How power rates increased against the law’s intention

IN 2001, Congress passed a law intending to lower electricity rates. Today, there are pending proposals at the House of Representatives aimed at reviewing or repealing it.

Why? Because that law has increased consumers’ electricity bills and made Philippine power rates the highest in Asia.

High electricity is one of the reasons our country’s gets the least foreign direct investments among our economic peers in the Association of Southeast Asian Nations (Asean).

One of the proposals is from the Gabriela Women’s Party. They are calling for the review of Republic Act 9316 or the Electric Power Industry Reform Act (EPIRA) as it has apparently failed to protect end-users from the “greediness” of electricity firms.

In June, Gabriela Rep. Luzviminda Ilagan was quoted in news reports claiming that electricity distributor and retailer Manila Electric Company (Meralco) has billed its residential consumers more than double since EPIRA took effect. She cited data from a study by the consumer group People Opposed to Warrantless Electricity Rates (POWER) that Meralco’s average residential power rate charge of P4.87 per kilowatt hour (kWh) in 2001 increased to P10.35 per kWh in 2010.

Residential rates

POWER’s study also revealed that the Philippines has the highest electricity rates in Asia. Based on the data that POWER obtained from a research by International Energy Consultants, the average residential retail electricity tariff in the Philippines in 2010 was around US$0.18 per kilowatt hour or 18 USc/kWh.

Japan was next with around 17 USc/kWh. Singapore was third with around 16 USc/kWh, followed by Thailand with about 9 USc/kWh, Malaysia with about 7 USc/kwh, Indonesia with around 6 USc/kWh, and Vietnam with around 4 USc/kWh.

Industrial rates

The average industrial electricity rate in the Philippines in 2010 was around 13 USc/kWh. This was second to Singapore’s rate pegged at around 14 USc/kWh. Tokyo was third with a rate of 12 USc/kWh, followed by Thailand with about 9 USc/kWh, Malaysia with around 8 USc/kWh, S. Korea with around 7 USc/kWh, Vietnam with about 6 USc/kWh, and Indonesia with about 5 USc/kWh.

“We have submitted a resolution for the review of EPIRA. However, the committees to which these resolutions have been submitted have sat on these issues. Wala pa silang pinapatawag na committee hearing kaya hindi ito nate-take up [They haven’t convened a committee hearing so this hasn’t been taken up],” Ilagan told The Manila Times. “We have to review EPIRA to find out how efficient the implementation of the law has been.”

That’s the biggest question on EPIRA. For a decade now, this law has shaped the future of the electricity industry and it will spell its fate for the next many years. But why was EPIRA drafted, enacted and implemented in the first place? The answer can be traced to the decisions and programs in electricity generation undertaken by past administrations.

Problems in power generation

In 1986, the US$2.2-billion Bataan Nuclear Power plant capable of producing 650 megawatts was ready for commissioning. However, the Corazon Aquino government abolished the energy ministry that had powers over the electricity generation industry and decided, for safety and political reasons, not to operate the plant.

This was a huge mistake, opined University of the Philippines Economics Professor Gerardo P. Sicat. In his book Philippine Economic and Development Issues, he writes, “The government lost all the investments put into the project and it burdened the nation with no additional electric power capacity to carry it through during the next stage of expansion of the service. Old power plants began to fail and there was no replacement.”

This eventually resulted in nationwide power shortage in the early 1990s, when Fidel Ramos was president. Citing insufficient funding for the construction of power generation facilities, the Ramos administration enticed foreign and private investors into the electric power industry. This resulted in the entry of Independent Power Producers (IPPs), according to Dr. Giovanni Tapang, professor at the UP National Institute of Physics and convenor of POWER.

This solved the immediate problem of power shortages. But the contracts with IPPs that the government entered into had provisions requiring the National Power Corporation (NPC) to pay IPPs whether power generated was actually consumed or not, according to Tapang, who is also the national chairperson of the Samahan ng Nagtataguyod ng Agham at Teknolohiya para sa Sambayanan (AGHAM), an organization of Filipino scientists.

Moreover, even if NPC’s liabilities for the power plants were transferred to the Philippine Treasury, NPC’s financial problems continued. It was forced to postpone needed increases in electricity tariffs, hence its operational deficits continued to rise, requiring more foreign borrowings, according to Sicat.

To help pay for NPC’s foreign debt and recover other losses caused by the contracts with the IPPs, higher electricity tariffs were charged. And this, according to Tapang, was done by adding the so-called Power Purchased Adjustment (PPA) to electric bills.

In turn, the high electricity rates contributed to the low levels of investments in electricity-intensive industries. It was also “threatening the competitiveness of Philippine Industry in international trade,” wrote Sicat.

EPIRA’s promise: competition results in low rates

EPIRA was passed as an attempt to solve the problems of the power industry. The law aimed to restructure the industry and called for the privatization of the NPC.

Why restructure the industry and privatize the NPC?

Before, NPC was the sole owner and operator of both the generation and transmission sectors and the supplier of electricity to distribution utilities like Meralco. But over the years, the NPC incurred huge losses in its operations instead of earning revenues.

EPIRA restructured the power industry by unbundling the stages of operations of NPC. As a business and industry, the generation of electric power was separated from the business of transmiting electricity (transmission stage) to consumers. EPIRA also called for the entry of foreign investors for the efficient management of all sectors, according to Tapang.

Since NPC consisted of generating plants though not all were earning enough to maintain themselves, EPIRA called for their privatization. The economic theory behind this was that when these plants were broken up and became private firms, the competition among them would force them to provide electricity at less cost to consumers.

To further introduce competition in the electricity generation sector, the Wholesale Electricity Spot Market (WESM) was created. It is as an auction market where generating companies compete to sell electricity to distributors. EPIRA also created the Energy Regulation Commission (ERC) to regulate power rates and penalize generators engaging in anti-competitive behavior. It also created the National Transmission Company (TransCo), which would take over the transmission assets of NPC and would eventually be privatized.

On one hand, the government would benefit from the privatization of NPC as it would be able to “cut losses from loans and pass on the burden of power infrastructure investment to the private sector, while earning revenues from the sale,” according to POWER. On the other hand, the Power Sector Assets and Liabilities Management Corp. (PSALM) would manage the sale of NPC’s assets and restructure its debts.

Ten years under EPIRA

Ten years later, the NPC is still drowning in debts. According to POWER’s study, “the proceeds from privatization did not lessen NPC debt.” “PSALM shelled out $18 billion from 2001 to 2010 to settle [the] original $16.39 billion NPC obligations. Yet total NPC debts remain at $15.82 billion in 2010. This is nearly 33 percent of the [coutnry’s total] national debts over the years.”

As to EPIRA’s promise of bringing about competition among generators by having more players to bring down electricity rates, the law has apparently only led to the concentration of ownership of generation firms to few corporations.

Data from POWER’s study show that only three companies control 52 percent of the country’s power generation capacity. San Miguel Corporation holds 20 percent, First Gen/Lopez has 17 percent, and Aboitiz controls 15 percent.

The rates have also increased. POWER claims it is because EPIRA has integrated the IPPs and their contracts requiring the government to pay for power generated whether it is used or not into the industry.

Asked why the government agreed to such contractual obligations, ERC Executive Director Francis Saturnino Juan explains that “whenever a power plant is built, there will be a need already for a market for the produce. Otherwise, it would be hard for the investor to decide whether to push or not the investment to put up a plant if there is nothing that will at least form the basis for its calculation of whether or not it would be recovering its costs, earning a return.”

Our understanding of this reply is that no investor would have put any money into its power plant project if there were no guarantee that it would be able to recover the investment.

This is the reason why the investors “actually asked for these [provisions in the] contracts, and NPC entered into these contracts where it will purchase the generation of these plants to a certain guaranteed volume,” adds Juan.

In other words, as we in The Times understand what Juan had said, the investors insisted on these provisions and the government agreed because it was desperate to solve the power shortage problem.

Rate hikes and ERC’s cost recovery schemes

POWER also claims that the various cost recovery schemes instituted by ERC are also a reason why electricity rates have increased. The group is pointing to the Incremental Currency Exchange Rate Adjustment (ICERA) and Generation Rate Adjustment Mechanism (GRAM)— which ERC implemented early on—and the Automatic Generation Rate Adjustment (AGRA) now being implemented.

Juan says ICERA was instituted because some operating and maintenance expenses such as those for fuel are affected by foreign exchange fluctuations. So when dollar rates rise resulting in higher operating and maintenance costs, the NPC, distribution utilities, transmission firms, and the generating companies are allowed to recover currency differentials by billing consumers under the heading ICERA.

GRAM, on the other hand, is claimed to be the ERC’s replacement for the PPA (which was abolished in response to angry public clamor). Asked if this is true, Juan explained that before, PPA accounted for the adjustments in generation and transmission components and system loss. When EPIRA mandated the unbundling of rates, GRAM accounted for the adjustment in generation.

Early on, NPC and distribution utilities which source power from IPPs were allowed adjust their generation rates through GRAM. But since GRAM was a quarterly adjustment, distribution utilities had to wait for three months before they could file their petitions for adjustment. Then the petitions would undergo public hearings.

Juan said that since a lag was inherent with the GRAM, during this lag, distribution utilities were given an “ability under the guidelines issued by ERC to recover carrying charges.” “Parang interest ito,” opined Juan.

He said ERC saw that carrying charges can be eliminated if ERC would revert to earlier mechanisms similar to the PPA where adjustment would be on an automatic basis, but there would be a confirmation process at the end of a period. This is what is now called AGRA.

Under the AGRA recovery mechanism, foreign currency differentials, which were originally being recovered through ICERA, are immediately claimed in customer charges.

“AGRA is for the distribution utilities. [With] IPPs, they continue to adjust depending on their contracts with the NPC. NPC [used] to recover these adjustments before through GRAM and ICERA. And right now, we reverted to automatic adjustments for NPC for the same reason na may lag or delay sa recovery nila,” explains Juan. “So they petitioned the ERC to be allowed to implement a mechanism similar to AGRA. So there is already right now automatic adjustment also in the fuel and purchased power cost of NPC and also its forex.”

Juan clarifies that all the adjustments are subject to hearings so that ERC can verify if the adjustments are really needed.

POWER, however, still objects to these cost recovery schemes. The group argues that through these mechanisms, NPC and distribution utilities have “passed on” currency fluctuations and contractual obligations to end-users. “Para bang lahat ng lugi nila ay pwede ng ipasa [It’s seems that now all their losses can be passed on to consumers,” Tapang said.

Juan admits that the ERC has been bombarded with criticisms. “We received a lot of criticisms that the rates continued to rise even if nagkaroon na ng EPIRA [even with the EPIRA],” he says.

Asked what are the possible factors why electricity rates have increased despite all the regulatory measures, Juan opines that one reason is the private investors’ cost of capital when they invest in the Philippines.

“If you are an investor investing in the Philippines…given all the risk involved sa pagnenegosyo [in doing business] in the Philippines, mas malaki ‘yung rate of return na gusto mo [you would want a higher rate of return],” says Juan. “Gusto mo na mas mataas ang presyo ng iyong kuryente [You would want the price of electricity to be higher].”

“If you approve the returns lower than what they are expecting or desire, pwede namang magkaroon ng underinvestment [then there could be an underinvestment] in the electricity supply and the distribution,” adds Juan. “Kasi [Because] that capital can be brought elsewhere where they may earn the return they want. ‘Yun ang pwedeng mangyari, na may underinvestment, may shortage sa supply. [That is what could happen, that there could be an underinvestment, that there will be a shortage of supply.]”

To turn what Juan told us into simple English, he in effect said: If ERC did not grant the investors the rate of return that they desire, then they would not invest. So there will be what he calls “an underinvestment” in the power industry. The result then be a power shortage.

Of course a power shortage means our economic growth and development will be curtailed.

New pass-on charges due to pre-Aquino GSIS?

Now here’s another bad news for power consumers.

The National Grid Corporation of the Philippines (NGCP), the country’s power transmission network’s private concessionaire composed of investors led by Henry Sy Jr. and the State Grid of China Corp., has recently filed a petition before the ERC asking for approval to increase its transmission charges, according to a report in The Philippine Star.

NGCP’s transmission assets were damaged by typhoons “Ondoy” and “Pepeng” and a bombing in Lanao del Norte, but these were not covered by the firm’s insurance policy. This means the new owners or concessionaires of the NGCP would have to spend their own money for the repairs.

The report said although then-government-run NGCP paid an insurance premium ranging from $5.57 million to $6.69 million, “the industrial all risks/submarine cable and sabotage and terrorism policy had a high deductible amount of $5 million in the aggregate and $2 million for each and every loss thereafter.” This means that NGCP’s losses have to be higher than the said amounts for the insurance company (or companies) to be held accountable.

But NGCP’s damage only amounted to P172.82 million—much less than $5 million. So it was indemnified for the Ondoy and Pepeng damage. The new NGCP owners paid for the rapairs and now want to recover its losses by increasing its transmission charges. Should ERC approve NGCP’s petition, consumers will have to pay P1.14 per kilowatt-hour for five years starting this year, the report said.

Mandated to insure all government property, the Government Service Insurance System (GSIS) reinsured NGCP with another insurance company “to lessen its exposure and risks,” according to the report.

The reinsurance of NGCP should have undergone biddings, but it is believed that the old GSIS management always renegotiated with the former reinsurer. “NGCP suspects that in the past, the bidding terms were being tailored-fit by the GSIS to favor the existing reinsurer.” The report also said that “suspicions have been raised that GSIS’s reinsurance program had been a source of graft and corruption in the past.” –CLAIRE MERCADO WRITER-RESEARCHER, Manila Times