The Supreme Court might have rendered a momentous decision last year but no one noticed. The headline of the press release issued Aug. 1, 2024 by the Supreme Court is as simple as it gets: “SC: Exclusive Franchises are Prohibited by the Constitution.”
The SC, in a decision written by Associate Justice Rodil Zalameda, ruled that exclusive franchises are not constitutionally protected. The Court emphasized that public utilities must serve the public interest, and competition could improve services and lower electricity rates.
In so ruling, the SC dismissed a petition filed by three Iloilo electric cooperatives, Iloilo Electric Cooperative Inc. I, II and III (ILECOs) challenging the validity of Republic Act (RA) 11918. The law expanded the franchise of another electricity provider, MORE Electric and Power Corp. (MORE), to areas within ILECOs’ franchise. The cooperatives claim to have exclusive franchises in their areas.
The SC ruled that electric cooperatives do not have a constitutional right to an exclusive franchise within their coverage areas. The SC pointed out that “a franchise, as a privilege granted by the state, is not the exclusive private property of the franchisee. Thus, it must yield to serve the common good, as determined by Congress.”
In the present case, the SC pointed out, “Congress enacted RA 11918 to make electricity more affordable for the people of Iloilo province. Congress determined that expanding MORE’s franchise would promote healthy competition since MORE was capable of offering lower energy rates.”
Indeed, it is a good decision for the people of the affected areas who are presently suffering from bad service and high rates from the cooperatives. The better funded MORE should be able to improve the service through efficient management. It should also be able to reduce the rates paid by consumers.
But having read the entire SC decision, it seems portions of the decision have implications on the electricity distribution sector including private distribution utilities who now think they have exclusive franchises to operate in their areas. This SC decision is saying that the exclusivity in their franchises must conform with the Constitutional mandate of no exclusivity. Here is what the SC decision says:
“Plain words do not require explanation. The 1935, 1973 and 1987 Constitutions are clear – franchises for the operation of a public utility cannot be exclusive in character. The 1935, 1973 and 1987 Constitutions expressly and clearly state that, ‘nor shall such franchise [. . . ] be exclusive in character.’ There is no exception. When the law is clear, there is nothing for the courts to do but to apply it. The duty of the Court is to apply the law the way it is worded…”
Then the decision goes on: “We are mindful of our ruling in Alyansa Para sa Bagong Pilipinas vs. Energy Regulatory Commission where we characterized Meralco’s franchise as in the nature of a monopoly because it currently does not have any competitor in its coverage areas. However, Meralco’s status as a monopoly does not preclude Congress from awarding other franchises to accommodate future competition that may lead to better public service and public good.”
It then concludes: “We underscored in said case that the Constitution prohibits the exclusivity of franchise. Thus, in case of any conflict between the Constitution and a statute, the latter yields to the former because the Constitution is the basic law to which all other laws must conform to.”
What happens now to the concept of natural monopoly? For the longest time, we have accepted the principle that there are industries that should be considered natural monopolies. The national transmission grid is an obvious example.
The concept was also long accepted to apply to the telecoms and electricity distribution industries. But then president Fidel Ramos broke up the telecoms industry and we now have three companies competing.
The SC took notice of how the electric utility sector justified being a natural monopoly. Here is what this SC decision says:
“In the Amicus Curiae Brief for the US case of Otter Tail Power Co. vs. US, it was explained that the economic characteristics of the electric utility industry bar application of traditional anti-monopoly concepts. First, electric utilities inevitably must invest huge quantities of capital in long-lived and inflexible facilities directly connected to consumers. Thus, to have direct competition for the patronage of given consumers would require costly facility duplication and therefore impose on society excessive and unnecessary capital costs.
“Second, electric utility operations are characterized by the existence of substantial economies of scale - that is, by declining costs as the scale of operation increases. Thus, direct competition among electric utilities has long been considered economically wasteful and hence, undesirable.”
Nevertheless, the SC emphasized, our Constitution is clear that the franchises of the electricity distribution industry does not entitle them to exclusivity.
That shouldn’t hurt Meralco. It should be pointed out that Meralco is no longer the monopoly it used to be. Meralco is now actively competing with generating companies for the provision of electricity for large commercial and industrial consumers, and that’s the most profitable segment of the market it now shares. It also has a net-metering program that allows customers with solar panels to sell to Meralco the power they are unable to use. Meralco is now very much market-driven.
The best way for Meralco is to render good service as it is doing now and let the people defend its monopoly.
Besides, competing with Meralco is difficult given the scope of capital required and geographical area covered. But it could theoretically happen that a worthy competitor may arise and Meralco will have no choice but to compete because, as the SC said, the Constitution prohibits exclusive franchises.
This looks like a victory for free market competition. Three Constitutions called for it but we only found out now.
Where we go from here, only the politics in our Congress can determine.
Boo Chanco’s email address is bchanco@gmail.com. Follow him on X @boochanco