High power rates in the Philippines: Who’s responsible?

Posted: May 14, 2008 in Socio-Political
Tags: , , ,

If there’s anything that could raise tempers on a hot summer day, it’s the rising prices of goods, from oil products, to rice and electricity.

The recent discussions on the high power rates serve to expose a lot of anomalies in the power industry. The Philippines, it has been said, has the second most expensive power rates in Asia, behind Japan. None of the power industry players can claim innocence over high power rates. Meralco, Napocor, the Energy Regulatory Commission, the Independent Power Producers, they all have in a way, contributed to rising power rates.

What our lawmakers are forgetting however is that these anomalies are all made possible under one umbrella policy which is the EPIRA, or the Electric Power Industry Reform Act which was signed into law on June 8, 2001 by none other than President Gloria Macapagal Arroyo.

Let us examine the culpabilities of key players in the power industry.

Meralco – The Lopez-owned distribution utility is being accused of unjust charges as well as questionable business dealings with its sister companies.

  1. Meralco charges its customers with systems losses which has an allowable cap of 9.5% of its total kWh sales. Systems losses represent the electricity lost due to pilferage, technical losses in the delivery of electricity, and what is called “company use” or the electricity used by Meralco itself (the cap is 1% of total kWh sales). For consumers, the question often asked is why should we pay for electricity lost to pilferage? Shouldn’t we be only paying for electricity delivered? Meralco is also able to “recover” pilfered electricity when it asks apprehended pilferers to pay a large fine. The consumer group POWER has raised this issue way back in 2002. It is only now (and why only now?) that the Arroyo administration is taking note of the problem. Also, all distribution utilities, not just Meralco, are allowed to recover systems losses.
  2. Meralco claims in its paid ad that lifeline users enjoy discounted rates. While this is true, it can also be misleading. In the first place, the subsidized rates are shouldered by other consumers and not by Meralco. Those consuming more are subsidizing those consuming 100 kWh or less. It’s something like the STFAP of UP, “rich subsidizing the poor”. However, unlike the STFAP, the lifeline subsidy scheme is supposed to be revenue neutral. Here is where another problem lies. Meralco claims that from 2003-2007, it has under-recovered its lifeline subsidy rates. It has actually paid for the subsidies of lifeline users from its own corporate pockets. The amount is almost P1 billion. A petition is pending before the ERC to allow Meralco to recover the amount from consumers.
  3. Meralco gets half of its power from its own IPP’s. Consumers would feel that there would be some conflict here between the customer wanting to have cheaper sources of power, and the Lopez-owned power plants wanting to make a profit. While it is true that the Lopez-owned IPP’s are selling power at relatively lower rates than Napocor due to several factors, there’s this persistent feeling that this type of cross-ownership in generation and distribution may not be all that beneficial to the consumers. For example, in the past, because of certain take-or-pay provisions in the Lopez IPP’s, consumers will have to pay for the “Installed capacity” of plants. This means that even if the plants don’t deliver a single watt of electricity to Meralco, we still pay them for their capacity to generate. But Meralco says that its bilateral contracts passed the scrutiny of government. That is also true, though consumers may not find that necessarily just.
  4. The recent congressional probe of Meralco also called attention to the distribution utility buying its cables and meters from Lopez-affiliated companies. Lawmakers found this practice also questionable. Meralco can of course say that it is just being made the whipping boy of the power industry by an unpopular regime desperate to stabilize it rule. There is some truth to that too. But at the end of the day, it is really very hard for Meralco to justify its dealings with its sister companies. There will always be doubts, and what if’s because the whole industry is profit-driven, and that includes Meralco and its affiliates. But there’s also the question to the government, why run after Meralco only now? Consumer groups have been raising these issues ever since?
  5. When the EPIRA mandated the unbundling of rates in 2001, Meralco filed for a petition to unbundle with a prayer for a rate increase. Bayan and other consumer groups, along with consumer crusader Mr. Genero Lualhati, represented by the Public Interest Law Center, contested the ERC’s approval of the petition. We won in the Court of Appeals but the Supreme Court reversed the CA’s decision in December 2006. The SC upheld the provisional rate hike BUT also ordered the ERC to seek the help of the Commission on Audit in examining the financial records of Meralco. To the knowledge of consumers, no audit has taken place. Such an audit would be helpful in determining if the rates charged by Meralco are reasonable, according to the SC decision.
  6. Meralco and Napocor have both agreed to settle a dispute in a previous supply agreement. The amount involved is P14 billion. They have a joint petition before the ERC to allow Meralco to recover the amount, which they have justified to be part of the generation cost. Meralco owes Napocor P14 billion and they want consumers to pay for it. Meralco will have paid for its debt, and Napocor would have made a hefty profit. The consumers will end up collectively poorer by P14 billion. I mean, come on, this is really hard for anyone to swallow.

Napocor – The state-owned generation firm is also being accused of escalating generation rates. More rate increases are also expected with the wave of privatization taking place as mandated by the EPIRA. And even if there is a spot market where Napocor trades in, rates haven’t been drastically reduced.

  1. Napocor also has contracts with IPP’s and these include take or pay provisions too. The IPP’s are guaranteed payments even if they don’t deliver a single watt of electricity. This is again justified by the assertion that consumers are actually paying for the “installed capacity”. No contract has been rescinded. The Arroyo government believes in the sanctity of these contracts, no matter how inimical they may be to consumers.
  2. Napocor has been accused of “market power abuse” in the wholesale electricity spot market. Its plants are said to have colluded to sell electricity at high rates so that it could recover losses sustained during the opening of the WESM when, for obvious political reasons, Napocor had to sell at very low rates (and thus earn brownie points for Mrs. President). The above anomalous WESM transaction involves P9 billion, from August to November 2006. The government through PSALM, wants this amount to be passed on to consumers (lem’me guess… because it represents the cost of generation?). A case is pending before the ERC.
  3. Napocor has also been accused of buying over-priced coal via negotiated contracts. This happens when Napocor faces a shortage in fuel and would have to resort to emergency purchases. A complaint is pending before the Ombudsman where it is being alleged that the amount of overpriced coal reached more than P600 million.
  4. Last May 9, the ERC issued a show cause order to Napocor, asking it to explain why it should not face administrative and criminal raps for failing to file its Generation Rate Adjustment Mechanism and its Incremental Currency Exchange Rate Adjustment. ERC estimates that Napocor over-recovered P10 billion from 2006 up to the present. This is equivalent to a 20 centavo/kWh rollback in power rates. In move to pre-empt the ERC probe, Napocor announced it was giving a 20 centavo/kWh rate reduction.
  5. The privatization of Napocor plants has led to fears of increased generation rates. Plants are being bought at very high prices. The Masinloc plant for example was sold for around $930 million. How will an investor get a return on his investments? Through its rates of course, which we can expect to be high. Generation is deregulated anyways, so they can just pass on high rates to consumers.

Independent Power Producers – During the power crisis of the 90’s, the Ramos government attempted to solve the power shortage by allowing the setting up of IPP’s. To attract investors, they had to be given certain guarantees such as the take-or-pay provisions. These contracts were maintained until the present. Profits for generators were ensured because no matter what happens, they get paid. We pay for “installed capacity” even if not a single watt is generated.

Ramos administration – Before we forget, the Ramos administration is responsible for having all these IPP’s doing business in the Philippines through onerous contracts. It was during FVR’s time that power outages became widespread and the only “creative” and “profitable” solution the government came up with was to get as many IPP’s to put up plants by giving them guaranteed profits. The Ramos government did not think building state-owned plants was a worthwhile undertaking. It probably thought more earnings could be made through shady deals with IPP’s.

Energy Regulatory CommissionWhen Meralco and Napocor are accused of over-charging or unjustly charging their customers, they quickly reply, “but the ERC approved these rates”. True, the ERC also has a hand in high power rates because it allowed generators and distributors to pass on so many charges to customers. The ERC introduced the GRAM and the ICERA as ways for generators to automatically recover rate adjustments. The ERC approved the unbundling of rates which effectively embedded the much-hated Purchased Power Adjustment (PPA) into the generation and transmission charges. The ERC gave Meralco a provisional rate hike during the unbundling of rates. The ERC was poised to give Meralco another rate hike if the Supreme Court hadn’t reversed the ERC’s ruling. The ERC has been sitting on the P14 billion Meralco-Napocor settlement, instead of dismissing it. It took the ERC two years to discover Napocor’s failure to file its GRAM and ICERA, resulting in P10 billion in over-recoveries. The only bright spot in the ERC so far is that it shares the consumer view that the VAT on power ought to be scrapped.

The Arroyo administration – And then there’s GMA. The EPIRA was the first major piece of legislation passed by the then 5-month old Arroyo administration in 2001. The promise then was lower electricity rates. We saw TV ads proclaiming the Power Act reduction in electricity rates. We were given a preview into the spot market. Competition they said will bring down power rates. Privatization they said would unburden government of bad debts and will make the industry more efficient. Under the EPIRA, we will know the true cost of power.

It’s been almost seven years. Power rates remain high, and they have become higher over time. Power plants have been privatized. The transmission sector has also been auctioned off.

The Arroyo administration wants to amend the EPIRA, particularly the privatization threshold so that open access can happen sooner. Under open access, power consumers can choose among which power producer can give the lowest rates. The amendment can be seen as some kind of remedial measure aimed at bringing down rates with the assumption that competition will indeed happen even if only 50% of the generation sector is privatized. Not many are hopeful rates would indeed go down in a privatized and deregulated environment.

The Arroyo administration is also responsible for the VAT on power. This comprises about 72-75 centavos/kWh of the total power rates. Its’ about 10% of our total bill. The VAT is being applied to generation, transmission and distribution. This has resulted in some outrageous charges.

Systems losses are also charged with VAT. There’s no logic to taxing pilfered electricity, that’s for sure. Yet the government does this because the little centavos it collects, when put together, can reach billions.

Lifeline subsidies to smaller consumers are also taxed with the VAT. We subsidize consumers then still we’re taxed. Only in the Philippines.

Franchise taxes are also taxed again by the VAT. This is double taxation. It’s a tax on a tax.

Take away the VAT and you substantially reduce power rates. The Arroyo government has so far ignored this call, but it seems that some Arroyo allies are not as hard line in their defense of VAT.

Government has all the powers and the means to protect consumers. However, if government is keen on deregulating and privatizing the power industry, then consumer interests would have to take a back seat to profits. That is the bottom line. That is why a nationalized power industry is needed, so that consumer interests are protected by government.

  1. When we examine closely, there are many factors that affect the power rate. We can’t just point one. Let’s us help together in solving this issue.

  2. professor x says:

    Who is the lesser ‘evil? A private company like Meralco which is highly regulated by the ERC, SEC and other government agencies?

    A government corporation like NAPOCOR which claims to offer low electric rates even if it buys at high price?

    A public utility run by the government which lacks credibility and has no track record in managing corporations?

    If the Lopezes continue to run Meralco, at least, we are assured that the ‘honorable and esteemed’ members of the Senate and Congress can always call for Senate hearings and shame those businessmen to high heavens.

    If we let the government take over private corporations, you can be sure that their stealing and corruption will go unnoticed or just be whitewashed.

    Hey, we are still paying for the pajeros and excessive allowances of those damn NAPOCOR officials, aren’t we?

  3. charles xavier says:

    I blame the government. I blame the government for every child that dies of malnutrition, I blame the government for every crime committed, I blame the government for every OFW abused by their employeers, kidnapped by terrorist,caught in crossfire.

    Honorable men and women of this government, the blood in your hands.

  4. Everytime we blame the government, we blame ourselves. Blame ourselves for every child who suffers malnutrition, let us blame ourselves for every crime, for every wrongdoings in our society.

    We are part of everything.

  5. We need to reform this country’s political system. This will only happen if we ourselves and our ways of living. We need elect leaders who have honesty, integrity and loyalty to serve other people. I doubt if there are any politicians that have all these traits.

  6. Uhaw na Isda says:

    Philippines is the world’s second largest Geothermal power producer, it can supply Asia’s cheapest electricity, someday.

    We just need faith in the government and better engineers to make this dream come true.


  7. KiffTeets says:

    Interesting writing – hope to visit once again.

  8. fucker says:

    fuckkkkk all of youuuu