Philippines – Implementing Amendments To Public Service Act (2).

Classification of Public Service

As discussed in my previous article, the Philippines has opened its public service which is not classified as public utility to full foreign ownership. Sectors classified as public utility have been identified in Republic Act 11659 (the “amendment”), which amended the Public Service Act (Commonwealth Act 146).

The amendment expressly reserved the authority to classify sectors as a public utility to legislative discretion. The amendment states that “no other person shall be deemed a public utility unless otherwise subsequently provided by law.”

However, the amendment authorized the President, upon recommendation of the National Economic and Development Authority (NEDA), to recommend to Congress the classification of other public services to public utility. The recommendation should be based on the following criteria:

1. The person or juridical entity regularly supplies and transmits, and distributes to the public through a network a commodity or service of public consequence;
2. The commodity or service is a natural monopoly that needs to be regulated when the common good so requires. For this purpose, natural monopoly exists when the market demand for a commodity or service can be supplied by a single entity at a lower cost than by two or more entities;
3. The commodity or service is necessary for the maintenance of life and occupation of the public; and
4. The person or juridical entity, providing the commodity or service, is obligated to provide adequate service to the public on demand.

The Implementing Rules and Regulations on the amendment of the Public Service Act or PSA IRR further clarifies the factors that NEDA shall consider on the classification to public utility, to wit:

1. The commodity or service can only be regularly supplied, transmitted, and distributed to the public through an infrastructure network, composed of nodes and links, specifically built to facilitate the delivery of the commodity or service;
2. The commodity or service is a natural monopoly based on, but not limited to, the following:
   a) The economies of scale characterized by declining average cost relative to output; b) High fixed cost c) Industry or market demand is insufficient to support two or more firms; and d) Monopoly power is not due solely to regulatory or legal restrictions.
3. The commodity or service is necessary for the maintenance of life, livelihood or employment of the general public; and
4. An uninterrupted market supply of the commodity or service is required to meet market demand, whether such market demand is actual or potential.

Further, PSA IRR prescribed the review procedure to reclassify public service. Section 12, Rule III of the PSA IRR provides that NEDA may initiate the review for classification of public service motu proprio or upon request by the relevant Administrative Agency.

The review procedure requires the submission of the performance audit conducted by the Administrative Agency. Section 48 of the PSA IRR requires Administrative Agencies to conduct an annual performance audit to monitor cost, quality of services provided to the public, and the ability of the public service provider to immediately and adequately respond to emergency cases.

Notably, the Supreme Court had previously ruled against the classification of certain sectors as public utility despite contradicting legislative classifications. It would then be interesting to see how the Supreme Court will decide on questions involving the classification of public utility based on the Amendment and the PSA IRR.