Franchise Amendments and Public Utilities: When Does the Common Good Justify Change

The Supreme Court recently upheld the constitutionality of Republic Act No. 11918, which expanded the franchise area of MORE Electric and Power Corporation (MORE Power) to include territories previously served by three electric cooperatives in Iloilo. The ruling clarifies a fundamental principle in Philippine constitutional law: no public utility franchise is exclusive, and Congress has the sole discretion to determine when the common good requires amending or repealing a franchise.

The Case: ILECO I, II, and III v. Executive Secretary

The petitioners—Iloilo I, II, and III Electric Cooperatives (ILECO I, II, and III)—held congressional franchises to distribute electricity in various municipalities in Iloilo province and Passi City. Their franchises were set to expire between 2029 and 2053.

In 2019, Republic Act No. 11212 granted MORE Power a franchise to operate an electric distribution system in Iloilo City. Then, on August 30, 2022, Republic Act No. 11918 amended and expanded MORE Power's franchise to include 15 municipalities and one city that overlapped with the petitioners' service areas.

The electric cooperatives challenged Section 1 of RA 11918, arguing it violated their exclusive franchises, their right to due process, the non-impairment of contracts clause, and equal protection. They also claimed the law infringed on the National Electrification Administration (NEA) Decree and the Electric Power Industry Reform Act of 2001 (EPIRA).

The Issue: Do Exclusive Franchises Exist Under the Constitution?

The central question was whether the electric cooperatives had a constitutional right to exclusive franchise over their coverage areas. The Court answered with a resounding no.

Section 11, Article XII of the 1987 Constitution explicitly provides that no franchise for the operation of a public utility shall be exclusive in character or for a longer period than fifty years. This prohibition traces back to the 1935 and 1973 Constitutions, which contained nearly identical language.

The Court emphasized that when the law is clear, there is nothing for courts to do but apply it. Franchises are not exclusive private property of the grantee; they are privileges granted by the State, subject to amendment, alteration, or repeal by Congress when the common good so requires.

The petitioners cited Section 41(c) of the NEA Act, which prohibits granting franchises within areas where a cooperative already holds one. However, the Court ruled that the Constitution must always prevail over conflicting statutes. Any statutory exclusivity cannot override the constitutional mandate against exclusive public utility franchises.

Due Process and the Determination of Common Good

The petitioners argued that RA 11918 violated substantive due process because no common good justified the expansion. The Court disagreed, noting that Congress exhaustively deliberated on the matter.

During the legislative debates, lawmakers weighed the potential consequences, including the possibility that ILECO rates could increase by as much as 83% if customers switched to MORE Power. However, Congress ultimately determined that introducing competition would benefit consumers by giving them a choice between service providers. MORE Power offered lower distribution rates—P1.76 per kilowatt-hour compared to ILECO's P1.89 to P1.97.

The Court held that determining whether the common good warrants amending a franchise is a legislative function. Courts must tread carefully in striking down such laws. Here, Congress decided that healthy competition would improve public welfare in Iloilo, and that determination deserved deference.

Non-Impairment of Contracts and Police Power

The petitioners also claimed that RA 11918 impaired their power supply contracts, which contained take-or-pay provisions obligating them to pay for minimum contracted capacities regardless of actual usage. If customers switched to MORE Power, the cooperatives' revenues would drop, but they would still owe their suppliers.

The Court found no impairment. The law did not change the terms of any contract, impose new conditions, or withdraw remedies. The petitioners remained bound by their agreements, which showed the contracts were still valid and effective.

Even if the law did affect their contracts, the Court noted that the State's police power prevails over the non-impairment clause. Every contract carries an implied reservation that it is subject to police power—especially franchises, which are grants from the State. Property rights must yield to general welfare when the legislature determines that conditions demand it.

Practical Takeaways

• No exclusive franchises in the Philippines. Any franchise for a public utility is non-exclusive by constitutional mandate. Businesses operating under franchises should not assume permanent territorial protection.
• Congress determines the common good. Courts will generally defer to legislative determinations about when amending or repealing a franchise serves the public interest, absent a compelling reason to intervene.
• Franchises are privileges, not property. A franchise grant is subject to amendment, alteration, or repeal. Grantees should plan their investments accordingly.
• Statutory exclusivity provisions yield to the Constitution. Laws like the NEA Act that appear to grant exclusive areas cannot override the constitutional prohibition on exclusive franchises.
• Police power trumps contract rights. The non-impairment clause does not shield franchisees from regulatory changes that serve the common good.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.