Is it the end for EPIRA?

Over the past two months or so, we have been hearing various stories, accusations and counter accusations from power industry participants on what or who really caused that atrocious hike in Meralco power rates. I don’t see closure coming around soon and that’s not good for the power industry.

Until we finally get a conclusive and credible explanation of what really happened, public perception of the power industry will remain suspicious at best. And if their image remains murky for a while longer, calls for a repeal of EPIRA may become irresistible.

I am not sure if the power generators, Meralco, NGCP all reciting the Act of Contrition will soften the hearts of people enough to get them a safe pass. Bad as government has been in managing our power requirements in the past, repealing a system that promised lower power rates but gave us record highs instead seem appealing.

More and more I am seeing comments in social media and in e-groups that echo the view of Tony Anciano, who used to run the planning service of the Ministry of Energy in the final years of his career at the PNOC/Petron. Tony’s view is more mainstream despite his past work in energy because he had been out of it for a couple of decades now.

“If you ask me,” Tony wrote on an e-group of mostly Ateneo alumni in retirement mode, “I’ll get rid of EPIRA and WESM and return to a situation where a government corporation controls a minimum of 50 percent, preferably more, of generating capacity.”

Tony explains why: “I used to play the local stock market and in this ‘free market’, players will manipulate a situation that could be manipulated. And our electricity industry is an oligopoly with some monopolistic features.

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“The electric power industry requires more government supervision and interference (as compared to the petroleum industry) because the bulk of the population and industries requires power and has little or no alternatives.”

Tony went on to cite the story of the petroleum industry I cited in an earlier column. “There is an idea and lesson to be learned from the way the Philippine government regulated the oil industry and played a role in it even after the tight controls under martial law were dismantled. We can mention the primary objectives of the PH government in the oil industry:

“1) to raise tax revenue for the financially strapped government during the 1970s to 1990s.

“2) to restrict the profitability of the entire oil industry to the barest tolerable levels so that the country would not bear the additional burden on top of heavy and massive petroleum taxes.

“Those were the two basic objectives of oil pricing policy for a long time and the government succeeded. Up to now those petroleum taxes still do their job though we do not need them as much.

“The government succeeded in the oil industry because it had a workable plan and the correct instrument to execute the plan. During the period when direct government price controls existed, there was no need for ingenuity. The government simply mandated the price levels of petroleum products.

“After martial law and when the deregulation craze emerged, the government maintained ownership of PNOC (Phil National Oil Co,) which owned Petron Corporation and Bataan Refining. Petron used to be the marketing arm of ESSO Philippines or Exxon and the organization was fit for market combat. The government used PETRON, which had more than 35 percent market share to regulate petroleum product prices.

“If we wanted lower oil prices, Petron lowered its price and Caltex, Shell and the others had to follow or lose market share. The government could dictate indirectly the profits of the oil companies because PNOC could see how Petron profits are affected…

“The same idea could have been or could be done in the power industry. The problem was NPC because it was chronically ‘bankrupt’. NPC did not have the credibility that PNOC and Petron had. But that was not the fault of NPC mainly. Sure, NPC could have been inefficient and even corrupt at times but that was not the main cause of its financial troubles and high power rates.

“NPC got into financial trouble because the Philippine government was in dire financial straits too and COULD NOT CAPITALIZE PROPERLY THE BIG NPC POWER PLANTS ON THE PIPELINE. NPC was forced to maximize BORROWINGS beyond the limits of propriety and interest rates at the time were quite high. NPC drowned in interest expense and was additionally hit by price controls imposed by the dictator to prevent inflaming public sentiment further.

“Philippine power rates since about year 2003 rose to become about the highest in Asia close to Japan due to:

“1) heavy taxation of power rates and primary energy sources i.e. a 12 percent VAT, a VAT on coal sales, and an effective 60 percent corporate income tax on geothermal steam, Malampaya natural gas, and local coal production.

“2) the absence of any government subsidy on top of heavy taxation. Our neighbors who produce and export oil subsidize power rates. Thailand subsidized power rates from their major natural gas discovery.

“3) a possibly inefficient as well as a possibly profiteering power industry.

“We have to cut those taxes in the power sector. I guess what I was saying is that EPIRA and WESM are the blunders. They are very costly blunders and the effort to correct their flaws would not be worth it. We will have similar future problems even if some corrections are made within the next three years.

“Our power industry is a combination of monopoly and oligopoly realities. There are less than a handful of sellers. One giant distributor is a monopoly and many cooperatives are ‘weak hands.’

“The blunder is installing a deregulated and ‘free market’ system on top of real monopolies and oligopolies. Who conceived of this system? This system was rearing its head as early as 1987 when it was proposed by ‘an economist’ and I do not know who his real boss was. It was so obvious that the WESM system would not work. It would be manipulated.

“How did this get through the law makers?

“We should go back to an NPC type system, a government corporation that controls 50 percent of all generating plants and reserves. The government corporation should control the reserve capacity. Private generating plants would be welcome and would be granted long-term contracts that would enable them to recover their investments with a reasonable return.”

Tony is of the view that the wave of privatizations in the energy sector was an ideological over indulgence. “NPC’s assets were sold off regardless of logic and proper strategic management. I found it so dysfunctional, damaging to the consumer, highly profitable for the monopolists and oligopolists and truly stupid.”

Hmmm… quite a swing to the other extreme, but believe me, if the power industry can’t behave themselves, that’s what will happen next. I am not sure something as drastic as the repeal of EPIRA is called for now. Better and intelligent regulation by the ERC and less greedy industry participants could make the theory behind EPIRA work.

But for now, the promise of a free market means nothing to consumers. And people are blaming EPIRA and calling for its repeal. Power generators or distributors should be very worried… better yet, behave and curb their natural capitalist tendency to be greedy… that includes the supposedly socialist State Grid of China. –Boo Chanco (The Philippine Star)