance with this Act. Within six (6) months from the effectivity of this Act, each distribution utility shall file its revised rates for the approval by the ERC. The distribution retail wheeling charge shall be unbundled from the distribution retail supply rate and the rates shall reflect the respective costs of providing each service. For both the distribution retail wheeling and supply charges, inter-class subsidies shall be removed in accordance with this Act. Within six (6) months from the date of submission of revised rates by NPC and each distribution utility, the ERC shall notify the entities of their approval. Any electric power industry participant shall functionally and structurally unbundle its business activities and rates in accordance with the sectors as identified in Section 5 hereof. The ERC shall ensure full compliance with this provision.