Consumer issues, Oil deregulation, Power industry

Heartless, greedy Meralco thrives under privatized, deregulated regime

With the country still reeling from the devastation wrought by Yolanda, the people are facing yet another disaster – the calamity of soaring prices. People ask: Are the oil companies and Meralco (Manila Electric Co.) that heartless and greedy?

Alas, this is the cruel reality of neoliberal economics, of deregulation and privatization. The market is regarded as greater than the people, and government allows the heartless and greedy to reign.

Price hikes

Starting December, oil firms implemented a record-high increase in LPG prices. Petron hiked its LPG price by P14.30 per kilogram (kg); Liquigaz, P13; and Solane, P11. These translate to an increase of P121 to P157 for an 11-kg LPG tank commonly used by households.

Then the oil companies jacked up the price of other petroleum products. Diesel rose by P1.35 per liter; kerosene, P1.20; and gasoline, P0.35. This week, oil firms implemented another round of oil price hikes with diesel rising by 30 centavos. Prior to the latest increases, the price of diesel has already jumped by P4.08 per liter this year and gasoline by P2.04, based on the Department of Energy’s (DOE) monitoring.

And of course, Meralco said that it will implement a hefty increase in power rates this month. The distribution utility said that the hike in its generation charge could reach P3.44 per kilowatt-hour (kWh) but it will be implemented in installments to mitigate the impact.

The Energy Regulatory Commissioned (ERC) allowed Meralco to collect the increase in three tranches. That would be P2 in December, P1 in February and P0.44 in March.

But generation is just one component of the electricity bill that will rise. Also increasing is the transmission charge, which will go up by P0.04 per kWh. Taxes (value-added tax and local franchise tax), system loss charge, lifeline rate subsidy and others, which are a percentage of generation and transmission costs, will also add another P0.67 per kWh in the Meralco bill.

Thus, the actual rate hike to be felt by consumers would be P2.41 per kWh in December, P1.21 in February and P0.54 in March.

However, while the sudden impact of a one-time huge rate hike will be mitigated, consumers will end up paying more. According to the ERC, Meralco may charge its customers an interest on the entire deferred amount or the so-called carrying cost.

And even at a staggered basis, the rate hike would still be tremendous. A 200-kWh household, for instance, will see its Meralco bill jump by P482 this month.

The increase in power bill creates a domino effect on the prices of other basic goods and commodities. Contrary to propaganda of government and big business, wages are not the main driver of price hikes but electricity cost. The Employers Confederation of the Philippines (Ecop) said that power accounts for as much as 40% of production cost. With the big Meralco rate hike, Ecop also warned of higher prices.

‘What can we do?’

The official who is supposed to be in charge over the oil and power sectors – Energy Secretary Jericho Petilla – had this to say to the restless public: “Kung nagkasabay-sabay silang lahat, hindi yan pinlano, it just happened. What can we do…? Don’t buy, kung namamahalan kayo!”

Of course, Meralco’s customers could not choose not to buy electricity from Meralco. They have no choice. Petilla’s remarks sum up government’s indifference to the plight of consumers, which the Aquino administration has repeatedly displayed in its almost four years in power.

By themselves, the record increases in petroleum prices and electricity bills are already oppressive. But what makes them doubly onerous is that the country is still recovering from Yolanda’s onslaught. Government has not even fully accounted the total number of dead, which now stands at 5,796, according to the latest official count.

Note that this is not the first time that these same companies displayed total disregard of public interest and welfare. Last year, amid the torrential, Ondoy-like rains that poured over Metro Manila, oil companies and Meralco also increased prices.

Price control

Ironically, the country is supposed to be under a state of national calamity as declared by President Benigno Aquino III through Proclamation No. 682. But the string of record price hikes shows that big business can act with impunity.

The reason is that the price control aspect of the proclamation is limited by law and the overall deregulation policy of government. Under Republic Act (RA) 10623 (which amended RA 7581 or the Price Act), the price of LPG may be controlled under a state of calamity but only for 15 days. The price of LPG and other petroleum products is deregulated under RA 8479 or the Oil Deregulation Law.

Electricity rates are also not included among the basic necessities that government may control during a state of calamity. Through RA 9136 or the Electric Power Industry Reform Act (Epira), government deregulated the setting of the generation charge of Meralco and other distribution utilities. Epira also deregulated rate-setting through the wholesale electricity spot market (Wesm).

To pave the way for the deregulation of the oil and power industries, government privatized Petron Corp. and the National Power Corp. (Napocor).

The Oil Deregulation Law and Epira trump the Price Act and any proclamation of a state of calamity. Apparently for government, not even the strongest typhoon ever recorded could change that. Both policies were imposed on the country by foreign creditors led by the World Bank and the Asian Development Bank (ADB).

Artificial tightness

The huge Meralco rate hike is a perfect example of how privatization, deregulation and lack of state control over key sectors burden the consumers. Had government not relinquished effective control over energy development to profit-oriented private business, the public would have been spared from the impending hefty increase in power rates.

The supposed tight energy supply is only artificial. It could have been prevented if the maintenance shutdown of the country’s energy sources and power plants were effectively controlled by government. But because it relies too heavily on private business, government has no handle in determining the maintenance schedule of power plants in a way that ensures energy security and public interest.

For instance, the maintenance shutdown of Malampaya started on Nov. 11, the same date that President Aquino put the country under a state of calamity. Energy officials already knew then that it will trigger a big spike in power rates. At that time, energy supply in Luzon was already tight due to a series of maintenance shutdowns of major power plants.

Plant shutdowns

Meralco, in fact, already implemented a large increase in power rates in November when it jacked up its rates by P1.24 per kWh. The utility giant said that the maintenance shutdown of several big power plants was the main factor behind the rate hike. These were Unit 2 of Malaya power plant in Rizal (Dec. 2012 to Oct.); Unit 2 of Pagbilao plant in Quezon (Aug. to Nov.); Unit 1 of Sual plant in Pangasinan (Sep. to Oct.); and Sta. Rita Module 20 (Oct. 23-28).

In addition, a number of power plants were also on forced outage. These were San Lorenzo Module 60 (May to Mar. 16, 2014); Unit 1 of Masinloc plant in Zambales (Sep. 25-28); Unit 2 of Calaca plant in Batangas (Sep. 29 to Oct. 1); Quezon Power (Oct. 5-6); and Unit 1 of Sual plant in Pangasinan (Oct. 22-26).

Monopoly and manipulation

But instead of ensuring that Malampaya will remain online, especially after Yolanda, government stood idly as the source of 40% of Luzon’s power needs was cut off. The shutdown of Malampaya and of the other power plants, said Meralco, forced its suppliers Sta. Rita and San Lorenzo power plants to use more expensive fuel.

The utility giant claimed that it was also compelled to buy more from the Wesm where electricity is being sold at a higher price. Meralco said that its exposure to Wesm will increase from less than 5% to 12% due to the Malampaya shutdown.

Note, however, that the private investors who control Meralco are the same investors that control the power plants as well as the traders in the Wesm. The 1,000-megawatt (MW) Sta. Rita and the 500-MW San Lorenzo plants are owned by the Lopez group, which also has a 3.9%-stake in Meralco. Power plants associated with the Lopez group also account for around 18% of the capacity registered at Wesm.

Illegitimacy of rate hikes

The concentration of ownership over power generation and distribution, and even over the spot market, raises a valid question on the legitimacy of the power rate hikes. The same thing can be said in the case of the oil industry wherein basically just four companies lord over more than 80% of the industry.

Thus, the move of the House of Representatives to investigate Meralco’s rate hike is a welcome development. Officials of the distribution utility, the power plants, and also the DOE should explain the circumstances behind the huge increase.

There is certainly a need to closely look at the shutdown of Malampaya and the power plants as well to determine if the big power investors are abusing the public through their unhampered control over the energy sector.

But more importantly, policy makers must reconsider government’s energy development program that is hinged on deregulation and privatization. Even without a super-calamity like Yolanda, neoliberal policies like Epira and the Oil Deregulation Law are already greatly oppressing the public. ###

Read more about Epira and the Philippine power industry here and Oil Deregulation Law here

Consumer issues, Power industry

Prepaid electricity, anyone?

Imagine yourself engrossed in your favorite teleserye one night. As a plot-twisting revelation was about to be told by one of the main characters, power was suddenly shut off. It wasn’t a brownout because all your neighbors still had their lights on and only your unfortunate household was engulfed in darkness. You reached for your cellphone and sent an SMS. Within seconds, you received a text message that read: “Your Meralco prepaid balance as of 1/18/13 20:45 is P0.00. Please reload soon to restore electricity services in your household.”

Using SMS

Welcome to the era of prepaid electricity.

The Manila Electric Co. (Meralco), the country’s largest power distributor, has started the first leg of its pilot tests to determine the viability of the prepaid electricity retail scheme in the residential sector. An initial 100 households in Rizal province are covered by the pilot tests, which will eventually expand to 2,000. If the scheme proved to be feasible, Meralco will put some 40,000 households in its franchise area under the prepaid mode of payment.

Meralco, however, is not the first distribution utility (DU) to implement the prepaid scheme. The Batangas I Electric Cooperative Inc. (Batelec I) already launched its prepaid system last Jan. 16 covering around 295 residents in Barangay Camastilisan, Calaca, Batangas. Batelec would later clarify that it’s not yet a commercial operation but only a pilot test. Another cooperative, the Bohol II Electric Cooperative Inc. (Boheco II), has also sought consent from the Energy Regulatory Commission (ERC) to employ the prepaid scheme.

Under the Batelec I system, which is also the same scheme favored by Meralco and Boheco, consumers will use the SMS network to load prepaid electricity credits and check their remaining balance. Consumers can buy prepaid cards denominated in ₱100, ₱200 and ₱300 and send an SMS to 2861 (for Globe users only) to load their prepaid electricity. If they want to check their remaining balance, they can send “kwbalance” also to 2861.

The SMS system may be used too for registration, threshold warning, advice of disconnection and reconnection, and remote disconnection and reconnection. Meralco said that using the SMS system is more practical and viable than installing an in-home display (IHD), which will entail more costs on the utility firm and its customers. An IHD is a prepaid electric meter that loads the purchased energy, display real time information on load consumption and give a warning signal that the load is nearing zero.

Benefits?

The ERC first released the draft rules of the Prepaid Retail Electricity Services (PRES) in 2008. Initially, the PRES covers only residential customers but the coverage was expanded this year to include industrial and commercial establishments as well. Regulators also allowed the use of all available technologies (e.g., SMS, IHD) in the implementation of the prepaid system. When fully realized, the country will join South Africa, Indonesia, India, Australia and New Zealand which are already using prepaid electricity.

According to the ERC, it introduced the PRES so that consumers supposedly can have more power to control their electricity bills. Meralco, meanwhile, claimed that based on a survey it conducted with global conglomerate General Electric (GE) more consumers prefer the prepaid system. Meralco and GE last year signed an agreement on advanced metering infrastructure integrated solution project where the American giant will serve as system integrator.

A Meralco official explained: “Prepaid and buying tingi or sachet is ingrained in the Filipino lifestyle. Many wage earners receive daily or weekly pay, so they would prefer that their expenses from mobile to Internet and — yes — to electricity be also on a tingi basis. This enables them to bridge the timing of their cash outflows.” The utility giant also maintained that the prepaid system will make electricity more affordable for the poor: “If this (prepaid electricity) can be made possible, (consumers) will avoid the monthly experience of having to pay a one-time big amount. With the prepaid scheme, electricity, thus, becomes more abot kaya for some segments of our customers.”

Anti-consumer

These claims by the ERC and Meralco are hogwash; that consumers can really manage better their electricity bill and that the prepaid system will make electricity services more affordable are outright lies. Worse, the prepaid scheme would merely further expose poor households to marginalization while protecting the profits of DUs like Meralco.

Unlike in prepaid mobile phone credits wherein charges are fixed, electricity rates vary monthly (often upwards) because of deregulation under the Electric Power Industry Reform Act of 2001 (Epira). Under ERC rules, unconsumed credits in a given month will be charged with the prevailing rates in the following month. The fluctuating rates will make it difficult for a household to effectively monitor and regulate their consumption and accordingly plan their use of electricity based on prepaid credits. Furthermore, the increasing monthly power rates will offset efforts by a household to cut their electricity bill even if they shift to the prepaid system. No matter how much kilowatt-hour that a household tries to reduce in their monthly consumption, the end result is still an onerous electricity bill (the highest in Asia!) because of ever increasing rates due to automatic adjustments in the generation charge as well as other periodic adjustments allowed under Epira.

Indeed, the overall impact of a prepaid system is the further marginalization of the poor from accessing electricity as an essential service. When the provision of electricity is made prepaid, the cruel neoliberal principle of those who can’t pay can’t use fully comes into play. This creates a serious problem because while many can tolerate not loading their cellphones for a couple of days, not having electricity for running out of prepaid load affects a household’s quality of living. Poor households which rely on a very tight monthly budget that could hardly afford the basic necessities are especially vulnerable. It must be emphasized that depriving people of access to electricity because they have no money to afford it is inhuman, oppressive and exploitative.

But under the prepaid system, the lack of load means automatic disconnection of a household’s power supply. It violates the people’s basic human right to decent living. It also violates the rights of consumers against unfair disconnection of service such as those outlined in the Magna Carta for Residential Electricity Consumers. In the said Magna Carta, consumers have the right to due process prior to disconnection (Article 18); right to a notice prior to disconnection (Art. 19); right to suspension of disconnection (Art. 20); and right to tender payment at the point of disconnection (Art. 21). Under ERC rules, prepaid customers are supposed to be notified (e.g. through SMS) three days before the remaining load is estimated to run out. The warning shall be based on the average consumption of the household. But what if the household suddenly used more electricity than their average consumption and consumed the load in two days instead of three?

Clearly, the only party that will substantially benefit from the prepaid system is Meralco and the other DUs. Consumers, in particular the poor households which are the main target of the scheme, are obliged to pay in advance the DUs for electricity that they have yet to use. This effectively and easily eliminates “bad accounts” or users that could not pay on time and/or could not pay in full due to a limited household income. Furthermore, the system also allows the DUs to cut costs because they will no longer require additional workforce to read the monthly billing or perform the physical reconnection and disconnection of electricity services. Thus, the profits of Meralco and other DUs are firmly secured and guaranteed but at the great expense of poor consumers.

Political, too

Aside from economic gains, DUs and the government could also benefit politically as the social conflict or tension created by unpaid bills and the resulting disconnections are somehow eased by the prepaid system. This is achieved by eliminating the need for the consumers and the DU to transact physically or directly as payments, disconnections, reconnections, etc. are already done through SMS. In a prepaid system, Meralco no longer has to send its people to implement disconnection orders in a community and thus minimize the public visibility of a greedy and heartless corporation that takes away a household’s access to a vital service for failure to pay.

It will also take away the people’s option to use payment boycott as a form of protest against questionable and unjust electricity bills like what the late labor leader Crispin “Ka Bel” Beltran did against the purchased power adjustment (PPA) in 2002. In the book Electric capitalism: Recolonising Africa on the power grid, one of its writers Peter Van Heusden looked at the development of the prepaid electricity scheme in South Africa, which was the first to implement such system through prepaid meters. He noted that prepaid electricity was developed to counter the payment boycotts in the 1980s which was used in Soweto in Johannesburg, South Africa as a political weapon against local authorities and the apartheid regime.

Prepaid electricity does not answer the problem of onerous power rates. It will simply further shift the burden to hapless consumers while making life much easier and more profitable for Meralco and other DUs and absolving government and its flawed neoliberal policies like Epira of accountability to the people. Without electricity because of inability to pay, it’s not only your favorite teleserye that you will miss but also your right to decent living. ###

Economy, Global issues, Privatization

ADB: Anti-Development Bank

The Asian Development Bank (ADB) is holding its 45^th annual meeting from May 2 to 5 in Manila. Some 4,000 delegates including finance ministers and central bank governors from ADB’s member-countries; as well as representatives of big business, international financial institutions (IFIs), transnational banks, credit rating agencies, global media, and even so-called civil society are attending the said event. With the theme “inclusive growth through better governance and partnerships”, the event will mark the 15^th time that the ADB has held its annual meeting in Manila. Venues have been arranged at the Philippine International Convention Center (PICC).

The ADB was founded in 1966 and now has 67 members. It’s one of the global financial institutions set up by the industrial powers to fund their programs and projects in backward countries. Together with the International Monetary Fund (IMF), the World Bank and other IFIs, the ADB bankrolled numerous restructuring efforts that aim to liberalize, deregulate and privatize the economies of many countries in the Asia Pacific. These reforms have been implemented through huge and burdensome debts. The Philippines is a founding member of the ADB and has been hosting the bank’s main headquarters since its inception.

ADB’s 45^th meeting is an opportune time for the Filipino people to register its strongest condemnation of the multilateral bank that has been funding numerous anti-poor economic reforms and destructive projects in the country.

Neoliberal offensive in energy

In the Philippines, ADB’s disastrous impact is most felt in the energy sector through the Electric Power Industry Reform Act of 2001 (Epira) and the neoliberal reforms implemented in the sector in the past two decades. The ADB started funding the power sector reforms through loans and equity investments to independent power producers (IPPs) as well as guarantees for bonds issued by the National Power Corp. (Napocor). Due to sweetheart deals with the IPPs, Napocor further went deeper in debt, which the ADB used to justify its total privatization.

As Napocor’s largest creditor, the ADB aggressively pressured the national government to fully privatize the state-owned power firm and enact the Epira. In 1994, it funded a study that eventually became the basis of the then Ramos administration’s blueprint for power sector restructuring. This blueprint took the form of an Omnibus Power Bill that was filed in 1996 that aimed to privatize Napocor and restructure the power industry. The Omnibus Power Bill would later become the Epira, a process that was bankrolled by the ADB’s $300-million 1998 Power Sector Restructuring Program (PSRP). To access the loan, the ADB listed 61 specific conditionalities that the government should follow, including designing content and legislation of the Epira.

Even Epira’s actual implementation is being funded by the ADB. Since 2002, the ADB has approved an estimated $1.3 billion in loans to support the various programs and projects under Epira. These include debts to guarantee the bond issuance and improve the creditworthiness of the Power Sector Assets and Liabilities Management Corp. (Psalm), which Epira put up to oversee the privatization of Napocor, and establish the wholesale electricity spot market (WESM).

Under Epira, electricity bills have soared amid energy insecurity such as the case in Mindanao. According to one study, the power rates for residential users in Manila and Cebu are the first and third most expensive in Asia, respectively. Even the supposedly “cheap” electricity rates in Mindanao are still much more expensive than the rates in more progressive Asian cities like Hong Kong, Beijing, Kuala Lumpur and Seoul. Since Epira was implemented, the rates of the Manila Electric Co. (Meralco) have jumped by 112% while the rates of the Napocor have increased by 95 percent.

Meanwhile, the lack of energy security is the result of government’s abandonment of its mandate to invest in the rehabilitation of existing plants and construction of new ones. Instead of ensuring that there is enough energy supply consistent with a long-term industrialization plan, government used its time and resources to dispose the generation and transmission assets of Napocor as mandated by Epira.

Anti-poor reforms

Aside from the neoliberal restructuring of the power sector, the ADB has also aggressively promoted various privatization and commercialization initiatives including in water utilities, irrigation, dam, and the National Food Authority (NFA), among others. These reforms have resulted in food insecurity and in skyrocketing cost of living.

Privatization is one of the major programs of the ADB in the Philippines, including the public-private partnership (PPP) initiative of the Aquino administration. ADB is the main funder of the Project Development and Monitoring Facility (PDMF), which is government’s revolving fund for feasibility studies for projects under the PPP scheme. The ADB has already committed $21 million for the PDMF.

Furthermore, the ADB also bankrolled a 1993-1994 study that became the basis of the destructive Mining Act of 1995. This program, which liberalized the Philippine mining industry, has paved the way for the further wanton plunder of the country’s mineral resources, the destruction of the environment, and dislocation of communities.

Oppressive debt

Worse, these anti-development and anti-poor programs have been funded by onerous ADB loans. The ADB is now the country’s single largest foreign creditor. As of 2011, the country owes the ADB around $5.84 billion, which is almost 10% of the total foreign debt of the Philippines pegged at $16.71 billion. Among the multilateral creditors, the ADB accounts for more than 50% of the country’s total multilateral debt. All in all, the country has accumulated the fifth largest debt from the ADB, accounting for about 8% of total sovereign lending.

Due to automatic debt servicing, a huge portion of the national budget is being siphoned off by debt servicing, leaving almost nothing for social services. For 2012, for instance, the Aquino administration is ready to spend P738.6 billion for debt servicing, including interest payments and principal amortization. This is much bigger than the P575.8 billion that government is willing to spend for education, social security, health services, housing, land reform, and other social services.

To smokescreen the harsh effects of the neoliberal reforms that it has been sponsoring and the lack of resources for social services due to debt servicing, the ADB – together with the World Bank – is also funding the conditional cash transfer (CCT) program of the Aquino administration. Under the CCT, government provides direct cash assistance of as much as P1,400 to selected poor families on the condition that pregnant mothers will have their regular checkup and school age children will regularly go to class. But aside from being highly temporary and limited, the CCT also further deepens the indebtedness of the Philippines. The ADB is funding the CCT to the tune of $400 million in loans while the World Bank is also lending $405 million for the program.

Strong protest

ADB’s theme of inclusive growth for its meeting this year reflects the main theme of the host government’s Philippine Development Plan (PDP) 2011-2016. Under the PDP, inclusive growth is supposed to be achieved by expanding the domestic economy by 7-8%, which will generate jobs and livelihood and alleviate poverty. But Aquino’s inclusive growth means the implementation of the same policies and programs of liberalization, deregulation and privatization that the ADB – together with the IMF, World Bank and other global imperialist institutions – has long been imposing on the country.

We should not let the ADB meeting pass without registering our strong opposition to its decades of intervention in Philippine policy making and to the many programs that it has bankrolled through odious debts that perpetuate the backwardness of our economy and the poverty of our people. (end)

Consumer issues, Power industry, Privatization

Mindanao power is more expensive than Asia’s major cities

Mindanao power is more expensive than electricity rates in major cities in Asia but Aquino wants the region to pay more to supposedly address its power crisis (Photo from manilastandardtoday.com)

Mindanao must pay more to end the rotating brownouts, the President declared in his Power Summit speech. The region, said Aquino, needs more power supply but “cheap” power rates are discouraging private investors from building new power plants to meet Mindanao’s growing energy needs.

Pay more

“But how can you entice anyone to invest—and this is the question—if their generating cost is more than their selling cost?” Aquino, in his speech, asked. “The simple truth is: we can have a lot more energy, but we have to provide the incentives for businesses to come here to put up those plants. Therefore, there will be a change in what we have to pay. We will have to pay, perhaps, a bit more… You have to pay more because this is the reality of economics… Everything has its price. We have to pay a real price for a real service. There are actually just only two choices: pay a little more for energy, or live with the lack of energy and the continuation of the rotating brownouts.”

Cheap rates?

Aquino must apologize to the people of Mindanao for blaming them for the power crisis and accusing them of being spoiled by “cheap” power rates. Aquino must apologize for being shamelessly insensitive to the plight of Mindanao where 36% of the country’s poorest families live (based on the latest official poverty statistics released by the National Statistical Coordination Board or NSCB).

The premise that Mindanao has been unjustifiably enjoying “cheap” power rates is totally wrong. True, Mindanao has lower power rates than Luzon and Visayas. Latest available comparative data show that the region has an effective residential rate of P6.69 per kilowatt-hour (kWh). Luzon has P9.84 while Visayas has P8.19. (Data from 18^th EPIRA Implementation Status Report, which may be downloaded here)

Most expensive in Asia

Aquino, however, did not mention one very important fact. Mindanao power is “cheap” only because the country has the highest electricity rates in Asia. In a survey conducted by the Japan External Trade Organization (JETRO), Manila posted the most expensive residential rate (P10.16 per kWh), while Cebu (P8.39) is ranked third (Singapore ranked second with P8.83). JETRO conducted the survey in January 2011 to compare investment-related costs, including electricity, in 31 major cities in Asia and Oceania. (See the table at the end of this article for the complete list; Download the JETRO survey here)

While Aquino is blaming the power crisis on the people of Mindanao for being pampered by “cheap” power, Mindanao is actually paying much more than most major cities in Asia. Did you know that residential consumers in the Autonomous Region in Muslim Mindanao (ARMM), Cagayan de Oro City, Northern Mindanao, and the Davao and CARAGA regions are paying twice the electricity rates of residents in Seoul and Beijing? Except for CARAGA, all the Mindanao regions I mentioned also have more expensive residential power rates than Hong Kong. These areas in Mindanao, plus Cotabato City, Iligan City, SOCCKSARGEN, and the Zamboanga Peninsula all have higher residential rates than major Asian capitals like Taipei, Kuala Lumpur, Jakarta, New Delhi, Bangkok, and Shanghai, among others. All in all, Mindanao is paying an average of P1.82 per kWh more for electricity than the collective average residential rate of the 31 major cities in Asia and Oceania surveyed by JETRO.

I summarized these findings in the chart below, which culled data on residential rates from the JETRO survey and data on average residential rates of private distribution utilities (PDUs) and average systems rates of electric cooperatives (ECs) from the 18^th EPIRA report. The red bars represent Mindanao regions and cities.

Poorest region

Note that Mindanao has an average official poverty incidence of 33.5% of families (the national average is 20.9%). The country’s three poorest regions are in Mindanao – CARAGA (39.8%), ARMM (38.1%), and Zamboanga Peninsula (36.6%). ARMM does not only have the most expensive power rates in Mindanao, it also has (consequently) the highest cost of living (more than P1,287 based on the family living wage released by the NSCB in July 2008) among all regions in the Philippines, while the minimum wage there is just P232 (or just 18% of the cost of living). Amid this condition, the people of Mindanao are being forced to pay for electricity that is way beyond the rates in Asia’s richest cities. Yet Aquino wants Mindanao to shell out more money to supposedly solve its power crisis.

Blame EPIRA

Mindanao has lower rates than Luzon and Visayas not only because it sources its energy supply from cheaper hydropower but also because the region has been relatively and temporarily spared from the privatization and deregulation drive under EPIRA. State-controlled/owned installed capacity in Mindanao is still about 82% of the total (as of 2010 data from the DOE), compared to 18% in Luzon and 36% in Visayas where most power plants have already been privatized and are now controlled by the country’s profit-seeking “power lords”. Furthermore, unlike Luzon and Visayas, Mindanao does not have an EPIRA-created wholesale electricity spot market (WESM), which has only become a venue for price manipulation and speculation by power monopolies, sparking off wild spikes in power rates.

But EPIRA is also to blame for Mindanao’s energy insecurity. While government retained control over most of the installed and dependable capacity in Mindanao, it did not invest in additional capacity to meet the growing power demand of the region. Government abandoned its strategic role to design and implement power development projects consistent with a long-term industrialization plan and instead focused on selling the assets of the National Power Corporation (NAPOCOR) to private investors as mandated under EPIRA.

Reverse privatization

To fully solve the energy insecurity of Mindanao and the rest of the country as well as the problem of expensive electricity, there is no other recourse but for the state to take over. Aquino could no longer use the excuse that doing so will just further bankrupt the government. Despite the EPIRA, NAPOCOR remains trapped in deep debt (read here). So instead of further wasting limited public resources on a flawed energy program – which only made electricity bills more exorbitant and power supply more insecure – government should start reversing the privatization and deregulation of the energy sector. #

Consumer issues, Power industry, Privatization

Power lords

San Miguel Corporation cornered 41.3 percent of privatized generating plants and IPP contracts in terms of capacity (Photo from allvoices.com)

(Continued from Part 2)

The restructuring of the power industry under EPIRA facilitated the creation of new private monopolies that lord over not only the distribution but also the generation of electricity. The dominant position of these monopolies, controlled by billionaires in Forbes’ list of richest Filipinos and their foreign partners, is bound to further intensify under Aquino’s public-private partnership (PPP) program.

Privatized power plants and IPP contracts

Out of the 7,665.88 megawatts (MW) in capacity of privatized generating plants and IPP contracts, Danding Cojuangco’s San Miguel Corporation (SMC) cornered 41.3 percent while the Aboitiz group bagged 28.5 percent. Other major buyers include the Consunjis (7.8 percent) and the Lopezes (7.4 percent). American firm AES Corporation accounted for a significant 7.8 percent. South Korean companies SPC Power and K-Water have a combined 5.8 percent. (It includes the Angat hydropower plant that was put on-hold by the Supreme Court.) Five companies accounted for the remaining 1.4 percent.

The costs of these transactions total $6.69 billion. SMC accounted for 35.9 percent of the said amount; Aboitiz, 30.2 percent; AES Corp., 13.9 percent; K-Water, 6.6 percent; Lopez, 5.7 percent; Consunji, 5.4 percent; and others, 2.3 percent. (See Table 1)

In terms of overall generating capacity, the restructured Philippine power sector is now dominated by just three companies – San Miguel Power Corporation (20 percent), Lopez-owned First Gen Corporation (17 percent), and the Aboitiz group (15 percent).

Government through NAPOCOR and PSALM has 30 percent. (See Chart 4) SMC’s rise as a major player in the power industry is truly phenomenal considering that it has only started venturing in the industry in 2008.

These are the same groups that also control the biggest distribution utilities (DUs) in the country. SMC and the Lopez group, for example, control MERALCO with 27 percent and 6.6 percent, respectively. (Manny Pangilinan’s Metro Pacific controls 45 percent.) MERALCO is the largest DU in the Philippines with a franchise area covering 24.7 million (about 25% of the national population) in 31 cities and 80 municipalities. It serves Metro Manila, Bulacan, Rizal, and Cavite as well as parts of Laguna, Quezon, Batangas, and Pampanga.

The Aboitiz group, on the other hand, controls the second and third largest DUs – the Visayan Electric Company (VECO) and Davao Light and Power Company. VECO serves Metro Cebu covering four cities and four municipalities. Meanwhile, Davao Light serves Davao City and Panabo City as well as three municipalities in Davao del Norte. Aside from these DUs, the Aboitiz group also controls Cotabato Light and Power Company, San Fernando Electric Light and Power Company, and the DUs serving the Subic Freeport zone, Mactan export processing zone, and the West Cebu industrial park.

SM tycoon Henry Sy has taken advantage of the EPIRA as well. His One Taipan Holdings (30 percent), State Grid of China (40 percent), and Calaca High Power Corporation (30 percent) control the National Grid Corporation of the Philippines (NGCP). NGCP holds a 25-year concession agreement (CA) with government to operate the country’s transmission system beginning in January 2009.

No transparency or competition

Cross-ownership in distribution and generation, which EPIRA allows, makes claims by advocates of neoliberal power restructuring about transparency and competition in pricing an outright lie. EPIRA’s unbundling of rates, for example, is practically meaningless even if a consumer can see in his or her monthly bill how much he is paying for generation and distribution. Market abuse is not prevented even if rates are unbundled due to cross-ownership. This has been clearly illustrated in the operation of the EPIRA-created Wholesale Electricity Spot Market (WESM).

The WESM, which has been operating in Luzon since 2006, is meant to among others “provide and maintain a fair and level playing field for suppliers and buyers of electricity”. But cross-ownership negates whatever benefits that the WESM is supposed to offer. The intention of the WESM is to make rates more competitive by offering prices other than those set in the bilateral contracts. EPIRA even capped at 50 percent the power requirements that DUs can source from their own generators and the rest they must get from other IPPs and the WESM.

However, the WESM itself is dominated by the same generators that are related with the DUs. IPPs connected with MERALCO, for instance, account for 42.6 percent (SMC with 24.8 percent and Lopez, including Quezon Power, 17.8 percent) of the 11,652-MW capacity registered at the WESM. The Aboitiz group, meanwhile, comprises 13.1 percent. The huge shares of these groups to the WESM-registered capacity make the spot market vulnerable to manipulation and speculation. Case in point was early last year when the price of electricity at the WESM reached an unbelievable P68 per kWh at one point during the height of the El Niño.

The high WESM prices have been blamed by MERALCO for the monthly increases in its generation charge last year. The latest adjustment in MERALCO’s generation charge worth 51 centavos per kWh, announced last Tuesday, is again being blamed at the high increases in the WESM, where rates jumped by P1.89 per kWh. MERALCO IPPs, on the other hand, increased their rates by a smaller 16.2 centavos per kWh.

Energy insecurity

Finally, the country’s energy security has remained precarious under EPIRA. The rotating brownouts experienced in different parts of the country last year is a tell-tale sign that the power crisis has not been resolved by privatization. In Mindanao, for example, the power shortage reached as high as 700 MW in March 2010 that led to rotating brownouts of as long as 8 hours daily. Government quickly blamed the El Nño because Mindanao gets more than half of its power supply from hydroelectric plants.

But apparently, the deeper issue is not drought but government neglect. During the Aquino administration, for instance, Mindanao’s power mix was 75 percent hydro while peak demand was 800 MW, according to a former NAPOCOR president. In 2010, DOE data show that hydro accounted for a relatively smaller 51.8 percent of installed capacity in Mindanao while peak demand was 1,288 MW. Thus, the El Niño could not be solely blamed for the shortage since no significant additional capacity has been put in the region. This should have been the job of government but because of EPIRA, it focused on selling the assets of NAPOCOR instead of installing additional capacity.

Even Luzon was not spared from rotating brownouts during last year’s El Niño. Aggravating the low levels in Luzon’s major dams were the uncoordinated shutdowns implemented by privately controlled power plants. They include SMC generation plants Sual and Limay as well as the Lopez plants that use natural gas from Malampaya. The power supply shortfall reached 641 MW, which could have been easily offset by Luzon’s excess capacity and thus avoid the rotating brownouts. But because EPIRA has dissolved government’s role in ensuring power supply, there is no mechanism in place to fill the gap resulting from plant shutdowns.

Ten years is enough

Its proponents argue that EPIRA must be given a chance to work because once fully implemented, the country will surely reap its promised benefits. They cite the impending implementation of the so-called open access and retail competition. Under this system, power consumers will have the opportunity to choose their suppliers. But then again, the industry has already been monopolized by a few players making the supposed option to choose an illusion.

For its part, the Aquino administration and its allies in Congress have worked for the amendment of EPIRA to extend the so-called lifeline subsidy. But it still does not address the exorbitant and rising electricity rates that Filipino consumers are forced to shoulder. Besides, the subsidy is being paid for by other consumers and does not come from the pocket of MERALCO or government.

Ten years of EPIRA is enough. Its defects could not be corrected by simple cosmetic amendments. It is fundamentally wrong to allow the narrow profit agenda of private companies and banks to take over a sector as strategic as the power industry.

EPIRA has resulted in the doubling of power rates and intensification of private monopolies. At the same time, it failed to address the financial problems of NAPOCOR and the country’s energy security. Only NAPOCOR’s creditors and private local and foreign companies have benefitted from power restructuring. For these reasons, there is a clear and urgent need for our policy makers to seriously rethink the law and work for its repeal. (END)

Read Part 1 – 10 years of EPIRA: what went wrong? and Part 2 – The curious case of NAPOCOR debts

Also read The role of foreign lenders, investment banks, and credit rating agencies in Philippine power sector reform

Power industry, Privatization

The curious case of NAPOCOR debts

The deep indebtedness of NAPOCOR was one of the strongest arguments used to justify the EPIRA (Photo from Kevin Collins on flickr.com)

Continued from Part 1

Proponents of EPIRA made us believe that privatization will solve the financial woes of state-owned NAPOCOR. In fact, the deep indebtedness of NAPOCOR was one of the strongest arguments used to justify the EPIRA. If state coffers are being bled dry by the debts of NAPOCOR, then why not just sell its assets to wipe out its obligations? Obviously, the public was deceived by this simple line of reasoning.

Drain in public resources

Such argument by the then Arroyo administration sounded persuasive for some because government was facing a swelling budget deficit and debt. In 2001, the budget shortfall was P147.02 billion. Including the deficit of other government units, the consolidated public sector deficit was P174.27 billion. Meanwhile, the outstanding national government debt during the period was P2.38 trillion. NAPOCOR represented the biggest drain in public resources. Its 2001 debt of $16.39 billion or some P834.29 billion (at P50.99 per US dollar) accounted for 34.9 percent of government’s outstanding debt. With the EPIRA, the Arroyo administration promised to reverse the situation.

Fast forward to 2011. According to the PSALM Corp., the remaining debt of NAPOCOR as of 2010 is $15.82 billion. Thus, after 10 years, only $570 million have been shaved from the state power firm’s 2001 debt of $16.39 billion. At $15.82 billion or P713.64 billion (at P45.11 per US dollar), the debt of NAPOCOR comprised a still a significant 15 percent of government’s outstanding debt. Meanwhile, the budget deficit ballooned to P314.5 billion in 2010, a new high in absolute terms.

While its IPP obligations have been reduced by $1.63 billion between 2001 and 2010, NAPOCOR’s debt also increased by $1.02 billion during the same period. This implies that IPP obligations have been mainly financed by new debts. (See Chart 3)

Worse, PSALM has already shelled out $18 billion to settle the obligations of NAPOCOR from 2001 to 2010. Of the said amount, $6.7 billion went to principal amortization; $4.3 billion for interest payments; and $7 billion for obligations to independent power producers (IPPs). (See Chart 4) But if government spent $18 billion in the past 10 years, why then did the debt of NAPOCOR was reduced by a mere $570 million?

New debts

PSALM itself provided the explanation. According to it, NAPOCOR contracted new debts in the past 10 years. From 2001 to 2010, NAPOCOR accumulated new debts of $12 billion, on top of its $16.39-billion pre-EPIRA debt. Of the $12 billion, 73 percent represented operational losses while the commissioning of new IPP plants accounted for the remaining 27 percent. PSALM noted that the commissioning of new IPP plants bloated the total financial obligations of NAPOCOR to $22.35 billion by 2003.

The question now is why did officials tasked to privatize NAPOCOR have to resort to more borrowings? Doesn’t it defeat the purpose of power sector reform which is to free up government from its debilitating financial woes?

Under the EPIRA, eliminating NAPOCOR’s debts primarily involves using the proceeds from the privatization of the state power firm’s generation and transmission assets and liabilities. Apparently, this has not happened because earnings from power privatization were not enough to compensate the huge financial obligations of NAPOCOR.

According to the PSALM, government has earned $10.65 billion as of October 2010 from the sale of its generation plants, transmission assets, and IPP contracts. Of the said amount, the largest, $3.95 billion, came from the privatization of the National Transmission Corporation (TRANSCO). The sale of generating plants, on the other hand, yielded $3.47 billion. Finally, the transfer of NAPOCOR’s IPP contracts to IPP Administrators (IPPAs) accounted for the remaining $3.23 billion.

Privatization debacle

However, of the $10.65 billion in total privatization proceeds, only $4.85 billion was actually collected and used to pay for NAPOCOR’s debt. PSALM reasoned that earnings from the privatization of TRANSCO and the IPP contracts will be fully collected in a number of years through a staggered collection scheme. “But in any year when maturing debts exceed privatization collections, PSALM will have no recourse but to raise funds through new loans to pay for maturing obligations,” PSALM said. This explains the $12 billion in new debts incurred by NAPOCOR in the past 10 years.

It appears that the supposed benefits of privatization in terms of addressing NAPOCOR’s financial bleeding will not be felt anytime soon. PSALM said that the debt of NAPOCOR will be significantly reduced only by 2026, with a projected residual debt of $3.78 billion. The amount is exclusively based on privatization proceeds as of 2010 and maturing financial obligations. Depending on future privatization proceeds and earnings from the universal charge, PSALM claimed that it may even liquidate the $3.78 billion before its corporate life ends in 2026.

But it doesn’t mean that NAPOCOR will be debt-free by the time PSALM expires 15 years from now. This will depend on how much government can earn from the privatization of its remaining assets and IPP contracts. If the experience of the past 10 years is to serve as indicator, it seems that there is nothing much to hope in EPIRA even in just mitigating the public sector’s fiscal burden. Why is this so?

NAPOCOR’s financial bleeding

Even prior to the EPIRA, there were already initial efforts by government to privatize the power industry. But even then, officials already knew that power privatization can only be successful if government could package it in the most attractive way for businesses to take notice. One factor going against efforts to privatize the power sector was the small energy market of the Philippines. Being a pre-industrial, backward economy, Philippine energy consumption is not as huge as those of other countries even compared to our neighbors in Southeast Asia.

To remedy the concern over a small market, government had to offer incentives and other benefits that will guarantee the profits of private investors. IPPs, for instance, were offered a guaranteed market that was much larger than the actual electricity consumption of the country through take-or-pay contracts, on top of other benefits. These guarantees and perks were the underlying reasons for NAPOCOR’s financial hemorrhage.

Legitimizing onerous contracts & debts

Alas, EPIRA even legitimized these burdensome and unjust contracts and debts. To entice investors, Section 32 of the law mandated the government (and ultimately, the taxpayers) to automatically assume P200 billion in financial obligations of NAPOCOR.

Section 68 of EPIRA did mandate the “thorough review” all IPP contracts by an inter-agency committee headed by the Department of Finance (DOF). It also tasked the committee to take necessary actions in cases where contracts are found to be grossly disadvantageous or onerous to the government. Implementing this provision, then President Arroyo ordered a review of 35 IPP contracts. In 2002, the DOF-led review committee said that a total of 27 contracts have financial issues. A financial issue pertained to an instance when the government agency that entered into the contract agreed to shoulder financial obligations “beyond what is necessary”.

But instead of rescinding these financially onerous IPP contracts, government opted to simply renegotiate them. PSALM claimed that the renegotiations have resulted in some $1.03 billion in savings for the government Such savings, however, were not the result of striking out the take-or-pay provisions in the contracts, which remained even after the renegotiations. The reported savings mostly came from IPPs reducing their nominated capacity, or the capacity that government agreed to pay for whether electricity is actually produced or not. The renegotiations were done not to substantially rewrite the contracts. On the contrary, discussions were carried out by PSALM officials with the IPPs within the parameters set by the contracts.

Consumers’ burden

Even worse, EPIRA mandated that all the costs resulting from these contracts be borne by the hapless consumers. Section 34 of the law states that “a universal charge to be determined, fixed, and approved by the ERC shall be imposed on all electricity end-users”. The universal charge shall be collected for, among others, the recovery of so-called stranded debt and stranded contract costs of NAPOCOR.

Section 4 of EPIRA defines stranded debts as any unpaid financial obligations of NAPOCOR which have not been liquidated by the proceeds from the sales and privatization of its assets. On the other hand, stranded contract costs refer to the excess of contracted cost of electricity under eligible contracts (i.e. those approved by the ERC as of December 2000) over the actual selling price of the contracted energy output of such contracts in the market. Stranded contract costs are basically the take-or-pay capacity payments that will not be offset by the privatization of the IPP contracts and thus will still be shouldered by NAPOCOR.

In June 2009, PSALM had filed petitions before the ERC to recover almost P470.87 billion in NAPOCOR stranded debts and almost P22.26 billion in stranded contract costs for the Luzon grid. The recovery of stranded debts translates to a rate hike of 30.49 centavos per kilowatt-hour (kWh) based on a recovery period of 17 years. Meanwhile, the petition to recover the stranded contract costs in five years will translate to a rate hike of 9.20 centavos per kWh. PSALM filed another set of petitions in June 2010 to recover stranded debts for 2010 (projected at almost P54.90 billion), equivalent to almost 86.77 centavos per kWh. It also proposed to recover in three years stranded contract costs for 2009 estimated at almost P26.69 billion, equivalent to 18.79 centavos per kWh.

Fortunately, the ERC dismissed these petitions last November 15, 2010. The dismissal, however, was not because they had no basis (EPIRA allows such recoveries through the universal charge) but due to PSALM’s failure to submit supporting documents and information. In fact, the ERC decision clearly stated that the dismissal was “without prejudice to the re-filing of the same after conforming to the pertinent ERC regulations”. The relief for consumers is indeed just temporary. On or before June 30 this year, PSALM is expected to file another set of petitions to recover NAPOCOR’s stranded debts and stranded contract costs. Reportedly, PSALM is filing for 12 to 15 centavos per kWh-hike in the universal charge. (To be concluded)

Also read The role of foreign lenders, investment banks, and credit rating agencies in Philippine power sector reform

Power industry, Privatization

The role of foreign lenders, investment banks, and credit rating agencies in Philippine power sector reform

EPIRA was the result of intense pressure from NAPOCOR creditors led by the Asian Development Bank (Photo from finchannel.com)

Last June 8, the Electric Power Industry Reform Act (EPIRA) of 2001 or Republic Act (RA) 9136 marked its tenth year of implementation. A day before, utility giant Manila Electric Company (MERALCO) announced that it is again hiking its generation charge by 51 centavos per kilowatt-hour (kWh). The rate hike underscored how EPIRA has harmed consumers with exorbitant electricity rates, which have now become the highest in Asia. Indeed, EPIRA is considered one of the most notorious legacies of the despised Arroyo administration that was even accused of bribing Congress just to get EPIRA passed a decade ago.

But Mrs. Arroyo and her allies in the legislature are not solely to blame because EPIRA was not just a product of internal and independent policy making. Rather, it was the result of intense pressure from the creditors of the National Power Corporation (NAPOCOR) who were wary that the heavily indebted state firm will not be able to pay them back. NAPOCOR lenders, namely, the Asian Development Bank (ADB), World Bank, and the Japan Export-Import Bank (JEXIM) and Overseas Economic Cooperation Fund (OECF) withheld committed loans for NAPOCOR unless EPIRA was passed. At the same time, they promised additional lending for the privatization and deregulation of the power sector. (JEXIM and OECF merged in 1999 to form the Japan Bank for International Cooperation or JBIC.)

Credit rating agencies also put pressure on the bankrupt government to pass the EPIRA while investment banks acted as privatization consultants. These institutions represent foreign corporate interests who also pushed for the passage of EPIRA to widen their profit-making opportunities in the Philippines through the privatization and deregulation of the power industry. Therefore, these foreign banks and corporations are as accountable as the Philippine government for the mess created by EPIRA.

Pre-EPIRA intervention

In fact, the restructuring of the power industry and the role that these creditors played did not begin with Arroyo’s EPIRA in 2001. EPIRA was in reality the culmination of neoliberal power reforms long pushed by multilateral creditors. Initial efforts started in 1987 during the administration of the late President Cory Aquino with her Executive Order (EO) No. 215. This EO allowed private sector participation in the construction and operation of power plants in the country. In 1990, Congress passed RA 6957 or the BOT Law that authorized the financing, construction, operation, and maintenance of infrastructure projects by the private sector.

These policies formed part of neoliberal structural adjustment pushed by the IMF and World Bank starting in the 1980s in poor countries facing a debt crisis like the Philippines. Among the stated objectives of structural adjustment was to supposedly reduce government deficit and spending through, among others, the privatization of state assets and functions. The ADB had supported these privatization efforts in the early 1990s through loans and equity investment to independent power producers (IPPs) as well as guarantees for NAPOCOR bonds.

Compounding the fiscal woes of government was the deteriorating power situation in the early 1990s, which government responded to with more privatization. In 1993, former President Fidel Ramos was granted emergency powers to enter into negotiated contracts with IPPs for the construction of power plants through the Electric Power Crisis Act or RA 7648. Then in 1994, RA 7718 which amended RA 6957 was enacted to further promote the participation of the private sector in infrastructure development, including power generation.

However, the ADB in a 1994 study (as cited in Sharma et. al., “Electricity industry reform in the Philippines,” Energy Policy, 2004) noted that despite these efforts at privatization, the power crisis continued to worsen. It argued that there was a need for further privatization because NAPOCOR, despite ending its monopoly in generation, still retained its monopsony position. Furthermore, domestic capital was considered insufficient to meet the long-term capital requirements of the industry while legal restrictions on foreign ownership were hampering investment.

Power restructuring program

As early as 1994, the ADB, NAPOCOR, Department of Energy (DOE), and Department of Finance (DOF) had already initiated policy dialogue concerning NAPOCOR’s difficulty in funding necessary generation and transmission projects “and the need for a radical change.” By 1996, an Omnibus Power Industry Bill was filed at Congress to privatize NAPOCOR and restructure the industry. The bill did not gain ground but was later re-filed in 1998 as the ADB approved a $300-million loan to fund the Power Sector Restructuring Program (PSRP) that was co-financed by the JBIC with an additional $400 million. EPIRA was the direct product of this $700-million loan from the ADB and JBIC.

According to the ADB, the PSRP will create competitive electricity markets, restore NAPOCOR’s financial sustainability, and achieve operational improvements and increased efficiencies. The loan was meant to help finance the adjustment costs of privatization such as the take-or-pay contracts with the IPPs and excess debts upon NAPOCOR’s privatization – or what will be called as stranded debts and stranded contract costs under EPIRA. Aside from the loan, the PSRP was also accompanied by two technical assistance (TA) grants from the ADB worth $1.32 million for a study on electricity pricing and regulatory practice as well as a consumer impact assessment.

The PSRP was part of a standby arrangement in 1998 between the Philippines and ADB, World Bank, and IMF. The World Bank’s commitment to the standby arrangement was a fast disbursing loan package of $500 million while the IMF standby facility was worth $280 million. Under the standby arrangement, the Philippine government committed to implement among others further fiscal reforms, financial sector and structural reforms, and strengthening the corporate sector, which included as a critical component power sector restructuring.

Access to the PSRP was structured in a manner that ensured strict compliance to a total of 61 specific conditionalities identified by the ADB in the loan program. These conditionalities were jointly designed by the ADB, World Bank, and JBIC. The $300-million ADB loan was divided into three equal tranches with the first tranche released upon loan effectiveness and compliance to 13 conditionalities while the second tranche was targeted for release in 1999 upon compliance to an additional 8 conditionalities (including the approval of creditor banks of NAPOCOR’s restructuring and privatization plan and passage of EPIRA), while the third tranche was targeted for release in the second half of 2000 upon compliance to a further 7 conditionalities (including the promulgation of EPIRA’s implementing rules and regulations). The rest of the conditionalities were expected to be complied with during the implementation of the program.

However, the passage of EPIRA was delayed and the ADB conditionalities were not met on time. Consequently, the second and third tranches of the PSRP were withheld by the ADB until the conditionalities were implemented by the Philippine government. The second tranche was released in December 2001 and the last tranche in November 2002.

In early 1999, NAPOCOR disclosed that its creditors had warned to cut-off new loans until the privatization of the state-owned power firm was implemented. The World Bank, for instance, indicated that it will no longer support NAPOCOR until the year 2000 while the OECF had advised that no NAPOCOR project will be included in its loan packages. The ADB, meanwhile, had imposed a “very strict” condition of 8% return on rate base (RORB) – a measure of profitability – for NAPOCOR to ensure access to loans. [“No new Napocor loans (Precarious condition worries foreign lenders),” BusinessWorld, March 26, 1999] It was estimated that over $1 billion in fresh foreign loans were riding on the passage of EPIRA. [“Int’l credit groups unsure about tack on Napocor loans,” BusinessWorld, April 13, 2000]

Pro-business lobby

Aside from the foreign creditors, other imperialist institutions had also added to the pressure to privatize NAPOCOR and in some cases even pushed for specific provisions that eventually became part of EPIRA. Credit-rating agencies like Moody’s Investor Service, Inc., for example, had made the privatization of NAPOCOR a pre-requisite for a credit rating upgrade for the Philippines. [“Napocor privatization needed for Moody’s credit rating upgrade,” BusinessWorld, December 13, 1999]

US-based investment banks Credit Suisse First Boston and Arthur Andersen, meanwhile, pushed for government to retain the debts of NAPOCOR instead of passing them to generating companies to make privatization more attractive. These same investment banks advised legislators not to abrogate the onerous purchased power adjustment (PPA) because it will “damage the country’s reputation in the international financial and political arenas.” [“Transparency necessary in Napocor privatization,” BusinessWorld, August 31, 2000]

Credit Suisse, which government tapped to develop a privatization plan for NAPOCOR, also pushed for cross-ownership in generation and distribution in contrast to the then power reform bill that banned all forms of cross-ownership. [“Legislator says Napocor sale consultant exceeded mandate,” BusinessWorld, August 18, 2000] The unbundling of rates supposedly for transparency as well as the dismantling of all forms of subsidy “as rapidly as possible” because “they send incorrect pricing signals in a free market and create economic inefficiencies” were also among the specific provisions in the EPIRA pushed by the Credit Suisse group.

Foreign investors had also publicly called on government to pass the EPIRA without delay. British power firms, for example, warned government that delays in the legislation of EPIRA were turning off investors. They also openly lobbied for cross-ownership, which was one of the debated issues then at Congress. These British firms were among the hundred or so foreign companies – mostly American and Japanese – that had expressed interest in the privatization of NAPOCOR. [“British investors ask gov’t to accelerate Napocor sale,” BusinessWorld, April 5, 1999]

Bankrolling EPIRA implementation

These creditors continue to fund the restructuring of the power sector even after the passage of EPIRA. The ADB, for instance, approved in December 2002 a partial credit guarantee (PCG) of up to $500 million equivalent in Japanese yen bonds to “help meet the cash flow requirements during the initial stage of privatization.” Specifically, the PCG was used to guarantee the bond issuance of the newly created Power Sector Assets and Liabilities Management Corporation (PSALM). EPIRA established the PSALM to oversee the privatization of NAPOCOR.

Also in December 2002, the ADB approved a $45-million loan for the establishment of the wholesale electricity spot market (WESM) and upgrading of critical transmission lines and substations, including a TA worth $0.8 million. JBIC co-financed the project with $45.5 million. It was followed by another TA from the ADB in 2004 worth more than $1 million to boost the confidence of private investors in the EPIRA by enhancing the efficiency of the Energy Regulatory Commission (ERC) and provide financial and technical advice to PSALM for privatization of the NAPOCOR.

So far, the largest power reform loan from the ADB after EPIRA’s enactment was the $450-million Power Sector Development Program (PSDP) approved in December 2006. In its August 2010 Completion Report, the multilateral agency said that the “ADB developed the PSDP to deal with the largest sources of the fiscal imbalance in the public sector caused by losses among the public power agencies. The PSDP was seen to reduce the losses at the (NAPOCOR) and make the (PSALM) more creditworthy, and to create the necessary conditions for the privatization of major power sector assets.” In February 2007, JBIC provided co-financing for the PSDP worth $300 million bringing the total debt to $750 million.

PSDP’s specific objectives were (1) provide financial assistance to the government, through a program loan, to help meet part of the costs of power sector restructuring; (2) create the necessary conditions for substantial progress in privatization; (3) boost confidence in regulatory performance; and (4) smooth the transition to competitive markets. Part of the first objective is to help the national government finance the P200 billion in NAPOCOR debts that it absorbed under the EPIRA. In other words, government is servicing the debts of the state-owned corporation through additional debts.

Aside from bankrolling the implementation of EPIRA, the ADB also provided loans to private corporations involved in key privatization projects. In 2007, for example, it extended a $200-million loan to the Masinloc Power Partners Company Limited (MPPC), owned by the US-based AES Corporation, for the acquisition and rehabilitation of the Masinloc coal-fired thermal power plant. The 600-MW Masinloc plant was one of the largest privatized NAPOCOR-owned power plants. Incidentally, the ADB also provided $359 million in loans and Y12 billion in partial credit guarantee to NAPOCOR to build the Masinloc plant in the 1990s.

Meanwhile, Filipino taxpayers are not only burdened by the debts that bankrolled EPIRA. We are also oppressed by exorbitant power rates, energy insecurity, etc. that resulted from the neoliberal restructuring of the industry imposed on us by foreign institutions.

Read the “Ten years of EPIRA: What went wrong?” series

Part 1 – on electricity rates

Part 2 – on NAPOCOR debts

Part 3 – on monopolies and energy security

Power industry, Privatization

10 years of EPIRA: what went wrong?

People's organizations, research and consumer groups, and other stakeholders will hold a forum with lawmakers to review the impact of the 10-year old EPIRA (Poster from Bayan Muna)

On June 8, Republic Act (RA) 9136 or the Electric Power Industry Reform Act (EPIRA) of 2001 will mark its tenth year. Former President Gloria Arroyo signed EPIRA amid strong opposition from various sectors. The manner in which the law was passed also controversial. There were claims of bribery involving half a billion pesos that the Arroyo administration allegedly handed out to members of the House of Representatives (HOR) to speed up the passage of EPIRA.

Proponents touted EPIRA as the answer to our power and fiscal woes. But after ten years, the country has now the most expensive electricity in Asia. Price manipulation besets the industry. Rotating brownouts plague Mindanao. And the National Power Corporation (NAPOCOR) remains neck-deep in debt.

What went wrong? The long and short of it is that EPIRA is a wrong policy.

Brief background

EPIRA provides the legal framework for the privatization of NAPOCOR and deregulation of the power industry. The state-owned power firm used to own and operate generation plants and transmission facilities. It also held supply contracts with independent power producers (IPPs), or private companies allowed by the Power Crisis Act of 1993 (RA 7648) and BOT Law of 1994 (RA 7718) to build and operate generation plants. Under EPIRA, the Power Sector Assets and Liabilities Management Corp. (PSALM) was set up to privatize the NAPOCOR’s generation and transmission assets including its IPP contracts.

The passage of EPIRA was a conditionality set by the creditors of NAPOCOR for it to access additional loans. Among its largest creditors were the Asian Development Bank (ADB), World Bank, and Japan Bank for International Cooperation (JBIC). These creditors were worried that NAPOCOR, with its worsening financial problems, might not be able to pay them back. The pressure from these creditors provided the impetus for EPIRA’s enactment.

After 10 years, PSALM has already privatized 91.7 percent of NAPOCOR’s generation assets in the Luzon and Visayas grid. It has also privatized almost two-thirds of energy outputs under IPP contracts nationwide. Transmission was privatized as well via a 25-year Concession Agreement (CA) between government and the National Grid Corporation of the Philippine (NGCP) in January 2009. As of October 2010, remaining assets for privatization include three generating assets (1,740.10 megawatts) and eight IPP contracts (2,026.32 MW).

Soaring rates

For consumers, the most obvious impact of EPIRA is the escalation in their monthly electricity bills. From 2001 to 2010, for example, the average residential rate of the Manila Electric Company (MERALCO) has increased by 112.5 percent. The generation charge of NAPOCOR for the Luzon grid has also risen by 86 percent during the same period. (See Chart 1)

Rates have soared because EPIRA allowed the continued collection of the notorious purchased power adjustment (PPA).The PPA was a pre-EPIRA cost recovery mechanism so that NAPOCOR can increase its rates and pay for its ballooning obligations arising from its take-or-pay contracts with the IPPs. Take-or-pay basically means that NAPOCOR will pay an IPP for a fixed capacity regardless if such capacity was used or not. For consumers, it means that they pay for electricity that they did not even use.

Under EPIRA, the PPA was just replaced with other means of cost recovery. One is the generation rate adjustment mechanism (GRAM) which NAPOCOR recoups every quarter although the amount must be approved first by the Energy Regulatory Commission (ERC). Meanwhile, DUs that have their own IPPs like MERALCO can automatically recover every month the change in generation cost thru the Automatic Adjustment of Generation Rates and Systems Loss Rates (AGRA).

Aside from GRAM and AGRA, consumers are also being burdened by the Incremental Currency Exchange Rate Adjustment (ICERA). Thru the ICERA, hapless end-users of electricity shoulder the losses of companies arising from fluctuations in the foreign exchange. To illustrate, if the cost of imported oil or coal used by generation companies went up because the peso- dollar exchange rate rose, the increment will be paid for by the consumers. Like the GRAM, ICERA is recovered quarterly and needs ERC consent.

Consistent with the neoliberal agenda of EPIRA, the ERC adopted the performance-based regulation (PBR) in determining the rates of DUs. Before, DUs use the return on rate base (RORB) that pegged rates 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.” Thus, PBR allowed DUs to charge rates based on projected investments and operating expenses related to electricity distribution. Since using the PBR in 2009, MERALCO saw its distribution charge go up by 70.5 percent from its previous rate that used the RORB formula. (See Chart 2)

(Continued here)

Power industry, Privatization

P932-billion power debt: the cost of privatization

Energy Sec. Rene Almendras said that consumers should pay part of the enormous P932.21 billion in debts incurred by the energy sector. The rest will be shouldered by government, said Almendras, because they are not allowed to recover the entire P932.21 billion through the universal charge. Government, of course, will use taxpayers’ money and taxpayers are also the consumers of electricity.

In other words, we will absorb the full impact of the huge liabilities of the National Power Corp. (NAPOCOR), Power Sector Assets and Liabilities Management Corp. (PSALM), and the National Transmission Corp. (TRANSCO). PSALM accounts for 84.2 percent of the P932.21-billion debt. But note that PSALM just absorbed the debts of NAPOCOR as prescribed by the Electric Power Industry Reform Act of 2001 (EPIRA) or Republic Act (RA) 9136. TRANSCO is also a spinoff of NAPOCOR’s privatization under EPIRA. (See Chart)

More financial woes

Before EPIRA was passed in 2001, the debt of NAPOCOR was pegged at $16.5 billion or about P729.14 billion (based on an exchange rate of P44.19 per US dollar, the 2000 average according to central bank data). Proponents of power privatization made the public believe that such heavy debt burden can be reduced by EPIRA. Economic managers of the Arroyo administration, for instance, claimed that the privatization of NAPOCOR will yield a surplus of some P22.29 billion in consolidated public sector deficit (CPSD) by 2009. CPSD includes the budget deficit of the national government and its monitored government-owned and –controlled corporations (GOCCs) and reflects the public sector’s financial position.

But instead of a reduced debt, Filipino taxpayers and consumers are now confronted with a power debt that is more than P203 billion larger than before state-owned power plants and transmission assets were sold to the biggest local compradors and foreign companies. The CPSD for 2010, meanwhile, is expected to hit P281.3 billion. Government ended up more indebted and bankrupt, while the people oppressed thrice over – by servicing the debt through taxes, by enduring lack of social services as funds are siphoned off by debt servicing, and by paying exorbitant monthly electricity bills to cover among others payment for NAPOCOR debts.

This is the cost of the privatization of state assets that we have been paying for in the name of so-called fiscal consolidation, which by the way is the favorite buzzword today of the International Monetary Fund (IMF) and the World Bank, and unsurprisingly being echoed by Aquino’s finance officials. President Noynoy Aquino also made it clear that privatization, including through public-private partnership (PPP), will be among the main pillars of his medium-term economic program.

Stranded costs

As mentioned, bulk of the power sector’s debt, P785.09 billion, represents PSALM obligations, which it absorbed from NAPOCOR under EPIRA. Specifically, these are called stranded debts and stranded contract costs. Stranded debts refer to any unpaid financial obligations of NAPOCOR which have not been liquidated by the proceeds from the sale and privatization of its assets. Stranded contract costs refer to the excess of the contracted cost of electricity under contracts entered into by NAPOCOR with independent power producers (IPPs) as of Dec. 31, 2000 over the actual selling price of the contracted energy output of such contracts in the market. As mandated by EPIRA, these costs shall be passed on to hapless consumers through the universal charge.

Of the P785.09 billion debt of PSALM, stranded debts account for about P525.76 billion. PSALM has already filed two separate petitions in 2009 and this year before the Energy Regulatory Commission (ERC) to recover the amount through a total rate hike of P1.17 per kilowatt-hour (kWh). Meanwhile, PSALM’s stranded contract costs recovery, if approved by the ERC, will result in a rate hike of 69.03 centavos per kWh. Total rate hike due to stranded costs recovery thus could reach P1.86 per kWh that shall be reflected in the universal charge.

Privatization proceeds

But how and why did the debts of NAPOCOR/PSALM increase? Ideally, the debt of NAPOCOR should have been settled by the proceeds from the privatization of its power generation plants and other assets. This, however, did not happen as the sale of power plants has been greatly delayed and investor appetite hampered by among others lack of guaranteed markets through supply contracts and irregularities in the bidding process. Consequently, government has been forced to continue maintaining the unsold power plants and in the process incurred more debts.

EPIRA has only surpassed the 70-percent mark in privatized assets and contracted capacities early this year, and even this is still unofficial since the accomplishment counts Angat dam that is currently under question before the Supreme Court (SC). So far, PSALM has clinched privatization deals worth a total of $6.7 billion ($3.47 billion for power plants and $3.23 billion for contracted capacities) while the privatization of TRANSCO yielded $3.9 billion. But the privatization revenues as well as income from remaining power plants are not enough to cover the financial obligations of PSALM to creditors as well as to NAPOCOR’s old IPP contracts. In 2009, for instance, debt service maturities and obligations to IPPs reached $2.45 billion (about P116.72 billion, based on the 2009 average exchange rate), dwarfing the P10-billion income PSALM generated from the still unprivatized power plants during the same period.

Furthermore, we have also learned recently that PSALM has incurred “privatization-related expenses” that it integrated in its calculation of recoverable stranded costs. These include a privatization bonus for PSALM officials and employees amounting to P80.9 million as well as privatization consultancy fees worth P118 million.

Sweetheart deals

And how and why did NAPOCOR incur such huge debts prior to EPIRA? Since the time of the Cory Aquino administration, government has been entering into various PPP deals with private corporations to build power plants under the Build-Operate-Transfer (BOT) Law or RA 7718. To entice investors, government forged “sweetheart deals” with them. Government agreed to shoulder all the risks associated with market demand, fuel cost and foreign exchange fluctuation. The “take or pay” clause in these onerous contracts required NAPOCOR to pay 70 percent to 100 percent of the capacity of an IPP (capacity fee), whether electricity is actually delivered and used or not. (Read a 2004 article I wrote about these sweetheart deals here.)

In a 2002 review IPP contracts, an interagency committee found out that at least 26 contracts are fraught with financial issues, meaning they contain provisions (take or pay, fuel cost guarantee, etc) that are financially disadvantageous and burdensome for government. The then Arroyo administration set up the IPP review body amid strong public protest against exorbitant electricity rates. The table below lists these financially onerous IPP contracts. Unfortunately, government did not rescind these contracts after warnings from the foreign creditors and power firms that doing so would undermine investor confidence in the country.

Today, these debts are approaching the P1-trillion mark and the Aquino administration wants us – as consumers and taxpayers – to shoulder the burden. We should not honor these illegitimate debts. We should not allow PSALM to further hike power rates in order to recover NAPOCOR’s stranded costs through the universal charge. NAPOCOR’s debts should at least be renegotiated with creditors and the 2002 review of IPP contracts must be revisited in order to find ways to substantially reduce the debt burden. EPIRA must be finally repealed to stop the power sector’s financial bleeding.

The vicious cycle of privatization, debt, and exorbitant electricity rates must be stopped from further oppressing the people, especially the poor. Unfortunately, the policy direction of President Aquino points to more privatization, more debt, and more exorbitant electricity rates.

Consumer issues, Power industry, Privatization

More power rate hikes coming soon

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.

A Radical's Nut

Notes on Philippine economy and politics

Tag Archives: Epira

Heartless, greedy Meralco thrives under privatized, deregulated regime

Prepaid electricity, anyone?

ADB: Anti-Development Bank

Mindanao power is more expensive than Asia’s major cities

Power lords

The curious case of NAPOCOR debts

The role of foreign lenders, investment banks, and credit rating agencies in Philippine power sector reform

10 years of EPIRA: what went wrong?

P932-billion power debt: the cost of privatization

More power rate hikes coming soon