Oil and Power Advisory No. 001
29 March 2026
1. The conflict in Iran and the closure of the Strait of Hormuz have sent oil markets into turmoil. The Strait, a narrow waterway between the Sultanate of Oman and Iran, is the single most critical chokepoint in global oil trade, carrying roughly 20 percent of the world’s petroleum and liquefied natural gas (LNG) traffic on any given day. When that passage closes or is threatened with closure, spot prices spike immediately, and the effects ripple through every economy that imports oil, including the Philippines. Filipinos will feel this not only at the gas pump but in their electricity bills, and understanding why requires knowing how Philippine energy law handles fuel cost pass-throughs.
2. When the price of oil, coal, or gas that a power plant burns goes up, the generator is allowed to pass that incremental cost directly to distribution utilities and, ultimately, to consumers, without the increase being treated as profit and without it being subject to the ordinary rate-setting process. Philippine law, specifically the Electric Power Industry Reform Act of 2001 (EPIRA, Republic Act No. 9136) and the rules of the Energy Regulatory Commission (ERC), explicitly recognize this mechanism for electricity. The rationale is that fuel is a variable, market-driven input beyond the control of the generator. Holding generators to a fixed price when their fuel costs have doubled would make power generation financially unviable and drive investors away from the sector.
3. Under the EPIRA, power generation companies sell electricity either through bilateral contracts (Power Supply Agreements, or PSAs) or through the Wholesale Electricity Spot Market (WESM) administered by the Independent Electricity Market Operator of the Philippines (IEMOP). PSAs typically contain fuel cost escalation clauses that index the energy charge component of the tariff to published fuel price indices, such as the Mean of Platts Singapore (MOPS) for oil products or the Japan Korea Marker (JKM) for LNG. When global oil prices spike because of the closure of the Strait of Hormuz, MOPS and JKM prices move in tandem, and the escalation clause in the PSA automatically adjusts the tariff upward. Distribution utilities (DUs) like Meralco then apply to the ERC for approval to recover these increased generation costs from their captive customers through the Generation Rate Adjustment Mechanism (GRAM).
4. The GRAM is a quarterly mechanism under ERC Resolution No. 16, Series of 2009 (and its subsequent amendments). It requires DUs to file with the ERC a verified petition showing the actual generation costs incurred over the previous quarter versus the amounts already recovered. If the gap is upward (costs exceeded recoveries), the ERC authorizes a provisional upward adjustment pending full hearings. This means that a geopolitical shock in the Persian Gulf in, say, the first quarter of 2026 will show up in Philippine electricity bills by the second quarter, with a formal ERC order following thereafter. For large commercial and industrial consumers on interruptible supply contracts, the impact similarly flows through automatic fuel indexation in their Retail Electricity Supplier (RES) contracts.
5. For petroleum products at the retail level, the Oil Deregulation Law (Republic Act No. 8479) governs. The Philippines fully deregulated the downstream oil industry in 1998, abolishing price controls and the Oil Price Stabilization Fund. Oil companies are free to set pump prices, and the DOE monitors these through weekly price advisories. There is no regulatory approval required before a price increase. Oil companies simply post a price change effective at a given date, and competition is supposed to discipline excess.
6. Businesses should review their PSAs and RES contracts now to understand their fuel indexation exposure. Commercial customers with high energy costs should consider whether their own energy contracts have sufficient force majeure or price adjustment clauses to manage the downstream impact. And stakeholders who believe the GRAM mechanism is being abused, or that fuel cost claims in rate petitions are inflated, have the right to intervene in ERC proceedings and demand an audit of the underlying fuel purchase invoices.
Geronimo Law advises clients on energy regulation, oil and power law, DOE and ERC proceedings, and energy contracting. For inquiries, contact us at attorney@geronimo.law, +63 9999329836, or through www.geronimo.law. We are located at 6/F Valero One Center, Valero St., Salcedo Village, Makati City.
This advisory is for general information only and does not constitute legal advice. Consult counsel for advice on specific situations.
