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Friday, June 13, 2008

Privatization of Power Sector The Root of High Power Rates

The impetus behind the current crisis is the restructuring of the sector through the Electric Power Industry Reform Act, or EPIRA, one of the first laws signed by President Gloria Arroyo in 2001.

IBON Features-- Amid the flurry of accusations between private distributor Manila Electric Company (Meralco) and state-run National Power Corporation (Napocor) over unjust charges, one fact remains clear: privatization and deregulation of the power industry– distribution, transmission and generation– is at the heart of high electricity bills.

For example, consider the multitude of unjust ‘pass-on’ charges levied by Meralco on its customers. These include system losses, in which power lost through pilferage and technical problems are passed on to consumers and P500-million a year of Meralco’s own power consumption which is similarly reflected in electric bills. There is also a reported plan to pass bad debts incurred by the power distributor on to consumers.

These charges have been approved by the government Energy Regulatory Commission (ERC), which is tasked to regulate the rates of electricity distributors. Although blame has been placed on the ERC’s lax regulation for such excessive ‘pass-on’ rates, in truth the regulatory environment has become lenient because of deregulation of the power sector and while moving towards full privatization.

It should also be noted that although Meralco is a public utility with a congressional franchise, its essential nature is a private, profit-oriented corporation listed in the Philippine Stock Exchange. Thus, it should not be surprising that the company exploits legal loopholes to levy such unwarranted charges in order to fatten its bottom line and make its stockholders and owners happy.

The privatization of the power sector created profit opportunities for private-sector independent power producers (IPPs). In order to quickly attract investors to the sector, government had to ensure the power producers’ profitability. Thus, onerous provisions such as ‘take or pay’ (which required Napocor to buy 70% to 100% of power producers’ output) and ‘fuel cost guarantee’ (which obligated Napocor to source and pay for fuel used by IPPs) were tacked onto IPP contracts. These provisions bloated consumers’ power bills through charges such as the infamous Purchased Power Adjustment (PPA). They also contributed to Napocor’s skyrocketing debt burden.

It will be remembered that a government-mandated review of 35 IPP contracts during the Arroyo administration found that only six were “clean” or without financial or legal issues. Five were found to contain “onerous” terms that were “grossly disadvantageous to government”. However none of these contracts were cancelled, and were instead “renegotiated” .

High transmission charges have also been blamed as a factor in high power rates. But the National Transmission Corporation (Transco) is also set for privatization, and thus, needs to charge high rates in order to attract potential investors. It should also be noted that transmission charges are regulated by the ERC as well.

Open Access

The impetus behind the current crisis is the restructuring of the sector through the Electric Power Industry Reform Act, or EPIRA, which was one of the first laws signed by President Gloria Arroyo in 2001.

Before EPIRA the sector was composed of generation, transmission and distribution sectors. Napocor generated electricity on its own and bought electricity from IPPs, and transmitted this to distributors and large industrial customers through high-voltage wires. Distribution of electricity to end-consumers was done by privately-owned electric utilities, a few government-owned utilities and electric cooperatives.

Under EPIRA, the various components of the power sector are separated into generation, transmission, distribution and supply. Generation and transmission assets of Napocor would be privatized while distribution would continue to be handled by the private sector. The end goal of the sale of Napocor’s generation assets is “open access” which is government’s supposed answer to high electricity prices. “Open access” ostensibly aims to introduce competition into the industry by allowing consumers to select their supplier.

EPIRA advocates claim that competition would lower rates, particularly with a provision which states that no power generator should control more than 30% of supply in a given grid and ostensibly prevents monopolies. But the experience of the deregulation of the downstream oil industry demonstrates that such “competition” does not bring down prices. Deregulation has resulted in new players taking 12% of the market while the big three oil firms (Petron, Shell and Chevron) share the remaining 88% or an average of 29% per firm. This has not stemmed cartel-like behavior with oil industry players raising pump prices nearly simultaneously. It has also not resulted in lower prices, as pump prices of all petroleum products have raised an average of almost 580% since deregulation of the industry was implemented in 1996.

EPIRA also notably allows cross-ownership between distributors and generators. This has allowed the Lopez family to own a controlling share in Meralco while also owning IPPs. This situation has led to questions of conflicts of interest as Meralco would naturally be more inclined to buy power from its sister firms regardless of whether it is cheaper than electricity sourced from Napocor IPPs.

Reversing Privatization

In the light of high costs in power rates, the reversal of privatization of the entire power sector becomes an increasingly viable answer. This entails the repeal of EPIRA law, reversal of the privatization of Napocor’s generation assets, and government control over the entire power sector – distribution, generation, transmission and supply.

Of course many would question the return of state control over the industry, particularly in light of corruption allegations against Napocor such as its alleged overbilling of customers by some P10 billion and its purchase of overpriced coal for its power plants.

However there remains no substitute for responsible state control in an industry such as the power sector whose natural monopolies will inevitably be exploited by private interests for maximum profit even at the expense of the public. And as a state-run industry, the people must have the right to subject the power sector to scrutiny and demand transparency in its operations. Effective state control remains the best solution to address high power rates– even as it is acknowledged that leaving the power industry to an administration known for allegations of corruption, unaccountability, and subservience to elite interests compromises achieving a pro-people power sector. IBON Features

IBON Features is a media service of IBON Foundation, an independent economic policy and research institution. When reprinting this feature, please credit IBON Features and give the byline when applicable.

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