Lately, the Court has been perceived [albeit erroneously] to be an unwelcome interloper in affairs and concerns best left to legislators and policy-makers. Admittedly, the wisdom of political and economic decisions are outside the scrutiny of the Court. However, the political question doctrine is not some mantra that will automatically cloak executive orders and laws [or provisions thereof] with legitimacy. It is this Court’s bounden duty under Sec. 4, Art. VIII of the 1987 Constitution to decide all cases involving the constitutionality of laws and under Sec. 1 of the same article, “to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government.”
In the instant case, petitioners assail the constitutionality of certain provisions found in R. A. No. 8180, otherwise known as the “Downstream Oil Industry Deregulation Act of 1996.” To avoid accusations of undue interference with the workings of the two other branches of government, this discussion is limited to the issue of whether or not the assailed provisions are germane to the law or serve the purpose for which it was enacted.
The objective of the deregulation law is quite simple. As aptly enunciated in Sec. 2 thereof, it is to “foster a truly competitive market which can better achieve the social policy objectives of fair prices and adequate, continuous supply of environmentally-clean and high quality petroleum products.” The key, therefore, is free competition which is commonly defined as:
The act or action of seeking to gain what another is seeking to gain at the same time and usually under or as if under fair or equitable rules and circumstances: a common struggle for the same object especially among individuals of relatively equal standing xxx a market condition in which a large number of independent buyers and sellers compete for identical commodity, deal freely with each other, and retain the right of entry and exit from the market. [Webster’s Third International Dictionary].
and in a landscape where our oil industry is dominated by only three major oil firms, this translates primarily into the establishment of a free market conducive to the entry of new and several and oil companies in the business. Corollarily, it means the removal of any and all barriers that will hinder the influx of prospective players. It is a truism in economics that if there are many players in the market, healthy competition will ensue and in order to survive and profit the competitors will try to outdo each other in terms of quality and price. The result: better quality products and competitive prices. In the end, it will be the public that benefits [which is ultimately the most important goal of the law]. Thus, it is within this framework that we must determine the validity of the assailed provisions.
I. The 4% Tariff Differential
SEC. 5. Liberalization of Downstream
Oil Industry and Tariff Treatment.
xxx xxx xxx
(b) Any law to the contrary notwithstanding and starting with the effectivity of this Act, tariff duty shall be imposed and collected on imported crude oil at the rate of three percent (3%) and imported refined petroleum products at the rate of seven percent (7%), except fuel oil and LPG, the rate for which shall be the same as that for imported crude oil: Provided, That beginning on January 1, 2004 the tariff rate on imported crude oil and refined petroleum products shall be the same: Provided, further, That this provision may be amended only by an Act of Congress;
Respondents are one in asserting that the 4% tariff differential between imported crude oil and imported refined petroleum products is intended to encourage the new entrants to put up their own refineries in the country. The advantages of domestic refining cannot be discounted, but we must view this intent in the proper perspective. The primary purpose of the deregulation law is to open up the market and establish free competition. The priority of the deregulation law, therefore, is to encourage new oil companies to come in first. Incentives to encourage the building of local refineries should be provided after the new oil companies have entered the Philippine market and are actively participating therein.
The threshold question therefore is, is the 4% tariff differential a barrier to the entry of new oil companies in the Philippine market?
It is. Since the prospective oil companies do not [as yet] have local refineries, they would have to import refined petroleum products, on which a 7% tariff duty is imposed. On the other hand, the existing oil companies already have domestic refineries and, therefore, only import crude oil which is taxed at a lower rate of 3%. Tariffs are part of the costs of production. Hence, this means that with the 4% tariff differential (which becomes an added cost) the prospective players would have higher production costs compared to the existing oil companies and it is precisely this factor which could seriously affect its decision to enter the market.
Viewed in this light, the tariff differential between imported crude oil and refined petroleum products becomes an obstacle to the entry of new players in the Philippine oil market. It defeats the purpose of the law and should thus be struck down.
Public respondents contend that “a higher tariff rate is not the overriding factor confronting a prospective trader/importer but, rather, his ability to generate the desired internal rate of return [IRR] and net present value [NPV]. In other words, if said trader/importer, after some calculation, finds that he can match the price of locally refined petroleum products and still earn the desired profit margin, despite a higher tariff rate, he will be attracted to embark in such business. A tariff differential does not per se make the business of importing refined petroleum product a losing proposition.”1
The problem with this rationale, however, is that it is highly
speculative. The opposite may well hold true. The point is to make
the prospect of engaging in the oil business in the
There is likewise no merit in the argument that the removal of the tariff differential will revive the 10% [for crude oil] and 20% [for refined petroleum products] tariff rates that prevailed before the enactment of the Court. What petitioners are assailing is the tariff differential. Phrased differently, why is the tariff duty imposed on imported petroleum products not the same as that imposed on imported crude oil? Declaring the tariff differential void is not equivalent to declaring the tariff itself void. The obvious consequence thereof would be that imported refined petroleum products would now be taxed at the same rate as imported crude oil which R. A. No. 8180 has specifically set at 3%. The old rates have effectively been repealed by Sec. 24 of the same law.2
II. The Minimum Inventory Requirement and the Prohibition Against Predatory Pricing
SEC. 6. Security of Supply. – To ensure the security and continuity of petroleum crude and products supply, the DOE shall require the refiners and importers to maintain a minimum inventory equivalent to ten percent [10%] of their respective annual sales volume or forty  days of supply, whichever is lower.
xxx xxx xxx
SEC. 9. Prohibited Acts. – To ensure fair competition and prevent cartels and monopolies in the downstream oil industry, the following acts are hereby prohibited:
xxx xxx xxx
(b) Predatory pricing which means selling or offering to sell any product at a price unreasonably below the industry average cost so as to attract customers to the detriment of competitors.
The same rationale holds true for the two other assailed provisions in the Oil Deregulation Law. The primordial purpose of the law, I reiterate, is to create a truly free and competitive market. To achieve this goal, provisions that show the possibility, or even the merest hint, of deterring or impeding the ingress of new blood in the market should be eliminated outright. I am confident that our lawmakers can formulate other measures that would accomplish the same purpose [insure security and continuity of petroleum crude products supply and prevent fly by night operators, in the case of the minimum inventory requirement, for instance] but would not have on the downside the effect of seriously hindering the entry of prospective traders in the market.
The overriding consideration, which is the public interest and public benefit, calls for the leveling of the playing fields for the existing oil companies and the prospective new entrants. Only when there are many players in the market will free competition reign and economic development begin.
Consequently, Section 6 and Section 9 [b] of R. A. No. 8180 should similarly be struck down.
Respondent oil companies vehemently deny the “cartelization” of the oil industry. Their parallel business behavior and uniform pricing are the result of competition, they say, in order to keep their share of the market. This rationale fares well when oil prices are lowered, i.e. when one oil company rolls back its prices, the others follow suit so as not to lose its market. But how come when one increases its prices the others likewise follow? Is this competition at work?
Respondent oil companies repeatedly assert that due to the devaluation of the peso, they had to increase the prices of their oil products, otherwise, they would lose, as they have allegedly been losing specially with the issuance of a temporary restraining order by the Court. However, what we have on record are only the self-serving lamentations of respondent oil companies. Not one has presented hard data, independently verified, to attest to these losses. Mere allegations are not sufficient but must be accompanied by supporting evidence. What probably is nearer the truth is that respondent oil companies will not make as much profits as they have in the past if they are not allowed to increase the prices of their products everytime the value of the peso slumps. But in the midst of worsening economic difficulties and hardships suffered by the people, the very customers who have given them tremendous profits throughout the years, is it fair and decent for said companies not to bear a bit of the burden by forgoing a little of their profits?
PREMISES CONSIDERED, I vote that Section 5 [b], Section 6 and Section 9 [b] of R. A. No. 8180 be declared unconstitutional.
1Public Respondents’ Comment, G. R. No. 127867, p. 39.
2Sec. 24. Repealing Clause. – All laws, presidential decrees, executive orders, issuances, rules and regulations or parts thereof, which are inconsistent with the provisions of this Act are hereby repealed or modified accordingly.
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