ACHIEVING PARITY BETWEEN ROYALTIES ON THE EXPLOITATION OF INDIGENOUS ENERGY SOURCES AND DUTIES ON IMPORTED ENERGY FUELS PURSUANT TO SECTION 35 OF REPUBLIC ACT NO. 9136 OTHERWISE…

WHEREAS,
Presidential Decrees No. 87, 972 and 1442 were issued to promote the
discovery and development of the country’s indigenous energy resources
through the utilization of government and private resources, local and
foreign, under the arrangements embodied under said Presidential
Decrees;

WHEREAS,
under existing service contracts for the exploitation of geothermal and
petroleum resources, a production sharing scheme has been provided
whereby the Service Contractor is entitled to 40% of the net proceeds
from the sale of the energy resource and the government is entitled to
receive 60% of the net proceeds;

WHEREAS,
the aforementioned production sharing scheme under a service contract
arrangement has created inequalities between the rate of Royalty on the
exploitation of indigenous energy sources and the duties on imported
energy sources thereby affecting the competitiveness of energy from
indigenous sources with imported energy fuels;

WHEREAS,
under existing service contracts for the exploitation of coal, a
production sharing scheme has been provided whereby the Service
Contractor is entitled to 70% of the net proceeds from the sale of the
energy resource and the government is entitled to receive 30% of the net
proceeds.  Thus, the existing Royalty on local coal is lower than the duty on imported coal;

WHEREAS,
Section 35 of Republic Act No. 9136 (RA 9136) mandates the President of
the Philippines to reduce the royalties, returns and taxes collected
for the exploitation of all indigenous energy sources, including but not
limited to, natural gas and geothermal steam, so as to effect parity of
tax treatment with the existing rates for imported coal, crude oil,
bunker fuel and other imported fuels;

WHEREAS,
under existing laws, the rates of taxes on the exploitation of
indigenous energy sources and imported energy fuels on a per fuel type
basis are equal;

WHEREAS,
paragraph 2 of Section 35 of RA 9136 mandates that the reduction of
Royalty shall ultimately benefit the end-users using indigenous energy
sources and toward this end, the Energy Regulatory Commission (ERC)
shall reduce the rates of electricity from all indigenous energy
sources;

WHEREAS, the Department of Finance (DOF) and the Department of Energy (DOE) recommend the issuance of this Executive Order;

NOW, THEREFORE, I, GLORIA MACAPAGAL-ARROYO, President of the Philippines, by virtue of the powers vested in me by law, do hereby order:

SECTION 1.   Reduction of Royalty.
— For purposes of this Executive Order, “Royalty” shall refer to
government share net of income tax under service contract arrangements
pursuant to Presidential Decrees No. 87, 972 and 1442.

SECTION 2.   Effective Reduction of Royalty.
— To achieve parity between the Royalty on indigenous energy sources
and duties on imported energy fuels, the Royalty on the exploitation and
development of indigenous energy sources shall effectively be reduced
for natural gas and geothermal energy in accordance with the following
formula:

Tax Equalization = [Tax Burden per kWh on Indigenous] – [Tax Burden per kWh on Imported Energy Fuel]

Where:

Tax Burden (P/kWh) on Indigenous = [Royalty in pesos + Excise Tax in pesos] divided by ∑of Electricity Sales per plant in kWh;

Tax Burden (P/kWh) on Imported Fuel = [Duty in pesos per kWh] + [Excise Tax in pesos per kWh];

Provided, That [Tax Burden per kWh on Indigenous] > [Tax Burden per kWh on Imported Fuel].

Indigenous
Natural Gas and Geothermal Energy shall be benchmarked with the
appropriate imported energy source as determined by the DOF and the DOE.

Considering
that the existing Royalty on local coal is lower than the duty on
imported coal, the Royalty on the development and utilization of coal
shall remain.

SECTION 3.   Reduction
in the Price of Indigenous Energy Used for Electricity. — Pursuant to
Section 35 of RA 9136, the ERC shall reduce the rates of power from all
indigenous energy sources to reflect the reduction in Royalty, thus
ensuring lower rates for end-users of indigenous energy sources.

SECTION 4.   Universal Charge for Tax Equalization.
— The Universal Charge collected pursuant to Section 34(c) of RA 9136
shall be used to achieve parity between the Royalty on indigenous energy
sources and duties on imported energy fuels.  Service contractors shall continue to pay to the government the full amount of Royalty under their existing service contracts.  If
the cost of Royalty is passed on by the Service Contractor to the
Qualified Generation Company, the Qualified Generation Company shall be
entitled to claim from the Universal Charge the amount not exceeding the
Tax Equalization; Provided, however, That the cost of power passed on
by the Qualified Generation Company to the Distribution Utilities shall
be reduced by the amount of Tax Equalization; Provided further, That the
claim for reimbursement shall pertain only to indigenous energy sources
actually used for power generation.

The administrative guidelines for this Executive Order shall provide the details for its implementation.

SECTION 5.   Monitoring and Compliance.
— The Qualified Generation Companies and Distribution Utilities shall
implement the effective rate reduction mandated by the ERC.  For this purpose, the ERC shall strictly monitor the sale of electricity by generation companies and distribution companies.  The
ERC shall require generation companies and distribution utilities to
submit all information necessary for ERC and DOE to undertake its
monitoring function including information on the sales to
distributors/suppliers of power from all indigenous energy sources and
the amount of reduction in the cost of power attributable to the Tax
Equalization.

SECTION 6.   Periodic Review and Evaluation.
— The DOF and the DOE shall conduct a periodic review and evaluation of
the price of fuel, electricity sales, Royalty, tariff rates, and other
relevant factors for the purpose of periodic adjustment of Tax
Equalization, if such periodic adjustment is necessary.  The result of the review shall be submitted to the ERC.

SECTION 7.   Administrative Guidelines.
— The DOF and the DOE, in consultation with the ERC and other concerned
agencies, shall adopt administrative guidelines for this Executive
Order.

SECTION 8.   Repealing Clause.
— All orders, issuances, rules and regulations or parts thereof, which
are inconsistent with this Executive Order, are hereby repealed or
modified accordingly.

SECTION 9.   Effectivity.
— This Executive Order shall take effect fifteen (15) days from the
date of its publication in two (2) newspapers of general circulation.

Adopted: 03 May 2002

By the President:

(SGD.) ALBERTO G. ROMULO
Executive Secretary