Consumer issues, Fiscal issues

Toll hike, VAT, soaring utility rates in lieu of new taxes

SLEx toll will quadruple due to VAT and privatization of infrastructure development (Photo from ryucloud/photobucket.com)

President Noynoy Aquino has promised that his administration will try not to raise or impose new taxes to bridge the widening fiscal gap, which is expected to reach a record high P325 billion this year. But while not imposing new taxes (yet) to address its fiscal woes, the Aquino administration is still squeezing the people dry through unabated increases in prices and rates charged by privatized and deregulated utilities, and by getting the most out of the previous administration’s most onerous and anti-poor revenue-raising tool – the 12 percent value added tax (VAT).

By the way, did you know that the VAT, like privatization, was also a legacy of Noynoy’s late mother, President Cory Aquino? On July 25, 1987, Cory issued Executive Order (EO) No. 273, adopting the VAT. Cory issued the EO just before the 8th Congress opened, thus preempting the legislature’s constitutional power to impose taxes. The move was a ploy to swiftly implement the International Monetary Fund’s (IMF) prescription to impose the VAT and ensure that the bankrupt Cory administration can raise revenues for continued debt servicing.

Controversial tax

Today, the ever controversial tax is again in the headlines following the insistence of Aquino’s Bureau of Internal Revenue (BIR) chief to impose the regressive VAT on toll. If Noynoy will not intervene and order the Department of Finance (DOF) and BIR to suspend its implementation, fees charged by toll operators around the country will go up starting Monday (August 16) as the cash-strapped Aquino administration collect from motorists the VAT on toll roads.

The table below summarizes the current rates and new rates to be charged (12 percent increase, representing the VAT) by major toll roads in Luzon, based on a notice released by the Toll Regulatory Board (TRB).

Meanwhile, those using the South Luzon Expressway (SLEx) will feel the double whammy of VAT and toll hike that will raise the toll charged by its private operator, the South Luzon Tollway Corp. (SLTC). Motorists using the SLEx will see their toll almost quadruple mainly because of the new rates approved by the TRB last May.

Ironically, the principal author of the 2005 VAT law Republic Act (RA) 9337, Senator Ralph Recto, is strongly opposing the move arguing that VAT should not be imposed on a government service. Recto, who belongs to Aquino’s Liberal Party (LP) and presently chairs the Senate ways and means committee, suffered the VAT backlash and lost his reelection bid in the 2007 midterm elections, which explains his stance on the VAT on toll. Aside from Recto, another LP member, Sen. Franklin Drilon is also questioning the BIR plan because it is supposedly imposing a tax on tax. Business groups, in particular those operating in Southern Tagalog’s industrial zones, on the other hand, have warned of commodity price hikes while transport groups plying the SLEx threatened to increase fares.

Aquino’s dilemma

While some prominent LP members are against it, the Aquino administration’s dilemma is that backing down on the BIR plan to collect the unpopular VAT on toll will further limit its already scant revenue sources, which have been perennially drained by trade liberalization, automatic debt servicing, promotion of foreign investment and export production, and onerous privatization contracts, on top of tax evasion, smuggling, and fat paychecks of high officials of the bureaucracy.

Given the persistent external pressure from the IMF for so-called fiscal consolidation and to hike the VAT rate to 15 percent, it is unlikely that Aquino’s economic team – led by ardent VAT champions and neoliberals DOF Secretary Cesar Purisima (who as Arroyo’s DOF chief helped design and lobbied for RA 9337) and Socioeconomic Planning Secretary Cayetano Paderanga (who was among the UP economists that pushed for VAT and VAT rate hike) – will advise Aquino to heed the public clamor and stop the VAT on toll. But if Aquino will push through with the VAT on toll, he risks suffering a major political blow very early in his term because of the measure’s unpopularity and severe impact on the people. Such setback can be further compounded in case the Supreme Court (SC) decides favorably on petitions filed against the VAT on toll amid growing public opposition.

Nonetheless, the pending toll hikes, whether implemented or not, further highlight the lack of real reforms that matter to the people under the Aquino administration. That Aquino is trying to widen the scope of the onerous and anti-poor VAT is proof that prospects of better and more decent living conditions for social sectors neglected by past regimes remain dim, if not dimmer.

VAT on privatized, deregulated utilities

And even if the VAT on toll is withdrawn, the continued implementation of neoliberal policies will still oppress the poor and impoverish more people. Note for instance, that in the case of SLEx, the VAT imposition is just a small portion of the enormous increase in toll that stems from infrastructure privatization, the same policy that Aquino highlighted in his State of the Nation Address (Sona). With Aquino’s promotion of so-called Public-Private Partnerships (PPPs), we expect more similar increases in the future as these are built-in mechanisms to make privatization attractive to potential investors. A case in point is the proposed MRT fare hike, which the Aquino administration is seeking in order to pay for the guaranteed debts and profits of private investors that took part in MRT’s development and ease government’s fiscal burden.

Indeed, indications show that privatization and deregulation will not only continue but will even expand under the new government. Just barely one and a half months into the much hyped Aquino administration, we have already seen oil prices and electricity rates go up. Players in the deregulated oil industry have recently raised the pump prices of diesel, kerosene and gasoline by 50 centavos to P1 per liter, with the Department of Energy (DOE), just like in the past, warning of more oil price hikes in the coming months. In addition, the Manila Electric Co. (Meralco) has again increased its generation charge by 44 centavos per kilowatt-hour (kWh). More nationwide increases in the privatized and deregulated power industry, based on petitions pending before the Energy Regulatory Commission (ERC), should be expected by hapless households.

In the context of its fiscal woes, the Aquino administration welcomes these increases despite their harsh effect on consumers as they mean more VAT collections for the government. In fact, oil and electricity are the two largest sources of VAT revenues, increasing in direct proportion with rising pump prices and monthly electricity bills. From November 2005 (when RA 9337 was implemented) to December 2009, the VAT burden from oil and power has reached P239.94 billion, or more than 65.3 percent of the total revenues (P367.28 billion) generated by RA 9337.

Similarly, higher toll means higher VAT collection for the government. Under the old SLEx fees, for example, government’s VAT revenues will only range from P2.64 to P7.80 per vehicle per trip. But under the new rates approved by the TRB, the VAT burden of SLEx users will quadruple to P10.2 to P30.6. Overall, taxpayers will shoulder a tax burden of more than P12 billion annually from the VAT on toll.

No new taxes? It does not make a difference amid rising rates and prices due to deregulation and privatization, and continued imposition and expanded coverage of the 12 percent VAT. And lest we forget, Aquino’s promise of no new taxes is highly conditional on the results of its anti-smuggling and tax evasion drive which means the worst is yet to come.

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Consumer issues, Power industry, Privatization

More power rate hikes coming soon

meralco

Meralco has raised its generation charge for the fourth straight month and the seventh time since the start of the year (Photo from Reuters/www.daylife.com)

Sorry folks. Meralco (Manila Electric Co) “miscalculated” and had to increase our monthly bills again by 44 centavos per kilowatt-hour (kWh). (Read here) This is the fourth straight month that the giant utility has raised its generation charge and the seventh time since January. This also means that we will be paying Meralco P2.18 per kWh more this month than what we used to pay at the start of the year. If you are consuming 200 kWh a month, it means you will be paying about P236 more in your August billing than what you paid Meralco last January. The bad news is the power profiteers are just getting started.

Good news?

The good news is, according to Malacañang spokesperson Edwin Lacierda, high electricity rates are just temporary and may go down next month. No, the Aquino administration will not compel the Energy Regulatory Commission (ERC) to scrap the Automatic Adjustment of Generation Rates (AGRA) that has legitimized the monthly increases in Meralco’s generation charge. Lacierda, quoting Energy Secretary Jose Rene Almendras, said that they just expect the San Jose power plant to be completely rehabilitated by September. “Hopefully next month we will have lower prices of electricity,” Lacierda said. (Read here)

I do not know which “San Jose power plant” Lacierda is referring to. But I suppose it is the San Jose substation in Bulacan, which is not a power generation plant but a 2,400 Megavolt-Ampere (MVA) transmission facility. In May, the ERC approved the rehabilitation of the San Jose substation, which serves 40 percent of Metro Manila’s power needs, and ordered the replacement of its transformers. The ERC assured then that the rehabilitation “will have no immediate impact on the price of electricity charged to consumers”. (Read here)

Anyway, Lacierda and Almendras are blatantly misleading the people. Electricity rates will remain unreasonably high and will continue to increase in the coming months and years unless Congress will repeal Republic Act (RA) 9136 or the Electric Power Industry Reform Act (Epira) of 2001. (Read here) No less than President Noynoy Aquino has assured the people of high power rates in his State of the Nation Address (Sona), in which he lambasted the Arroyo administration for allowing the National Power Corp. (Napocor) to sell electricity at a loss. But Aquino’s argument on why the state-owned power firm went broke ignored the role of privatization as I’ve pointed out in a previous post. (Read here)

Nationwide increases

The problem of exorbitant and unabated power rate hikes is not confined to Metro Manila or Meralco’s franchise area. Using the Performance Based Regulation (PBR) scheme, a rate-setting methodology for distribution utilities that was made possible under Epira (Read here), the Visayan Electric Co (Veco), for example, has recently raised its distribution charge for residential customers by 3.41 percent. (Read here) Meralco, using the PBR methodology, has also increased its distribution charge by a total of 35 percent last year, on top of its increases in generation charge. (Read here)

But the rate increases of Meralco, Veco and other distribution utilities are just a portion of the bigger increases that households nationwide will have to face soon. The Power Sector Assets and Liabilities Management (Psalm) Corp., which Epira created to undertake the privatization of Napocor’s generation assets, has asked the ERC for rate increases (all in all, about P1.86 per kWh) to recoup supposed losses arising from stranded costs (read: guaranteed profits of independent power producers) as well as fat bonuses of Psalm officials. (Read here) The Philippine Electricity Market Corp. (PEMC), which is the governance arm of the Wholesale Electricity Spot Market (WESM), another Epira creation, has filed a petition for a 74-centavo per kWh hike in the spot market’s transaction fees. (Read here) The National Grid Corp. of the Philippines (NGCP), which took over the privatized transmission facilities, again as mandated by Epira, is seeking its own rate increase of 5 centavos per kWh in Mindanao. (Read here) Finally, Napocor has pending applications for rate increases of P3.38 per kWh in Luzon and P4.71 in the Visayas to recover adjustments in generation costs and currency fluctuations. (Read here)

Imagine how much our monthly electricity bill will cost if all these applications – on top of the automatic monthly increases such as Meralco’s generation charge – were approved by the ERC.

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Consumer issues, Privatization

MRT fare hike: subsidies for transnational banks and big comprador profits

MRT fare hike, privatization - ito ba ang daang matuwid ni Noynoy? (Photo from pictures.wayn.com)

In his first SONA, Aquino identified the case of the metro rail transit (MRT) as among the questionable and disadvantageous projects of the Arroyo administration:

“The government tried again to buy the people’s love. The operator was forced to keep the rates low. In effect, the guarantee given to the operator that he will still be able to recoup his investment was not fulfilled. Because of this, Land Bank and the Development Bank of the Philippines were ordered to purchase the MRT. The money of the people was used in exchange for an operation that was losing money”. (Read full SONA text here)

As if on cue, the Department of Transportation and Communication (DOTC) consequently announced that MRT commuters must brace for a fare hike due to rising operation and maintenance cost as well as government subsidies. (Read here)

(A very similar case is the National Power Corp. [Napocor]. The Department of Energy [DOE] disclosed after the SONA that power rates will increase to recover so-called stranded debts of the state power firm. Read salient points and issues here)

Aquino’s transportation officials justified the planned fare hike by pointing out that all Filipino taxpayers are unfairly subsidizing Metro Manila residents who are the regular commuters of the MRT. They claimed that the real cost of transporting a passenger from North Avenue to Taft Avenue can reach as much as P60. But actual maximum fare, in the last seven years, has remained at only P15. (Read here)

But the truth is taxpayers subsidize not the actual transportation cost of the ordinary worker, office employee or student who regularly uses the MRT. Profits are being squeezed from taxpayers and commuters for guaranteed debt payments and profits of the transnational banks and big comprador firms that undertook the MRT project through Public-Private Partnership (PPP) – yes, the same type of development initiative that Aquino said his administration will pursue.

Taxpayers are subsidizing the debts incurred by the private consortium that built the MRT – the Metro Rail Transit Corp. (MRTC).  Aside from guaranteeing debt payments, the national government also guaranteed a 15 percent return on investment per annum for MRTC under their 25-year build-lease-transfer (BLT) agreement in 1997 with the DOTC.

Thus the so-called “subsidies” go the Export-Import Bank of Japan, Sumitomo Bank, and other Japanese and Czech banks, as well as some local banks like the Bank of Philippine Islands (BPI). What made the deal more financially onerous was that the banks that provided the loan of US$462.5 million in 1998 and the private firms that constructed the MRT have the same owners.

MRTC included the Ayala Land Inc., owned by the Ayala family which also controls the BPI. MRTC also entered into an Engineering, Construction, and Procurement (EPC) Contract with the Sumitomo Corporation, owned by the same Japanese investors that control Sumitomo Bank.

Foreign lenders (Japan provided US$278.5 million while the Czech Republic, $88.4 million) also apparently “tied” their loans for the MRT, thus further maximizing profits for their exported capital (i.e. we pay for the principal plus interest for services and goods that come from the same country). Japanese Sumitomo Corporation used, as principal subcontractors, Japanese TNC Mitsubishi Heavy Industries for the civil works, track works, and electro-mechanical work, and Czech Republic-based CKD Dopravini for the manufacturing, testing, and commissioning of the rail vehicles.

In fact, the BLT was so financially burdensome that government started missing paying debts on time. Consequently, the government through the Land Bank of the Philippines (LBP) and the Development Bank of the Philippines (DBP) initiated an $800-million buyout of the MRTC to acquire 76-percent equity last year. The move was meant to terminate the guaranteed 15 percent return, that was supposed to last until 2025 (end of the BLT deal), by providing a lump-sum payment.

But in the end, Filipinos through our taxes will still shoulder this lump-sum payment. If the MRT fares will be increased, taxpayers will be paying for this exorbitantly priced PPP project twice over.

Meanwhile, aside from cashing in on the guaranteed profits and the lump-sum payment, MRTC firms have been raking additional profits from other investments made more lucrative by the MRT. The Ayalas, for instance, have built the TriNoma Mall in 2007, which is directly linked to MRT’s North Avenue station. The MRT also made the Ayala Center commercial complex in Makati City more accessible and thus more profitable.

Fil-Estate, which is also part of the MRTC consortium, on the other hand, had as early 2000 secured a P1.4-billion investment from the Bank of America to develop high-rise real estate projects along the MRT system.

Worse, the MRT fare hike is apparently just a prelude to its privatization (as usual to make it attractive to investors). Aquino’s officials said they are already talking to prospective buyers. And they plan to privatize not only the MRT along Edsa but the entire railway system in the country. (Read here)

And consider how a privatized and deregulated power industry has resulted in skyrocketing electricity costs – a major input in MRT/railway operation. If you want to just take the bus or jeepney because you can no longer afford a train ride, you will still have to contend with increasing fares because the oil industry is deregulated.

Hindi naman tumataas ang sahod mo. O swerte ka nga kung may trabaho. Ito na ba ang matuwid na daan ni Noynoy?

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Consumer issues, Power industry, Privatization, SONA 2010, Water crisis

SONA 2010: Water, power crises

Aquino just inherited from previous administrations the country’s water and power insecurity but the challenge is will he overhaul the existing policy framework that has allowed the privatization and deregulation of the country’s utility sectors and created the mess we are in right now? (Photo from Reuters/Cheryl Ravelo)

First published by the Philippine Online Chronicles

Part 1

President Benigno Aquino III will hold his first State of the Nation Address (SONA) on Monday, July 26 amid a water shortage engulfing a substantial portion of Metro Manila, with long queues for rationed water becoming a common sight.

Meanwhile, about two weeks ago, around the same time when the Manila Electric Co. (Meralco) announced another rate hike, a brownout hit the President’s residence at Times Street in Quezon City which he blamed for arriving late for an appointment. Rotating brownouts have been just as frequent as power rate hikes in the past couple of months.

“Wala nang kuryente, wala pang tubig, ang taas pa ng singil” is the common man’s complaint.

The double whammy of water and power crises, of supply disruptions and skyrocketing rates is being felt not only in the metropolis but nationwide. Government officials and private utilities have pinned the blame squarely on force ma jeure like the prolonged dry spell and slow dam replenishment due to lack of enough rains.

However, there are obvious policy issues that the latest episodes in water and power supply insecurity have brought to the fore. Considering their immediate and long-term effects on the people’s welfare and overall economic development, Aquino is expected by the public and policy makers to outline in his SONA how the administration plans to address these recurring problems.

Magnitude of the water shortage

According to the latest update from the Department of Public Works and Highways (DPWH), 344 barangays (villages) with close to 3 million people in the service area of Maynilad Water Services Inc. are already affected by the water shortage. The number is almost half (49 percent) of the entire West Zone concession area of Maynilad, which together with its East Zone counterpart Manila Water Co. Inc., took over the water distribution function of the privatized Metropolitan Waterworks and Sewerage System (MWSS) in 1997.

Maynilad chief operating officer Herbert Consunji disclosed that as of July 20, at least 18 percent (equivalent to some 450,000 people) of those affected by the water shortage in the West Zone can be considered as “severely affected”. This means that these areas have available water supply for only up to six hours at most or none at all.

In an earlier advisory posted on its website, Maynilad said that among those severely affected are 22 barangays in Quezon City, 13 barangays in Caloocan City, 4 barangays in Malabon, 4 barangays in Valenzuela City, 2 barangays in Las Pinas City, and 1 barangay in Navotas. The Pangilinan-Consunji-controlled water utility has already deployed 28 tankers to ration water in these areas. Reports say that residents are forced to line up as early as 5 AM and wait for Maynilad’s tankers.

In the service area of Manila Water, a smaller 21 percent is being affected by the water shortage, according to DPWH Secretary Rogelio Singson as quoted in a news report. The Ayala-led water firm in a separate report admitted that there is already a gradual reduction in water pressure in elevated within its concession area such as in parts of Pasig, Marikina, Cainta, Rodriguez, Taguig, and San Mateo in Rizal province. Manila Water may also have to resort to water rationing if the water level in Angat Dam – where they and Maynilad get 97 percent of their water supply for the domestic needs of Metro Manila and parts of Cavite and Rizal – will not improve in the coming months.

Blame it on the (lack of) rain

Due to a depleted water level because of the El Niño phenomenon, the private water concessionaires said that their water allocation from Angat Dam has substantially declined. DPWH reported that at present, Maynilad is actually receiving 1,800 million liters per day from Angat Dam, down from its normal level of 2,400 million liters per day (a 33.3 percent reduction). Manila Water, on the other hand, has seen its allocation dwindle to 1,245 million liters per day from 1,600 million liters per day, or a 28.5 percent reduction.

Latest update from the MWSS on the water level in Angat Dam pegged it at

Among the many promises of water privatization was 24/7 access to water for all (Photo from Raffy Lerma)

158.2 meters above sea level (masl) as of July 21. A day before that, it dropped to 157.56 masl, lower than its historic low of 158.15 masl in September 1998 which was also an El Niño year. Authorities said that recent typhoons “Basyang” and “Caloy” did not substantially replenish Angat Dam, adding up a combined 27 centimeters only. The critical level of Angat Dam is pegged at 180 masl, which was breached in April during the height of the latest El Niño. Without heavy rains, the dam’s water is expected to further recede to 147 masl by September. At 120 masl, the dam could no longer provide water for Metro Manila’s domestic consumption.

Rotating brownouts, power rate hikes

The lack of rains and depleting water level in the country’s major dams because of the El Niño have also been blamed for the power crisis – characterized by rotating brownouts and spikes in electricity rates – that has hit the country this year. In March, the power supply deficits reached record highs with Luzon experiencing a shortfall of 641 megawatts (MW) and Mindanao, 700 MW, according to the National Grid Corporation of the Philippines (NGCP).

Meralco had to implement a 90-minute power supply disruption throughout the day because of the supposed deficiency in available electricity. In Mindanao, blackouts have lasted by up to 12 hours a day, a situation that began as early as February. The southern island heavily depends on hydro power for its electricity needs, with hydropower plants accounting for 53.1 percent of Mindanao’s generating capacity, according to data from the Mindanao Economic Development Council (MEDCO).

But low water levels derailed the operation of these power plants. The 727-MW Agus and 255-MW Pulangi hydroelectric power plants, for instance, experienced an 80 and 90 percent reduction in capacity, respectively because of the prolonged drought. The water level in Lake Lanao, source for most of the hydropower plants in Mindanao, has breached its critical level of 699.15 meters in early March and dropped to 699.08 meters.

In addition, reduced power supply due to depleted dams amid high electricity consumption because of the hot temperature brought about by El Niño has also pushed up power rates throughout the country. Meralco, for example, has increased its rates several times in the past six months, with the latest rate hike of 5.8 centavos per kilowatt-hour (kWh) announced in the first week of July, supposedly because of high generation charges at the Wholesale Electricity Spot Market (WESM). Overall, Meralco’s generation charge has already jumped by P1.84 per kWh between January and July.

Part 2

The double whammy of water and power crises – major issues that require urgent response and actions from President Benigno Aquino III

Policy issues

While the private companies and government agencies concerned have conveniently blamed natural phenomenon for the water and power crises, a deeper look will show that the conditions for the crises have been laid out and at the same time aggravated by wrong policies.

Both the water and power sectors have been deeply privatized, a process that was set off by Aquino’s mother, the late President Corazon Aquino in the late 1980s, accelerated by the Ramos and Estrada administrations in the 1990s, then continued and intensified by former President and now Pampanga Representative Gloria Macapagal-Arroyo.

Among the many promises made by the private water concessionaires and hyped by the then Ramos administration to justify the privatization of the MWSS was upgrading the decrepit water system infrastructure. Such upgrade intends to substantially reduce non-revenue water (NRW, or water lost due to leaks and pilferage) and help achieve universal and 24/7 water supply for an increasing number of households. In their original concession agreement with MWSS, the private water firms promised to provide universal access by 2001.

But until today, less than 60 percent of 790,000 households in Maynilad’s service area have 24-hour water service while only 74 percent receive water at 7-pound per square inch (PSI) or stronger pressure. More than half (53 percent) of water allocated to Maynilad continues to get wasted because of leaks and pilferage. Meanwhile, Manila Water, claims 99 percent water supply coverage in its service area but will not say how big the portion is with individual and direct household connection and those serviced by private water suppliers or “middlemen”. These areas served by a third party private contractor are often poor communities and most vulnerable to water supply disruption.

Amid water supply problems, Maynilad and Manila Water jacked up their rates tremendously, taking advantage of full-cost recovery mechanisms offered by privatization. Since MWSS was privatized, Maynilad’s basic charge has already soared by 449 percent and Manila Water, by 845 percent.

Private monopolies and manipulation

The power crisis that the country has been facing is also more man-made than natural. Plant shutdowns and supposed fuel constraints have combined with the impact of depleted dams on hydropower generation to substantially constrict available capacity throughout the islands. The implementation of Republic Act (RA) 9136 or the Electric Power Industry Reform Act (Epira) of 2001, which facilitated the privatization of power generation and transmission as well as deregulated the setting of power rates, has not addressed the country’s energy security issues.

Under Epira, hydro and other power plants have been privatized and sold to foreign and local firms (Photo from napocor.gov.ph)

Epira merely transferred the state monopoly on power to private companies, which has set the stage for various forms of possible abuses and manipulation. Cross-ownership, for instance, between distributors like Meralco and power producers made electricity rates more blurred than transparent.

Take the case of the WESM, which Epira created to supposedly allow freer competition among industry players but in fact has become a venue for speculation and rigging of prices. Among the so-called independent power producers (IPPs) trading in the WESM is First Gen Power Corp. that runs two natural gas-fired power plants (1,000-MW Sta. Rita and 500-MW San Lorenzo) and two hydropower plants (100-MW Pantabangan and 12-MW Masiway). The Lopez family, which controls 13.4 percent of Meralco, owns First Gen which aside from the WESM transactions also supplies 35.7 percent of Meralco’s power requirements.

Plant shutdowns

Furthermore, another Meralco owner, San Miguel Energy Corp. (SMEC) which has a 34-percent stake in the utility giant, also operates the biggest power plants in the country like the 620-MW Limay Combined Cycle Power Plant, the 1,000-MW Sual Coal-Fired Power Plant, and the 1,200-MW Ilijan Combined Cycle Power Plant. During the height of the El Niño, SMEC shut down, along with other privately operated plants, one unit of its Sual plant (with a capacity of 540 MW) due to “coal supply problems”. Its Limay plant also went offline for about three weeks early this year for “inspection purposes”.

The unscheduled outages in its power plants fueled talks that SMEC may have intentionally decommissioned the Sual and Limay to constrict power supply and jack up rates. After the SMEC plant shutdowns, First Gen followed suit with its own maintenance shutdown of its natural gas-fired Sta. Rita and San Lorenzo power plants in mid-February to early March.

The cost of generation has gone sky-high because of these plant shutdowns that artificially reduced available capacity. Meanwhile, power retailers like Meralco have been able to easily pass on the charges to unfortunate end-consumers. Under Epira, they are allowed to automatically adjust generation charges on a monthly basis through a cost recovery mechanism called Automatic Adjustment of Generation Rates (AGRA).

Is Noynoy up to the challenge?

Despite the recurring problems caused by its flawed policies on water and power, the previous Arroyo administration has continued the relentless march towards the neoliberal restructuring of these sectors. In fact, among what can be considered a midnight deal, is the April 28 bidding of the Angat Dam which was won by a South Korean power company. If this deal will be completed, consumers fear of more water supply woes even as the country’s energy needs are not necessarily guaranteed.

To be sure, President Aquino just inherited from previous administrations these problems besetting the country’s water and power security. The challenge, however, is will he overhaul the existing policy framework that has allowed the privatization and deregulation of the country’s utility sectors and created the mess we are in right now?

He will have the chance to do this in his first SONA on Monday when he outlines his vision for the country in the next six years. People who have been abused long enough by private water and power utilities, who suffered endless brownouts and lack of water amid skyrocketing monthly bills, will certainly be interested to listen.

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Consumer issues, Privatization, Water crisis

Water shortage in Metro is beyond El Niño

A depleted Angat Dam (photo by Raffy Lerma)

The water shortage in Metro Manila has been conveniently blamed by the private water concessionaires and authorities on everything else but themselves. They blamed it on El Niño for drying up the Angat Dam. They blamed it on “Basyang” for not pouring enough rains on Norzagaray, Bulacan to replenish the dam’s water (read news report here).

But how much of the current shortage can be blamed on natural phenomenon and how much should be attributed to policy errors like water privatization? True, the prolonged dry spell depleted water to precarious levels not only in Angat but in several major dams around the country. The impact on domestic water supply in Metro Manila, however, could have been tolerable or at least not as bad as it is now if not for structural issues related to the privatization of the Metropolitan Waterworks and Sewerage System (MWSS) almost 13 years ago.

All-time low

According to the latest report, Angat Dam’s water, which supplies 97 percent of the domestic water needs of some 14 million people in Metro Manila and parts of Cavite and Rizal, has already dropped to an alarming 157.59 meters as of Sunday (July 18). This is an all-time low, with the previous record pegged at 158.15 meters recorded during the 1998 El Niño episode. The critical level of Angat Dam is 180 meters.

One of the private companies that took over the water distribution function of MWSS, Maynilad Water Services Inc., has already resorted to rationing water to some areas in its concession area. (Maynilad serves the West Zone of the old MWSS service area, while Manila Water Co. Inc. serves the East Zone)  Maynilad said that its water allocation has declined by 30 percent, causing supply disruptions since last week.

But many of these areas in Maynilad’s west zone have long been experiencing water supply problems even before the current El Niño. “Unfortunately, the reduction in our water allocation has forced us to ration water in elevated areas, in areas with a lot of water loss usually due to illegal connections, and in areas that need further service upgrade,” a Maynilad official said, describing the areas currently experiencing water supply disruption.

A failed policy

Among the many promises made by the private water concessionaires and hyped by the then Ramos administration was upgrading the decrepit water system infrastructure. Such upgrade intends to substantially reduce non-revenue water (NRW, or water lost due to leaks and pilferage) and help achieve universal and 24/7 water supply for an increasing number of households. In their original concession agreement with MWSS, the private water firms promised to provide universal access by 2001.

But until today, less than 60 percent of 790,000 households in Maynilad’s service area have 24-hour water service while only 74 percent receive water at 7-pound per square inch (PSI) or stronger pressure (read here). More than half (53 percent) of water allocated to Maynilad continues to get wasted because of leaks and pilferage (read here). Meanwhile, Manila Water, claims 99 percent water supply coverage in its service area but will not say how big the portion is with individual and direct household connection and those serviced by private water suppliers or “middlemen”. These areas served by a third party private contractor are often poor communities and most vulnerable to water supply disruption.

There is no available data that break down NRW into leaks and pilferage. But the continued pervasiveness of illegal connections may be explained by skyrocketing water bills due to full-cost recovery under water privatization. Since MWSS was privatized, Maynilad’s basic charge has already soared by 449 percent and Manila Water, by 845 percent. Put that in a situation of worsening job scarcity, stagnant wages and income, and rapid increases in the overall cost of living and you will get the picture. (See Chart)

 

Reverse privatization

Maynilad and Manila Water must be held accountable for failing to provide, after more than a decade of privatization, reliable and universal access to water for the people – a situation that has just been aggravated today by the El Niño.

Certainly, there is a need to reverse water privatization, a neoliberal policy that has already been discredited worldwide. Public control must be asserted especially over water which is not a simple commodity or service that we can afford to leave in the hands of profit-seeking companies.

The Aquino administration can start this by suspending the sale of the Angat Dam itself, which has been auctioned to a Korean power company last April. The further privatization of water through the sale of Angat Dam will mean worse water shortages in the coming months and years, with or without an El Niño.

These issues must be included in the medium-term policy agenda of the new administration.

Stopgap measures

But in the meantime, as a stopgap measure, Malacañang, the private concessionaires, MWSS, National Water Resources Board (NWRB) and other concerned government agencies must come out with a detailed plan on how they will ensure that water for domestic use will be available. Due focus must be given to vulnerable communities as they tend to be displaced under a privatized water system by well-off customers and commercial establishments even during times of abundant water supply.

Authorities must also strictly monitor and regulate the wasteful use of water by golf courses, malls, hotels, private parks, car wash shops, and other commercial establishments. An 18-hole golf course, for instance, consumes an average of 2.3 million liters of water per day, according to the United Nations (UN), causing an enormous impact on water withdrawals, and competing with the basic water needs of as much as 115,000 people.

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Consumer issues, Power industry, Privatization

Meralco’s rate hikes and neoliberal power reform (2)

Continued from Part 1

The series of increases in generation charge that Meralco has implemented this year is made possible by deregulation under Epira. Meralco explains in its website that “the level of Generation Charge is adjusted on a monthly basis as prescribed by the ERC in its Order dated October 13, 2004 under ERC Case No. 2004-322 approving the ‘Guidelines for the Automatic Adjustment of Generation Rates  and System Loss Rates by Distribution Utilities or the AGRA’”.

Increasing rates

Section 43 (f) of Epira authorizes the ERC to “adopt alternative forms of internationally-accepted rate setting methodology that will ensure reasonable price of electricity and non-discriminatory rates”. Since power rates have been unbundled under Epira, the ERC have set different rate setting methodologies for generation, transmission, and distribution as well as system loss.

Distribution utilities (DUs) like Meralco use the Performance-Based Regulation (PBR) methodology for their distribution rates and the AGRA to reflect adjustments in generation costs charged by their suppliers. AGRA allows DUs to calculate new generation rates on the tenth day of each calendar month. In the last 12 months, generation rates “passed on” by Meralco have been on an upward trend jacking up the electricity bill of end-users. (See Chart)

According to the ERC, the AGRA was devised to ensure, among others, “transparent and reasonable prices of electric power service in a regime of free and fair competition and to achieve greater operational and economic efficiency”.

From PPA to AGRA

But is it fair and reasonable for end-consumers to shoulder the adjustments under the AGRA? The AGRA actually is the latest incarnation of the notorious, pre-Epira Purchased Power Adjustment (PPA). The PPA was an automatic cost recovery mechanism designed to attract private IPPs in power generation. Through the PPA, IPPs are assured that they will be paid for contracted capacity (even if they did not actually produce it) and they will be protected from the fluctuating costs of fuel and foreign exchange rate – all of which are shouldered by the consumers in the form of PPA.

When Epira’s unbundling of rates was implemented in May 2003, the PPA was incorporated in the generation rates charged by IPPs and passed on to end-consumers by Meralco and other DUs in the form of the Generation Rate Adjustment Mechanism (GRAM). The GRAM was a deferred recovery mechanism using a three-month test period. Napocor and DUs had to apply their quarterly GRAM before the ERC, which will review and approve it. Meralco and other DUs criticized the GRAM because it “does not represent the true cost of power for the period that it is being recovered” and that “it resulted to cash flow problems on the part of the DUs”.

Automatic adjustments

Thus, the ERC replaced the GRAM used by the DUs with the AGRA (Napocor, on the other hand, continues to use the GRAM). The main difference is the manner of recovery – the AGRA like the PPA is automatically calculated and collected by Meralco and other DUs every month (i.e. without public hearings conducted by the ERC like in the case of GRAM).

The only sort of “oversight” on AGRA that the ERC exercises is that “at least every six months, the ERC shall verify the recovery of Generation Costs by comparing the actual allowable costs incurred for the period with actual revenues for the same period generated by the generation rates and the portion of the Systems Loss Rates attributable to Generation Costs”.  But if the ERC fails to verify the generation rate within six months from the submission of calculation by a DU, “the rates shall be deemed final and confirmed”. This set up not only gives Meralco more opportunities to exploit consumers but even legitimizes such abuse.

Automatic cost recovery schemes such as AGRA are indispensable in a deregulated and privatized energy sector. They are the concrete operationalization of the neoliberal principle of making so-called market forces in a regime of presumed free and fair competition determine the cost of a commodity or service. But the problem is there is neither free nor fair competition in the power sector as giant private monopolies like Meralco have been further strengthened by Epira. Worse, a related sector that significantly affects the cost of power, the oil industry, is also deregulated and dominated by private monopolies thus doubling up the burden of consumers.

Market-based, pro-investment rates 

Aside from the AGRA, Meralco is also allowed to increase its distribution rates using another market-based mechanism – the PBR. Based on Epira’s Section 43 (f) provision, the ERC is using the PBR to determine the rates that Meralco and others can charge. The PBR, which hiked Meralco’s distribution charge by a total of 41 centavos per kWh in separate increases in April and December last year, was chosen by design.

Consistent with the neoliberal agenda of Epira, PBR makes rates setting more market-based and reduces regulatory oversight, abolishing the 8-12 percent return on rate base (RORB) that DUs were allowed to use in the past. Under an RORB formula, rates are pegged on “reasonable” return on the assets actually used in distributing electricity. The PBR, on the other hand, adheres to the principle that “good utility performance should lead to higher profits” and thus allows DUs to charge rates based on projected investments and operating expenses related to electricity distribution. Like the AGRA in the case of power generation, the PBR ensures the commercial viability of DUs by making the end-consumers shoulder the risks of future investments and operating costs of running the utility.

Revenue-neutral?

The generation charge is just one of the 20 unbundled items that can be found in a Meralco monthly bill. But it comprises 50-60 percent of what Meralco customers pay. (The distribution charge, on the other hand, accounts for 20-25 percent of the monthly bill, Meralco claims.) The utility giant repeatedly claims that as a pass through charge, generation rate is revenue-neutral or it does not add anything to Meralco’s income. This may be true, but it does not mean that certain owners of Meralco do not benefit from increased generation rates.

The Lopez family, which currently controls 13.4 percent of Meralco, for instance, also owns the IPP First Gen that in turn owns First Gas Power Corp., operator of the 1,000 megawatt (MW) Sta. Rita Power Plant, and the FGP Corp. which operates the 500-MW Sta. Lorenzo Power Plant. In May 2010, the two power plants accounted for a combined 35.7 percent of power supplied to Meralco.

Other power sources of Meralco include the Napocor, which accounted for 24.3 percent and the wholesale electricity spot market (WESM), 17.2 percent. WESM was created under Epira as a spot market for trading electricity in the Philippines. Among the power generators involved in the WESM are the Lopez-owned First Gen power plants and the First Gen Hydro Corp., which runs the 100-MW Pantabangan Hydroelectric Plant and the 12-MW Masiway hydro plant. In addition, the Lopez family also established the First Gen Energy Solutions to “sell, market, or aggregate electricity to end-users” in the WESM.

Private monopoly

Aside from not prohibiting owners of DUs to also operate generation plants, Epira also allowed the DUs themselves to own power generation plants. Meralco, for instance, is planning to get into power generation to remain “competitive” when open access is implemented next year. Open access, another restructuring under Epira that is expected to be operational as early as next year, allows customers using not less than 1 MW to choose their own suppliers.

Epira’s objective was to dismantle the monopoly of Napocor over the power industry. But by allowing cross-ownership in distribution and generation, it has simply transferred such monopoly control to a few private companies such as Meralco. Transmission is also now a private monopoly by a consortium that includes Enrique Razon’s Monte Oro.

A year after open access, Meralco’s supply contract with Napocor shall automatically lapse. Under Epira, DUs are allowed to source not more than 50 percent of its power needs from its bilateral contracts with affiliated IPPs but the cap does not cover contracts forged before Epira was passed (such as Meralco’s supply contracts with First Gen). Meanwhile, DUs are also mandated by Epira to purchase at least 10 percent of their power requirements from the WESM for the first five years of the spot market’s operation. Epira is not clear what will happen after this period. In other words, Meralco can purchase as much as 90-100 percent of its power needs from affiliated IPPs, making cost manipulation easier.

Spot market manipulation

But even if Meralco is required to buy more from the WESM, it still does not guarantee cheaper and more reasonable power rates. This is because even the spot market which is supposed to facilitate free competition among suppliers to bring down electricity costs has been used to manipulate and jack up electricity rates. In fact, the largest monthly increase in generation charge implemented by Meralco so far this year was by 93 centavos per kWh in April, which the utility giant blamed on the increase in the price of WESM.

The WESM has become a venue for speculation in the price of electricity to the detriment of consumers. At one point in February, when talks about limited power supply due to El Niño started to surface, the price of electricity in the spot market jumped to an unbelievably high P68 per kWh.

It was also observed that half the time in the first two months of the year, the maximum offered capacity in Luzon was lower than peak demand although reported dependable capacity was even higher than peak demand. During this period, some big plants like San Miguel Energy Corp.’s (SMEC) 540-MW Sual Unit 1 power plant stopped operation for one month due to “coal supply problems”. Another SMEC-owned power plant, the 620-MW Limay power plant, also went offline for about three weeks during the same period for “inspection purposes”. San Miguel also has a 34 percent stake in Meralco. The unscheduled outages in its power plants fueled talks that SMEC may have intentionally shut down the Sual and Limay plants to constrict power supply and jack up rates.  

At the mercy of “market forces”

Epira did not make power rates charged by Meralco and other DUs in the country cheaper, reasonable, or even transparent. By further strengthening the monopoly control of private utility giants like Meralco through privatization and deregulation of power rates, Epira made consumers even more vulnerable to abuse and exploitation.

The series of increases in the generation charge this year amid allegations of supply manipulation and speculation in the WESM and unresolved and fresh cases of Meralco’s overcharging has made the long-time practice by power companies of passing all the business risks associated with generation, transmission, and distribution to hapless consumers even more deplorable. For consumers, there is no other way out of this quagmire but to repeal Epira and reverse the privatization and deregulation of the power industry.

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Consumer issues, Power industry, Privatization

Meralco’s rate hikes and neoliberal power reform (1)

Photo from flickr.com/Maan Bernales

Consumers are again up in arms with the latest increase in electricity rates imposed by the Manila Electric Co. (Meralco). The utility giant called the rate hike “slight”. At 5.8 centavos per kilowatt-hour (kWh), maybe it will be hardly felt by Meralco’s 4.7 million customers in their August billing.

But the recent power rate increase is neither small nor negligible when viewed in the context of successive rate hikes in the previous months (amid rotating brownouts, no less). The past increases were also huge that some consumers complained of having to pay Meralco twice as much for the same consumption.

Long-held perception

The unabated rise in monthly power bills reinforced the long-held public perception that Meralco is greedy and abusive and government regulators are inutile. It also revived calls to immediately bring down power rates by scrapping the 12 percent value added tax (VAT) on electricity. Indeed, Meralco and the Energy Regulatory Commission (ERC) must be held to account and the VAT on power must be scrapped.

But these proposals are not enough. Power rates will remain exorbitant and power utilities like Meralco will continue to abuse consumers without reversing one of Gloria Arroyo’s most anti-people, anti-development, corruption-ridden legacies – the neoliberal privatization and deregulation of the energy sector through the Electric Power Industry Reform Act (Epira).

Soaring profits

Doubtless, Meralco is a bad company (for consumers, that is, but surely not for its stockholders). Its long list of illegal and over collection cases is a testament to its unscrupulous reputation. To be sure, the Energy Regulatory Commission (ERC) is an even worse regulator. Its habitual failure to check Meralco’s abusive practices, and in many cases even legitimizing them, demonstrates its bias for industry players.

Last year, Meralco’s net profits increased by a whopping 114 percent (from P2.8 billion in 2008 to P6 billion) mainly due to an ERC-approved 13.9-centavo per kilowatt-hour (kWh) hike in the distribution charge of the utility giant in April 2009. Then in December, the ERC approved another increase in Meralco’s distribution charge, this time by 26.9 centavos. The distribution charge of Meralco thus increased from P1.0831 per kWh at the start of 2009 to P1.2227 in April and then to P1.4917 in December.

Imagine how much profits Meralco will rake in this year once the December increase in distribution charge makes its presence felt in the company’s end-2010 balance sheet. But to give you an idea, Meralco disclosed to the Philippine Stock Exchange (PSE) that its first quarter 2010 profits grew by 135 percent compared to the same period in 2009 (from P0.8 billion to P2 billion).

Overcharging

One week approving after Meralco’s distribution rate hike in December, the regulatory body received the report of the Commission on Audit (COA) saying that Meralco illegally collected as much as P6.64 billion from its customers in 2004 (P4.7 billion) and 2007 (P1.93 billion). But instead of reconsidering its earlier decision allowing the utility to hike its distribution charge, the ERC sat on the COA report. It was only after more than one and a half months since receiving the audit body’s findings that the ERC started to hear the case.

Amid this fresh allegation of overcharging, the ERC still allowed Meralco to continuously jack up its rates to recover the supposed increases in the cost of power generation like the 5.8-centavo/kWh increase this month. Prior to this increase in generation charge, Meralco also raised it by 44 centavos in February, P1.83 in March and P1.20 in April. It eased by P1.26 in May that the utility attributed to lower price of power it buys from its suppliers. But it again jumped by 18 centavos in June.

Remember also that until today, Meralco has yet to fully implement the billions of pesos in refunds that it owes to consumers worth more than P34.12 billion, including the P30.2 billion in income taxes that Meralco illegally collected from 1994 to 2002.    

VAT on power

Meanwhile, the 12 percent value added tax (VAT) imposed on electricity continues to be an onerous burden for consumers. In the case of the power industry’s system loss, VAT is doubly onerous since it is a consumption tax charged on electricity that is not even consumed.

In 2009, the Bureau of Internal Revenue (BIR) collected P10.6 billion (preliminary data) in VAT from the power industry and electric cooperatives. Since electricity was included among VAT-able goods and services in November 2005, no thanks to Republic Act (RA) 9337, the government has already collected a total of more than P47.41 billion in VAT on power.

Latest national data on electricity sales is 2008, pegged at 49,206 gigawatt-hours (GWh). Meanwhile, VAT collection from the power sector during the same year was P16.05 billion. This means that on the average, VAT collection from the power sector in 2008 was about 32.6 centavos per kWh.

System loss in 2008 for the entire power industry was about 12.63 percent of total electricity sales. This means that on the average, hapless consumers shelled out more than P2 billion to pay for the VAT on electricity they never used.

(To be concluded)

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Consumer issues, Power industry, Privatization

Meralco’s insulting attempt at pa-pogi

Meralco bill (Image from ofwnow.com)

On Tuesday (March 9), the Manila Electric Co. (Meralco) asked the Energy Regulatory Commission (ERC) to allow it to “reduce” and spread over several months the whopping P1.83 per kilowatt-hour (kWh) hike in this month’s generation charge.

This is clearly a case of an insulting attempt at pa-pogi. Meralco wants to make it appear that consumers should have utang na loob for the firm’s voluntary offer to mitigate the impact of a drastic rate hike when in reality, the rate increase is unreasonable and Meralco has billions of unpaid debts to its close to 5 million customers.

Lower rate hike

In its petition, Meralco said that instead of a one-time hike of P1.8298 per kWh in generation charge for March, the ERC approve a rate hike of just P1.3852. The remaining balance of 44.46 centavos shall be collected from April to September to ease the impact of the increase on its customers.

Under the Electric Power Industry Reform Act (Epira) of 2001, distribution utilities like Meralco can implement automatic generation rate adjustment. This means that they can automatically pass on to consumers increases in the cost of power generation.

Overcharging probe

Meralco’s move comes amid an ongoing probe on fresh allegations that the power firm overcharged its customers. In a December 2009 report, but released to the public only last month by the ERC, the Commission on Audit (COA) accused Meralco of overcharging its customers by as much as P7.29 billion.

According to the COA report, Meralco illegally passed on to consumers operating expenses such as P2.36 billion worth of employees’ pensions and benefits. Consumers were also made to shoulder the costs of property and equipment that COA said are questionable including the construction of a P526.2-million creek and a P156-million parking lot.

The ERC is expected to conduct public hearings this month to determine if the power firm needs to refund or implement a rate reduction to offset its over collections. Or it can also uphold Meralco’s claim of innocence.

Propensity for abuse

But this is not the first time that Meralco has been accused of overcharging. In 2003,  the Supreme Court (SC) affirmed COA’s findings that Meralco illegally collected P30.2 billion from its customers from 1994 to 2002. COA discovered that Meralco included income taxes in its RORB (return on rate base) calculations resulting in bloated electricity bills for consumers. Until today, the power distributor has yet to fully comply with the refund order of the SC.

Far from the image of a considerate and responsible company it desperately hopes to portray, Meralco has shown its unmistakable propensity for abuse. Its pattern of overcollections in the past couple of years clearly attests to this. Aside from the P30.2 billion, Meralco was also ordered by the ERC to return P2.88 billion in meter deposits as well as P3.92 billion in over-recovery of currency adjustments.

Upholding public interest

The power distributor could not claim that its generation charge is simply a pass on cost. Remember that Meralco sources its electricity from its own independent power producers (IPPs) and sister firms. Even in the Wholesale Electricity Spot Market (WESM), which Meralco is citing for the sudden and drastic hike in this month’s generation charges, Meralco’s sister companies and IPPs allow Meralco to account for as much as 40 percent of generated capacity.

Thus, consumers have nothing to thank Meralco for. We do not owe Meralco a single centavo, and it is Meralco that still has to return billions of pesos it illegally collected from us.

In light of the latest COA report accusing Meralco of again overcharging the consumers, the ERC should disallow any petition for a rate hike by the power distributor. Allowing it to jack up its rates would mean continuing injustice to consumers.

An immediate rate reduction is also justifiable considering that the latest COA report questioned the cost assumptions that the ERC used in approving Meralco’s huge 41-centavo hike in its distribution rates last year, which  allowed Meralco to post a 114 percent increase in its 2009 profits.

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Agrarian reform, Consumer issues

Notes on sugar production, supply, and prices

Photo from The Philippine Star (Boy Santos)

Government’s move to import duty-free 150,000 metric tons (MT) of sugar to supposedly mitigate soaring local prices may cause more harm than good for end-consumers as it encourages further speculation in supply and prices in the domestic market.

The importation implies a situation of tight domestic supply and reliance on the world market where prices are skyrocketing. This provides more fertile ground for traders to exploit and further jack up local prices. However, what government does not mention is that while it is scrambling to import expensive sugar, it is also committed to export about 158,906 MT of sugar to the US this year under a quota system.

Thus the simple question is: Why will we need to import to stabilize local supply and prices and yet export sugar to the US instead of ensuring our own needs?

Historical sugar supply and demand in the Philippines clearly indicate that we do not face an actual deficit that could justify the price hikes. The only plausible explanation behind the sudden and steep hike in sugar prices is speculation and hoarding by traders who benefit most from high sugar prices.

Price increases

As of January 30, 2010, the prevailing retail price of refined sugar in Metro Manila is P54 per kilogram (kg) and brown (raw) sugar, P44, according to a price bulletin issued by the Bureau of Agricultural Statistics (BAS). For the whole January, the BAS has monitored five rounds of increase in sugar retail prices that hiked prices by a total of P8 per kg for refined and brown sugar.

The frequent and unusual price increases in sugar retail prices was observed to have started in the last week of November 2009. It has soared since then by P14 per kg for refined sugar and by P12 for brown sugar. Prior to that, the last monitored increase was in mid-October by P2 per kg. Before that, prices have remained steady for almost nine months (February to October). (See Table 1)

Table 1. Retail* price of sugar in Metro Manila, for the dates indicated (in P per kg)
Week monitored Refined sugar Brown (raw) sugar
February 7, 2009 36 30
October 15, 2009 38 30
November 21, 2009 40 32
November 24, 2009 42 34
December 8, 2009 44 34
December 22, 2009 45 34
January 5, 2010 46 36
January 9, 2010 48 38
January 12, 2010 50 40
January 19, 2010 52 44
January 30, 2010 54 44
* Monitored retail prices in Obrero Market, Guadalupe Market, Malabon Central Market, New Muntilupa Public Market, Susano Market, Pasay Public Market, Mutya ng Pasig Public Market, Quinta Public Market, Sangandaan Market and Trading Center, and Marikina Market Zone

As monitored and compiled by the Bureau of Agricultural Statistics (BAS)

Sugar Regulatory Administration (SRA) head Raphael Coscolluela said that retail prices are increasing due to increasing mill gate buying price, which in turn is supposedly based on world prices. Global prices are increasing, on the other hand, because of a shortage of 9-13 million tons in the world market. For the last two years, Coscolluela explained that sugar production worldwide, including in the Philippines, had gone down due to bad weather, low prices, and high cost of inputs.[1]

Data from the Food and Agriculture Organization (FAO) show that the annual sugar price index in 2009 rose to 257.3 from 181.6 in 2008 and 143 in 2007. It rose sharply in the latter part of last year, reaching 334 in December from a monthly price index of only 177.5 in January and 233.1 in June.

No justifiable reason

There is no justifiable reason for local sugar prices to increase due to increasing global prices. The Philippines is not highly dependent on imported sugar and in fact, is a net sugar exporter.

Available production and consumption (or withdrawals, which also include those for export) data on raw and refined sugar covering crop years 1987-88 to 2008-09, as compiled by the Philippine Sugar Millers Association (PSMA), show that in 22 of these years, deficit in supply and demand/withdrawals occurred seven times – in 1994-1995, and from crop years 1996-97 to 2001-02. But of these seven instances of “shortage”, five can be considered artificial.

Note that the country also continued to fulfill its export commitments to the US and other countries during these years of deficit. If exports to the US were deducted from the deficits, actual shortfall will only be in two crop years – 1998-99 and 1999-2000 – following a major and prolonged El Niño episode in 1997-98. (See Table 2)

Table 2. Summary of Philippine sugar (raw and refined) supply and demand balance, Crop years 1992-93 to 2009-10 (in MT)
Crop years Balance Exports Balance without US exports
Total US
1992-93 402,521 296,172 170,017 572,538
1993-94 53,010 303,525 143,186 196,196
1994-95 (137,519) 167,144 167,140 29,621
1995-96 17,523 256,101 256,102 273,625
1996-97 (126,840) 277,736 294,497 167,657
1997-98 (112,406) 222,304 222,304 109,898
1998-99 (191,669) 157,943 157,943 (33,726)
1999-00 (344,882) 101,999 101,999 (242,883)
2000-01 (86,856) 99,839 99,839 12,983
2001-02 (37,181) 84,283 84,283 47,102
2002-03 125,194 153,533 153,533 278,727
2003-04 315,385 213,053 213,053 528,438
2004-05 148,041 283,076 283,076 431,117
2005-06 209,617 238,446 238,446 448,063
2006-07 339,352 218,977 218,977 558,329
2007-08 474,846 172,672 172,672 647,518
2008-09 165,187 57,885 57,885 223,072
Source of basic data: Philippine Sugar Millers Association (PMSA)

Philippine sugar exports go to the US market under its Tariff Rate Quota (TRQ) system. This system sets the specified volume of raw cane sugar that the US will allow to enter its market at a relatively low tariff as part of its commitment under the World Trade Organization (WTO) Uruguay Round agreements.

For 2010, the US Trade Representative (USTR) is allocating 142,160 metric tons raw value (MTRV) or about 158,906 MT of raw cane sugar to the Philippines. It is the third biggest allocation out of 40 countries (accounting for 12.7 percent of the total) granted with quota, behind only the Dominican Republic and Brazil, under the US’s TRQ system.[2]

El Niño, biofuels

Official data, however, also show that in the last crop year (2008-09), raw and refined sugar production declined by 3.56 million MT or about 13 percent. Another year of lower production this year due to the expected El Niño could put the country in a similar situation in the 1998-2000-period, government officials and industry players said.

While production in 2008-09 did fall, the country still managed to post a surplus of about 165,187 MT of raw and refined sugar in that crop year. This surplus had already taken into account the country’s quota exports to the US of 57,885 MT in 2008-09. If we did not export to the US, the surplus would reach 223,072 MT. (See Table 2)

There is no official estimate yet on how big the impact of this year’s El Niño on the sugar industry will be. Large sugar players though are reporting production decline and anticipate further plunge. Victorias Milling, for instance, said that its production already fell by 18 percent last year and may again decline this year due to extreme weather events.[3]

Aside from El Niño, another source of pressure on local sugar production and supply is the competition from biofuels. The diversion of cane from sugar millers for the production of ethanol means less available sugar for the country’s food requirements. Republic Act (RA) 9367 or The Biofuels Act of 2006 mandated a 5-10 percent ethanol blend for gasoline products sold in the country.

Best safeguard

But at this point, everything is still speculative. And the best safeguard that we have against threat of lower production is not the importation of expensive sugar but an immediate halt to exportation, in particular to the US. This is justified by our food security interests. During the height of the global rice crisis in 2008, major rice exporters such as Thailand and India suspended exports. The SRA simply needs to fulfill its mandate of regulating sugar export to ensure domestic supply.

For the surging prices, government must impose a price ceiling and not simply a suggested retail price (SRP). Sugar, as a basic necessity, is among the products covered by RA 7581 or the Price Act of 1992. At present, the government’s SRP of P54 per kilo reflects the massive speculation in sugar prices and thus unreasonable. The sugar imports, at best, could only bring down prices to a still inflated P48 per kilo.[4]

A more rational retail price should be about only P42 or the prevailing price in Metro Manila in the last week of November, based on the assumption that the steep increases in prices since December are speculative and not justified by the supply-demand balance and changes in production costs. This must be accompanied by a serious crackdown not on small retail outlets but on the largest private sugar traders that hoard supply.

Another policy move in relation to supply should be the review of the biofuels program. RA 9367 itself provides for a review by the National Biofuel Board (NBB) of the supply of locally-sourced biofuel feedstock such as sugar cane and make necessary adjustments in the biofuel blend. Even before the recent surge in sugar prices, the local sugar industry could supply only about 79 percent of RA 9367’s minimum requirements (i.e. 5 percent ethanol blend).[5] Surging food prices, on top of land reform and environmental issues, must pressure policymakers to reconsider the country’s biofuels program and correct a policy that further undermines local food production.

Private traders, of course, want to take advantage of high global sugar prices and would rather export their commodity for larger profits. Or some commercial planters may want to sell their produce to ethanol plants that offer a bigger margin. Neoliberal thinking dictates that this must be allowed so that market forces can determine the best value of a commodity. But at the receiving end would be the ordinary people who will be forced to contend with high and increasing prices and at the same time the direct producers of sugar – the poor farm and factory workers – who continue to receive depressed wages amid soaring market prices.

Sources


[1] GMA News website, “Sugar prices may go up P54/kilo in February”, January 26, 2010, http://www.gmanews.tv/story/182452/sugar-prices-may-go-up-to-p54kilo-in-february

[2] US Trade Representative website, “USTR announces FY 2010 Tariff-Rate Quota allocations for raw cane sugar, refined and specialty sugar, and sugar-containing products”, http://www.ustr.gov/about-us/press-office/press-releases/2009/september/ustr-announces-fy-2010-tariff-rate-quota-allocat

[3] Manila Times website, “Domestic sugar output to plunge further”, January 28, 2010, http://www.manilatimes.net/index.php/top-stories/10471-domestic-sugar-output-to-plunge-further

[4] GMA News website, “Agri dept expects imports to bring down sugar prices to P48/kilo”, January 29, 2010, http://www.gmanews.tv/story/182730/agri-dept-expects-imports-to-bring-down-sugar-prices-to-p48kilo

[5] Arnold Padilla, “Pro-Arroyo landlords in Congress to reap profits from Biofuels Act”, IBON Features, published by Bulatlat.com, Vol. VII No. 3, February 18-24, 2007, http://www.bulatlat.com/news/7-3/7-3-biofuels.htm

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Consumer issues, Power industry, Privatization

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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