A formula for cutting the cost of power

Several years ago, this senior legislator from Cagayan led a one-man campaign against the controversial  purchased power adjustment scheme in which end-users were unreasonably  made to shoulder even the cost of excess or unused power supplied by independent power producers.   The scrapping of the scheme to ease the burden on power consumers became his campaign battle cry for his senatorial bid in the 2004 elections.

Now the third-highest elected public official of the land, Senate President Juan Ponce Enrile, is again spearheading the drive to lower power costs to enable the ordinary Filipino to cope with economic hardships and to help distressed industries survive the onslaught of the global financial meltdown.   Enrile is pushing hard for the enactment of a package of laws that he himself crafted and filed aimed at reducing power rates in the country,  reputedly the second highest in East Asia after Japan.

At the rate Enrile is vigorously pursuing this popular advocacy, one is tempted to think he might be doing this to endear himself to the voters. Although the senator is already 84 years old, he is still contemplating running for re-election in 2010.

Undoubtedly, Enrile is one of the few men in Congress well-versed on the complexities of the power industry. From where I stand, I can see that Enrile is pursuing a three-pronged legislative approach to bring down the cost of power. First, there is the bill amending the Electric Power Industry Reform Act of 2001. The Senate has just approved this on third and final reading.  Second, Enrile proposes to impose a uniform

3-percent franchise tax on the gross income of power distribution utilities in lieu of the 12-percent value added tax, income tax and other levies.  Third, he wants a drastic cut in the government royalty on indigenous sources of energy that are used as fuel for power generating plants.

Understandably, there are cynics who think that Enrile is pursuing a quixotic goal because the government remains lukewarm to legislative measures that would scrap or reduce taxes at a time when it is wrestling with a ballooning budgetary deficit. Revenue agencies have been incurring shortfalls in tax collections, which are blamed on the economic slump.  In fact, administration economic managers are instead batting for the upgrading of taxes on cigarettes, liquor and other so-called sin products, if not the imposition of new taxes.  Given the unfavorable situation, one could only foresee Enrile’s tax-relief measures being made to pass through the proverbial eye of the needle if ever they would prosper. And unless the proponent has the political savvy and parliamentary skills to combine with his conviction in the soundness of what he is doing, such proposals are bound to get nowhere.

In a recent public hearing of the Senate committee on ways and means, officials of the Department of Finance and the National Tax Research Center echoed the Cabinet’s opposition to the exemption of power distribution utilities from the VAT and income taxes, as embodied in Senate Bill 3147, on the ground that these would deprive the government of an estimated P4-billion revenue per year. Enrile, who had anticipated the negative reaction, argued that the revenue loss will be compensated by beneficial effects of the measures in many ways.   “So in effect, the government will recover portion of that revenue loss because with the resulting increase in the tempo of the economy, you will preserve the jobs of people and they will continue earning.”

Under the present system where the power industry players are required to pay the VAT and income tax, Enrile says “consumers are placed at a disadvantage as the energy companies simply pass on the cost of paying these taxes to the end-users.”   He explains that the bill seeks to revert to the previous system where franchise tax is paid by distribution utilities not only to allow the industry players to enjoy a more equitable tax regime.  More importantly, he explains that “the imposition of a franchise tax which is directly absorbed by the franchisee will free the consumers from shouldering additional pass-on charges.”

In a separate measure, Senate Bill 3148, Enrile is proposing the reduction of government royalty from indigenous and renewable sources of energy to 3 percent of the net proceeds from the sale of such energy. At current rates, the government collects P1.46 per kilowatt hour in royalty from natural gas produced from the Malampaya wells off Palawan.  This is five to eight times more than the amount levied on imported fuels such as coal (17 centavos per kwh); oil, 20 centavos per kwh; and liquefied natural gas, 29 centavos per kwh. More disquieting, according to the veteran lawmaker, is the fact that “between indigenous petroleum which is intensively used for generating electricity and other local extractive industries such as mining, the former is being subjected to royalties of about 60 percent while the latter enjoys a much lower tax rate of 3 percent.”

When natural gas was discovered in Malampaya in the mid-1990s, this kindled high hopes of relieving Filipinos from rising fuel and power costs. Unfortunately, those hopes turned out to be false, and they are wondering why. It is ironic that instead of enjoying lower electricity rates, we are being penalized for utilizing the energy resources that abound in our land.  The Philippine Chamber of Commerce and Industry reported that government’s royalty earnings from the Malampaya gas reached $1 billion or more than P47 billion in 2007 alone.  But since the government’s policy was to use these tremendous proceeds to narrow down the deficit, the clamor to re-channel them as subsidy to consumers of power has taken a back seat.

A 2008 study conducted by University of the Philippines economics professor and former Socio-economic Planning Secretary Dante Canlas showed that a substantial reduction of natural gas royalty on industrial load would induce more economic growth on account of greater competitiveness and productivity of domestic industries. The study concludes that the reduction of the royalty will provide the government with additional tax and non-tax revenues that would be more than sufficient to offset the forgone revenues in less than two years from implementation.

Enrile is determined to have the bills mandating a uniform 3-percent franchise tax on power utilities and the cut in natural gas royalty approved by the Senate before it adjourns  on June 6.  Based on his computation, the implementation of these twin tax relief measures would result in the reduction of power rates  by P2 to P3 per kwh.

These two measures will complement the already-approved amendments to the Epira that are aimed at cutting power rates. How? As the bill states, by disallowing the National Power Corp. and all private distribution utilities from passing on their “stranded debt and stranded cost” to the consumers. The bill also provides that if the Napocor and power utilities has bought electricity from independent power producers at a higher price and the price of electricity has gone down, they will have to shoulder the losses instead of slapping additional charges against the consumers

Also franchise taxes imposed by local government units on power utilities have been severely limited while the corporate income tax levied on the taxable income of the National Transmission Corp. and its private concessionaire and its distribution utilities shall not be passed on to end-users.

To the disenchantment of the public, the 10-year-old Epira did not bring about the much-heralded decline in power costs. Now, with the amendments initiated by Enrile in place, some lawmakers are still not sure whether they will work and produce the desired results.  But let us be a little optimistic and hope that they will. –f_maragay@yahoo.com, Manila Standard Today