Rising electricity bill and neoliberal reforms

First published by Bulatlat.com

There’s good news for its close to five million customers to start the New Year, said utility giant Manila Electric Power Co. (Meralco). It claimed that its January billing will go down by 30.5 centavos per kilowatt-hour (kWh) due to lower generation and transmission charges.

But Meralco did not say that the said reduction is just one side of the story. The other side is that consumers must brace for a new 26.9-centavo increase in Meralco’s distribution charge. On top of this, power users in Luzon and Visayas should also anticipate a hike of P3.38 and P4.71 per kWh, respectively in generation and transmission charges from the National Power Corp. (Napocor).

These increases continue the trend in soaring electricity rates in the country. Some blame it on regulation failure or even regulatory capture. But the deeper issue is the neoliberal restructuring of the power sector that has legitimized these onerous power rate hikes.

Rate hikes

Last December 14, the Energy Regulatory Commission (ERC) allowed Meralco to jack up its distribution charge from P1.2227 to P1.4917 per kWh. The rate hike was based on a formula under the commission’s so-called Performance-Based Regulation (PBR).

It was in fact the second round of increase in Meralco’s distribution charge through the PBR. In April last year, the ERC also let the company hike its rate from P1.0831 to P1.2227 per kWh. Thus, Meralco has raised its distribution charge by 40.86 centavos per kWh or by 37.7 percent in the last eight months.

This easily belies claim by Meralco that the 30.5-centavo drop in generation and transmission charges would offset the hike in its distribution rates. The net effect of its 2009 PBR rate adjustments and the January fall in generation and transmission charges is an increase of almost eight centavos per kWh.

Prior to the latest increase in its distribution charge, Meralco has also raised its metering charge by 9.45 centavos per kWh between December 2008 and December 2009. (During the same period, the distribution charge also increased due to the first PBR. See Table 1)

And there seems no end in sight for the woes of hapless power consumers.

Remember that Napocor too has pending applications before the ERC for rate increases. The most recent, filed last December 28, seeks to hike generation and transmission charges by P1.7033 per kWh in Luzon; P1.3545 in the Visayas; and 22.54 centavos in Mindanao. These applications fall under the so-called 14th Incremental Currency Exchange Rate Adjustment (ICERA) and 15th Generation Rate Adjustment Mechanism (GRAM).

The ERC has yet to decide on two previous ICERA (12th and 13th) and GRAM (13th and 14th) applications by Napocor. If approved, customers in Luzon will bear a total increase of P3.3811 while those in the Visayas, P4.7134 per kWh. Mindanao consumers, on the other hand, will see a reduction of P1.0977 per kWh. Napocor explained that 90 percent of Mindanao’s power supply is generated by cheaper hydro-power, thus the rate reduction. (See Table 2)

GRAM and ICERA are cost recovery mechanisms to make the power sector attractive to private investors. GRAM replaced the notorious purchased power adjustment (PPA). But the principle remains the same. Consumers bear all the risks associated with the operation of power plants including fuel costs and foreign exchange fluctuations.

“Good utility performance”   

Some critics argue that unreasonable power rates are due to regulators’ failure to implement the law. They say that the ERC does not follow the intent of the Electric Power Industry Reform Act (Epira) of 2001. There is a need to clarify this.

The problem is Epira itself. While couched with pro-consumer intensions, the law in reality aims to create the most conducive environment for private capital.

Epira created the ERC as an independent, quasi-judicial body. Among its key functions is to determine the distribution rates of utilities like Meralco. As to the methodology, Epira lets ERC to use any form as long as it is internationally accepted. As to the rates, the law said it must allow Meralco and others to “operate viably”. (Epira, Chapter IV Section 43 – f)

Based on this provision, the ERC is using the PBR to determine the rates that Meralco and others can charge. The PBR was chosen by design. Consistent with the neoliberal agenda of Epira, it makes rates setting more market-based and reduces regulatory oversight. It adheres to the principle that “good utility performance should lead to higher profits”. (Biewald et al: 1997)

But this raises a fundamental question. What exactly is good utility performance? For a private company, good performance means high profits. For consumers, it means reliable service at the most reasonable rates. The law, however, is clear. The bottom line is the commercial viability of private utilities.

Thus, despite unresolved consumer concerns on the reasonable-ness of power rates, Meralco still got away with another rate hike. Onerous charges and taxes like the value added tax (VAT) including on unused electricity remain. Consumers continue to shoulder the costs of Napocor’s onerous contracts with independent power producers (IPPs).

Milking customers dry

Worse, Meralco does not even need a rate hike to remain viable or profitable. It has been earning way beyond what it should at the expense of consumers. From 1987 to 2007, for instance, Meralco earned a total return of P39.28 billion. Its total paid-up capital during the period meanwhile was only P441.6 million. (Nasecore: 2009)

What do these figures mean? They show that from 1987 to 2007, Meralco’s annual rate of return was a whopping 423 percent. It is scandalous to say the least. The acceptable level of rate of return is only 12 percent for public utilities. (Supreme Court: 2002)

Meralco owners have been milking customers dry throughout the years. Yet customers are today forced to shell out more money not only to finance Meralco’s operations. They are also asked to pay more so Meralco owners can increase their already outrageous profits.

Further, Epira institutionalized private monopoly control over the power sector. Meralco, aside from its captured market in distribution, also has its own IPPs. This allowed the firm to overcharge as much as P49.56 billion from June 2003 to June 2006. The amount represents the difference between the generation rates of Napocor IPPs and Meralco IPPs. (Nasecore: 2009)

Indeed, its customers have not only long paid whatever increases in rates that Meralco is asking for. It is Meralco that owes consumers. Until today, it has not even completed the past refunds ordered by the Supreme Court and ERC worth more than P34.12 billion.

Towards lower power cost

The power sector certainly needs restructuring. But such reforms must be within the framework of nationalization and effective people’s control. To pave the way for these reforms, Epira must be repealed.

In the immediate, the courts and ERC must be pressured to issue a restraining order on approved rate hikes. Pending petitions should also be strongly opposed. Current rate setting methodology must be reviewed to capture the more important public interest. To do this, the review process must be democratic and participatory.

At the same time, concrete measures to bring down the cost of electricity must be implemented now. These include some policy proposals long pushed by consumers and advocacy groups, to wit:

(1)   Scrap the VAT on power and oil;

(2)   Refund to customers all illegal collections by Meralco, other distribution utilities, and Napocor;

(3)   Stop the imposition of questionable charges like system loss, which is partly associated with a firm’s inefficiency;

(4)   Cancel onerous IPP contracts to liberate consumers from paying unused electricity;

(5)   Credible and thorough audit of financial records of Napocor, Meralco, and other players in the power sector (i.e. COA plus a parallel audit by consumer groups, independent experts, etc)

References:

  1. Nasecore, FOVA, FOLVA vs. Meralco, Reply to Meralco’s Comment (With Urgent Prayer To Grant Restraining or Status Quo Order, Court of Appeals, Special Fourteenth Division, CA-GR SP No. 108663, September 22, 2009
  2. Republic vs. Manila Electric Co., GR No. 141314, 391 SCRA 700, 708, November 15, 2002
  3. Beiwald, Bruce et al (1997). “Performance-Based Regulation in a Restructured Electricity Industry”, Prepared for the National Association of Regulatory Utility Commissioners, Cambridge, MA, November 8, 1997
  4. “Plug power rate hike loophole”, Philippine Daily Inquirer, January 1, 2010, http://nasecore.org/pr_010210.php
  5. “Meralco income to rise due to 2-step gov’t favor”, Malaya, January 6, 2010, http://www.malaya.com.ph/01062010/busi1.html
  6. “Napocor seeking increase in generation rates nationwide”, GMANews.TV, January 8, 2010, http://www.gmanews.tv/story/181077/napocor-seeking-increase-in-generation-rates-nationwide
  7. “Meralco cuts rates”, The Philippine Star, January 9, 2010, http://www.philstar.com/Article.aspx?articleId=539261&publicationSubCategoryId=63
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