Consortium Requirement in Subtransmission Asset Acquisition: A Philippine Power Industry Guide

The Philippine Supreme Court recently clarified a critical rule for power industry participants: when two or more distribution utilities are connected to a subtransmission asset, they must form a consortium before acquiring it. In National Grid Corporation of the Philippines v. Manila Electric Company (G.R. No. 239829, May 29, 2024), the Court ruled that this requirement under Section 8 of the Electric Power Industry Reform Act (EPIRA) is mandatory—not merely directory. The decision provides essential guidance for distribution utilities, electric cooperatives, and industry stakeholders navigating asset acquisitions in the country's evolving power sector.

Background of the Case

The case arose from a 2011 Contract to Sell between the National Transmission Corporation (TRANSCO) and Manila Electric Company (Meralco) covering several subtransmission assets, including the Dasmariñas-Abubot-Rosario 115 kV Line and Rosario Substation Equipment. TRANSCO and Meralco jointly applied with the Energy Regulatory Commission (ERC) for approval of the sale.

The National Grid Corporation of the Philippines (NGCP) intervened, claiming it had incurred improvement costs on the assets that should be compensated. More significantly, the ERC disapproved the sale of the Dasmariñas-Abubot-Rosario assets because the Cavite Economic Zone (CEZ) was also connected to them. While the Philippine Economic Zone Authority (PEZA) had waived its right to purchase in favor of Meralco, the ERC ruled that Section 8 of EPIRA required Meralco and PEZA to form a consortium.

The Consortium Requirement Under EPIRA

Section 8, paragraph 6 of EPIRA states that where there are two or more connected distribution utilities, "the consortium or juridical entity shall be formed by and composed of all of them and thereafter shall be granted a franchise to operate the subtransmission asset by the ERC."

The Supreme Court applied the plain-meaning rule (verba legis), holding that the word "shall" denotes a mandatory and imperative obligation. The Court rejected arguments that a waiver by one distribution utility could dispense with the consortium requirement, noting that allowing such circumvention would undermine the law's purpose of preventing monopolization by a single distribution utility where others are connected.

Key Rulings of the Court

Mandatory consortium formation. The Court ruled that all connected distribution utilities must form a consortium before acquiring a subtransmission asset. A waiver by one utility does not eliminate this requirement.

Flexibility within the consortium. While consortium formation is mandatory, the law provides flexibility in participation. Section 8, paragraph 7 of EPIRA allows subscription rights to be proportionate to load requirements "unless otherwise agreed by the parties." This means a utility like PEZA could join a consortium with minimal subscription rights or limited operational responsibilities.

Asset reclassification. The Court affirmed the ERC's determination that the Dasmariñas-Abubot-Rosario assets should be reclassified as transmission assets because a 40 MW solar power plant had connected to the line. Under ERC Resolution No. 15, Series of 2011, assets that transmit electricity from directly connected generators are classified as transmission assets and can no longer be sold to distribution utilities.

Deference to ERC expertise. The Court emphasized that factual findings of administrative bodies like the ERC are given great weight and finality, particularly on technical matters within their expertise.

Practical Takeaways

• Consortium formation is non-negotiable. Distribution utilities connected to the same subtransmission asset must form a consortium before acquiring it. A waiver by one utility does not excuse compliance with this requirement.

• Plan for subscription flexibility. Parties forming a consortium can agree on subscription rights that differ from their proportionate load requirements, allowing utilities with limited interest to participate minimally.

• Check asset classification carefully. Before pursuing acquisition, verify whether an asset remains a subtransmission asset. Connection of a generator may trigger reclassification as a transmission asset, removing it from the scope of permissible sale.

• Consider ERC's technical expertise. The ERC's determinations on asset classification and technical matters are entitled to great deference. Parties should present substantial evidence to challenge such findings.

• Review prior ERC practice. The ERC has consistently required consortium formation in subtransmission asset sales. Industry participants should anticipate this requirement in their transaction planning.

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