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)

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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.

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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, 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, 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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Oil deregulation, Power industry, Privatization, Water crisis

Overpriced oil inflates costs of El Niño, power crisis

Petron and other oil firms have been jacking up pump prices in recent weeks (Photo from http://www.petronmarketing.com)

Those who are ready to absolve government for the harmful effects of El Niño should think again. While El Niño is a natural phenomenon, its impact on the people and the economy could have been eased by right government policies. Sadly, the policies in place have exposed the country not only to the strongest blows from what experts describe as a “moderate” El Niño. These flawed policies have also exposed us to El Niño’s magnified impact.

Deregulated, privatized energy

Take the case of power and oil – strategic sectors that have been privatized and deregulated by government. As the water level in dams around the country fell, hydropower generation also declined. Consequently, more power is generated from plants running on expensive and overpriced oil. To make the situation worse, oil prices have been on an uptrend again in the past few weeks. Electricity bills, which are also artificially bloated, climbed as a result. Prices of other commodities and services are sure to follow.

Such predicament could have been capably addressed by a government that has the needed policy tools. But it threw away these tools when it allowed private corporations to take control of the entire energy sector. It tried to reclaim some of these tools through emergency powers but was met with understandable public skepticism. In the end, the reality that Congress could not be convened at this point in the election season forced government to give up the plan.

As an alternative, government now intends to lease modular generating sets that could produce an additional 160 megawatts (MW) of electricity for Mindanao. By itself, this plan is already costly with an initial tab of P5.5 billion aside from increasing power rates in Mindanao by P14 per kilowatt-hour (kWh). But it is made even costlier by overpriced oil that will be used in great amounts to feed the generating sets.

Amid the El Niño, energy companies, with their greed and abuses un-moderated, are having a heyday.

P8.12 per liter overpricing

In the coming months, households not only in Mindanao will have to pay for higher electricity bills. The reason is not only the limited supply of cheaper hydropower due to El Niño. As more power is generated by oil-fed power plants, consumers also become more exposed to the impact of frequent oil price hikes and overpriced petroleum.

Under Republic Act (RA) 8479 or the Oil Deregulation Law of 1998, oil companies are allowed to increase pump prices at whim. They are not even required to inform the public about their price changes, much less explain their price hikes. This policy has been abused to the hilt by the oil firms. The National Economic Development Authority (Neda) itself has once confirmed that oil firms are indeed overpricing their products.

As of January 2010, oil products in the country are still overpriced by an average of P8.12 per liter. This figure is based on the monthly difference between the ideal and actual changes in pump prices from January 2008 to January 2010. The ideal pump price adjustment is computed using the difference in the monthly averages of Dubai crude and foreign exchange (forex) rate during the said period. The actual price movement, meanwhile, is based on the Department of Energy’s (DOE) monitoring.

There is no consolidated data yet on actual pump price movement for February and March. But note that in February, there should have been an 83-centavo per liter rollback based on Dubai crude and forex monthly movements. The actual pump price of diesel, however, did not move during the said month while kerosene prices even jumped by 25 centavos a liter. In other words, the overpricing could be much higher (aside from the fact that even before imported oil reach our ports, they are already overpriced due to global monopoly control by the oil giants).

Daily overcharges of P7.44 M for Minda extra power

Meanwhile, government’s plan to lease modular generation sets to produce

Power generated by the Agus and other hydroelectric power plants in Mindanao has drastically fallen due to El Nino (photo from http://static.panoramio.com/)

an additional 160 MW of electricity in Mindanao will require millions of liters of petroleum. For purposes of comparison, let us look at the 1 MW Generac Diesel Power Module manufactured by Mitsubishi. This generator, running at 100 percent capacity, consumes 238.56 liters per hour of diesel; at 75 percent, 178.92 liters; and at 50 percent, 119.28 liters.

Using this as yardstick, and factoring in the P8.12 per liter in overpricing, we can estimate how much the people will needlessly spend for additional electricity in Mindanao. We shall use the 100 percent capacity level since the generating plants that will be leased need to run at full capacity to augment the power shortage in the region.

Per hour, the overpricing would be equivalent to P1,937.11. If a 1-MW generator runs for the entire day, the extra cost would be P46,490.57. If the entire 160 MW is generated in a day, the figure would be P7.44 million. For one month (30 days), the overpricing would be P223.15 million. If the 160-MW generators were commissioned for three months (April to June), taxpayers will unjustly shell out around P669.45 million on top of the real price of diesel and the cost of leasing the generating plants.

Unabated oil price hikes and overpricing also worsen the people’s burden due to El Niño in other ways. For instance, farmers who rely on irrigation pumps and fishers who use motorized bancas will have to pay more for gasoline. Note that due to El Niño, more farmers turn to irrigation pumps. Fishers also consume more gasoline as they spend more time fishing (warm temperature drives fish to deeper waters, fishers claim).

Overpriced power, too

Meanwhile, outstanding issues in the power sector continue to unjustly burden the people with or without an El Niño. Due to the ongoing implementation of RA 9136 or the Electric Power Industry Reform Act (Epira) of 2001, power rates remain exorbitant and continue to shoot up. Automatic adjustment in generation charges, for instance, allowed Meralco to again hike its rates for March by P1.38 per kWh. Just last year, Meralco jacked up its distribution rates by 41 centavos per kWh.

The Epira-created Wholesale Electricity Spot Market (WESM) also gave more opportunities for the new private power monopolies to manipulate electricity rates. In February this year, for example, power rates in the WESM spiked to as much as P68 per kWh, which Arroyo’s own economic adviser Albay Gov. Joey Salceda described as “unspeakable”. Apparently, power companies trading in the spot market withheld supply, a market abuse easily done by firms in control of both distribution and generation, jacking up prices in the process. Power sold in the Luzon grid is dispatched through the WESM, a mechanism that will also be set up in the Visayas soon.

These increases become more deplorable as power companies, like the oil firms, also overcharge the consumers. In its December 2009 report, for instance, the Commission on Audit (COA) said that Meralco’s illegal charges could reach more than P7 billion. And Meralco has not even com-

Activists call for the nationalization of the oil industry (photo from http://www.bayan.ph)

pletely refunded the P34.12 billion in overcharges that it illegally imposed on its almost 5 million customers in the past.

Nationalized energy

The energy sector is a lucrative industry but the billions of profits it makes come at the expense of the people and national development. Such greed and abuse become more deplorable during times of natural calamities such as the current El Niño when the people’s poverty and hunger intensify and the domestic economy is further undermined.

What we need is an oil and power industry that is not privatized and deregulated, and that is not controlled by the Cojuangcos, Aboitizes, Lopezes, Pangilinans and their American, European, and Japanese partners. What we need is an energy sector that is nationalized, state-owned, and effectively controlled by the Filipino people. Only then can we stop overpricing in petroleum and electricity, and better plan the energy needs of our people and economy.

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