Department
Circular No. 2004-06-007
PROMOTING
INVESTMENT MANAGEMENT CONTRACTS AS ONE MEASURE IN EFFECTING GREATER PRIVATE
SECTOR PARTICIPATION IN THE MANAGEMENT AND OPERATION OF RURAL ELECTRIC COOPERATIVES
PURSUANT TO SECTION 37 OF
REPUBLIC ACT NO. 9136 AND ITS
IMPLEMENTING RULES AND REGULATIONS
WHEREAS, under Section 2 of the
Republic Act 9136, otherwise known as the Electric Power
Industry Reform Act of 2001 or EPIRA, it is
declared policy of the State to:
(i) ensure
and accelerate the total electrification of the country;
(ii) ensure
the quality, reliability, security and affordability of the supply of electric
power; and
(iii)
enhance the inflow of private capital and broaden the base of the power
generation, transmission and distribution sectors.
WHEREAS, pursuant to Section 37(e)(i) and
(ii) of
EPIRA and Section 1, Rule 3 of the
Implementing Rules and Regulations of EPIRA or EPIRA-IRR, the
Department
of Energy (DOE) is mandated to encourage private sector investments in the
electricity sector, and to facilitate and encourage reforms in the structure
and operation of distribution utilities for greater efficiency and lower costs;
WHEREAS, pursuant to Section 37(e)(p) of
EPIRA and Rule 3 of
EPIRA-IRR,
the
DOE has the responsibility to
formulate such rules and regulations as may be necessary to implement the
objectives of EPIRA;
WHEREAS,
pursuant to Section
43 of
EPIRA, the
Energy
Regulatory Commission (ERC) shall, inter alia, promote competition,
encourage market development, and ensure customer choice in the restructured
electricity industry;
WHEREAS, pursuant to Section 58(b) of
EPIRA and Section 3, Rule 3 of
EPIRA-IRR,
the
National Electrification Administration
(NEA) is mandated to develop and implement programs to strengthen the
technical capability and financial viability of rural electric cooperatives;
NOW,
THEREFORE, FOR AND IN CONSIDERATION OF THE FOREGOING PREMISES, the
DOE
hereby promulgates the following guidelines to promote private sector
partnership and participation in the operations of rural electric cooperatives
or ECs toward sustainable financial viability, enhance ECs access to private
capital, and to improve services to electricity end-users.
Section
1. Definition of Terms.
Unless the
context otherwise indicates, the terms used in this Circular shall have the
following meanings:
(a) Department of Energy or DOE refers to the government agency
created pursuant to
Republic Act No. 7638 whose expanded
functions are provided under
EPIRA;
(b) Electric
Cooperative or EC means a distribution utility
organized pursuant to
Presidential Decree No. 269, as
amended, or as otherwise provided under EPIRA;
(c) ERC means the
Energy Regulatory Commission established
under Section 38 of
EPIRA;
(d) Investor-Operator
may include, without limitation, private firms, nongovernmental
organizations, cooperatives, distribution utilities, generation companies, or
subsidiaries of distribution utilities or generation companies, or combinations
thereof to embrace such groupings as joint ventures, consortia, and
partnerships;
(e) Investment
Management Contract or IMC refers to one of the modalities of
private sector participation in the management and operation of electric
cooperatives further described in Section 3 of this Circular;
(f) LGU Guarantee Corporation or LGUGC refers to the entity appointed
by the
DOE, to manage a credit guarantee
program to enhance EC credit worthiness;
(g) Memorandum
of Agreement or MOA means the agreement to be
entered into and executed by and between the
DOE,
NEA and an EC which sets out the terms and
conditions of the process to be observed in assisting the EC in establishing the
partnership between the private sector participant and the EC;
(h) National Electrification Administration
or NEA refers to the
government agency created under
Presidential Decree No.
269, as amended, and whose additional mandate is further set forth under
EPIRA; and
(i) Person
refers to a natural or juridical person, as the case may be.
Section
2. Declaration of Policy.
It is
hereby declared the policy of the
DOE for
ECs to achieve the readiness to compete in the restructured and competitive
electricity market. Towards this end,
the
DOE is implementing, supporting and
promoting programs and projects to urge ECs to undertake structural and
operational reforms with a view to achieving greater efficiency and lower
costs, through collaboration with the private investor-operator/s to gain access
to private sector capital and management expertise.
The
DOE recognized that reform options ECs may
consider include, but are not limited to, the following:
(a)
Collaborative efforts with private sector participants, such as an
investor-operator, under IMCs;
(b)
Amalgamations, either through a merger, consolidation or regional joint
management arrangements; and
(c)
Conversion into Stock Cooperatives under
Cooperative
Development Authority (CDA) or Stock Corporations under the Corporation
Code.
As regards
IMCs, it is hereby further declared the policy of
DOE to support only IMC transactions
concluded through a transparent and competitive bidding process, where the
resulting IMC offers the EC an arrangement which is transparent, long-term,
competitive, comprehensive, and demonstrates sustainable solution for the
efficient operation of the EC.
It is the
stated policy of
DOE that it will provide
all necessary support to ECs interested and/or participating in the
implementation of IMCs.
Section
3. Essential Features of the IMC.
The IMC, as
duly endorsed by the
DOE, is a contractual
relationship between a willing EC and a willing investor-operator, for the
infusion of risk capital and provision of management expertise by the latter to
the former, to provide for sustainable EC recovery based on improved
efficiency, lower costs and systems losses reduction.
The
essential features of the IMC are:
(a) The EC
remains the duly authorized distribution utility; hence, members of the EC,
through the EC Board, shall continue to exercise the rights and responsibilities
under its franchise. It shall continue
to be regulated by the ERC.
(b) The EC
will continue to function and act through its Board, which shall retain
critical residual powers under the IMC, such as, but not limited to:
(i)
monitoring performance of the investor-operator to ensure compliance with
agreed performance standards and deliverables; and
(ii)
working with the investor-operator to approve and implement an investment
program consistent with achieving on-going compliance with the
Distribution Code.
(c) The EC
will retain ownership of and strategic control of its assets, as well as
control over setting the standards of service to its customers.
(d) To ensure
that the EC is adequately protected and reasonably assured of sustainable
recovery, the investor-operator will only obtain a return on investment and so
remunerated where systems loss reduction is achieved and costs are considerably
decreased, through an equitable profit-sharing and/or lease option scheme.
Section
4. Issuance of
NEA Memorandum.
As an
expression of its support for and endorsement of IMC, the
NEA shall, within thirty (30) days from the
promulgation of this Circular, issue a memorandum substantially setting out the
following:
(a)
Endorsement of the IMC, as defined in Section 1(e) hereof and with the
essential features set out in Section 3 of this Circular, to qualified
ECs. It is acknowledged that the IMC has
the dual purpose of providing ECs with access to capital, they could not
otherwise obtain, and improving performance incentives.
(b)
Recognition of the participation of the
DOE-appointed
Transaction Advisor (as provided in Section 5 hereof) in the implementation of
IMCs, to ensure that a transparent and competitive bidding process is
undertaken to tailor the IMC to the needs of participating qualified ECs and to
match a suitable investor-operator with and EC.
(c)
Encouragement by
NEA for ECs to consider
the IMC, and in doing so, to further avail the services of the Transaction
Advisor in undergoing the IMC process.
Towards this
end, ECs are further advised to enter into a Memorandum of Agreement (MOA) with
the
DOE and
NEA which shall be followed in qualifying an
EC and facilitating the IMC transaction with the investor-operator. The MOA sets out the terms and conditions of
the IMC process.
Section
5. Guided Transaction Process.
To
facilitate a transparent and competitive bidding process, the
DOE has appointed a Transaction Advisor. The Transaction Advisor has been engaged to
act as the transaction process guide and independent broker between the EC and
an investor-operator, to ensure that a transparent and competitive bidding
process is in place and is undertaken to tailor the IMC in a manner suitable to
the EC, while at the same time making the transaction attractive to potential
investor-operator/s.
DOE has instructed the Transaction Advisor to
develop a best-practice model IMC, which protects and advances the interests of
EC and its members.
ECs
desirous of exploring the IMC option are strongly encouraged to avail
themselves of the services of the Transaction Advisor, duly appointed by the
DOE.
Interested ECs are thus invited to enter into a MOA with DOE and NEA,
which will set the terms for the support that each EC will receive at various
stages of the IMC transaction process.
Section
6. Support for and Regulation of ECs
under IMCs.
The
end-users shall be protected from any rate increase arising from the IMC
transaction. On the other hand, the
DOE is cognizant of the need for
investor-operator to achieve the required returns on their investments once the
target EC performance is met and operating surpluses are realized. Investor-operators need to be protected from
the risk that such surpluses are dissipated through regulated rate reductions. Accordingly, the
DOE and
ERC
will consult and petition the
ERC for
development of a special regulatory regime for ECs under private sector
partnerships, under which ECs can opt into a locked-in tariff path. Such tariff path will provide certainty both
to consumers and potential investor-operators.
The
DOE has also appointed the
LGU Guarantee Corporation (LGUGC) to manage a
credit guarantee program designed to enhance EC credit worthiness. This program, funded by the Global
Environment Facility and the
World Bank,
aims to provide partial credit guarantees to local Philippine banks (financial
institutions) for loan to ECs or investor-operators. The
DOE
shall encourage
LGUGC to support the
implementation of IMCs, by recognizing such contracts as significant
contributions to reducing credit risk.
Section
7. Repealing Clause.
All pertinent issuances, circulars and memoranda inconsistent with this
Circular are hereby amended or repealed accordingly.
Section
8. Saving Clause.
(a) If for
any reason, any provision of this Circular is declared unconstitutional or
invalid, the other parts or provisions hereof which are not affected thereby
shall continue to be in full force and effect.
(b) The
implementation of this Circular shall not exempt the parties from complying
with applicable laws and government rules and regulations.
Section
9. Effectivity.
This
Circular shall take effect within fifteen (15) days upon publication in
newspaper of general circulation.
VICENTE
S. PΙREZ, JR.
Secretary
Metro
18
June 2004
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