Oil Deregulation in the Philippines

Due to an oil crisis’ occurrence in 1997, the government created the Oil Industry Commission (OIC) to regulate the goings-on of businesses working with oil. The OIC can fix prices of petroleum products, control refinery capacities, license new refineries, and regulate the general operations of affected businesses. The digest also pointed out the control of foreign companies over the industry, where almost every operations in the country at the time is owned by these companies. To break the foreigners’ control, with President Marcos’ initiative, the Philippine National Oil Corporation (PNOC).

PNOC, operating as PETRON, was the first Philippine-owned Corporation in the market. The Oil Price Stabilization Fund (OPSF) was then created,2 in 1984, as a buffer against the fluctuations in oil prices. Basically, the OPSF compensates by allowing companies to reimburse from the fund whenever prices change due to either exchange rate adjustments or world oil market prices. Caltex, Shell, and PNOC, or Petron, were the only three remaining oil companies in the country came 1985.

Under the Cory Aquino administration, the Energy Regulatory Board (ERB) was created with the purpose of, much the same as the functions of the OIC, regulating operations of oil companies with the addition of paying the OPSF to recover the importer’s expense from importing whenever there is petroleum product-deficit to temporarily adjust price levels, among others. 3 Department of Energy (DOE) was created on December 9, 1992, with its focus to privatize energy-related government agencies, to deregulate power and energy industry, and to reduce oil-fired plants dependency resulting to Petron’s privatization in 1993.

4 In March 1996, Republic Act No. 8180, which is the law discussed in the Supreme Court decision, was enacted. This law aims to expel all government control over the oil industry and is to be done within two phases. Phase one, the transition phase which started in August 1996, aims to take away control over non-pricing related aspects while phase two, the full deregulation phase, now includes the pricing itself, which abolishes the OPSF. To make things official, six months after the first phase, President Ramos signed an Executive Order that fully deregulates the oil industry.

The passage of the bill incited protests from groups with the Bagong Alyansang Makabayan (Bayan). In October 1997, because of a strike, the Supreme Court issued a temporary restraining order (TRO) against the law and, eventually, deemed as unconstitutional in the decision being discussed earlier on. 5 Its unconstitutionality was because of the violation against a Constitutional provision that states “the State shall regulate or prohibit monopolies when public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed.

”6 The Supreme Court points out that the act does not make a truly competitive market because of the 4% difference on the tax imposition on existing businesses versus new comers. Two months after, the act was replaced by the now-existing R. A. No. 8479. The newer act retains almost everything except the unconstitutional provisions present in the previous law. A petition was filed by Cong. Enrique Garcia criticizing the very short duration (five months) before the full deregulation phase be effective provided in Section 19 of the Act.

Garcia states that the provided duration is too short, making it hard for new comers, and the market will still dominated by the big three, making it unconstitutional because there’s still monopoly/oligopoly. The high court, however, denied the petition on the grounds, basically, that the argument of the petitioner is not against the law itself, but just against the timeliness of the provided duration for the full deregulation phase. 7 Fast-forward to today, many petitions has been filed to repeal or amend the act but not one has been actually successful.

The most controversial issue surrounding the act is the overpriced petroleum products and frequent increases, with vague reasons, but seldom rollbacks like a two-step-forward-one-step-backward situation. Even though there are more than 600 companies in the industry and competition seems to be fair within the oil industry,8 the problem still exists — the high prices of petroleum products which has a domino effect to everything in the country. Economically, is it really favorable to the Filipino people or the favor only applies to the corporations involved in the downstream oil industry?

If the latter is the answer, then it’s affecting the Filipino majority negatively, meaning the deregulation of the oil industry is actually unconstitutional because it violates the for-the-people essence of our constitution. B. Statement of the Problem The 1987 Constitution has entailed the adaptation of an implicit competition policy framework which refers to all laws, government policies and regulations aimed at the establishment and maintenance of competition that aims to promote, advance, and ensure competitive market conditions by the removal, as well as to redress anti-competitive results of, public and private restrictive practices.

In effect, Philippine legislature has been adamant in ratifying laws both in realization of this provision and the protection of consumers, examples of which are R. A. No. 3247 (An Act to Prohibit Monopolies and Combinations in Restraint of Trade), The Philippine Corporation Code Batas Pambansa Blg. 68, and Executive Orders signed to increase Trade and Investment Liberalization. 9 Part of the competition policy framework is the liberalization and deregulation of select Philippine industries such as the maritime industry, civil aviation, telecommunications, energy and utilities.

However, the actualization of the ideals of the framework seems lacking in the reality that most of these industries remain structurally monopolistic or oligopolistic. A casual observer could commit to the rash conclusion of the ineffectiveness of the changed stance of the Philippine government. 10 The Oil Deregulation law was enacted to address this new framework of the Constitution. The law seeks to attain “a truly competitive market that runs with fair prices and a suitable supply of environmentally-clean and high quality petroleum products.

11” The oil industry brought in a fair amount of new competitors, now there are about 600 competitors in the market and it’s safe to say that the law is achieving its goal. But for years it has been Petron Corp, Chevron Corp. , and Pilipinas Shell that are enjoying high market revenues. Up until now, the big three have remain to be most profitable in the market. Notably Petron Corp. at the top, followed by Pilipinas Shell and Chevron Corp.

The big three still have 68% of the market share, which has improved from before but still with over a hundred of competitors, the number is staggering and it remains a question why the big three are still controlling the industry even with the oil deregulation law is in effect for 15 years. With the Constitution’s anti-monopolistic agenda particularly, Sec. 19 Article XII “which commands the state to prohibit or regulate monopolies for public interest,” the oil deregulation law have become one of the most questionable laws in the country. 12

The transparency of the oil prices has been an issue for the consumers as oil price hikes have not stopped since the law was approved by the congress. The time when the current oil deregulation law was enacted, February 1998, gasoline costs around just P12. 62 and now it went up to 300% ranging from P48. 65 to P54. 64 per liter. These gasoline prices are being questioned by the consumers for the price hikes are not supported by facts as to why gas prices need to be raise. The people are forced to just accept whatever reason the oil companies and the Department of Energy gives.

13 Given these issues, it would seem that the oil deregulation law is unconstitutional, a fact which the paper seeks to determine. C. Objectives of the Study The objective of the study is to provide a more accurate assessment on the unconstitutionality of the Oil Deregulation Law. The study aims to determine whether the law is constitutional: Does its provisions and effects violates the constitutional provision to achieve market competitiveness for public welfare? Republic Act 8479 will be compared to deregulation laws in other countries.

Because of this, the study will be able to give comparison as to the success of other deregulation laws. D. Significance of the Study In the Philippines, the downstream oil industry remains a highly controversial aspect of the economy in spite, or perhaps because of, the implementation of full deregulation that started in 1998. Contrary to expectations, diesel and other petroleum product prices have consistently risen at a seemingly accelerating rate unfair to the average Filipino.

Consumers and transport groups alike have thus repeatedly called for temporary or permanent reestablishment of price controls, only to be ignored by a government firm in the belief that deregulation as part of a liberalized approach to the economy will ultimately benefit the country in the long run. It is therefore in both private and public interests that the policy’s actual effect and its constitutionality be tested through empirical analyses. Results should be disseminated and scrupulously explained to the public at large to put to rest the clashing beliefs of the two concerned parties.

If it has been found that the oil deregulation law is against the constitution or perhaps failed to induce competitiveness, the government would do well to reconsider and implement new policies or even revise or amend it for the sake of public welfare. If, however, the opposite has been concluded and the oil deregulation is in fact deemed to attain its goals, the government must focus its energies towards ensuring that the expected benefits are actually felt by consumers. A democratic government such us the Philippines’ is, after all, by definition supposed to cater to public interest and welfare. E. Scope and Limitations of the Study

The thesis aims to closely determine whether or not R. A. No. 8479, the Downstream Oil Industry Deregulation Act of 1998, is consistent with what the constitution provides for. The researchers will interview lawyers to see if there is an unconstitutional provision within the act’s content and from economists to assess if the effects from the act’s implementation is really in a positive note. Included in the interview will be possible solutions, amendments or replacements to the still-contentious Oil Deregulation Law. Data-gathering will take place within Metro Manila and during the 2nd term of the academic year 2013 – 2014.

II. REVIEW OF RELATED LITERATURE INTRODUCTION The researchers will cover four important topics central to the thesis. The first topic covers the Competition Policy framework of the 1987 Constitution. Included here are policies that ensure a competitive environment, which is in line with the goal of the Oil Deregulation Law. Reviewing the framework will help determine whether the law is actually doing its job to keep the playing field levelled, preventing monopolies. The second one will be about the transition from RA 8180 to RA 8479. Using the petition of Rep. Garcia against the R. A.

8479 in August 1999 as a source, the first part of our literature review will discuss the unconstitutional provisions R. A. No. 8180 that was not present in the revamped R. A. No. 8479. To know what transpired before the passage of the RA 8479 is important as it will give context and will direct where the thesis will go. After scrapping all the unconstitutional provision that made the ODL of 1998 to be successfully enacted, does the new law is clear of any constitution-violation? Apparently not, as the third part will discuss the different reasons from various persons and groups why RA 8479 is unconstitutional.

Sources used in this part will cover news articles, House and Senate bills. Discussed in this part are bills that seek to either amend or repeal the ODL, the grounds that makes the law unconstitutional and the violated provision in the Constitution. While enumerating the grounds, this part will touch on the effects of the ODL to the oil industry, and to the people. This part is relevant because the grounds that will be listed can be our bases as to what our recommendations will be. The main objective of the ODL is to promote a truly competitive market, but did the law actually do so?

The last part of the literature review will give insights about the status of the oil industry as of today. As the main source of the last part, the fairly recent paper entitled “Philippine Oil Deregulation and the Oil Crisis: A Policy Issue Paper” by Marlou Mumar of University of the Philippines. The paper roughly discusses the oil crisis in general, the ODL and its effects, and various suggested solutions to lessen oil prices. To provide a more broad view on the matter being discussed, the author interviewed five people from different sectors and of different specializations.

The Constitution provided in Section 19, Article XII that deregulation must be only allowed if the public needs such action. That’s why it’s important to know whether or not the law is economically beneficial to the Filipino people, and this policy issue paper will help the researchers determine the same. A. Competition Policy One of the most tremendous shift from the 1973 constitution to the 1987 constitution was the implementation of competition policy framework14 that will make sure that markets in the country is free from anti-competitive practices.

This government policy shall promote laws and measures that will maintain the level of competition in markets as well as affect the industry structures. Since then, deregulation of select economic industries, such as civil aviation, telecommunication, electric power, and downstream oil industry, have been implemented. A review of the Philippine Tariff Commission’s statement regarding the competition policy will be used in order to have knowledge on market industries, deregulation, and competition laws in the country. Here, we learn that the oil deregulation law is a product of the competition policy

that the 1987 constitution adapted. Competition policy contains actions to keep or create competiveness in economic industries, which taking away the power of the government to take control of it, is included. Deregulation and other measures are used in order to promote economic efficiency. Economic efficiency is comprised of three components namely: (1) Productive efficiency; (2) Allocative efficiency; and (3) Dynamic efficiency. All of these components are essential to achieve competitiveness in markets, correction of market failure, and enhancement of consumer welfare. 15 Market structures are also enumerated and described here.

There are five (5) market structures that are given here specifically: (1) Perfect Competition; (2) Monopoly; (3) Natural Monopoly; (4) Monopolistic Competition; and (5) Oligopoly. The first one is the goal of the oil deregulation law, to have a perfect competition in the oil market. In this market structure, there are several players entering in and out of the industry, selling similar products with fair competition. Many argue that the oil industry is an oligopoly of the big three (Petron, Shell, and Caltex), meaning that they can influence the price and output of the market by themselves.

This assumption will be studied later on. 16 Sources of market failure are also discussed, which a monopoly can cause. If there is a monopoly in a market, income distribution is minimal. Also, consumer welfare is not guaranteed for monopolistic practices produce abusive price controls and inefficient production. These things may sound familiar, for many people now complain about these things against the government regularly. 17 Discussion of anti-competitive agreements are also given. Horizontal agreements, where firms agree to the pricing of a good, giving them ability to control prices.

In this agreement, collusion between companies happen. These things can be solved with prohibitions or authorizations, which are few examples of solution for anti-competitive practices. 18 Although there are no developed legislation relating to anti-trust and monopoly activities, a competition policy framework is a strong backbone to safeguard consumer welfare. The oil deregulation law’s goal is part of the framework that the constitution wants to achieve. The statement by the Philippines Tariff Commission about competition policy is an evidence that the government should issue anti-competitive practices in the country.

Issues about the oil market today, regarding possible oligopoly, predatory pricing, and consumer well-being should be taken a look at. The literature gave the definition of an oligopolistic market and indications of anti-competitive practices. The verdict will be given later if indeed the oil deregulation is not against the goal of the constitution as well as the law itself, which is to make the oil market competitive that runs with fair prices. 19 B. Transition from R. A. No. 8180 to R. A. No. 8479

In reviewing the constitutionality of the Republic Act 8479, it is necessary to know what was changed from the first oil deregulation law which was the Republic Act 8180, “An Act Deregulating the Downstream Oil Industry of 1996”. The petition of Rep. Garcia regarding the unconstitutionality of Sec. 19 of R. A. No. 8479 will be analyzed to give a brief background regarding the law. The first one was declared by the Supreme Court unconstitutional in November 5, 1997 for mainly three reasons. First, the provisions laid down were already advantageous to the major competitors; it will give more power to the oligopoly of the big three.

Second, it will block the entry of effective competitors. Third, the law will sire an even more powerful oligopoly whose power to the market will take advantage of the consumers’ general welfare. 20 In this topic, a case study of the petition of honorable Enrique T. Garcia in 1999 against the 1998 Oil Deregulation Law is essential to know if R. A. 8479 is cleared of any constitutional flaws. The petition seeks to know if the new oil deregulation law is indeed constitutional and will ensure equal competitive market and welfare of its consumers.

He pointed out that the court’s power of judicial review should protect its people from laws that could harm their rights. The case focused on the changed provisions of R. A. 8479 particularly; the 4% tariff differential, minimum inventory level, and predatory pricing provisions. Which should hinder the big three oil companies make practices that are anti-competitive, which is prohibited by the law such as cartelizing their operations by taking advantage of deregulation. The 4% tariff differential from R. A.

8180 was too much for the new competitors to compete with the established oil companies here in the country. With Sec. 6 of the R. A. No. 8479, they scrapped the former revision and imposed the tariff rates single and uniform for all players. The minimum inventory level requirement was also removed from the R. A. No. 8479 which could have given the incoming competitors tough time to be able to keep up with the resources that the big three companies already own. The last one was the issue on predatory pricing; Congressman Tinge suggested the Arena-Turner test and proposed to redefine predatory pricing.

The definition states that pricing below average variable cost in order to match the lower price of the competitor shall not be considered predatory pricing unlike what was perceived to be pricing for purpose of discouraging a potential competitor in entering the market. 21 The judicial review also pointed out provisions that will make the oil industry be more attractive to potential competitors that should support the anti-trust protection of the R. A. 8479. The law allows the free participation of the private sectors and cooperatives in developing more gasoline stations.

Moreover, the law also requires that there should be initial public offering of shares equivalent to 10% of the capital investments by oil companies. The DOE should give the consumers assurance on the pricing, for they are obliged to monitor increases in the gas prices from time to time. To further ensure that the rights of the consumers are protected, R. A. 8479 will form a task force with members of the DOJ and DOE to investigate anomalies in the deregulated oil industry. 22 The petitioner turned his attention to the phases that happened after the approval of the R. A. 8479 mainly, the transition phase and the full deregulation phase.

In the transition phase, all non-pricing facets were lifted. With the eradication of the Oil Price Stabilization Fund (OPSF), a buffer fund was made to cover increases of petroleum products, with the exception of premium gasoline. The automatic oil pricing mechanism was maintained in order to estimate the local prices of gasoline products in the global market. A market-oriented formula was also approved by the Energy Regulatory Board (ERB) to know the wholesale posted price of gasoline products to be determined by the adjustments of the Singapore Posting of refined petroleum products, the Singapore Import Parity or the crude landed cost.

The transition period should last up to five months following the enactment of the law but with the power granted to him at that time, President Fidel V. Ramos accelerated the start of full deregulation through E. O. 471 in March 14, 1998. His decision was supported by the DOE and DOF because of two reasons: (1) the prices of crude oil and petroleum products in the world market are beginning to be stable and on a downtrend since January 1998; and (2) the exchange rate of the peso in relation to the US dollar has been stable for the past three months, averaging at around P40.

00 to one US dollar. 23 Rep. Garcia pointed out four reasons for the unconstitutionality of R. A. 8479. In his petition, he said that the Sec. 19 of R. A. 8479 which grants for the five-month transition phase, shortened by Pres. Ramos, is pro-oligopoly, anti-competitive, and is against the economic welfare of the people. And therefore, the law was processed unconstitutionally for being foul and disparaging infringement of the constitutional policy and command embodied in Article XII, Section 19 of the 1987 constitution against monopolies and combinations in restraint of trade.

It also violates the goal of the oil deregulation law, which is to make the oil market competitive under a system of fair prices. 24 And because of that, the law is a very vital and grave abuse of discretion on the part of the legislative and executive branches of government. Lastly, because of the hastened transition, he pointed out that Sec. 19 should be declared null and void for the transition and full deregulation should have price controls that should protect the public interest from the big three oligopoly’s price fixing and overpricing.

All he said points out to the question, whether or not the execution of deregulating the oil industry conflicts the mandate of free competition under section 19, Article XII of the 1987 constitution. 25 The petitioner claimed that acceleration of the transition phase was pro-oligopoly, anti-competition, and anti-people for the reason that the short transition period was not enough to establish true competition in the local oil industry. He also said that true competition exists only when there can be a sizable number of players, and at that time there was only 3% of the market share which belongs to new competitors.

Because of this, he suggested that the transition phase should be prolonged while the big three are still dominating the market with price controls so that the public can be protected from a possible overpricing or fixed pricing from the big three. 26 Subsequently, respondents claim that the decorum of full deregulation is a non-justifiable issue for it involves the perception of congress and the acceleration was also recommended by the DOE and DOF because of the two conditions that were discussed earlier.

They also claim that the short transition period was not against the mandate of the constitution because the new competitors were given enough time to set up their businesses in the manner captured at least 3% of the market share. Petron Corp. , a respondent, pointed out that a short transition period is beneficial to new players coming in for they will be able to set up their business properly within a manageable time, to set up their prices, taking into account their investment and operating costs.

It also claimed that an indefinite period of time would only discourage new players for they hoped that the price regulation would be lifted within a reasonable time. 27 Interposing economic arguments by the public respondents claim that price regulation is not beneficial to the public as well as to the economy. They added that the acceleration of full deregulation is based on existing conditions and sound economic theory. Shell Corp. filed a rejoinder and further added that if Sec. 19 were to be dismissed, there will never be full deregulation and would provide a new law that is different from what was already enacted.

And, extending the transition period would bring back the automatic pricing mechanism which means that it will only replace the mode of price regulation by still another regulatory scheme. 28 As Garcia listen to these counter arguments, he said that he was just asking for the constitutionality of Sec. 19, not the essence of it. For he claims that Sec. 19 is anti-competitive, thus it is contrary to what the constitution says. He added that conviction against monopolies and combination in restraint of trade should be given legal consequence by the court.

Garcia insists that the court should consider his petition that the downstream oil industry should go back to partial deregulation, in which the main features of deregulation would be allowed but the retail prices of petroleum products would still be regulated through an automatic pricing mechanism. 29 The Supreme Court Justice at that time, Corona, thought that his petition lacked legal basis even though it seem beneficial to the public. He added that the job of the Supreme Court was just to interpret and apply the law as conceived and approved by other departments of the government in accordance with the prescribed procedure.

The knowledge and to rescind or alter laws were the job of the legislation. Furthermore, he stated that if they allowed an open ended transition period with pricing regulation by the government, the liberalization of the downstream oil industry would have been suspended. Then, it would bring about a free interaction of market forces that would eventually lead to hindrance of fair competition in the market. He also pointed out that to execute full deregulation depending on the number of new players would be to legislate a floating provision reliant on the happening of a conditional event.

In that way, the goal of R. A. 8479, which is to deregulate and liberalize the downstream oil industry to ensure a truly competitive market under a regime of fair prices, adequate and continuous supply, environmentally clean and high-quality gasoline products, would be demoralize. Lastly, he also pointed out that reviewing the wisdom of the law is not a power of the judiciary, that power is only vested in the congress. Policy issues are within the domain of the political branches of government and of the people themselves as the repository of all state powers. 30