8 years after: Affordable power remains a dream

7th in a series on GMA’s 9th State of the Nation Address

MANILA – Meralco’s stockholders’ meeting in 2007 saw an angry Winston Garcia on stage, perorating about the “inefficiencies” of the power retailer. That episode had been interpreted as government getting back at a perceived foe: the Lopez family.

But it was also an illuminating moment that brought home a point: electricity prices, 8 years after Arroyo assumed office in January 2001, remained high. In fact, the highest in Asia according to one lawmaker who cited a survey by American investment bank JP Morgan Chase.

While the Arroyo government has not planted the seeds to ease the problem of high electricity prices, it had certainly contributed to its worsening.

High electricity prices had been blamed on take-or-pay provisions from contracts between the Ramos government and independent power producers. Nonetheless, the Electric Power Industry Reform Act or EPIRA law—which was supposed to address the distortions ingrained in the Ramos-led IPP contracts—was passed in June 2001, 5 months after Arroyo started her 9-year reign.

The EPIRA, however, was easier crafted than implemented. Up to now, the government has yet to fully meet the law’s requirements when these were supposed to have been in place way back in 2004.

Competition, customer choice

The Philippine energy industry is a complex business—with a baggage.

The whole supply chain—from power sources (power plants) to transmission to bringing the electricity at the end-users’ doorstep—is a complex maze of different technologies, environmental impact, and most importantly, ownership issues.

The EPIRA, however imperfect it was designed according to its critics, was supposed to help bring electricity prices down by shaking up and re-shaping the status quo.

Its end goal was to open what used to be monopolized businesses to competition.

Just like what residents of California enjoy, the EPIRA’s final impact on Filipino customers was supposed to not just lower costs, but provide the availability of choice. By the time EPIRA will be fully in place, end-customers could choose from a menu of power sources—fossil-based to cleaner sources like water, wind and geothermal.

For example, a resident in Metro Manila, who is serviced by Meralco, could instruct Meralco to transport its network of power poles from the power plant of choice. The Meralco customer makes the choice, not Meralco anymore.

It was an effort to encourage power plants to be more efficient, in the process attracting private investors to invest in the capital intensive power generation industry.

That, however, is Level 6.

Levels 1 to 5 were the EPIRA’s prerequisites to help smoothen the transition from monopolies to market-based competition. These prerequisites are: the establishment of a wholesale electricity spot market; approval of unbundled transmission and distribution wheeling charges; implementation of the cross-subsidy removal scheme; privatization of 70% of the capacity of the government-owned National Power Corp. (Napocor) in Luzon and the Visayas, and transfer of 70% of Napocor capacity covered by independent power producer (IPP) contracts to IPP administrators.

Delays occurred in all these prerequisites. The last 1 has yet to be completed.

Privatization

A few years ago, a foreign expat who had been in the Philippines since the early 1990’s expressed to Newsbreak how he preferred to stay put instead of relocating their manufacturing operations to Vietnam. During our interview, he showed how high electricity costs trumped our edge—having English-speaking and highly creative workforce—against our peer countries in Asia.

Foreign and local business chambers have been consistent in pointing out how a more regionally competitive cost of electricity is a staple in their “wish list” whenever government officials tap them for inputs on how to attract investors.

Consistently, government emissaries point to state-owned National Power Corporation, or Napocor, and its massive debts as the culprit.

Napocor’s debts are mostly the consequence of past decisions, particularly that of former President Fidel Ramos, whose administration was greeted with blackouts when he assumed office in 1992. What were considered decent deals with power producers then turned into oversupply of power that Napocor was bound to pay for.

Paying for Napocor’s debts meant lower allocation from the national government’s budget for social services.

It did not help that President Arroyo, due to populist demands in 2002, put a cap to what Napocor could charge. That artificial effort to keep power prices low further bloated Napocor’s debts. By 2004, when the national government eventually absorbed all of Napocor’s debts, the bill skyrocketed to about P600 billion. A fiscal crisis loomed, and the Arroyo government, to keep its fiscal house in check, had to pass the tab to legitimate consumers by increasing the value-added tax.

Nine years after EPIRA, putting most of Napocor assets in private hands—supposed to be more efficient and less politically beholden—has long been in the government’s to-do list. Privatizing at least 70% of Napocor’s assets was supposed to have been concluded in 2004.

Last July 8, the Power Sector Assets and Liabilities Management Corp. (PSALM), the state agency tasked to bid out or sell public assets, said they have finally reached the 70% requirement of EPIRA after the sale of the 600-megawatt Calaca coal-fired thermal power plant to Consunji-led conglomerate DMCI Holdings Inc.

Changing of hands

One culprit that was beyond Arroyo’s control was the runaway inflation that hit countries worldwide last year.

Inflation at home peaked at 12.4% in August 2008 as global food prices and fuel costs hit record highs. To an extent, those prices helped make the power sector attractive to private investors.

While the boardroom battle in Meralco was widely considered to have been influenced by politics, it also became an opportunity for corporate heavyweights like Philippine Long Distance Telephone Co. and San Miguel Corporation to dip their feet in what used to be an industry closed to newcomers like themselves.

Aside from the usual come-on of the power industry being defensive business (earnings are consistent whether in good or bad economic times), newly introduced technology and synergies with what used to be unrelated industry, like telecommunications, were factors too.

Nonetheless, the sale of Napocor’s power plants and the transmission arm were not spared from controversies. For example, the National Transmission was sold to a consortium led by Monte Oro Grid Resources Corp., where an Arroyo ally, Enrique Razon, owns a stake. Losing bidders cried foul when the decision makers in the bid turned out to include individuals allied to Razon.

How these Napocor assets are being privatized could eventually mean Filipinos—and investors—will soon see the end of the ‘Napocor problem.’ At worse, if these assets turn out to just be a changing of hands from the government to Arroyo’s allies, the ‘Napocor problem’ may just evolve into another set of reasons why power cost here will remain high.

As Arroyo presents her accomplishments for the past years, she can rightly claim that reforms in the power sector were carried out under her watch—even if she tampered with them. The EPIRA’s promises of lower power cost and more competition, however, are yet to be fully realized. –Lala Rimando and Judith Balea, Newsbreak and abs-cbnNEWS.com