|
Note:
After Manila Electric Co. (Meralco), the country’s largest
electricity distributor and supplier, announced in April
an increase in its generation charges by 51.88 centavos
per kilowatt-hour (kWh), rumors of a brewing government
takeover began spreading like wildfire. Signals are there,
experts say, as shares of both the government and the
Lopezes each jumped to more than 30 percent, with the
Lopezes having a slight fractional advantage. The recent
government actions to pin down Meralco and target the
Lopezes, however, only serve to narrow the discourse to a
simplistic formula: Electricity rates are high; for which
Meralco and the Lopezes are to blame. Meralco is no doubt
an easy and guilty target. But there are more reasons for
electricity rates in the Philippines being among the
highest in Asia. And the Arroyo government is equally to
blame, if not more. This position paper by the Freedom
from Debt Coalition (FDC) was submitted to the Joint
Congressional Power Commission (JCPC), which opened
hearings into high power rates this week.
THE issue
of high electricity prices is a result of a confluence of
factors, from bad governance to corruption, to
mismanagement to rent-seeking to framework concerns. It is
also more complex than what the media portray or what some
politicians would want us to believe. We attempt to
identify these factors as our contribution to gaining a
fuller understanding of the problem of unabated expensive
electricity.
The FDC
argues that the skyrocketing price of electricity emanates
from structural, management, policy, governance and
paradigmatic causes. These problems cannot be resolved
fully without transforming the electricity industry into
one that is more responsive and accountable to the people,
and more environmentally sustainable. Meanwhile, it would
greatly help the consumer for the government to target
specific rate-hiking factors and introduce immediate
reforms, with the end in view, of course, of more
comprehensive changes sooner rather than later.
We believe
electricity is expensive because of the following:
1. The
Energy Regulatory Commission (ERC) allows Meralco, other
distribution utilities (DUs) and the National Transmission
Commission (Transco) to earn over and above what used to
be the statutory return on rate base of 8 percent to 12
percent. The Electric Power Industry Reform Act (Epira)
allowed ERC to change the system of tariff setting, and it
did. But the system it now follows allows both
transmission and distribution companies to earn far more
than what they were allowed to earn in the past. And, as
far as generation and supply companies are concerned, the
ERC has little, if any, say in the prices they charge
because generation and supply are deregulated under Epira.
2. The
Arroyo government wants to attract private investors to
purchase the National Power Corp.’s (NPC) assets, and for
the assets to become attractive, electricity rates have to
be high. The higher the winning bidder bids, the higher
the electricity price we have to pay in the future so the
winning bidder can recover its investment.
This can
be observed from the nature of recent electricity rate
hikes. Following the suggestion of the Asian Development
Bank (ADB), the NPC petitioned rate hikes in order to
attract investors since no investor would invest without
proof of financial viability. Out of the P1.98/kWh NPC
petitioned in 2004, P1.03/kWh was approved by ERC in
2005—the highest rate hike in the history of the ERC.
Transmission charges also increased from P0.7716/kWh in
May 2006 to P0.9163/kWh in July 2006 (which is contrasted
with almost flat prices from November 2005 up to May 2006)
as the privatization and the bidding process is about to
start.
3. The
Arroyo government did not renegotiate the contracts with
NPC’s independent power producers, or IPPs. These
contracts require NPC to purchase electricity whether
these are actually generated or dispatched, and to supply
fuel to IPPs that are in operation. The price NPC agreed
to pay for this electricity was overstated to begin with,
and many of these contracts have clauses that allow the
IPP to raise rates over time. NPC also bears the risk of
peso devaluation and the risk of the cost of fuel, such as
oil and coal, going up.
We have
been paying for these contracts in our electric bills for
over a decade, and we continue to pay for these today,
although this is less transparent, thanks to unbundling.
With world oil and coal prices hitting all-time highs,
with the peso now at P40 to the dollar compared with
P26:$1 when these contracts were signed, the cost of these
contracts is an excessive burden on ordinary Filipino
electricity consumers. Even consumers who do not have
electricity at home are also made to pay for these
contracts because the government guarantees all of NPC’s
obligations to the IPPs.
4. The
Epira allows Meralco to purchase, at most, half of its
electricity requirements from its sister companies or IPPs.
Besides the problem of NPC with the IPPs, we have the
problem of Meralco’s contracts directly with its own IPPs.
Epira also allows cross-ownership between generation and
distribution. A closer look at the ownership of most of
Meralco’s IPPs will show that they are owned by the
Lopezes. Examples include the Santa Rita, the San Lorenzo
natural gas and the Quezon coal-fired power plants.
Whatever guarantees the government gives to its IPPs,
Meralco also gives to its IPPs. Meralco has always claimed
that it doesn’t earn from the high generation charges of
its IPPs, and that it is merely passing on to its IPPs
whatever it charges its customers for generation. Meralco
is telling the truth. But that is not the entire picture.
For while Meralco doesn’t itself earn from the high
generation charges of its IPPs, the Lopezes do. A simple
review of the financial statements of the Lopez holding
company and its generation companies will show this.
This
results in a clear case of double-whammy for the
consumers. At one end, NPC must still pay for the unsold
electricity it gets from IPPs because of the take-or-pay
provision—an undue cost which will later be part of NPC’s
stranded cost to be passed on eventually to consumers.
At the
other end, Meralco pays its IPPs more than what it would
have paid NPC, if it bought the electricity from NPC
during the same hours that Meralco was buying from its
IPPs. As NPC rates vary from hour to hour, becoming more
expensive when demand for electricity peaks, we must
compare on an hourly basis what Meralco pays its IPPs with
what it would have paid NPC if it bought electricity from
NPC instead of its IPPs.
Fortunately, during the May 6, 2008, dialogue at the ERC,
members of the FDC and EmPower Consumers were able to
obtain a copy of Meralco’s electricity suppliers and their
respective cost and share for the months of March and
April. Data show that the cost of power from Meralco’s
IPPs is higher than that of NPC’s (see table below).
NPC-generated
electricity is cheaper, also because there is a P0.30/kWh
mandated reduction required by Epira for electricity
generated by NPC or its IPPs. The electricity Meralco buys
from its IPPs is not subjected to this 30-centavo mandated
reduction.
5. High
electricity prices breed inefficiencies, which further
raise the cost of electricity. The power sector is
inherently inefficient. Average capacity utilization of
Transco’s transmission lines, according to an ADB report,
is only at 12 percent. We are paying for the investment
and loans incurred to set up a transmission grid and on
the average, only 12 percent of the capacity is being
utilized. With regard to generation, dependable capacity
in the Philippines amounted to 13,639 megawatts (MW) at
the end of 2006, but that same year, peak demand for
electricity was only 8,760 MW. We pay for capacity we
don’t use, and this is such a heavy burden on consumers
that we economize on our use of electricity even further.
However, the less we consume of electricity, the more we
have to pay of unused capacity. This is a vicious cycle
similar to a debt trap. Industries cannot survive such a
setup. Poor consumers, even less so.
This is
manifested in electricity consumption data obtained from
the Department of Energy: Electricity consumption grew by
10.6 percent in 2003, then by a lower 3.2 percent in 2004,
then by an even lower 2.5 percent in 2005. In 2006
electricity consumption grew by only 1.1 percent. Today it
is residential and commercial users who hold a bigger
share of total consumption. The thing is, residential and
commercial consumers have peak hours when their demand for
electricity is strong. Beyond that, demand is very low.
This leaves the power sector with a huge inefficient
setup: Base load demand is weak but you have to have extra
capacity for use during the peak hours. This also means
that you have to spend on additional capacity that will
most likely get used only during peak hours. This is
clearly wasteful and inefficient.
6. Other
ERC decisions have rendered the cost of electricity high.
One such decision is the ERC’s dismissal of the Power
Sector Assets and Liabilities Management Corp. (PSALM)
market abuse case alleged by the Philippine Electricity
Market Corp. (PEMC), the operator of the Wholesale
Electricity Spot Market (WESM). The ERC dismissed this for
lack of sufficient evidence, despite the detailed market
data submitted by the PEMC clearly showing that PSALM
exercised its market power to raise the WESM spot price.
The dismissal by ERC will cost consumers an additional P14
billion.
7. Epira-mandated
removal of subsidies. Following the logic of privatization
and market reforms, Epira states that instruments such as
cross-subsidies, which distort the “real” price of
electricity, should be removed. This is in keeping with
the transformation of electricity industry from a
public-service industry to a commodity market. The prices
should be subjected to market rules alone—and
considerations such as equity and justice in the provision
of electricity should be abolished. Households no longer
enjoy subsidies from the industrial and commercial
sectors, and households in Mindanao and the Visayas are no
longer being subsidized by households in
Luzon. These households that no longer enjoy the subsidies of the
pre-Epira days have experienced a hike in rates as a
result of the removal of these subsidies.
Even the
lifeline rate today is not what it used to be. In the
logic of subsidy, better-off consumers subsidize the more
disadvantaged ones. This may work in cities like
Manila,
but in areas that are by and large poor, the lifeline rate
is symbolic more than real and it is actually the less
poor who are subsidizing the poorer.
8. Unfair
and unjust practices of industry players that the ERC
cannot effectively regulate, or may even condone. The ERC
is known to have been powerless in providing more
substantial solutions to recurrent abuse (overcharging and
corporate malpractice) of DUs such as Meralco. On a number
of times Meralco was proven to have engaged in such
unscrupulous practice, yet Meralco can and will probably
engage in such practice because of the lack of fundamental
action on the part of the ERC. For example:
§
In 2002
the ERC discovered P0.50/kWh unjustified overrecoveries of
Meralco from the PPA. It reached P12.3 billion as based in
December 2001 computations. Meralco was asked to refund it
to the consumers.
§
In 2003
the Commission on Audit (COA) discovered that Meralco
overcharged its customers by P0.017/kWh through inclusion
of income tax as operation expense which it passed on to
consumers from 1994 to 2002. The Supreme Court
subsequently ordered Meralco to stop this practice and to
refund the consumers by as much as P30 billion.
§
Also in
2003 the FDC questioned the ERC’s giving of provisional
authority to Meralco to raise its rates by as much as
P0.12/kWh. Fortunately for the consumers, the Supreme
Court junked the ERC decision in January 2004 because it
violated certain rules during its own hearings.
§
In June
2004 Meralco again applied for P0.1327/kWh increase
through Generation Rate Adjustment Mechanism. The Supreme
Court again junked the petition in February 2006 as
Meralco did not follow the prescribed process (lack of
hearing and publication).
But
Meralco is not the only one engaged in abusing and
deceiving the consumers. The Panay Electric Co., also
known to be owned by the Lopez family, had also been asked
by the ERC to refund the consumers P2/kWh it earned due to
overcharging.
9.
Value-added tax (VAT). Because of the ballooning fiscal
deficit of the government, which is in part caused by
guaranteed obligations of government-owned and -controlled
corporations like NPC, the 12-percent VAT now includes oil
and electricity which was exempted before (zero-rated) in
the previous consumption tax regime because it was
categorized as “socially sensitive”—raising its prices
will translate to rising prices of other commodities.
According to some studies, VAT raises electricity prices
by P0.60/kWh to P0.90/kWh. It is estimated that the
government earned at least P7.668 billion from VAT in the
electricity industry in 2005.
One of the
more controversial applications of VAT in electricity is
the imposition of VAT to system loss, electricity which
had been generated but not used. It is unjust to impose
consumption tax on goods and services not actually
consumed.
10.
Corruption and mismanagement.
§
In NPC.
Corruption in NPC artificially inflates generation
charges. This includes allegations of “overpricing” in the
process of buying coal and oil supply for NPC-owned power
plants and NPC-IPP’s.
§
In PSALM.
The privatization of NPC plants is anomaly-ridden, the
most outstanding proof of which is the halted sale of the
Masinloc Power Plant to the winning bidder—the YNN. Aside
from the fact that YNN capacity is questionable (it failed
to pay down payment despite three extensions), sale of
Masinloc to YNN will only raise electricity prices form
P2.80 to P4.80/kWh. What is more revolting in this case is
that, according to a COA report, PSALM officials gave
themselves a P10-million bonus because of the “successful”
closing of the failed transaction with YNN. |
