Wanted: true competition in power

The more things change, the more they stay the same. More than 20 years after we found ourselves hobbled by acute electric power shortages, and after various policy and investment interventions, power remains among the foremost drags on the nation’s development. Meralco’s announced P4.15 per kilowatt-hour rate increase in early December last year raised a firestorm about the continuing sorry state of the Philippine electric power sector. The country’s power costs are known to be the highest in developing Asia, and among the highest in the entire continent. Worse, many fear we are headed for a repeat of the 1992 power crisis, with no one seemingly able to provide a convincing picture of our power supply and demand outlook. And there seems so much confusion about what needs to be done.

Partly because few even seem to remember and/or understand exactly what had been done to address the crisis back then, let alone appreciate how we averted an even deeper crisis and longer-term difficulties, thanks to the decisive moves taken then.

For instance, some have resurrected, for the nth time, misplaced perceptions on the emergency powers granted by Congress to President Fidel V. Ramos to deal with the power crisis he had inherited in 1992. Typical is a recent column (not in the Inquirer) that states: “Ramos was granted emergency powers to deal with the power crisis in 1993. To solve it, he issued licenses to independent power producers (IPPs), giving them generous terms…. There was no public bidding. The IPPs’ contracts granted through the emergency powers of Ramos resulted in high power rates, with excessive profits going to the electricity provider and kickbacks paid to the powers that be.…” Such inaccurate statements somehow keep coming up despite repeated clarifications made in the past (indeed, every time recurrent issues in electric power gained public attention).

To set the record straight yet again, the much-criticized IPP contracts had nothing to do with Ramos’ emergency (one-year) powers granted in 1993 under Republic Act No. 7648 or the Electric Power Crisis Act (Epca). He used those powers merely to procure emergency (and inevitably high-cost) diesel-fired generators to provide immediate relief in the face of the acute power shortage at the time—machines that have since been long decommissioned. For transparency, Congress imposed disclosure and publication requirements in the exercise of such authority, all of which Ramos strictly complied with. On top of that, Ramos submitted quarterly reports on the law’s implementation to Congress, as required by the law.

Contrary to the columnist’s faulty recollection, the IPP contracts blamed for the subsequent high cost of power were awarded not under the Epca, but under terms of the Build-Operate-Transfer (BOT) Law and Extended BOT Law. As such, all were subjected to a rigorous evaluation process prescribed by these laws, involving the National Power Corp.; the Departments of Energy, Finance, Environment and Natural Resources, Trade and Industry; the National Economic and Development Authority (Neda); Bangko Sentral ng Pilipinas; and the sanggunian of concerned local government units, with final approval from the independent Energy Regulatory Board. As head of Neda then, I can attest to the due diligence that each of those IPP contracts went through—a process so diligent, in fact, that we were taken to task by certain critics for making the BOT evaluation process “too rigorous and time-consuming.”

A critical difference between then and now is that we now have the Electric Power Industry Reform Act of 2001 (Epira, or RA 9136) in place. Some see this landmark legislation as a boon, while others see it as a bane. In essence, Epira was intended to privatize the power industry, foster competition therein, and bring down electricity prices as end result. Twelve years since its enactment, only the first of the three has occurred, and the most important objective of cost reduction remains elusive. Was the law itself seriously flawed? Or has the problem been in government’s failure to implement it faithfully and properly?

The critical bridge between the first and the third goals is fostering competition in the power industry, and by all indications, this has not happened. For competition to be effective, there must not be effective control over either the generation or distribution sides of the power market. The law provided that no single entity should own more than 25 percent of the total generating capacity, theoretically allowing for at least four key players. But in the Luzon grid, the top two companies own 50 percent and 30 percent of total installed capacity, respectively. Meanwhile, Meralco controls 71 percent of the distribution capacity. This situation sharply contrasts with the competitive market mandated by Epira, and which government, through a properly functioning Energy Regulatory Commission, should not have allowed to come about and persist—yet it did. Should anyone be surprised, then, that power costs have remained high? Should we lay the blame on Epira, or on those who implemented (or failed to implement) it?

In power, as in any other sector or industry, competition is what drives the economy to efficiency and improved consumer welfare, a fundamental principle taught in basic economics. Lack of it leads to excessive unearned profits accruing to a few at the expense of the many (that is, we consumers)—unless government is effective in regulating the industry to forestall those outcomes.

What we needed all along is the faithful implementation of an otherwise good law, and it’s time our energy regulators stepped up to the plate. –Cielito F. Habito, Philippine Daily Inquirer
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E-mail: cielito.habito@gmail.com

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