Power rates in the Philippines are the highest in Asia and rank fifth in the world. Brownouts lasting several hours a day have plagued Mindanao during the last few months and the Department of Energy (DOE) warns of disruptions and shortages in the near future in Luzon. Thus, it was not surprising that at the hearings on the 2013 budget at the House of Representatives, DOE received the most intensive interpellation of all the executive agencies–far more intensive, in fact, than the Department of Social Welfare and Development, which had been expected to draw most of the legislators’ attention owing to the P44 billion allocation for its Conditional Cash Transfer (CCT) program.
What was surprising, though, was unlike last year, the DOE declared itself open to reexamining the most controversial mechanisms that have, in the opinion of consumer watchdog groups, contributed to the unending ascent of power prices.
Delaying Open Access
One of these mechanisms is “Open Access” in the retail energy market. Originally scheduled for implementation this October, an Open Access Regime would allow electricity end-users with an average monthly peak demand of one megawatt (MW) to choose their electricity service supplier. Labor and consumer groups have charged that with electricity distribution highly monopolized, the power providers will still be able to informally set prices even under open access, thus defeating the purpose of power sector reform, which is to bring down the cost of power. Moreover, whatever profits they might have to forego in the case of the big industrial users (which will be the users primarily served by an open access regime) can be regained from residential consumers who will not have the same freedom of choice.
Interestingly, I was able during the hearings to extract a promise from the DOE that it would consider the deferment of Open Access during the budget deliberations. After the DOE budget sponsor, Rep. Jun Abaya, made this concession in the formal exchange, then Secretary Rene Almendras went up to me and told me, “We have the same fears about open access. It won’t work in a captive market.” And then the most pleasant surprise of all: shortly after the budget hearings, the Electricity Regulatory Commission (ERC) informed the public that it was postponing till June 2013 the introduction of Open Access.
The postponement of Open Access was a victory, though a partial one. The objective must be to eliminate it as an option altogether.
Questioning Performance-based Regulation and Indexation
The Open Access issue was one of the controversial issues on which the DOE made concessions during the budget hearings. The DOE also promised to review “Performance-based Regulation” (PBR), a regime for calculating electricity charges under which massive rate increases have been made in the last few years. During the hearings, the DOE revealed that a study was being conducted of PBR and “if the study shall produce a conclusion that it should be scrapped or amended, or modified, then ERC is open to such an idea.”
A third issue of concern on which the DOE retreated was the indexation of natural gas from the Malampaya Fields to international oil prices and geothermal steam from Leyte to international coal prices. Consumer groups have complained that this practice has kept up the local price of natural gas and geothermal energy. At the budget hearing, DOE disclosed that the government “has partnered with New Zealand and Indonesia to come up with a study and come up with a totally different framework and hopefully, they could come up with an indexing much lower than coal.”
Time to Replace EPIRA?
Open Access, PBR, and Indexation have been key parts of the Electric Power Industry Reform Act (EPIRA), which was passed in 2001. EPIRA privatization program has been extremely controversial. The passage of state assets to the private sector, for one, has been criticized as a giveaway. In fact, during the hearings, the DOE agreed with my charge that National Power Corporation assets such as the Masinloc coal plant in Zambales and Transco, the power transmission facility, were sold at very attractive terms to the private sector. The department budget sponsor, the Rep. Jun Abaya, said, “I would say probably that we sold these for a song…but these were activities done by the previous department, previous administration.”
Consumer and labor groups such as Nagkaisa!, the biggest labor coalition in the country, have charged that instead of a free market in energy generation EPIRA has created an oligopoly, instead of lower prices it has triggered higher prices, and instead of efficiency it has brought about more inefficiency.
It is difficult to contest these claims.
EPIRA was supposed to bring about massive investment in and creation of electric generation capacity. Yet there has been only a 2,223 MW net increase in installed generating capacity, and this was mostly committed before EPIRA took effect. Given the fact that the country may need a total additional capacity of 14,400 MW in the next few years, many say this speaks badly of the private sector’s ability to meet the country’s needs under the framework of EPIRA. Indeed, 10 years after the process of privatization began, the DOE’s 19th Status Report on EPIRA Implementation asserts, “The government may need to involve itself once again in power generation to avoid power shortages in the future and keep hold of the current momentum being enjoyed as an investment attractive economy. “ If this assessment of the failure of the private sector is correct, then we face a major problem. Getting government involved again in energy generation is going to be a real challenge since only some 10 per cent of the NPC’s former assets remain in its hands.
A key aim of EPIRA was to bring about a free market in the power market. Instead, it has resulted in shifting energy generation from the original monopoly structure to an oligopoly structure. For instance, generating capacity in the Luzon grid is now highly concentrated among three major groups, San Miguel 30 per cent, Aboitiz, 17 per cent, and Lopez, 15 per cent. It is estimated that these groups control 52 per cent of energy generating capacity in the whole country. Moreover, the cross-ownership provision of EPIRA allows for vertical integration of generation and distribution, resulting in an even more monopolized structure of energy provision in this country.
After nearly 11 years, EPIRA has not brought about the efficiency in power distribution and lower electricity rates that its sponsors promised. Like most other neoliberal schemes that sought to expand the reach of the private sector and dismantle the state sector in the belief that this would allow the market to “work its magic,” it has brought about the worst of all possible worlds: skyrocketing power prices and a powerful oligopoly that cares nothing about gouging the consumer.
Former Energy Secretary Almendras was frank about his doubts about the different mechanisms of privatization, as a result of which he postponed the planned launching of Open Access to the middle of 2013, with a hint that this might be scrapped altogether since, as he admitted, it “won’t work in a captive market.” The new DOE chief, Carlos Jericho Petilla, would do long suffering power consumers a big favor not only by scrapping Open Access altogether but, equally important, hitting the drawing board to design a new power paradigm to replace the failed EPIRA paradigm. This need not mean a return to the old paradigm of the state virtually monopolizing energy generation but a hybrid system where the state plays some role in directly generating power and distributing it but where its main thrust is effective regulation of the private sector in coordination with consumer groups.