State of RP power industry: Things may get worse before they get better

(FIRST OF TWO PARTS)

Rotating brownouts during sweltering summer months. Electricity price spikes at the spot market. And yes, there’s a Department of Energy (DoE) that failed in planning. Familiar scenes? Well, that was the State of California in the past decade before it hurtled into its monumental power market deregulation failure.

Now, the same events are being relived in Philippine shores. But if it is any stroke of luck, the local power industry appears more resilient, and fortunately, still has the room to save its deregulated market from teetering to failure.

The oft-repeated centerpiece of the power industry’s restructuring program underpinned by the Electric Power Industry Reform Act (EPIRA) is: Lower rates. But where are we in attaining that objective? Just a plain warning here: That part of the party may have been over before it even started.

With the tightening supply conditio and the soaring electricity prices in the spot market witnessed in the past months, industry players are now giving more realistic assumptions that the “era for lower rates had been over.” Hopefully, just for the meantime, until we see how competition will influence pricing in the longer term.

“Filipino consumers will have to bear the brunt of all the shortcomings of a power reform structure that is a work-in-progress. It will become worse before it becomes better,” one of the industry players said. We have seen unprecedented spikes in the electric bills of Manila Electric Company (Meralco) customers in the past two months, although temporary relief came this month with the P1.26 per kilowatt hour (kWh) reduction in its generation charge.

“The promise to bring down electricity rates under EPIRA was wrong in the first place,” noted Global Power President Jesus N. Alcordo, qualifying that “there are factors that contribute to the costs of power that are beyond the control of the generator – like fuel, inflation, foreign exchange movements.”

But before the rates issue aggravates the debate, industry players hold out some glimmer of hope – if you can call it that. They surmise that when competition finally reigns in the industry, with the kick-off point anticipated either this year or by 2011, the end-result may be a situation likened to the telecommunications and airlines industries where consumers have been benefitting from intense competition.“Under a competitive environment, we should expect better operating efficiencies, better ‘governance’ and competitive prices,” Mr. Alcordo stressed.

Aboitiz Power Corporation president Erramon I. Aboitiz also noted that other countries, even the more developed jurisdictions of Europe and United States took the pain of power industry restructuring over a stretch decades and not merely years. He acknowledged the birth pains that will engulf the transition process, yet he assured that “relief will definitely come for the consumers.”

At this phase in the industry’s restructuring, it was noted that there’s no real interplay of “buyers” and “sellers” yet in the market, in the sense that, the size of some (including in the buyers’ end) still have evident sway on the outcomes.

Mr. Ernesto Pantangco, president of the Philippine Independent Power Producers Association (PIPPA), is also not giving up on prognosis that “consumers can expect power prices to be lowered.”

However, he is more pragmatic in asserting this time that “this will only be felt by the residential sectors in the next 2-3 years.” The bigger commercial and industrial customers, he added, may feel the benefit earlier upon the advent of open access, or the regime that will give them a choice on suppliers.

“If we get to the stage of retail competition and open access, the Filipino consumer can expect the entry of products and services tailor-fitted to meet his or her needs…under a full-blown retail competition and open access, expect to see more value-added service offerings or optional demand-side management programs,” lawyer Ranulfo Ocampo, president of the Private Electric Power Operators Association (PEPOA) explained further.

Long on asset sales, short on cash

Prior to the much-anticipated era of competition, what will consumers see in their electric bills apart from the monthly movement in generation charges driven by fuel cost, forex rates or purchased power costs; or the incremental adjustments in distribution charges approved in the performance-based tariffs of the distribution utilities?

One of the tormenting part, it seems, is the pending universal charge (UC) application of the Power Sector Assets and Liabilities Management Corporation (PSALM) wherein it opts to recover a total of P471 billion worth of National Power Corporation (NPC) stranded debts within a stretch of 17-25 years. Depending on the length of recovery that will eventually be approved by the Energy Regulatory Commission (ERC), this could translate to added burden for consumers of up to a P0.3049 per kWh additional charge that will be reflected as separate item (under universal charge) in the electricity bills. This will be on top of the UC for stranded contract costs, in which PSALM’s initial calculation for some contracts already hovered at P22.3 billion for an equivalent charge of up to P0.5024 per kWh, as applied with the regulator.

Based on the initial evaluation of PSALM’s applications, sources from the regulator’s end indicated that the company had bloated recovery values because it included even some costs that had already been previously disallowed by the Commission. When asked why NPC’s stranded cost recoveries
Ibazeta said: “ERC has its own assessmentbeen inflated to half-a-trillion peso level, acting Energy Secretary and PSALM vice chairman Jose C. and we have our own computations.”

Documents showed that PSALM made prepayments to loans totaling $1.423 billion, hence reducing PSALM’s mounting debts to $5.8 billion from $7.01 billion as of 2008. But the company’s loan procurements in the past two years proved more perturbing for the industry, as PSALM secured a staggering $2.2 billion fresh round of borrowings, just in 2009. Plus recently, it was out in the market again issuing P30 billion worth of bonds. Of course, Filipinos ought to worry because these are eventually passed on to them either through their electric bills or as added tax burdens.

By the same token, the EPIRA mandated that the privatization proceeds from NPC shall be used to retire NPC’s outstanding debts. No doubt that the asset sales performance of PSALM has been outstanding. Number-crunching would reveal proceeds reaching as much as $3.467 billion for generation assets and $3.95 billion for the concession deal on the National Transmission Corporation (TransCo). As collected proceeds went directly into national government’s coffers and some are still on amortization payments or pending for turnover, no one wants to second-guess how such amounts been or will be allocated. Nevertheless, the consumers deserve an explanation, at the very least.

Apart from PSALM’s humungous debts and contractual burdens, consumers must also prepare to absorb charges that will be borne out of integrating renewable energy (RE) into the power supply chain, which may come in the form of feed-in-tariff (FIT) – designed to be reflected as RE charge in the bills. Brace yourselves, because the charges may even get longer as the process moves headway.

Efficiencies with privatization

Given recent developments in the industry and with new players contributing their own ‘fumbles’ in the learning curve, questions emerge as to how the consumers or the sector will eventually benefit from restructuring, say in terms of efficiency gains? Some players articulated that “efficiency can be measured in many ways.” Evidently with privatization, the new owners can get away with the circuitous government bureaucracy in buying spare parts, fuel, etcetera; as had been the practice when the assets were still under NPC’s charge. Another would be cutting through the red tape in decision-making; and still another would be on having full plant dispatch which can set efficient level of operations, which in turn may result in lower cost per kilowatt hour of inputs.

“I agree that the private sector might have apparent advantage in faster procurement, faster decision making, but effecting efficiency of plant thru full dispatch is debatable,” one industry player argued though. As far as people efficiency is concerned, it was noted that what appears now is that NPC still has the pool of technically-qualified people to run the plants; hence, many of them were absorbed by the buyers of the privatized facilities.

“It is a testament that they have been able to run those plants through storms, through droughts. I have serious doubts that the plants are more efficient because they were taken out of NPC hands. The reality is, even with privatization, they are still being run by NPC personnel who were absorbed by the new owners,” another industry player noted.

Albeit the ‘no-argument scenario’ there is that “a new kind of professionalism is being instilled in the plants’ workforce,” and by and large, these power facilities are no longer at the mercy of politicians, hence they are now run better by their private owners.

Yet the thing that cannot be disregarded is, even in private hands, there are obstacles that just cannot be helped, such as what happened to Sual, the technical troubles at Masinloc and even Calaca plants. Only in the hands of the private sector, the mistakes being committed are expected to be corrected or remedied way faster than when these are under government control.

“The objective of privatization is for the government to get out of power generation and transmission, as these proprietary functions are best left to the private sector to fund, manage and operate. The big difference now is that unlike a government-run company where taxpayers’ money can be used to bail out of its inefficiencies, private companies do not have the same luxury for they stand to absorb the cost of their own mistakes. This is a great motivator for private players to perform efficiently,” Atty. Ocampo has pointed out.

A prime example was when the Sual plant ran out of coal, remedial procurement came fast in just a matter of days. If it is any word of assurance, San Miguel Energy Corporation president Ramon S. Ang later told media that his company (being Sual’s IPPA), already “entered into a long-term coal contract with an Indonesian supplier.” As far as the technical glitches and boiler tube leaks at the Calaca and Masinloc plants are concerned, buyers DMCI Holdings and American firm AES Corporation, respectively, were also quick in getting the plants back on-line in just a few days.

When government-run entities mess up and they squander taxpayers’ money due to inefficiencies, the Filipino consumers are also paying for it exorbitantly through the denial of basic social services such as education and health services because of the misspent financial resources.

“I believe that the private sector will try to utilize its capital as efficiently as possible to give it a maximum return. And that’s what is going to drive innovation, that’s what is going to drive efficiency and optimization of the assets,” Mr. Aboitiz opined.

For concessionaire NGCP, the “problem-fixing’ phase appears coming only after the conclusion of equity flipping concluded last March. It has been an open secret in the industry that the previous interest-holders were purportedly not “in sync” on strategies how to run the company; hence affecting some management decisions on key projects and programs which should have helped enhance operational efficiencies at the transmission network early on.

The departure of one of the transmission concessionaire’s equity holders is expected ending reported scuffles at management level, especially with the organizational restructuring undertaken. Some insiders gave hints at how NGCP was previously ran, when they commented: “it’s a marriage that never had its honeymoon. So the annulment was a necessary step.” The NGCP took over as TransCo concessionaire January 15 of last year. (To be continued) –MYRNA M. VELASCO, Manila Bulletin