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GOVERNMENT SANCTIONED EXPLOITATION: ILLEGALITY OF THE AUTOMATIC OIL PRICING MECHANISM IN THE DOWNSTREAM OIL INDUSTRY DEREGULATION ACT OF 1998
A Thesis Presented to the Faculty of the College of Law De La Salle University By Francisco C. Banguis Krisha Mariel B. Simagala Alexandra G. Soledad
In partial fulfillment of The requirements for the Degree Juris Doctor
April 2019
THESIS ADVISER’S ENDORSEMENT
Atty. Virgilio R. De Los Reyes Associate Dean DLSU College of Law Thru: Atty. Vyva M. Aguirre, Thesis Program Coordinator Dear Associate Dean De Los Reyes: I hereby certify that I have read the Thesis of BANGUIS, FRANCISCO C., SIMAGALA, KRISHA MARIEL B., and SOLEDAD, ALEXANDRA G. entitled “Government Sanctioned Exploitation: Illegality of Automatic Oil Pricing Mechanism of the Downstream Oil Industry Deregulation Act of 1998.” I further certify that the Thesis satisfactorily meets the requirements for the degree of Juris Doctor. In this regard, I hereby endorse the same for oral defense this 2nd Semester, A.Y. 2018-2019. Thank you.
________________________________, Dr. Juan Arturo Iluminado C. De Castro, B.A., LL.B., LL.M., J.S.D. Thesis Adviser April 5, 2019
ACKNOWLEDGMENT
The proponents would like to extend their heartfelt gratitude to the following who have been instrumental in the completion of this study:
First and foremost, to the omnipresent God for giving the proponents energy, prudence and perseverance during the research study and throughout their lives, and for the grit to continue despite the circumstances that they have encountered.
Second, to their Thesis Adviser, Dr. Juan Arturo Iluminado C. De Castro, B.A., LL.B., LL.M., J.S.D. for his immense knowledge and unwavering guidance that enlightened the proponents in the research and writing of this thesis. Without his persistent help, the proponents could not have formed this concept and pursue the research.
Also, to Atty. Antonio P. Bonilla, our Taxation Law professor, for guiding us in the TRAIN Law aspect of this thesis.
Moreover, to the Department of Energy for its responsive participation in giving the proponents the data they need related to this thesis.
Last but not the least, to Alexandra’s parents’, Ma. Theresa and Alexius Soledad, her sister Alexis, and brothers Michael and Walter; to Krisha’s mom, Cecilia Peralta, her aunts, Mary Jean and Elisa and her special someone Ed Sanchez; to Francisco’s parents, Annabelle and Francisco Banguis, their families, relatives and their friends for their consistent encouragement and for their presence during difficult times.
The proponents hope that this thesis would greatly benefit the consumers, especially those in the poverty line. They also hope that this would help mold the way to materialize the true intent of the Constitution that is to promote free trade, fair competition, and provide affordable and accessible energy as basic human right.
Abstract
The power crisis experienced by the Philippines in the early 1970’s decelerated the progress of national economy prompting the government to plan reforms and rehabilitation programs to resolve it. Former President Fidel V, Ramos revived the plans to liberalize the oil industry.
In response, the Philippine Congress attempted to deregulate the downstream oil industry in 1996 through the passage of Republic Act. No. 8180, but the same was declared unconstitutional by the Supreme Court on 5 November 1997 on the rationale that it encourages an anti-competitive behavior among stakeholders in the oil industry, specifically oil companies engaged in the downstream oil industry, violative of Section 19, Article XII of the 1987 Constitution on which prohibits monopolies and combinations of trade or unfair competition.
Congress again pursued the deregulation of the downstream oil industry by enacting Republic Act No. 8479 or known as the Deregulation of the Downstream Oil Industry Act of 1998 on 10 February 1998. It became effective on 14 March 1998. Finally, the downstream oil industry was fully-deregulated when Executive Order No. 471 was then enacted by former President Fidel V. Ramos. It was enacted to propel competition among oil companies in the local market which is dominated by the Big Three
Companies such as Petron, Shell and Caltex (Big 3 Companies); and to remove from the government the burden of maintaining price subsidy due to the deficit of the Oil Price Stabilization Fund (OPSF). The deregulation law allowed the oil companies to set oil prices which was previously fixed by the abolished Energy Regulatory Board (ERB).
In an attempt to question the validity of R.A. 8479 as a policy, the Supreme Court upheld its constitutionality and avoided trespassing on the powers of Congress and its wisdom on its enactment. However, it did not prevent the end-users or consumers and other militant groups to inquire on the law’s constitutionality and allege that the effects of the same runs counter from its purpose. Oil companies are accused of price fixing, through cartelization among Big 3 Companies, and the existence of asymmetry in oil prices. Apparently, the automatic oil pricing mechanism that is previously the function of the ERB is a major why the prices of oil since 1998 consistently increased, and it has been subject to abuse by the oil cartel to the detriment of the general public.
Chapter 2 of this study will show the transition of the downstream oil industry from a regulated phase to a deregulated phase and how it affects the increase of oil prices. Further, it will show how the law promoted an anti-competitive behavior due to the unfair trade practices and monopoly of foreign-owned oil companies thereby causing asymmetry in oil prices negatively affecting the poor Filipinos, and other end-use or
consumers. It also reviews the proposed national oil exchange, and the stand of opposition groups vying to declare R.A.8479 as unconstitutional. Moreover, it will show the relationship between oil prices and alternative and/or renewable source of energy, as well as other oil and petroleum products.
Chapter 3 uses consultative interviews, case law analysis, and documentation analysis to come up with the information provided in the preceding chapter, as well as interview key informants to validate the same.
Chapter 4 examines the effects of the deregulation law, and the proposed oil exchange. Moreover, a welfare analysis is utilized to show that asymmetry in oil prices is caused by cartelization by the Big Three Companies (Caltex, Shell and Petron) which defeats the purpose of the law’s enactment. It will expose how automatic oil pricing mechanism in the downstream oil industry has been exploited by oil companies, which is why the Department of Energy intervene in the industry more than merely assessing and monitoring oil prices. The rising standard of living of Filipinos will also be discussed and how their quality of life mandated by the 1987 Constitution is prejudiced by the deregulation of the downstream oil industry. An analysis of how the lowering of oil prices could increase the consumption of petroleum products which eventually is not good for the environment is also provided. However, suggestions on the use of alternative and other renewable energy sources is not the only solution to
solve the problem because the same is also limited, and replenishable. The effects of the effectivity of the TRAIN law also shows that the burden of the taxpayers will increase.
Finally, Chapter 5 concludes that although new players entered the country’s downstream oil industry and participated in the retail gasoline market, the public experienced the negative effects of its deregulation due to the monopoly engineered by the Organization of Petroleum Exporting Countries, and the domestic cartelization of the Big 3 Companies. As crude oil import costs increased, so did the retail of petroleum products prices continued to move in the same trend. The study recommends that oil exchange should be nationalized though buy-back of Petron by the government, and a review committee be established to prevent unfair practices and oil cartelization. In addition, the generation of more renewable energy resources is also recommended.
TABLE OF CONTENTS Chapter I – Introduction A. Background of the Study 1. Thesis Statement 2. Objectives of the Study 3. Significance of the Study 4. Scope and Limitation
1 7 7 7 8
Chapter II - Review of Related Literature A. Developments and History of Oil Industry in the Philippines
10
1. Regulation of the Downstream Oil Industry in the Philippines a. Regulation under Republic Act No. 387 or the Petroleum Act of 1949 b. Passage of R.A. 6173 creating the Oil Industry Commission in 1971 c. Enactment of Presidential Decree No. 43 creating the Philippine National Oil Company in 1973 d. Enactment of Presidential Decree No. 1956 creating the Oil Price Stabilization Fund (OPSF) 2. Oil Prices during the Regulated Phase a. During the regulated phase (January 1971- March 1996) 3. Deregulation of the Downstream Oil Industry in the Philippines a. Deregulation in the year 1997 through Republic Act No. 8180 b. Enactment of the Deregulation of Downstream Oil Industry Act of 1998 or Republic Act No. 8479 which fully-deregulated downstream oil industry c. List of New Key Players in Downstream Oil Industry 4. Oil Prices during the Deregulated Phase a. During the deregulated phase (April 1996-December 2018 only) 5. Creation of the Energy Regulatory Commission under R.A. 9136 or the “Electric Power Industry Reform Act of 2001” or known as EPIRA a. The jurisdiction of the ERB over the downstream oil industry b. The creation of the ERC abolished the ERB
12 12 14 15 16 17 18 20 20 22
24 28 28 29 29 30
B. Automatic Oil Pricing Mechanism 1. Pricing Mechanism a. Prices defined b. How prices are affected c. Effect of Geopolitics d. USA and OPEC as Key Oil Producers e. Effect of pricing mechanism 2. Automatic Pricing Mechanism a. Automatic Oil Pricing Mechanism in the Philippines b. What Affects Philippine Oil Prices c. Fuel Pricing Systems Comparable to the Philippines d. Impact of TRAIN Law e. Estimated Profiteering of the Key Oil Companies
33 33 34 35 37 38 38 40 41 42 45 46 50
C. Energy as a Basic Human Right D. Standard of Living E. Minimum Wage F. Renewable Energy 1. Renewable Energy
54 57 59 60 61
a. Renewable Energy Defined 61 b. Renewable Energy in the Philippines 61 c. Relationship of Rising Oil Prices in the face of Renewable Energy 62 Sources Chapter III - Research Methodology A. Introduction B. Participants of the Study C. Research Design 1. Data Resources 2. Data Collection and Analysis 3. Summary Chapter IV - Analysis and Conclusion A. Automatic Oil Pricing Mechanism, a mechanism exploited by Oil Companies
63 63 64 64 65 65
66
B. Rising standard of living and quality of life mandated by the 1987 Constitution C. Consumer participation in economic decision-making guaranteed by the 1987 Constitution D. Intense Domination and Profiteering of the Big Three Companies E. The Weekly Price Adjustment Impact on Taxation 1. The effectivity of TRAIN Law caused successive increase in the prices of goods which heavily burdened the consumers especially the poor 2. Oil price hikes due to automatic adjustment of oil prices by oil companies at pump 3. Oil companies abused APM by greatly profiteering from excessive oil price hikes 4. The government promoting a culture of acclimatization F. Effect of Cheap Oil Prices against Renewable Energy Sources 1. Effect of Cheap Oil Prices against Renewable Energy Sources G. Renewable Energy as an Alternative to Increasing Oil Prices
70 71 72 73 73
77 79 80 82 82 83
Chapter V – Recommendation A. Amendment of the Downstream Oil Industry Deregulation Act of 86 1998 1. Amendment of Sec. 18 on Automatic Pricing Mechanism 86 a. The power to determine the automatic pricing mechanism should 86 be expressly granted to the DOE- Oil Industry Management Bureau. B. Nationalization of the Downstream Oil Industry 1. Nationalization of Petron 2. Centralized Procurement of Crude Oil and other Petroleum Products
86 87 88
C. Taxes insofar as Oil and Other Petroleum Products under the TRAIN 89 law should be lowered down D. Institutionalizing an Independent Review Committee comprised of all 91 parties involved in reassessing the effects of the deregulation law and as well as the TRAIN law E. Renewable Energy in the Country must be strengthened as it 92 promotes more benefits than drawbacks
A Thesis Presented to the Faculty of the College of Law De La Salle University By Francisco C. Banguis Krisha Mariel B. Simagala Alexandra G. Soledad
In partial fulfillment of The requirements for the Degree Juris Doctor
April 2019
THESIS ADVISER’S ENDORSEMENT
Atty. Virgilio R. De Los Reyes Associate Dean DLSU College of Law Thru: Atty. Vyva M. Aguirre, Thesis Program Coordinator Dear Associate Dean De Los Reyes: I hereby certify that I have read the Thesis of BANGUIS, FRANCISCO C., SIMAGALA, KRISHA MARIEL B., and SOLEDAD, ALEXANDRA G. entitled “Government Sanctioned Exploitation: Illegality of Automatic Oil Pricing Mechanism of the Downstream Oil Industry Deregulation Act of 1998.” I further certify that the Thesis satisfactorily meets the requirements for the degree of Juris Doctor. In this regard, I hereby endorse the same for oral defense this 2nd Semester, A.Y. 2018-2019. Thank you.
________________________________, Dr. Juan Arturo Iluminado C. De Castro, B.A., LL.B., LL.M., J.S.D. Thesis Adviser April 5, 2019
ACKNOWLEDGMENT
The proponents would like to extend their heartfelt gratitude to the following who have been instrumental in the completion of this study:
First and foremost, to the omnipresent God for giving the proponents energy, prudence and perseverance during the research study and throughout their lives, and for the grit to continue despite the circumstances that they have encountered.
Second, to their Thesis Adviser, Dr. Juan Arturo Iluminado C. De Castro, B.A., LL.B., LL.M., J.S.D. for his immense knowledge and unwavering guidance that enlightened the proponents in the research and writing of this thesis. Without his persistent help, the proponents could not have formed this concept and pursue the research.
Also, to Atty. Antonio P. Bonilla, our Taxation Law professor, for guiding us in the TRAIN Law aspect of this thesis.
Moreover, to the Department of Energy for its responsive participation in giving the proponents the data they need related to this thesis.
Last but not the least, to Alexandra’s parents’, Ma. Theresa and Alexius Soledad, her sister Alexis, and brothers Michael and Walter; to Krisha’s mom, Cecilia Peralta, her aunts, Mary Jean and Elisa and her special someone Ed Sanchez; to Francisco’s parents, Annabelle and Francisco Banguis, their families, relatives and their friends for their consistent encouragement and for their presence during difficult times.
The proponents hope that this thesis would greatly benefit the consumers, especially those in the poverty line. They also hope that this would help mold the way to materialize the true intent of the Constitution that is to promote free trade, fair competition, and provide affordable and accessible energy as basic human right.
Abstract
The power crisis experienced by the Philippines in the early 1970’s decelerated the progress of national economy prompting the government to plan reforms and rehabilitation programs to resolve it. Former President Fidel V, Ramos revived the plans to liberalize the oil industry.
In response, the Philippine Congress attempted to deregulate the downstream oil industry in 1996 through the passage of Republic Act. No. 8180, but the same was declared unconstitutional by the Supreme Court on 5 November 1997 on the rationale that it encourages an anti-competitive behavior among stakeholders in the oil industry, specifically oil companies engaged in the downstream oil industry, violative of Section 19, Article XII of the 1987 Constitution on which prohibits monopolies and combinations of trade or unfair competition.
Congress again pursued the deregulation of the downstream oil industry by enacting Republic Act No. 8479 or known as the Deregulation of the Downstream Oil Industry Act of 1998 on 10 February 1998. It became effective on 14 March 1998. Finally, the downstream oil industry was fully-deregulated when Executive Order No. 471 was then enacted by former President Fidel V. Ramos. It was enacted to propel competition among oil companies in the local market which is dominated by the Big Three
Companies such as Petron, Shell and Caltex (Big 3 Companies); and to remove from the government the burden of maintaining price subsidy due to the deficit of the Oil Price Stabilization Fund (OPSF). The deregulation law allowed the oil companies to set oil prices which was previously fixed by the abolished Energy Regulatory Board (ERB).
In an attempt to question the validity of R.A. 8479 as a policy, the Supreme Court upheld its constitutionality and avoided trespassing on the powers of Congress and its wisdom on its enactment. However, it did not prevent the end-users or consumers and other militant groups to inquire on the law’s constitutionality and allege that the effects of the same runs counter from its purpose. Oil companies are accused of price fixing, through cartelization among Big 3 Companies, and the existence of asymmetry in oil prices. Apparently, the automatic oil pricing mechanism that is previously the function of the ERB is a major why the prices of oil since 1998 consistently increased, and it has been subject to abuse by the oil cartel to the detriment of the general public.
Chapter 2 of this study will show the transition of the downstream oil industry from a regulated phase to a deregulated phase and how it affects the increase of oil prices. Further, it will show how the law promoted an anti-competitive behavior due to the unfair trade practices and monopoly of foreign-owned oil companies thereby causing asymmetry in oil prices negatively affecting the poor Filipinos, and other end-use or
consumers. It also reviews the proposed national oil exchange, and the stand of opposition groups vying to declare R.A.8479 as unconstitutional. Moreover, it will show the relationship between oil prices and alternative and/or renewable source of energy, as well as other oil and petroleum products.
Chapter 3 uses consultative interviews, case law analysis, and documentation analysis to come up with the information provided in the preceding chapter, as well as interview key informants to validate the same.
Chapter 4 examines the effects of the deregulation law, and the proposed oil exchange. Moreover, a welfare analysis is utilized to show that asymmetry in oil prices is caused by cartelization by the Big Three Companies (Caltex, Shell and Petron) which defeats the purpose of the law’s enactment. It will expose how automatic oil pricing mechanism in the downstream oil industry has been exploited by oil companies, which is why the Department of Energy intervene in the industry more than merely assessing and monitoring oil prices. The rising standard of living of Filipinos will also be discussed and how their quality of life mandated by the 1987 Constitution is prejudiced by the deregulation of the downstream oil industry. An analysis of how the lowering of oil prices could increase the consumption of petroleum products which eventually is not good for the environment is also provided. However, suggestions on the use of alternative and other renewable energy sources is not the only solution to
solve the problem because the same is also limited, and replenishable. The effects of the effectivity of the TRAIN law also shows that the burden of the taxpayers will increase.
Finally, Chapter 5 concludes that although new players entered the country’s downstream oil industry and participated in the retail gasoline market, the public experienced the negative effects of its deregulation due to the monopoly engineered by the Organization of Petroleum Exporting Countries, and the domestic cartelization of the Big 3 Companies. As crude oil import costs increased, so did the retail of petroleum products prices continued to move in the same trend. The study recommends that oil exchange should be nationalized though buy-back of Petron by the government, and a review committee be established to prevent unfair practices and oil cartelization. In addition, the generation of more renewable energy resources is also recommended.
TABLE OF CONTENTS Chapter I – Introduction A. Background of the Study 1. Thesis Statement 2. Objectives of the Study 3. Significance of the Study 4. Scope and Limitation
1 7 7 7 8
Chapter II - Review of Related Literature A. Developments and History of Oil Industry in the Philippines
10
1. Regulation of the Downstream Oil Industry in the Philippines a. Regulation under Republic Act No. 387 or the Petroleum Act of 1949 b. Passage of R.A. 6173 creating the Oil Industry Commission in 1971 c. Enactment of Presidential Decree No. 43 creating the Philippine National Oil Company in 1973 d. Enactment of Presidential Decree No. 1956 creating the Oil Price Stabilization Fund (OPSF) 2. Oil Prices during the Regulated Phase a. During the regulated phase (January 1971- March 1996) 3. Deregulation of the Downstream Oil Industry in the Philippines a. Deregulation in the year 1997 through Republic Act No. 8180 b. Enactment of the Deregulation of Downstream Oil Industry Act of 1998 or Republic Act No. 8479 which fully-deregulated downstream oil industry c. List of New Key Players in Downstream Oil Industry 4. Oil Prices during the Deregulated Phase a. During the deregulated phase (April 1996-December 2018 only) 5. Creation of the Energy Regulatory Commission under R.A. 9136 or the “Electric Power Industry Reform Act of 2001” or known as EPIRA a. The jurisdiction of the ERB over the downstream oil industry b. The creation of the ERC abolished the ERB
12 12 14 15 16 17 18 20 20 22
24 28 28 29 29 30
B. Automatic Oil Pricing Mechanism 1. Pricing Mechanism a. Prices defined b. How prices are affected c. Effect of Geopolitics d. USA and OPEC as Key Oil Producers e. Effect of pricing mechanism 2. Automatic Pricing Mechanism a. Automatic Oil Pricing Mechanism in the Philippines b. What Affects Philippine Oil Prices c. Fuel Pricing Systems Comparable to the Philippines d. Impact of TRAIN Law e. Estimated Profiteering of the Key Oil Companies
33 33 34 35 37 38 38 40 41 42 45 46 50
C. Energy as a Basic Human Right D. Standard of Living E. Minimum Wage F. Renewable Energy 1. Renewable Energy
54 57 59 60 61
a. Renewable Energy Defined 61 b. Renewable Energy in the Philippines 61 c. Relationship of Rising Oil Prices in the face of Renewable Energy 62 Sources Chapter III - Research Methodology A. Introduction B. Participants of the Study C. Research Design 1. Data Resources 2. Data Collection and Analysis 3. Summary Chapter IV - Analysis and Conclusion A. Automatic Oil Pricing Mechanism, a mechanism exploited by Oil Companies
63 63 64 64 65 65
66
B. Rising standard of living and quality of life mandated by the 1987 Constitution C. Consumer participation in economic decision-making guaranteed by the 1987 Constitution D. Intense Domination and Profiteering of the Big Three Companies E. The Weekly Price Adjustment Impact on Taxation 1. The effectivity of TRAIN Law caused successive increase in the prices of goods which heavily burdened the consumers especially the poor 2. Oil price hikes due to automatic adjustment of oil prices by oil companies at pump 3. Oil companies abused APM by greatly profiteering from excessive oil price hikes 4. The government promoting a culture of acclimatization F. Effect of Cheap Oil Prices against Renewable Energy Sources 1. Effect of Cheap Oil Prices against Renewable Energy Sources G. Renewable Energy as an Alternative to Increasing Oil Prices
70 71 72 73 73
77 79 80 82 82 83
Chapter V – Recommendation A. Amendment of the Downstream Oil Industry Deregulation Act of 86 1998 1. Amendment of Sec. 18 on Automatic Pricing Mechanism 86 a. The power to determine the automatic pricing mechanism should 86 be expressly granted to the DOE- Oil Industry Management Bureau. B. Nationalization of the Downstream Oil Industry 1. Nationalization of Petron 2. Centralized Procurement of Crude Oil and other Petroleum Products
86 87 88
C. Taxes insofar as Oil and Other Petroleum Products under the TRAIN 89 law should be lowered down D. Institutionalizing an Independent Review Committee comprised of all 91 parties involved in reassessing the effects of the deregulation law and as well as the TRAIN law E. Renewable Energy in the Country must be strengthened as it 92 promotes more benefits than drawbacks
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