Political Law

Francisco Tatad et al vs Secretary of Energy

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G.R. No. 124360 – 281 SCRA 330 – Political Law – Constitutional Law – Equal Protection – Oil Deregulation Law

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 to accommodate innovations in the oil industry. One such law was 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: No. 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-a-vis the established oil companies by requiring them to meet certain conditions already being observed by the latter.

Note: A year later, R.A. No. 8479, or the new oil deregulation law, was passed

Read full text here.

Note: Consolidated with this case is G.R. No. 127867.

Read another version of this digest here (Title of Laws)

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