how power rates increased against the law

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How power rates increased against the laws intention

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Published : Sunday, August 28, 2011 00:00Article Views : 1,036Written by : CLAIRE MERCADO WRITER-RESEARCHER

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IN 2001, Congress passed a law intending to lower electricity rates. Today, there are pending

proposals at the House of Representatives aimed at reviewing or repealing it.

Why? Because that law has increased consumers electricity bills and made Philippine powerrates the highest in Asia.

High electricity is one of the reasons our countrys gets the least foreign direct investmentsamong our economic peers in the Association of Southeast Asian Nations (Asean).

One of the proposals is from the Gabriela Womens Party. They are calling for the review ofRepublic Act 9316 or the Electric Power Industry Reform Act (EPIRA) as it has apparentlyfailed to protect end-users from the greediness of electricity firms.

In June, Gabriela Rep. Luzviminda Ilagan was quoted in news reports claiming that electricitydistributor and retailer Manila Electric Company (Meralco) has billed its residential consumersmore than double since EPIRA took effect. She cited data from a study by the consumer groupPeople Opposed to Warrantless Electricity Rates (POWER) that Meralcos average residentialpower rate charge of P4.87 per kilowatt hour (kWh) in 2001 increased to P10.35 per kWh in2010.
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Residential ratesPOWERs study also revealed that the Philippines has the highest electricity rates in Asia. Basedon the data that POWER obtained from a research by International Energy Consultants, theaverage residential retail electricity tariff in the Philippines in 2010 was around US$0.18 per

kilowatt hour or 18 USc/kWh.

Japan was next with around 17 USc/kWh. Singapore was third with around 16 USc/kWh,followed by Thailand with about 9 USc/kWh, Malaysia with about 7 USc/kwh, Indonesia witharound 6 USc/kWh, and Vietnam with around 4 USc/kWh.

Industrial ratesThe average industrial electricity rate in the Philippines in 2010 was around 13 USc/kWh. Thiswas second to Singapores rate pegged at around 14 USc/kWh. Tokyo was third with a rate of 12USc/kWh, followed by Thailand with about 9 USc/kWh, Malaysia with around 8 USc/kWh, S.Korea with around 7 USc/kWh, Vietnam with about 6 USc/kWh, and Indonesia with about 5

USc/kWh.

We have submitted a resolution for the review of EPIRA. However, the committees to whichthese resolutions have been submitted have sat on these issues. Wala pa silang pinapatawag nacommittee hearing kaya hindi ito nate-take up [They havent convened a committee hearing sothis hasnt been taken up], Ilagan told The Manila Times. We have to review EPIRA to findout how efficient the implementation of the law has been.

Thats the biggest question on EPIRA. For a decade now, this law has shaped the future of theelectricity industry and it will spell its fate for the next many years. But why was EPIRA drafted,enacted and implemented in the first place? The answer can be traced to the decisions andprograms in electricity generation undertaken by past administrations.

Problems in power generationIn 1986, the US$2.2-billion Bataan Nuclear Power plant capable of producing 650 megawattswas ready for commissioning. However, the Corazon Aquino government abolished the energyministry that had powers over the electricity generation industry and decided, for safety andpolitical reasons, not to operate the plant.

This was a huge mistake, opined University of the Philippines Economics Professor Gerardo P.Sicat. In his book Philippine Economic and Development Issues, he writes, The governmentlost all the investments put into the project and it burdened the nation with no additional electricpower capacity to carry it through during the next stage of expansion of the service. Old powerplants began to fail and there was no replacement.

This eventually resulted in nationwide power shortage in the early 1990s, when Fidel Ramos waspresident. Citing insufficient funding for the construction of power generation facilities, theRamos administration enticed foreign and private investors into the electric power industry. Thisresulted in the entry of Independent Power Producers (IPPs), according to Dr. Giovanni Tapang,professor at the UP National Institute of Physics and convenor of POWER.


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This solved the immediate problem of power shortages. But the contracts with IPPs that thegovernment entered into had provisions requiring the National Power Corporation (NPC) to payIPPs whether power generated was actually consumed or not, according to Tapang, who is alsothe national chairperson of the Samahan ng Nagtataguyod ng Agham at Teknolohiya para sa

Sambayanan (AGHAM), an organization of Filipino scientists.

Moreover, even if NPCs liabilities for the power plants were transferred to the PhilippineTreasury, NPCs financial problems continued. It was forced to postpone needed increases inelectricity tariffs, hence its operational deficits continued to rise, requiring more foreignborrowings, according to Sicat.

To help pay for NPCs foreign debt and recover other losses caused by the contracts with theIPPs, higher electricity tariffs were charged. And this, according to Tapang, was done by addingthe so-called Power Purchased Adjustment (PPA) to electric bills.

In turn, the high electricity rates contributed to the low levels of investments in electricity-intensive industries. It was also threatening the competitiveness of Philippine Industry ininternational trade, wrote Sicat.

EPIRAs promise: competition results in low ratesEPIRA was passed as an attempt to solve the problems of the power industry. The law aimed torestructure the industry and called for the privatization of the NPC.

Why restructure the industry and privatize the NPC?

Before, NPC was the sole owner and operator of both the generation and transmission sectorsand the supplier of electricity to distribution utilities like Meralco. But over the years, the NPCincurred huge losses in its operations instead of earning revenues.

EPIRA restructured the power industry by unbundling the stages of operations of NPC. As abusiness and industry, the generation of electric power was separated from the business oftransmiting electricity (transmission stage) to consumers. EPIRA also called for the entry offoreign investors for the efficient management of all sectors, according to Tapang.

Since NPC consisted of generating plants though not all were earning enough to maintainthemselves, EPIRA called for their privatization. The economic theory behind this was that whenthese plants were broken up and became private firms, the competition among them would forcethem to provide electricity at less cost to consumers.

To further introduce competition in the electricity generation sector, the Wholesale ElectricitySpot Market (WESM) was created. It is as an auction market where generating companiescompete to sell electricity to distributors. EPIRA also created the Energy RegulationCommission (ERC) to regulate power rates and penalize generators engaging in anti-competitivebehavior. It also created the National Transmission Company (TransCo), which would take overthe transmission assets of NPC and would eventually be privatized.


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On one hand, the government would benefit from the privatization of NPC as it would be able tocut losses from loans and pass on the burden of power infrastructure investment to the privatesector, while earning revenues from the sale, according to POWER. On the other hand, thePower Sector Assets and Liabilities Management Corp. (PSALM) would manage the sale of

NPCs assets and restructure its debts.

Ten years under EPIRATen years later, the NPC is still drowning in debts. According to POWERs study, the proceedsfrom privatization did not lessen NPC debt. PSALM shelled out $18 billion from 2001 to 2010to settle [the] original $16.39 billion NPC obligations. Yet total NPC debts remain at $15.82billion in 2010. This is nearly 33 percent of the [coutnrys total] national debts over the years.

As to EPIRAs promise of bringing about competition among generators by having more playersto bring down electricity rates, the law has apparently only led to the concentration of ownershipof generation firms to few corporations.

Data from POWERs study show that only three companies control 52 percent of the countryspower generation capacity. San Miguel Corporation holds 20 percent, First Gen/Lopez has 17percent, and Aboitiz controls 15 percent.

The rates have also increased. POWER claims it is because EPIRA has integrated the IPPs andtheir contracts requiring the government to pay for power generated whether it is used or not intothe industry.

Asked why the government agreed to such contractual obligations, ERC Executive DirectorFrancis Saturnino Juan explains that whenever a power plant is built, there will be a needalready for a market for the produce. Otherwise, it would be hard for the investor to decidewhether to push or not the investment to put up a plant if there is nothing that will at least formthe basis for its calculation of whether or not it would be recovering its costs, earning a return.

Our understanding of this reply is that no investor would have put any money into its powerplant project if there were no guarantee that it would be able to recover the investment.

This is the reason why the investors actually asked for these [provisions in the] contracts, andNPC entered into these contracts where it will purchase the generation of these plants to a certainguaranteed volume, adds Juan.

In other words, as we in The Times understand what Juan had said, the investors insisted onthese provisions and the government agreed because it was desperate to solve the power shortageproblem.

Rate hikes and ERCs cost recovery schemesPOWER also claims that the various cost recovery schemes instituted by ERC are also a reasonwhy electricity rates have increased. The group is pointing to the Incremental CurrencyExchange Rate Adjustment (ICERA) and Generation Rate Adjustment Mechanism (GRAM)


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which ERC implemented early onand the Automatic Generation Rate Adjustment (AGRA)now being implemented.

Juan says ICERA was instituted because some operating and maintenance expenses such asthose for fuel are affected by foreign exchange fluctuations. So when dollar rates rise resulting in

higher operating and maintenance costs, the NPC, distribution utilities, transmission firms, andthe generating companies are allowed to recover currency differentials by billing consumersunder the heading ICERA.

GRAM, on the other hand, is claimed to be the ERCs replacement for the PPA (which wasabolished in response to angry public clamor). Asked if this is true, Juan explained that before,PPA accounted for the adjustments in generation and transmission components and system loss.When EPIRA mandated the unbundling of rates, GRAM accounted for the adjustment ingeneration.

Early on, NPC and distribution utilities which source power from IPPs were allowed adjust their

generation rates through GRAM. But since GRAM was a quarterly adjustment, distributionutilities had to wait for three months before they could file their petitions for adjustment. Thenthe petitions would undergo public hearings.

Juan said that since a lag was inherent with the GRAM, during this lag, distribution utilities weregiven an ability under the guidelines issued by ERC to recover carrying charges. Paranginterest ito, opined Juan.

He said ERC saw that carrying charges can be eliminated if ERC would revert to earliermechanisms similar to the PPA where adjustment would be on an automatic basis, but therewould be a confirmation process at the end of a period. This is what is now called AGRA.

Under the AGRA recovery mechanism, foreign currency differentials, which were originallybeing recovered through ICERA, are immediately claimed in customer charges.

AGRA is for the distribution utilities. [With] IPPs, they continue to adjust depending on theircontracts with the NPC. NPC [used] to recover these adjustments before through GRAM andICERA. And right now, we reverted to automatic adjustments for NPC for the same reason namay lag or delay sa recovery nila, explains Juan. So they petitioned the ERC to be allowed toimplement a mechanism similar to AGRA. So there is already right now automatic adjustmentalso in the fuel and purchased power cost of NPC and also its forex.

Juan clarifies that all the adjustments are subject to hearings so that ERC can verify if theadjustments are really needed.

POWER, however, still objects to these cost recovery schemes. The group argues that throughthese mechanisms, NPC and distribution utilities have passed on currency fluctuations andcontractual obligations to end-users. Para banglahat ng lugi nila ay pwede ng ipasa [Its seemsthat now all their losses can be passed on to consumers, Tapang said.


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Juan admits that the ERC has been bombarded with criticisms. We received a lot of criticismsthat the rates continued to rise even ifnagkaroon na ng EPIRA [even with the EPIRA], he says.

Asked what are the possible factors why electricity rates have increased despite all the regulatorymeasures, Juan opines that one reason is the private investors cost of capital when they invest in

the Philippines.

If you are an investor investing in the Philippinesgiven all the risk involved sa pagnenegosyo[in doing business] in the Philippines, mas malaki yung rate of return na gusto mo [you wouldwant a higher rate of return], says Juan. Gusto mo na mas mataas ang presyo ng iyongkuryente [You would want the price of electricity to be higher].

If you approve the returns lower than what they are expecting or desire, pwede namangmagkaroon ng underinvestment [then there could be an underinvestment] in the electricity supplyand the distribution, adds Juan. Kasi [Because] that capital can be brought elsewhere wherethey may earn the return they want. Yun ang pwedeng mangyari, na may underinvestment, may

shortage sa supply. [That is what could happen, that there could be an underinvestment, thatthere will be a shortage of supply.]

To turn what Juan told us into simple English, he in effect said: If ERC did not grant theinvestors the rate of return that they desire, then they would not invest. So there will be what hecalls an underinvestment in the power industry. The result then be a power shortage.

Of course a power shortage means our economic growth and development will be curtailed.

New pass-on charges due to pre-Aquino GSIS?

Now heres another bad news for power consumers.

The National Grid Corporation of the Philippines (NGCP), the countrys power transmissionnetworks private concessionaire composed of investors led by Henry Sy Jr. and the State Grid ofChina Corp., has recently filed a petition before the ERC asking for approval to increase itstransmission charges, according to a report in The Philippine Star.

NGCPs transmission assets were damaged by typhoons Ondoy and Pepeng and a bombingin Lanao del Norte, but these were not covered by the firms insurance policy. This means thenew owners or concessionaires of the NGCP would have to spend their own money for therepairs.

The report said although then-government-run NGCP paid an insurance premium ranging from$5.57 million to $6.69 million, the industrial all risks/submarine cable and sabotage andterrorism policy had a high deductible amount of $5 million in the aggregate and $2 million foreach and every loss thereafter. This means that NGCPs losses have to be higher than the saidamounts for the insurance company (or companies) to be held accountable.

But NGCPs damage only amounted to P172.82 millionmuch less than $5 million. So it was


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indemnified for the Ondoy and Pepeng damage. The new NGCP owners paid for the rapairs andnow want to recover its losses by increasing its transmission charges. Should ERC approveNGCPs petition, consumers will have to pay P1.14 per kilowatt-hour for five years starting thisyear, the report said.

Mandated to insure all government property, the Government Service Insurance System (GSIS)reinsured NGCP with another insurance company to lessen its exposure and risks, according tothe report.

The reinsurance of NGCP should have undergone biddings, but it is believed that the old GSISmanagement always renegotiated with the former reinsurer. NGCP suspects that in the past, thebidding terms were being tailored-fit by the GSIS to favor the existing reinsurer. The report alsosaid that suspicions have been raised that GSISs reinsurance program had been a source ofgraft and corruption in the past.

how power rates increased against the law

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