ever-evolving landscape of the Philippine energy sector, generation companies
and distribution utilities (DUs) find themselves grappling with regulatory
requirements aimed at fostering inflow of private capital and broadening of
ownership base. One such requirement in the Electric Power Industry Reform Act
of 2001 (EPIRA) mandates that these entities offer and sell at least fifteen
percent (15%) of their common shares of stock to the public.
While the public offering requirement aligns with the broader goals of EPIRA, its application can be particularly challenging for small renewable energy (RE) companies. Many of these entities lack the financial resources and market capitalization needed to navigate the complex process of listing in the Philippine Stock Exchange (PSE). Current PSE listing rules stipulate varying public offering percentages based on market capitalization, making it unattainable for some smaller players.
In August 2023, the SEC approved the direct public offering (DPO) of Pacerm-1 Energy Corporation, setting a precedent for small RE companies to sell their common shares without relying on financial intermediaries like underwriters and investment banks. Pacerm-1’s DPO, covering 250,000 common shares, demonstrated an alternative compliance avenue.
SEC Commissioner Kelvin Lester K. Lee recently announced that the SEC would soon release an exposure draft for “SEC Power C Rules,” aiming to simplify the application and approval process for ERC constituencies seeking to comply with EPIRA’s public offering requirement. These rules, akin to SEC FARMS and SEC HOPES, are part of a broader effort to boost the capital market and support the growth of the energy industry.
EPIRA, enacted in 2001, initially set a five-year compliance window for existing generation companies and DUs. However, this proved to be a formidable task for many, prompting an extension. In 2011, Energy Regulatory Commission (ERC) Resolution No. 04 (ERC Resolution No. 4, series of 2011) extended the compliance period by another five years from its issuance, allowing existing entities until 2016 to meet the requirement. New companies, on the other hand, were mandated to fulfill this obligation within five years from receiving their certificate of compliance. In 2015, a group of small RE companies petitioned the ERC to hold in abeyance the implementation of ERC Resolution No. 4, series of 2011, until a clarification is issued as regards the acceptable modes of public offering.
Non-compliance with EPIRA’s public offering mandate carries significant repercussions. The ERC is empowered to impose fines and penalties on violators, while Congress, upon the recommendation of the Department of Energy (DOE) and/or ERC, could revoke the franchise or privilege granted to non-compliant companies. These stringent measures underscore the government’s commitment to promoting competition, market development, and customer choice while preventing the abuse of market power in the electricity industry.
A significant development in the interpretation of EPIRA’s public offering requirement is the clarification by the Securities and Exchange Commission (SEC) that “public offering” extends beyond PSE listing. SEC-OGC Opinion No. 14-14 clarified that the sale of securities to 20 or more persons qualifies as “selling to the public.” This expanded definition provides alternative avenues for compliance.
Furthermore, the SEC, through a letter to the ERC dated 15 August 2018, also confirmed that the forms of solicitation or presentation of securities for sale through various means under Rule 3.1.17 of the 2015 Implementing Rules and Regulations of the Securities Regulation Code (SRC IRR) constitute “public offering.” These include print media, public or commercial venues, electronic communication, and distribution of offering materials through various channels. Nevertheless, all these modes require SEC approval, with the registration process necessitating the submission of a Registration Statement and a prospectus or offering circular.
ERC Resolution No. 04-2019 dated 4 June 2019, reinforced the SEC’s position by highlighting that there are multiple ways for generation companies and DUs to comply with EPIRA’s public offering requirement. These include PSE listing, compliance with the SRC IRR, direct offers of capital stock, and more. Importantly, ERC Resolution No. 04-2019 clarified that Employee Stock Option Plans (ESOPs) do not constitute public offerings unless they involve registered enterprises under the Omnibus Investment Code. The privatization of Build Operate and Transfer (BOT) scheme projects does not absolve new owners from their public offering obligations, emphasizing the continuity of compliance regardless of ownership transfers.
Compliance with EPIRA’s public offering requirement is a multifaceted endeavor, influenced by market dynamics, regulatory interpretations, and the evolving energy landscape. While challenges persist, the government and regulatory bodies are actively exploring avenues to facilitate compliance, particularly for small RE companies and new entrants. These efforts reflect a commitment to nurturing a competitive and transparent electricity industry in the Philippines, with a focus on minimizing hurdles and maximizing opportunities for all players.
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