Failed promises of the Electric Power Industry Reform Act of 2001
Time and again the government has been promising that the privatization of government-controlled corporations and agencies would result in better services, lower rates and fees for the Filipino people while bringing in much-needed funds to the government. These privatization efforts have taken many forms: outright sale of government assets, contracting out functions of government agencies such as the purchase and importation of rice, Build-Operate-Transfer schemes, and the much touted Public-Private-Partnerships of the current Aquino government.
But the Filipino people’s experience with the power industry proved otherwise.
By ANNE MARXZE D. UMIL
MANILA – Power rates are expected to increase again this month. Meralco, the biggest power distributor in the country, said it will increase its generation charge by 0.085 centavos per kilowatt-hour to 5.3721 per kWh.
A household consuming 100 kWh can expect an increase of P8.50 per kWh in their electricity bills while those that use 200 kWh a month will have to pay P17 more for August. Households that use up 300 kWh monthly can also expect an increase by as much as P25.50 per kWh.
The never ending increases in power rates are blamed on privatization, according to a study POWER FAILURE: 10 years of EPIRA, A people’s review on the impact of the Electric Power Industry Reform Act of 2001, which was conducted by Bagong Alayansang Makabayan (Bayan), People Opposed to Warrantless Electricity Rates (Power) and independent think tank group Ibon.
According to Bayan, the Electric Power Industry Reform Act (Epira) systematized and widened privatization and deregulation of the power industry in the country. Epira has paved the way for private corporations to control the transmission, generation and distribution of electricity. Corporations that control some of the distribution utilities also own generating plants.
Rates doubled under Epira
Despite strong opposition from various sectors, Epira was railroaded by Malacañang’s allies in the House of Representatives and signed by then president Gloria Macapagal-Arroyo on June 8, 2001,
Epira, according to the Department of Energy aims to “bring down electricity rates and to improve the delivery of power supply to end-users by encouraging greater competition and efficiency in the electricity industry.” In its website, the DOE claimed that the Epira will make sure that the country will have reliable and competitively priced electricity. “The strategy is to put an end to monopolies that breed inefficiency, encourage the entry of many more industry players, and generate competition that will benefit consumers in terms of better rates and services.”
Ten years after, however, Bayan, Power and Ibon said Epira’s implementation is ten years of burden to consumers.
Despite the promise that electricity will lower upon implementation of Epira, electricity rates have doubled, Prof. Giovanni Tapang, convener of consumer group Power and chairman of Agham (not the party list) said.
“The law was designed not for the benefit of end-users but for the benefit of private companies, which would eventually own and control the entire power industry,” Tapang said.
In 2000, Tapang said, Meralco’s residential rate is only P4.87 kWh ($0.11). By 2010, nine years after Epira, power rates have doubled to P10.35 kWh ($0.24). “Meralco’s effective residential electricity rate per kilowatt hour rose by 112.5 percent,” Tapang said.
Bayan, meanwhile, noted that Napocor’s generation charge also increased. For one, Napocor’s effective rate in Luzon grid increased from P2.39 kWh in 2000 to P4.67 this year or has jumped by more than 95 percent between 2000 to 2010. “Napocor’s generation charge has doubled in the past ten years,” Bayan said.
Under Epira, the wholesale electricity spot market (WESM) was created purportedly to enhance competition. According to the law, WESM or the spot market is where generators compete, “a leveling mechanism to bring down the prices of electricity.”
Bayan’s study, however, revealed that the establishment of WESM made power rates rise to ridiculous levels in 2010 due to speculation and lack of generation capacity. Because of speculation, Bayan said, WESM charged P68/kWh ($1.61) in Feb. 2010. Bayan added that high prices in the spot market is the reason behind Meralco’s continuing expensive charge in early parts of 2010. “But if we were to investigate, it was during this time when there was a sudden disruption in operations of San Miguel Corporation’s (SMC) plant including Sual and Limay plants. There are allegations that SMC intended to disrupt power supply to create artificial shortage that caused high electricity rates.”
The Energy Regulatory Commission (Epira) created under Epira also opened the doors for a new way to set electricity rates, the study said. From the return on rate base (RORB) system, it instituted the performance-based regulation (PBR) for distribution utilities and even in the transmission rates of the National Grid Corporation of the Philippines (NGCP). “Under the PBR, rates are set based on promises of operation performance, costs and capital outlays planned by the company. Consumers are thus paying for something that has not happened yet,” Bayan said. In RORB, charges are based on reasonable return from the assets actually used in the distribution of electricity.
Agham also said recoveries also known as pass-on costs jacked up electricity rates. “On top of these is the value added tax that is imposed across all the components of our bill – including local and franchise taxes and systems losses,” the study said.
Bayan added that consumers shouldered the 475.66 percent increase in pass-on costs.
Purchased power adjustment and automatic recoveries
Epira has allowed the continued collection of the purchased power adjustment (PPA).The PPA is a cost recovery mechanism to enable Napocor to increase its rates and pay for its obligations arising from its take-or-pay contracts with the independent power producers (IPPs). Take-or-pay provision compels Napocor to pay IPPs 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.
Then president Fidel V. Ramos aggressively enticed private investors, including foreign companies into the country’s electric power industry using schemes like the Build-Operate-Transfer (BOT) program and the Power Crisis Act when the country experienced eight to 12 hour daily brownouts.
In 1998, IPPs constructed and began to operate power generation facilities with a total capacity of 4,800 megawatts, estimated at $6 billion. After a year, half of total energy sales in the country were already sourced from IPPs. The study said this generation capacity was not obtained cheaply. “With the onerous take-or-pay provisions that contain off-take requirements of 70 to 85 percent of contracted capacity, Napocor has to pay the IPPs whether power was actually consumed or not. Higher tariffs result from the recovery of these losses through PPA. As of June 2002, PPA was already more than half of the electricity bills of consumers.”
However, because of the outrage and protests that the PPA generated, then president Gloria Macapagal-Arroyo ordered a cap in the PPA in May 2002. Eventually, the PPA was subsumed in the other charges reflected in electricity bills.
According to the study, the PPA remains to be a large part of electric power rates of end-users, albeit under different names. “With the unbundling scheme ordered by the ERC, the PPA was hidden and distributed in the various line items in the new electric bill such as the generation charge, the transmission charge, system loss charges, subsidies and franchise taxes.”
PPA was never removed from the consumer’s bill, it was only replaced by a new mechanism called the Generation ate Adjustment Mechanism (GRAM) or Adjustment of Generation Rates and System Loss Rates (AGRA) for distribution utilities like Meralco.
Like PPA, Napocor passes on to the consumers, through GRAM and AGRA, their additional expenses like fuel and contracts to independent power producers (IPPs). Changes in exchange rates between peso and dollar are also passed on to the consumers through Incremental Currency Exchange Rate Adjustment (ICERA).
The study said these automatic recovery charges are on top of the generation charge, pegged at P3.4029 when the rates were first unbundled as required by Epira. Part of GRAM’s formula is the “purchased power cost as approved by ERC.” The PPA’s formula, on the other hand, includes the “cost of electricity during a supply month. “Both do not make a distinction whether electricity was actually delivered or not as a result of the onerous take or pay provisions of many IPPs,” the study said.?
“Consumers still pay and will continuously pay for electricity that they do not actually use; shoulder the cost of excessive rates of power contracted by Napocor and the different distribution utilities; and pay for the inefficient operations of IPPs,” Bayan said.
Inefficient power supply
Despite high rates, the supply of electricity is not stable. “The Epira has not brought about and will not bring about a stable electricity supply to the whole country,” the study concluded.
Despite Epira’s promise to have a sustainable and stable supply of electricity, there are still looming threats of power crises in the country as electricity generation failed to keep up with the demand.
In 2010, the peak demand of electricity has reached 10,231 megawatts. The DOE projects that it would need a total additional capacity of 16,550 megawatts onwards to 2030. As of 2010, total installed capacity in the country is 16,359 megawatts up from 13,380 megawatts in 2001. Total dependable capacity according to the study is only 13,902 megawatts.
This, according to Bayan, is also one of the pitfalls of privatization.
Citing Cebu Private Power Corp (CPPC) as an example, the study said investors can and will shut down operations as soon as the location becomes a liability to the private company’s profit margins. The CPPC made threats that it will shut down operations of its 65 megawatt plant due to financial constraints further aggravating the projected shortage in the Visayas. “Such moves make the development and industrialization of our country hostage to the whims and profit margins of the private industry players,” the study said.
IPPs only sees the power industry as a business and not a service. “Private investors and IPPs would only build and maintain a power plant if it remains economically viable and earn profits for them,” the group said.
The study said Epira has further exploited and plundered the country’s energy resources by mostly foreign owned transnational companies.
“This is important since energy utilities are strategic in nature to the development of the country. If these industries are left to monopoly capital, whose interest is to recoup their investment and rake profits – it will result in a unending increase in utility costs and our national interest will not be addressed.”