A look at changes to the Public Service Act
By Ramon Vaughn Dy on March 31, 2022
Operating a public utility has for the longest time been limited to Filipino citizens and entities whose capital is at least 60-percent owned and controlled by Filipino citizens. Foreign equity participation also cannot exceed 40 percent of a public utility’s capital stock.
The nationality restriction is embodied in Article XII, Section 11, of the 1987 Constitution, which states that “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 60 per centrum of whose capital is owned by such citizens.” This recognizes the sensitive and vital position of public utilities in the national economy and national security (Gamboa v Teves, GR 176579, Oct. 9, 2012 citing Bernas, Joaquin G., S.J).
Because of the absence of a clear definition of what constitutes a public utility, the expansive definition of the term “public service” under Commonwealth Act 146, otherwise known as the Public Service Act or PSA (which includes the operation of ice plants, airports, shipyards, canals, irrigation systems, gas, electric light, petroleum, sewerage system, wire or wireless communications system and other similar public services, etc.) was used in characterizing and classifying an entity as a public utility.
Republic Act (RA) 11659, which was finally signed into law on March 21, 2022, introduced key changes to the PSA, which originated way back in 1936. It brought into force a plethora of impactful amendments aimed at relaxing stringent rules on foreign equity participation in entities not classified as public utilities.
One of the more relevant amendments was the inclusion of a definition of the term “public utility.” The old PSA and the 1987 Constitution do not provide for an express definition of what constitutes a public utility. The term was not particularly defined because it would be difficult to construct a definition that would fit every conceivable case (Generoso Almario, Public Service Law, 1966).
With RA 11659, “public utility” now refers to a public service that operates, manages or controls for public use any of the following: (1) distribution of electricity; (2) transmission of electricity petroleum; (3) petroleum product pipeline transmission systems; (4) water pipeline distribution systems and wastewater pipeline systems, including sewerage pipeline systems; (5) seaports; and (6) public utility vehicles. Concessionaires, joint ventures and other similar entities that wholly operate, manage or control these sectors for public use are also considered public utilities.
It must be noted that the definition of what constitutes a “public service” under the old PSA has been retained. By virtue of the changes introduced by RA 11659, the other businesses covered by the term “public service” that were not included in the enumeration of what constitutes a public utility (airlines, telecommunication companies, ice plants, etc.) are no longer subject to the a definition of the term “public utility.”. In other words, public service entities falling outside the definition of a public utility may now be owned up to 100 percent by foreign investors.
The 60-40 restriction is now limited to entities classified as a public utility under RA 11659 in accordance with Article XII, Section 11 of the 1987 Constitution. Certificates authorizing the operation, management or control of a public service can be issued to any corporation, partnership, association or joint stock company constituted and organized under the laws of the Philippines. However, public service entities will continue to be regulated by relevant government agencies such as the Civil Aviation Authority of the Philippines, Department of Energy, Land Transportation Franchising and Regulatory Board, and National Telecommunications Commission, among others.
The classification of public utilities can still be modified. Upon recommendation of the National Economic and Development Authority, the president may recommend to Congress the classification of a public service as a public utility based on criteria provided under Section 13(e) of RA 11659.
RA 11659 also provides that in the interest of national security, foreign equity participation can be suspended or prohibited in any proposed merger or acquisition, or any investment in a public service that will result in the grant of control to a foreigner or a foreign corporation. It is also worthy to note that entities controlled by or acting on behalf of a foreign government or a foreign state-owned enterprise are strictly prohibited from owning capital in any public service classified as a public utility or critical infrastructure.
RA 11659 introduced key amendments to the old PSA that will surely have a significant impact on the economy for years to come. These, along with recent changes to the Foreign Investments Act, are crucial toward the Philippines’ recovery from the Covid-19 pandemic. Through the help of foreign direct investments, the country will hopefully move forward toward globalization, competitiveness and becoming one of Asia’s premier investment hubs.
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Ramon Vaughn F. Dy 3rd is a graduate of the Ateneo de Manila University School of Law and a legal assistant at Mata-Perez, Tamayo and Francisco (MTF Counsel).