Energy Law Cases and Optional Readings Atty.

Dimalanta
Gamboa vs. Teves
In 1928, the Philippine Long Distance Telephone Company (PLDT) was granted a franchise to engage in the
business of telecommunications. Telecommunications is a nationalized area of activity where a corporation engaged
therein must have 60% of its capital be owned by Filipinos as provided for by Section 11, Article XII (National
Economy and Patrimony) of the 1987 Constitution, to wit:
Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations or associations organized under the laws of the
Philippines, at least sixty per centum of whose capital is owned by such citizens; xxx
In 1999, First Pacific, a foreign corporation, acquired 37% of PLDT common shares. Wilson Gamboa opposed said
acquisition because at that time, 44.47% of PLDT common shares already belong to various other foreign
corporations. Hence, if First Pacifics share is added, foreign shares will amount to 81.47% or more than the 40%
threshold prescribed by the Constitution.
Margarito Teves, as Secretary of Finance, and the other respondents argued that this is okay because in totality, most
of the capital stocks of PLDT is Filipino owned. It was explained that all PLDT subscribers, pursuant to a law
passed by Marcos, are considered shareholders (they hold serial preferred shares). Broken down, preferred shares
consist of 77.85% while common shares consist of 22.15%.
Gamboa argued that the term capital should only pertain to the common shares because that is the share which is
entitled to vote and thus have effective control over the corporation.
ISSUE: What does the term capital pertain to? Does the term capital in Section 11, Article XII of the
Constitution refer to common shares or to the total outstanding capital stock (combined total of common and non-
voting preferred shares)?
HELD: Gamboa is correct. Capital only pertains to common shares. It will be absurd for capital to pertain as
inclusive of non-voting shares. This is because a corporation consisting of 1,000,000 capital stocks, 100 of which are
common shares which are foreign owned and the rest (999,900 shares) are preferred shares which are non-voting
shares and are Filipino owned, would seem compliant to the constitutional requirement here 99.999% is Filipino
owned. But if scrutinized, the controlling stock the voting stock or that miniscule .001% is foreign owned. That
is absurd.
In this case, it is true that at least 77.85% of the capital is owned by Filipinos (the PLDT subscribers). But these
subscribers, who hold non-voting preferred shares, have no control over the corporation. Hence, capital should only
pertain to common shares.
Thus, to be compliant with the constitution, 60% of the common shares of PLDT should be Filipino owned. That is
not so in this case as it appears that 81.47% of the common shares are already foreign owned (split between First
Pacific (37%) and a Japanese corporation).
IMPORTANT:
When may preferred shares be considered part of the capital share?
If the preferred shares are allowed to vote like common shares.




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Redmont Case (2010)

Facts: Mining company allegedly using layers of corporations to conceal failure to comply with citizenship
requirements.

Doctrine Only: SEC applied the grandfather rule because the foreign investor provided practically all the funds of
the Philippine mining companies; as such, the SEC concluded that the 60-40 Filipino alien equity ownership was in
doubt and therefore the grandfather rule should be applied.

While the control test shall be used as standard to determine the nationality of corporations, the grandfather rule will
be applied if there is doubt about compliance with Filipino ownership requirements
The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural
resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not diminish that right
through the legal fiction of corporate ownership and control. But the constitutional provision, as interpreted and
practiced via the 1967 SEC Rules, has favored foreigners contrary to the command of the Constitution. Hence, the
Grandfather Rule must be applied to accurately determine the actual participation, both direct and indirect, of
foreigners in a corporation engaged in a nationalized activity or business.
Compliance with the constitutional limitation(s) on engaging in nationalized activities must be determined by
ascertaining if 60% of the investing corporations outstanding capital stock is owned by Filipino citizens, or as
interpreted, by natural or individual Filipino citizens. If such investing corporation is in turn owned to some extent
by another investing corporation, the same process must be observed. One must not stop until the citizenships of the
individual or natural stockholders of layer after layer of investing corporations have been established, the very
essence of the Grandfather Rule.
Lastly, it was the intent of the framers of the 1987 Constitution to adopt the Grandfather Rule
Grandfather Rule: the citizenship of individuals or natural persons who ultimately own or control the shares of
stock of the corporation must be considered for purposes of determining compliance with the Filipino ownership
requirement


Chavez vs. PEA

The Public Estates Authority is the central implementing agency tasked to undertake reclamation projects
nationwide. It took over the leasing and selling functions of the DENR insofar as reclaimed or about to be reclaimed
foreshore lands are concerned.
PEA sought the transfer to AMARI, a private corporation, of the ownership of 77.34 hectares of the Freedom
Islands. PEA also sought to have 290.156 hectares of submerged areas of Manila Bay to AMARI.
ISSUE: Whether or not the transfer is valid.
HELD: No. To allow vast areas of reclaimed lands of the public domain to be transferred to PEA as private lands
will sanction a gross violation of the constitutional ban on private corporations from acquiring any kind of alienable
land of the public domain.
The Supreme Court affirmed that the 157.84 hectares of reclaimed lands comprising the Freedom Islands, now
covered by certificates of title in the name of PEA, are alienable lands of the public domain. The 592.15 hectares of
submerged areas of Manila Bay remain inalienable natural resources of the public domain. Since the Amended JVA
seeks to transfer to AMARI, a private corporation, ownership of 77.34 hectares of the Freedom Islands, such transfer
is void for being contrary to Section 3, Article XII of the 1987 Constitution which prohibits private corporations
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from acquiring any kind of alienable land of the public domain. Furthermore, since the Amended JVA also seeks to
transfer to AMARI ownership of 290.156 hectares of still submerged areas of Manila Bay, such transfer is void for
being contrary to Section 2, Article XII of the 1987 Constitution which prohibits the alienation of natural resources
other than agricultural lands of the public domain.
Addendum: So how do you acquire lands of the public domain? Declare that it is no longer needed for a public
purpose, hence making it patrimonial.

The Court ruled that land devoted to public use by the Department of Foreign Affairs, when no longer needed
for public use, may be declared patrimonial property for sale to private parties provided there is a law authorizing
such act. Well-settled is the doctrine that public land granted to an end-user government agency for a specific public
use may subsequently be withdrawn by Congress from public use and declared patrimonial property to be sold to
private parties. R.A. No. 7227 creating the BCDA is a law that declares specific military reservations no longer
needed for defense or military purposes and reclassifies such lands as patrimonial property for sale to private
parties.
Government owned lands, as long they are patrimonial property, can be sold to private parties, whether
Filipino citizens or qualified private corporations. Thus, the so-called Friar Lands acquired by the government
under Act No. 1120 are patrimonial property which even private corporations can acquire by purchase. Likewise,
reclaimed alienable lands of the public domain if sold or transferred to a public or municipal corporation for a
monetary consideration become patrimonial property in the hands of the public or municipal corporation. Once
converted to patrimonial property, the land may be sold by the public or municipal corporation to private parties,
whether Filipino citizens or qualified private corporations.

Optional Readings:

Spanish Civil Code of 1889
Article 426. Any Spaniard or foreigner may freely perform in land of public domain samplings or excavations not
exceeding 10 m in breadth or depth for the purpose of discovering minerals; but he must give prior notice thereof to
the local Authorities. On private property no sampling may be performed without the authorisation of the owner or
his representative.

Philippine Organic Act of 1902 (Section 21)
Section 21. That all valuable mineral deposits in public lands in the Philippine Islands, both surveyed and
unsurveyed, are hereby declared to be free and open to exploration, occupation, and purchase, and the land in which
they are found to occupation and purchase, by citizens of the United States, or of said Islands:Provided, that when
on any lands in said Islands entered and occupied as agricultural lands under the provisions of this Act, but not
patented, mineral deposits have been found, the working of such mineral deposits is hereby forbidden until the
person, association, or corporation who or which has entered and is occupying such lands shall have paid to the
Government of said Islands such additional sum or sums as will make the total amount paid for the mineral claim or
claims in which said deposits are located equal to the amount charged by the Government for the same as mineral
claims.

Parity Amendment (Commonwealth Act No. 733, 3 July 1946)

"ARTICLE VII
"1. The disposition, exploitation, development, and utilization of all agricultural, timber, and mineral lands of the
public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces and sources of potential energy,
and other natural resources of the Philippines, and the operation of public utilities, shall if open to any person, be
open to citizens of the United States and to all forms of business enterprise owned or controlled, directly or
indirectly, by United States citizens, except that (for the period prior to the amendment of the Constitution of the
Philippines referred to in Paragraph 2 of this Article) the Philippines shall not be required to comply with such part
of the foregoing provisions of this sentence as are in conflict with such Constitution.

"2. The Government of the Philippines will promptly take such steps as are necessary to secure the amendment of
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the Constitution of the Philippines so as to permit the taking effect as laws of the Philippines of such part of the
provisions of Paragraph 1 of this Article as is in conflict with such Constitution before a such amendment.

Republic Act No. 1355 (Laurel-Langley Act)

ARTICLE VI
1. The disposition, exploitation, development, and utilization of all agricultural, timber, and mineral lands of the
public domain, waters, minerals, coal, petroleum and other mineral oils, all forces and sources of potential energy,
and other natural resources of either Party, and the operation of public utilities, shall, if open to any person, be open
to citizens of the other Party and to all forms of business enterprise owned or controlled, directly or indirectly, by
citizens of such other Party in the same manner as to and under the same conditions imposed upon citizens or
corporations or associations owned or controlled by citizens of the Party granting the right.
2. The rights provided for in Paragraph 1 may be exercised, in the case of citizens of the Philippines with respect to
natural resources in the United States which are subject to Federal control or regulations, only through the medium
of a corporation organized under the laws of the United States or one of the States thereof and likewise, in the case
of citizens of the United States with respect to natural resources in the public domain in the Philippines, only
through the medium of a corporation organized under the laws of the Philippines and at least 60% of the capital
stock of which is owned or controlled by citizens of the United States. This provision, however, does not affect the
right of citizens of the United States to acquire or own private agricultural lands in the Philippines or citizens of the
Philippines to acquire or own land in the United States which is subject to the jurisdiction of the United States and
not within the jurisdiction of any State and which is not within the public domain. The Philippines reserves the right
to dispose of its public lands in small quantities on especially favorable terms exclusively to actual settlers or other
users who are its own citizens. The United States reserves the right to dispose of its public lands in small quantities
on especially favorable terms exclusively to actual settlers or other users who are its own citizens or aliens who have
declared their intention to become citizens. Each Party reserves the right to limit the extent to which aliens may
engage in fishing or engage in enterprises which furnish communications services and air or water transport. The
United States also reserves the right to limit the extent to which aliens may own land in its outlaying territories and
possessions, but the Philippines will extend to American Nationals who are residents of any of those outlaying
territories and possessions only the same rights, with respect to ownership of lands, which are granted therein to
citizens of the Philippines. The rights provided for in this Paragraph shall not, however, be exercised by either Party
so as to derogate from the rights previously acquired by citizens or corporations or associations owned or controlled
by citizens of the other Party.
3. The United States of America reserves the rights of the several States of the United States to limit the extent to
which citizens or corporations or associations owned or controlled by citizens of the Philippines may engage in the
activities specified in this Article. The Republic of the Philippines reserves the power to deny any of the rights
specified in this Article to citizens of the United States who are citizens of States, or to corporations or associations
at least 60% of whose capital stock or capital is owned or controlled by citizens of States, which deny like rights to
citizens of the Philippines, or to corporations or associations which are owned or controlled by citizens of the
Philippines. The exercise of this reservation on the part of the Philippines shall not affect that any State of the United
States of America should in the future impose restrictions which would deny to citizens or corporations or
associations owned or controlled by citizens of the Philippines the right to continue to engage in activities in which
they were engaged therein at the time of the imposition of such restrictions, the Republic of the Philippines shall be
free to apply like limitations to the


Presidential Decree No. 151 (13 March 1973)

1. Citizens of the Philippines or corporations or associations which have acquired lands of the public domain or
which now own, hold or control such lands under the Public Land Act or any other law, are hereby allowed to enter
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into service contracts for financial, technical, management or other forms of assistance with any foreign person or
entity whenever and wherever such contracts are vital to achieve sound and more expeditious exploration,
development, exploitation or utilization of such lands owned, held or controlled by such citizens or corporations.
2. For purposes of this Decree, a service contract with a foreign citizen or entity for financial, technical,
management and other forms of assistance shall be considered vital to a national interest if, consistent with
requirements for national security, the exploration, exploitation or utilization of land subject thereof is necessary for
carrying out agricultural, industrial and commercial development projects such as the development of export
oriented industries, import substitution and other dollar saving industries, cottage industries, cooperative
development, land reform, research projects, and such other activities which may be certified by the President upon
recommendation of the National Economic Development Authority as vital to national interest.
3. No service contract for financial, technical, management or other forms of assistance shall be valid without the
prior approval of the Secretary of Agriculture and Natural Resources shall promulgate such rules and regulations as
may be necessary to carry this Decree into effect.
4. Service contracts for financial, technical, management or other forms of assistance that are valid and existing as of
January 17, 1973, shall be recognized and the terms and conditions thereof shall remain in full force and effect
unless modified by the parties thereto.

PICOP V. BASE METALS
G.R. No. 163509
December 6, 2006
Ponente: Tinga

FACTS: In 1987, the Central Mindanao Mining and Development Corporation (CMMCI for brevity) entered into a
Mines Operating Agreement with Banahaw Mining and Development Corporation whereby the latter agreed to act
as Mine Operator for the exploration, development, and eventual commercial operation of CMMCI's 18 mining
claims located in Agusan del Sur. Pursuant to the terms of the Agreement, Banahaw Mining filed applications for
Mining Lease Contracts over the mining claims with the Bureau of Mines. On April 29, 1988, Banahaw Mining was
issued a Mines Temporary Permit authorizing it to extract and dispose of precious minerals found within its mining
claims. Since a portion of Banahaw Mining's mining claims was located in petitioner PICOP's logging concession in
Agusan del Sur, Banahaw Mining and petitioner PICOP entered into a MOA whereby petitioner PICOP allowed
Banahaw Mining an access to its mining claims. In 1991, Banahaw Mining converted its mining claims to
applications for Mineral Production Sharing Agreements (MPSA for brevity).

While the MPSA were pending, Banahaw Mining, on December 18, 1996, decided to sell/assign its rights
and interests over 37 mining claims in favor of private respondent Base Metals Mineral Resources Corporation. The
transfer included those covered by its mining operating agreement with CMMCI. Upon being informed of the
development, CMMCI, as claim owner, immediately approved the assignment made by Banahaw Mining in favor of
private respondent Base Metals, thereby recognizing private respondent Base Metals as the new operator of its
claims. On March 10, 1997, private respondent Base Metals amended Banahaw Mining's pending MPSA
applications with the Bureau of Mines to substitute itself as applicant and to submit additional documents in support
of the application. Area clearances from the DENR Regional Director and Superintendent of the Agusan Marsh and
Wildlife Sanctuary were submitted, as required.
On November 18, 1997, petitioner PICOP filed with the Mines Geo-Sciences Bureau (MGB), an
Opposition to private respondent Base Metals' application because it violate the non-impairment clause and will be
prejudicial to herein petitioner. The Panel Arbitrator initially ruled for petitioner, but upon appeal to the Mines
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Adjudication Board, judgment was in favor of respondent, CA affirmed stating that the Presidential Warranty of
September 25, 1968 issued by then President Ferdinand E. Marcos merely confirmed the timber license granted to
PICOP and warranted the latter's peaceful and adequate possession and enjoyment of its concession areas. It was
only given upon the request of the Board of Investments to establish the boundaries of PICOP's timber license
agreement. The Presidential Warranty did not convert PICOP's timber license into a contract because it did not
create any obligation on the part of the government in favor of PICOP. Thus, the non-impairment clause finds no
application.

Issue: W/N the concession area of petitioner is closed to mining activities and that the conversion of the agreement
into MPSA will run counter to the non-impairment clause of the Constitution. NO, a Timber license agreement is
not a contract, but a mere privilege.

RATIO: We should state at this juncture that the policy of multiple land use is enshrined in our laws towards the
end that the country's natural resources may be rationally explored, developed, utilized and conserved. In like
manner, RA 7942, recognizing the equiponderance between mining and timber rights, gives a mining contractor the
right to enter a timber concession and cut timber therein provided that the surface owner or concessionaire shall be
properly compensated for any damage done to the property as a consequence of mining operations.
Firstly, assuming that the area covered by Base Metals' MPSA is a government reservation, defined as
proclaimed reserved lands for specific purposes other than mineral reservations, such does not necessarily preclude
mining activities in the area. Sec. 15(b) of DAO 96-40 provides that government reservations may be opened for
mining applications upon prior written clearance by the government agency having jurisdiction over such
reservation. Sec. 6 of RA 7942 also provides that mining operations in reserved lands other than mineral
reservations may be undertaken by the DENR, subject to certain limitations. Secondly, RA 7942 does not disallow
mining applications in all forest reserves but only those proclaimed as watershed forest reserves. There is no
evidence in this case that the area covered by Base Metals' MPSA has been proclaimed as watershed forest reserves.
DENR Memorandum Order No. 03-98, which provides the guidelines in the issuance of area status and clearance or
consent for mining applications pursuant to RA 7942, provides that timber or forest lands, military and other
government reservations, forest reservations, forest reserves other than critical watershed forest reserves, and
existing DENR Project Areas within timber or forest lands, reservations and reserves, among others, are open to
mining applications subject to area status and clearance.
Lastly, PICOP failed to present any evidence that the area covered by the MPSA is a protected wilderness
area designated as an initial component of the NIPAS pursuant to a law, presidential decree, presidential
proclamation or executive order as required by RA 7586.

ALVAREZ V. PICOP
G.R. No. 162243
December 3, 2009
Ponente: Chico-Nazario

FACTS: PICOP (Paper Industries Corp of the Phil) filed with the DENR an application to have its Timber License
Agreement (TLA) No. 43 converted into an IFMA (Integrated forest management agreement). In the middle of the
processing of PICOPs application, however, PICOP refused to attend further meetings with the DENR. Instead, on
2 September 2002, PICOP filed before the RTC of Quezon City a Petition for Mandamus
1
against then DENR
Secretary Heherson T. Alvarez. PICOP seeks the issuance of a privileged writ of mandamus to compel the DENR
Secretary to sign, execute and deliver an IFMA to PICOP. Lower court ruled in favor of respondents, CA affirmed,
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but upon appeal to the Supreme Court, it reversed the judgment of the CA. Now PICOP files a Motion for
Reconsideration.
ISSUE: W/N PICOP is entitled to the IFMA by way of mandamus and due to the non-impairment clause of the
Constitution in relation to Document 1969. NO, Document 1969 is not a contact, but a mere collateral undertaking
pursuant to the TLA.
RATIO: An examination of the Presidential Warranty (Doc. 1969) at once reveals that it simply reassures PICOP of
the governments commitment to uphold the terms and conditions of its timber license and guarantees PICOPs
peaceful and adequate possession and enjoyment of the areas which are the basic sources of raw materials for its
wood processing complex. The warranty covers only the right to cut, collect, and remove timber in its concession
area, and does not extend to the utilization of other resources, such as mineral resources, occurring within the
concession. The Presidential Warranty cannot be considered a contract distinct from PTLA No. 47 and FMA No. 35.
It is merely a collateral undertaking which cannot amplify PICOPs rights under its timber license. The ruling in
Oposa v. Factoran that a timber license is not a contract within the purview of the non-impairment clause is edifying.
Also, PICOP failed to secure NCIP Cerification based on R.A. 8371 and Sanggunian consultation and
approval for environmentally critical projects based on the Local Government Code.


Q: Are Service Contracts and FTAAs the same?
A: Essentially, Yes.
The Meaning of Agreements Involving Either Technical or Financial Assistance

A constitutional provision specifically allowing foreign-owned corporation to render financial or technical
assistance in respect of mining or any other commercial activity was clearly unnecessary; the provision meant to
refer to more than mere financial or technical assistance.

The framers of the Constitution, during its deliberation regarding foreign investment in and management of an
enterprise for large-scale exploration, development and utilization of minerals spoke about service contracts as the
concept was understood in the 1973 Constitution. It is obvious from their discussions that they did not intend to ban
or eradicate service contracts. Instead, they were intent on crafting provisions to put in place safeguards that would
eliminate the abuses prevalent during the martial law regime.

They were going to permit service contracts with foreign corporations as contractors but with safety measures to
prevent abuses as an exception to the general norm established in the first paragraph of Section 2 of Article XII,
which reserves or limits to Filipino citizens and corporations that are at least 60 percent owned by such citizens the
exploration, development and utilization of mineral or petroleum resources. This was prompted by the perceived
insufficiency of Filipino capital and the felt need for foreign expertise in the EDU of mineral resources.

The drafters, by specifying such agreements involving assistance, necessarily gave implied assent to everything that
these agreements entailed or that could reasonably be deemed necessary to make them tenable and effective
including management authority with respect to the day-to-day operations of the enterprise, and measures for the
protection of the interests of the foreign corporation, at least to the extent that they are consistent with Philippine
sovereignty over natural resources, the constitutional requirement of State control, and beneficial ownership of
natural resources remains vested in the State.

It is clear that agreements involving either technical or financial assistance referred to in paragraph 4 are in fact
service contracts, but such new service contracts are between foreign corporations acting as contractors on the one
hand, and on the other hand government as principal or owner of the works, whereby the foreign contractor
provides the capital, technology and technical know-how, and managerial expertise in the creation and operation of
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the large-scale mining/extractive enterprise, and government through its agencies (DENR, MGB) actively exercises
full control and supervision over the entire enterprise.

Such service contracts may be entered into only with respect to mineral oils. The grant of such service is subject to
several safeguards, among them: (1) that the service contract be crafted in accordance with a general law setting
standard or uniform terms, conditions and requirements; (2) the President be the signatory for the government; and
(3) the President report the executed agreement to Congress within thirty days.

La Bugal Blaan Cases
LA BUGAL-B'LAAN vs DENR
Jan. 21, 2004

Facts: R.A. No. 7942 defines the modes of mineral agreements for mining operations, outlines the procedure for
their filing and approval, assignment/transfer and withdrawal, and fixes their terms. Similar provisions govern
financial or technical assistance agreements.

Petitioners filed the present petition for prohibition and mandamus, with a prayer for a temporary restraining order
alleging that at the time of the filing of the petition, 100 FTAA applications had already been filed, covering an area
of 8.4 million hectares, 64 of which applications are by fully foreign-owned corporations covering a total of 5.8
million hectares, and at least one by a fully foreign-owned mining company over offshore areas.

Issue: Are foreign-owned corporations in the large-scale exploration, development, and utilization of petroleum,
minerals and mineral oils limited to technical or financial assistance only?

Ruling: Only technical assistance or financial assistance agreements may be entered into, and only for large-scale
activities. These are contract forms which recognize and assert our sovereignty and ownership over natural resources
since the foreign entity is just a pure contractor and not a beneficial owner of our economic resources. The proposal
recognizes the need for capital and technology to develop our natural resources without sacrificing our sovereignty
and control over such resources by the safeguard of a special law which requires two-thirds vote of all the members
of the Legislature.
It is true that the word technical encompasses a broad number of possible services. However, the law follows the
maxim casus omisus pro omisso habendus est which means a person, object or thing omitted from an enumeration
must be held to have been omitted intentionally.

LA BUGAL-B'LAAN vs DENR
Dec. 1, 2004

Facts: On January 27, 2004, the Court en banc promulgated its Decision granting the Petition and declaring the
unconstitutionality of certain provisions of RA 7942, DAO 96-40, as well as of the entire FTAA executed between
the government and WMCP, mainly on the finding that FTAAs are service contracts prohibited by the 1987
Constitution.

The Decision struck down the subject FTAA for being similar to service contracts, which, though permitted under
the 1973 Constitution, were subsequently denounced for being antithetical to the principle of sovereignty over our
natural resources, because they allowed foreign control over the exploitation of our natural resources, to the
prejudice of the Filipino nation.

Issue: Are foreign-owned corporations in the large-scale exploration, development, and utilization of petroleum,
minerals and mineral oils limited to technical or financial assistance only?

Ruling: Only technical assistance or financial assistance agreements may be entered into, and only for large-scale
activities. Full control is not anathematic to day-to-day management by the contractor, provided that the State retains
the power to direct overall strategy; and to set aside, reverse or modify plans and actions of the contractor. The idea
of full control is similar to that which is exercised by the board of directors of a private corporation: the performance
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of managerial, operational, financial, marketing and other functions may be delegated to subordinate officers or
given to contractual entities, but the board retains full residual control of the business.
Tatad vs. Garcia
Considering that oil is not endemic to this country, history shows that the government has always been finding ways
to alleviate the oil industry. The government created laws accommodate these innovations in the oil industry. One
such law is the Downstream Oil Deregulation Act of 1996 or RA 8180. This law allows that any person or entity
may import or purchase any quantity of crude oil and petroleum products from a foreign or domestic source, lease or
own and operate refineries and other downstream oil facilities and market such crude oil or use the same for his own
requirement, subject only to monitoring by the Department of Energy. Tatad assails the constitutionality of the law.
He claims, among others, that the imposition of different tariff rates on imported crude oil and imported refined
petroleum products violates the equal protection clause. Tatad contends that the 3%-7% tariff differential unduly
favors the three existing oil refineries and discriminates against prospective investors in the downstream oil industry
who do not have their own refineries and will have to source refined petroleum products from abroad.3% is to be
taxed on unrefined crude products and 7% on refined crude products.
ISSUE: Whether or not RA 8180 is constitutional.
HELD: The SC declared the unconstitutionality of RA 8180 because it violated Sec 19 of Art 12 of the
Constitution. It violated that provision because it only strengthens oligopoly which is contrary to free competition. It
cannot be denied that our downstream oil industry is operated and controlled by an oligopoly, a foreign oligopoly at
that. Petron, Shell and Caltex stand as the only major league players in the oil market. All other players belong to the
lilliputian league. As the dominant players, Petron, Shell and Caltex boast of existing refineries of various
capacities. The tariff differential of 4% therefore works to their immense benefit. Yet, this is only one edge of the
tariff differential. The other edge cuts and cuts deep in the heart of their competitors. It erects a high barrier to the
entry of new players. New players that intend to equalize the market power of Petron, Shell and Caltex by building
refineries of their own will have to spend billions of pesos. Those who will not build refineries but compete with
them will suffer the huge disadvantage of increasing their product cost by 4%. They will be competing on an uneven
field. The argument that the 4% tariff differential is desirable because it will induce prospective players to invest in
refineries puts the cart before the horse. The first need is to attract new players and they cannot be attracted by
burdening them with heavy disincentives. Without new players belonging to the league of Petron, Shell and Caltex,
competition in our downstream oil industry is an idle dream.
RA 8180 is unconstitutional on the ground inter alia that it discriminated against the new players insofar as it
placed them at a competitive disadvantage vis--vis the established oil companies by requiring them to meet certain
conditions already being observed by the latter.