Gov’t not helpless on power rate

Energy Secretary Jericho Petilla says he is confident there will be no summer power blackouts. I can understand why Petilla must say that but I hope he is intelligent enough not to believe it. Given the uncertainty in the power industry today, the opposite has a greater chance of happening.

The way I see it, we are lucky this ruckus over the surge in Meralco rates happened at the time it did… the tail end of the Malampaya maintenance shutdown. Other power plants on forced or scheduled shutdowns also got back on line quickly enough to ease demand pressure on the Wholesale Electricity Spot Market (WESM).

But if the legal challenge before the Supreme Court drags to March or even April, we could have real problems. We have very thin reserves in the Luzon Grid even in the best of times. With the oil fired peaking plants unable or unwilling to buy diesel because Meralco has not fully paid them the TROed bills, blackouts are inevitable if a big power plant like Sual conks out.

It is encouraging that Petilla is trying to be really creative in tapping the power capacities of private companies like SM and Robinsons who have fairly large back-up generators. Every little bit counts and every megawatt the big users don’t take out from the system is a megawatt contributed to the cause of keeping the Grid going.

Petilla calls his plan the Interruptible Load Program (ILP). As he explained it, the ILP will ease the price pressure at WESM, the country’s trading floor for electricity. Petilla said this is going to be implemented only when supply is tight and prices at the spot market are too high. With a lot of hope and prayers, this band-aid measure will probably work.

But there is a need for government to examine all factors that contribute to high power rates. For one, has government aggravated the power rate problem by using the system as an easy way to collect taxes? How much does government get from every kwh we buy?

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I asked Meralco that question. They told me they don’t have a single figure but “around 10 percent (or approx P1/kWh) is VAT & Local Franchise tax, That can be added to the gross proceeds from Malampaya of P1.60/kWh, though that would still not include things like import duties, real property taxes, etc. Government take includes royalties, income tax of SPEX, LGU share, etc.”

So I suppose we can say that government take is approximately (or at least) P3/kwh for Meralco consumers.

According to Sen. Sergio Osmena III, in a speech delivered two years ago, “the Philippines collects a royalty of about P1.46 per kwh on our own natural gas. To import would only cost 24 centavos in duties and taxes.”

Our government also collects royalty on local production of geothermal and coal. All those are in addition to VAT, customs duties on the imported fuel and other imposts.

An Australian consultant commissioned by Meralco two years ago reported that “several neighboring countries (Thailand, Indonesia, Malaysia, Korea, Taiwan) have average tariffs that are much lower than Meralco’s. These lower tariffs result from Government policies to provide subsidies of up to (and in excess of) 50 percent to consumers. These countries provide subsidies in the form of frozen tariffs, sale of fuel to utilities at below market rates and utility-losses shouldered by the government…

“Several (but not all) other countries with lower tariffs provide fuel to their utilities at below-market rates. Although the remaining 20 percent of energy is provided by renewables, the all-in cost of these sources is not low.”

Indonesia and Malaysia are finding out now that subsidies for power and fuel are unsustainable. In our case, we have a confused view. We say our policy is market based. But there are big exceptions.

For example, power is cheaper in Clark for some favored locators. That’s because government recognizes that power cost really matters in attracting manufacturing investors. That’s why even a company in tire manufacturing, a power intensive industry, had been attracted to Clark. The subsidy was granted by then President Arroyo through an executive order.

For a time, the semiconductor exporters enjoyed a preferential power rate too. PEZA also provides a special rate for locators in the zones it manages itself. I understand the subsidy for the Clark locators is costing the government an amount greater than the subsidy now being given to MRT 3 riders.

Of course the subsidy to the foreign manufacturers can be justified as needed for the jobs being created. But does it mean government just granted the power rate subsidy because it has given up on making our power rates competitive?

Indeed, we are doing the exact opposite of what our subsidizing neighbors are doing. The taxes on power consumers are rather heavy. This policy must be reviewed. Government must contribute something to the solution of this problem too.

A reduction in the government take is a quick way of bringing down power rates and increasing our business competitiveness. There may be a decrease in tax collections in the short term but increased taxes can be collected once investors previously turned off by our uncompetitive power rates come back.

Giving up some of its collections will also be painful enough to give government a strong incentive to ensure EPIRA works in a way that would bring down power rates. Perhaps in time power rates will get low enough to resume the imposts. I wonder if that’s now in the realm of impossible dreams.

Making EPIRA work as promised is key. We must find out what caused that “black swan event” with reference to the confluence of events leading to the astronomic increase in Meralco’s power rate last month. Power industry voices are suggesting what happened was highly unusual and not likely to happen again soon. I am not too sure of that.

So, what happened to the free market forces supposedly unleashed by EPIRA? The questions in the public mind were well enunciated by a UP professor of economics at the Virata School of Business in an e-group I monitored.

“First, EPIRA has not lowered the price of electricity as promised. Second, privatization of the NPC’s power plants was cornered by three local business groups with over 50 per cent share of the Luzon Grid.”

We don’t need to prove collusion because it seems the structure of the industry resulting from EPIRA already makes it a virtual if not an actual reality. As the professor puts it, “the power setting is simply a change from a public monopoly to a private oligoploy (in generation); from a public monopoly to a private monopoly (in transmission), and status quo in the distribution sector where privately investor owned utilities (e.g. Meralco, Veco, Cepalco, Davao Light, etc.) still operate as monopolists in major urban areas through the geographic franchise arrangement. The promise of retail electricity competitive market has not come and it will not come if the retail market is defined as a minimum of 1 MW.”

Then again, EPIRA works, one industry spokesman told me. “Did you notice that the big industrial power consumers have been silent? That’s because they have signed supply contracts and are protected from aberrations like what happened. Nothing is stopping Meralco from covering their requirements 100 per cent too by similar supply contracts so they don’t have to deal with the uncertainties of WESM at all.”

Finally, it is clear that government must improve the quality of regulation by having better qualified regulators. The ERC is populated by lawyers when it needs engineers and utility economists who understand the complex world of the power industry.

Regulatory capture is clear. It seems that the only thing ERC ever does is to sign orders drafted by the utility companies because it does not have the staff that understands and can verify the often technical claims being made.

The local power industry must also be more upfront in how they are gaming the system. It is no secret the industry wrote EPIRA, if former Energy Secretary Mario Tiaoqui is to be believed. He told me his objections were mostly disregarded.

If EPIRA is to work as promised, the private power industry must realize that as utilities, their profit motivations must mesh well with the public interest or they risk a strong political backlash that will bring them back to square one.

Making our power rates more reasonable will also require more than just government reducing its total take in royalties and taxes. The power industry must do everything to bring about the market efficiency EPIRA promised and make sure consumers feel it in terms of lower rates.

The problem of government and the private power industry today is how to bring some amount of credibility in the way the power industry is managed and most importantly, how power rates are determined. Unless that happens, it will always be a mess. –Boo Chanco (The Philippine Star)