14 years of oil deregulation is enough! (Part 1)

Because oil is a very socially sensitive commodity, the Oil Deregulation Law has become one of the country's most contentious laws (Photo by Nino Jesus Orbeta)

On February 10 (Friday), Republic Act (RA) 8479, or more notoriously known as the Oil Deregulation Law, will mark its 14th year of implementation. The law, which was aggressively pushed by the International Monetary Fund (IMF), was enacted on Feb. 10, 1998 by the 10th Congress. Because oil is a very socially sensitive commodity, the ODL has become one of the most contentious laws in the country. Its constitutionality had been the subject of several petitions at the Supreme Court (SC). In the past five Congresses, many legislators have filed bills amending or repealing the ODL. The Executive has convened, since 2005, three “independent” panels to review the law, including one recently set up by the Aquino administration.

From RA 8180 to RA 8479

In fact, RA 8479 was not the original deregulation law. The original, RA 8180, was enacted on Mar. 28, 1996. But massive people’s protests greeted the passage of RA 8180. Organizations under the Bagong Alyansang Makabayan (Bayan) launched two people’s strikes against oil price increases. The Asian financial crunch in 1997 further inflamed the unrest. Following a massive strike in October 1997, the Supreme Court (SC) was forced to issue a temporary restraining order (TRO) against the deregulation law. RA 8180 was finally declared as unconstitutional by the SC in a Nov. 5, 1997 decision.

According to the SC, the said law breached constitutional provisions outlined in Article XII Section 19. This provision states that “The State shall regulate or prohibit monopolies when public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed.” In its decision, the SC recognized that the Philippine oil industry conceded that “operated and controlled by an oligopoly, a foreign oligopoly at that.”

The High Court further pointed out that “The much ballyhooed coming in of new players in the oil industry is quite remote considering that these prospective investors cannot fight the existing and well-established oil companies in the country today, namely Caltex, Shell, and Petron. Even if these new players will come in, they will still have no chance to compete with the said three (3) existing big oil companies considering that there is an imposition of oil tariff differential of 4% between importation of crude oil of the said oil refineries paying only 3% tariff rate for the said importation and 7% tariff rate to be paid by businessmen who have no oil refineries in the Philippines but will import finished petroleum/oil products which is (sic) being taxed with 7% tariff rates.”

However, then President Fidel V. Ramos marshaled his allies in Congress to immediately pass a replacement, correcting the unconstitutional provisions cited by the SC. The minimum inventory requirement was deleted while the import tariff rate was pegged at 3% for both crude oil and refined petroleum products. In two months since the SC junked RA 8180, Congress enacted RA 8479, which continues to be effective until today. Another petition was filed against RA 8479 arguing that price control should not be lifted because it contradicts the anti-monopoly provision of the Constitution. But in a Dec. 17, 1999 decision, the SC denied the said petition.

Role of the IMF

The passage of RA 8180 (and its replacement RA 8479) was tied to a loan of almost $1.04 billion that the Philippines contracted with the International Monetary Fund (IMF) in 1995 under the multilateral institution’s Extended Fund Facility (EFF). The deal with the IMF actually involved six major areas covering 43 specific measures. Aside from the deregulation of the oil industry, other conditionalities included tax reform, import liberalization, financial sector reform, foreign investment liberalization, and privatization. According to Bangko Sentral ng Pilipinas (BSP) Governor Gabriel Singson, the IMF wanted these provisions in the Oil Deregulation Law in order for the country to exit from the IMF “on a secure footing.”

Not only did the IMF push for the passage of an oil deregulation law, it also actively influenced the actual provisions that such legislation will contain. In fact, to access some $300 million in the first tranche of the EFF, as well as another $300 million in loans from the Japan Export Import Bank (JEXIM), the IMF had first to approve the then newly enacted RA 8180. (See BusinessWorld, “New oil deregulation law gets nod,” February 20, 1998) The IMF had also pushed for automatic price adjustment and elimination of any form of subsidy as among the main provisions that an oil deregulation law must contain.

The timing of full deregulation also became a contentious issue during the deliberations in Congress. The Senate and the House of Representatives were then pushing for a transition period before full deregulation takes place but the Executive was rejecting the proposal because the IMF requirement was immediate liberalization of the oil industry. To accommodate the IMF conditionality, the Ramos administration lobbied for an acceleration clause. Congress, in the end, passed RA 8479 with such clause, stated in Chapter VI Section 19, which authorizes the President to accelerate the start of full deregulation (which the law states shall start five months following the effectivity of RA 8479) except for socially-sensitive oil products (i.e. LPG, regular gasoline, and kerosene). As expected, Ramos exercised this prerogative and accelerated the implementation of full deregulation (earlier by four months) to hasten the approval of fresh loans worth $1.6 billion under the IMF’s standby credit facility. (See BusinessWorld, “Oil deregulation rushed for ‘IMF credit,’” March 16, 1998)

Continue reading here 

Power lords

San Miguel Corporation cornered 41.3 percent of privatized generating plants and IPP contracts in terms of capacity (Photo from allvoices.com)

(Continued from Part 2)

The restructuring of the power industry under EPIRA facilitated the creation of new private monopolies that lord over not only the distribution but also the generation of electricity. The dominant position of these monopolies, controlled by billionaires in Forbes’ list of richest Filipinos and their foreign partners, is bound to further intensify under Aquino’s public-private partnership (PPP) program.

Privatized power plants and IPP contracts

Out of the 7,665.88 megawatts (MW) in capacity of privatized generating plants and IPP contracts, Danding Cojuangco’s San Miguel Corporation (SMC) cornered 41.3 percent while the Aboitiz group bagged 28.5 percent. Other major buyers include the Consunjis (7.8 percent) and the Lopezes (7.4 percent). American firm AES Corporation accounted for a significant 7.8 percent. South Korean companies SPC Power and K-Water have a combined 5.8 percent. (It includes the Angat hydropower plant that was put on-hold by the Supreme Court.) Five companies accounted for the remaining 1.4 percent.

The costs of these transactions total $6.69 billion. SMC accounted for 35.9 percent of the said amount; Aboitiz, 30.2 percent; AES Corp., 13.9 percent; K-Water, 6.6 percent; Lopez, 5.7 percent; Consunji, 5.4 percent; and others, 2.3 percent. (See Table 1)

In terms of overall generating capacity, the restructured Philippine power sector is now dominated by just three companies – San Miguel Power Corporation (20 percent), Lopez-owned First Gen Corporation (17 percent), and the Aboitiz group (15 percent).

Government through NAPOCOR and PSALM has 30 percent. (See Chart 4) SMC’s rise as a major player in the power industry is truly phenomenal considering that it has only started venturing in the industry in 2008.

These are the same groups that also control the biggest distribution utilities (DUs) in the country. SMC and the Lopez group, for example, control MERALCO with 27 percent and 6.6 percent, respectively. (Manny Pangilinan’s Metro Pacific controls 45 percent.) MERALCO is the largest DU in the Philippines with a franchise area covering 24.7 million (about 25% of the national population) in 31 cities and 80 municipalities. It serves Metro Manila, Bulacan, Rizal, and Cavite as well as parts of Laguna, Quezon, Batangas, and Pampanga.

The Aboitiz group, on the other hand, controls the second and third largest DUs – the Visayan Electric Company (VECO) and Davao Light and Power Company. VECO serves Metro Cebu covering four cities and four municipalities. Meanwhile, Davao Light serves Davao City and Panabo City as well as three municipalities in Davao del Norte. Aside from these DUs, the Aboitiz group also controls Cotabato Light and Power Company, San Fernando Electric Light and Power Company, and the DUs serving the Subic Freeport zone, Mactan export processing zone, and the West Cebu industrial park.

SM tycoon Henry Sy has taken advantage of the EPIRA as well. His One Taipan Holdings (30 percent), State Grid of China (40 percent), and Calaca High Power Corporation (30 percent) control the National Grid Corporation of the Philippines (NGCP). NGCP holds a 25-year concession agreement (CA) with government to operate the country’s transmission system beginning in January 2009.

No transparency or competition

Cross-ownership in distribution and generation, which EPIRA allows, makes claims by advocates of neoliberal power restructuring about transparency and competition in pricing an outright lie. EPIRA’s unbundling of rates, for example, is practically meaningless even if a consumer can see in his or her monthly bill how much he is paying for generation and distribution. Market abuse is not prevented even if rates are unbundled due to cross-ownership. This has been clearly illustrated in the operation of the EPIRA-created Wholesale Electricity Spot Market (WESM).

The WESM, which has been operating in Luzon since 2006, is meant to among others “provide and maintain a fair and level playing field for suppliers and buyers of electricity”. But cross-ownership negates whatever benefits that the WESM is supposed to offer. The intention of the WESM is to make rates more competitive by offering prices other than those set in the bilateral contracts. EPIRA even capped at 50 percent the power requirements that DUs can source from their own generators and the rest they must get from other IPPs and the WESM.

However, the WESM itself is dominated by the same generators that are related with the DUs. IPPs connected with MERALCO, for instance, account for 42.6 percent (SMC with 24.8 percent and Lopez, including Quezon Power, 17.8 percent) of the 11,652-MW capacity registered at the WESM. The Aboitiz group, meanwhile, comprises 13.1 percent. The huge shares of these groups to the WESM-registered capacity make the spot market vulnerable to manipulation and speculation. Case in point was early last year when the price of electricity at the WESM reached an unbelievable P68 per kWh at one point during the height of the El Niño.

The high WESM prices have been blamed by MERALCO for the monthly increases in its generation charge last year. The latest adjustment in MERALCO’s generation charge worth 51 centavos per kWh, announced last Tuesday, is again being blamed at the high increases in the WESM, where rates jumped by P1.89 per kWh. MERALCO IPPs, on the other hand, increased their rates by a smaller 16.2 centavos per kWh.

Energy insecurity

Finally, the country’s energy security has remained precarious under EPIRA. The rotating brownouts experienced in different parts of the country last year is a tell-tale sign that the power crisis has not been resolved by privatization. In Mindanao, for example, the power shortage reached as high as 700 MW in March 2010 that led to rotating brownouts of as long as 8 hours daily. Government quickly blamed the El Nño because Mindanao gets more than half of its power supply from hydroelectric plants.

But apparently, the deeper issue is not drought but government neglect. During the Aquino administration, for instance, Mindanao’s power mix was 75 percent hydro while peak demand was 800 MW, according to a former NAPOCOR president. In 2010, DOE data show that hydro accounted for a relatively smaller 51.8 percent of installed capacity in Mindanao while peak demand was 1,288 MW. Thus, the El Niño could not be solely blamed for the shortage since no significant additional capacity has been put in the region. This should have been the job of government but because of EPIRA, it focused on selling the assets of NAPOCOR instead of installing additional capacity.

Even Luzon was not spared from rotating brownouts during last year’s El Niño. Aggravating the low levels in Luzon’s major dams were the uncoordinated shutdowns implemented by privately controlled power plants. They include SMC generation plants Sual and Limay as well as the Lopez plants that use natural gas from Malampaya. The power supply shortfall reached 641 MW, which could have been easily offset by Luzon’s excess capacity and thus avoid the rotating brownouts. But because EPIRA has dissolved government’s role in ensuring power supply, there is no mechanism in place to fill the gap resulting from plant shutdowns.

Ten years is enough

Its proponents argue that EPIRA must be given a chance to work because once fully implemented, the country will surely reap its promised benefits. They cite the impending implementation of the so-called open access and retail competition. Under this system, power consumers will have the opportunity to choose their suppliers. But then again, the industry has already been monopolized by a few players making the supposed option to choose an illusion.

For its part, the Aquino administration and its allies in Congress have worked for the amendment of EPIRA to extend the so-called lifeline subsidy. But it still does not address the exorbitant and rising electricity rates that Filipino consumers are forced to shoulder. Besides, the subsidy is being paid for by other consumers and does not come from the pocket of MERALCO or government.

Ten years of EPIRA is enough. Its defects could not be corrected by simple cosmetic amendments. It is fundamentally wrong to allow the narrow profit agenda of private companies and banks to take over a sector as strategic as the power industry.

EPIRA has resulted in the doubling of power rates and intensification of private monopolies. At the same time, it failed to address the financial problems of NAPOCOR and the country’s energy security. Only NAPOCOR’s creditors and private local and foreign companies have benefitted from power restructuring. For these reasons, there is a clear and urgent need for our policy makers to seriously rethink the law and work for its repeal. (END)

Read Part 1 – 10 years of EPIRA: what went wrong? and Part 2 - The curious case of NAPOCOR debts

Also read The role of foreign lenders, investment banks, and credit rating agencies in Philippine power sector reform

Toll hike, VAT, soaring utility rates in lieu of new taxes

SLEx toll will quadruple due to VAT and privatization of infrastructure development (Photo from ryucloud/photobucket.com)

President Noynoy Aquino has promised that his administration will try not to raise or impose new taxes to bridge the widening fiscal gap, which is expected to reach a record high P325 billion this year. But while not imposing new taxes (yet) to address its fiscal woes, the Aquino administration is still squeezing the people dry through unabated increases in prices and rates charged by privatized and deregulated utilities, and by getting the most out of the previous administration’s most onerous and anti-poor revenue-raising tool – the 12 percent value added tax (VAT).

By the way, did you know that the VAT, like privatization, was also a legacy of Noynoy’s late mother, President Cory Aquino? On July 25, 1987, Cory issued Executive Order (EO) No. 273, adopting the VAT. Cory issued the EO just before the 8^th Congress opened, thus preempting the legislature’s constitutional power to impose taxes. The move was a ploy to swiftly implement the International Monetary Fund’s (IMF) prescription to impose the VAT and ensure that the bankrupt Cory administration can raise revenues for continued debt servicing.

Controversial tax

Today, the ever controversial tax is again in the headlines following the insistence of Aquino’s Bureau of Internal Revenue (BIR) chief to impose the regressive VAT on toll. If Noynoy will not intervene and order the Department of Finance (DOF) and BIR to suspend its implementation, fees charged by toll operators around the country will go up starting Monday (August 16) as the cash-strapped Aquino administration collect from motorists the VAT on toll roads.

The table below summarizes the current rates and new rates to be charged (12 percent increase, representing the VAT) by major toll roads in Luzon, based on a notice released by the Toll Regulatory Board (TRB).

Meanwhile, those using the South Luzon Expressway (SLEx) will feel the double whammy of VAT and toll hike that will raise the toll charged by its private operator, the South Luzon Tollway Corp. (SLTC). Motorists using the SLEx will see their toll almost quadruple mainly because of the new rates approved by the TRB last May.

Ironically, the principal author of the 2005 VAT law Republic Act (RA) 9337, Senator Ralph Recto, is strongly opposing the move arguing that VAT should not be imposed on a government service. Recto, who belongs to Aquino’s Liberal Party (LP) and presently chairs the Senate ways and means committee, suffered the VAT backlash and lost his reelection bid in the 2007 midterm elections, which explains his stance on the VAT on toll. Aside from Recto, another LP member, Sen. Franklin Drilon is also questioning the BIR plan because it is supposedly imposing a tax on tax. Business groups, in particular those operating in Southern Tagalog’s industrial zones, on the other hand, have warned of commodity price hikes while transport groups plying the SLEx threatened to increase fares.

Aquino’s dilemma

While some prominent LP members are against it, the Aquino administration’s dilemma is that backing down on the BIR plan to collect the unpopular VAT on toll will further limit its already scant revenue sources, which have been perennially drained by trade liberalization, automatic debt servicing, promotion of foreign investment and export production, and onerous privatization contracts, on top of tax evasion, smuggling, and fat paychecks of high officials of the bureaucracy.

Given the persistent external pressure from the IMF for so-called fiscal consolidation and to hike the VAT rate to 15 percent, it is unlikely that Aquino’s economic team – led by ardent VAT champions and neoliberals DOF Secretary Cesar Purisima (who as Arroyo’s DOF chief helped design and lobbied for RA 9337) and Socioeconomic Planning Secretary Cayetano Paderanga (who was among the UP economists that pushed for VAT and VAT rate hike) – will advise Aquino to heed the public clamor and stop the VAT on toll. But if Aquino will push through with the VAT on toll, he risks suffering a major political blow very early in his term because of the measure’s unpopularity and severe impact on the people. Such setback can be further compounded in case the Supreme Court (SC) decides favorably on petitions filed against the VAT on toll amid growing public opposition.

Nonetheless, the pending toll hikes, whether implemented or not, further highlight the lack of real reforms that matter to the people under the Aquino administration. That Aquino is trying to widen the scope of the onerous and anti-poor VAT is proof that prospects of better and more decent living conditions for social sectors neglected by past regimes remain dim, if not dimmer.

VAT on privatized, deregulated utilities

And even if the VAT on toll is withdrawn, the continued implementation of neoliberal policies will still oppress the poor and impoverish more people. Note for instance, that in the case of SLEx, the VAT imposition is just a small portion of the enormous increase in toll that stems from infrastructure privatization, the same policy that Aquino highlighted in his State of the Nation Address (Sona). With Aquino’s promotion of so-called Public-Private Partnerships (PPPs), we expect more similar increases in the future as these are built-in mechanisms to make privatization attractive to potential investors. A case in point is the proposed MRT fare hike, which the Aquino administration is seeking in order to pay for the guaranteed debts and profits of private investors that took part in MRT’s development and ease government’s fiscal burden.

Indeed, indications show that privatization and deregulation will not only continue but will even expand under the new government. Just barely one and a half months into the much hyped Aquino administration, we have already seen oil prices and electricity rates go up. Players in the deregulated oil industry have recently raised the pump prices of diesel, kerosene and gasoline by 50 centavos to P1 per liter, with the Department of Energy (DOE), just like in the past, warning of more oil price hikes in the coming months. In addition, the Manila Electric Co. (Meralco) has again increased its generation charge by 44 centavos per kilowatt-hour (kWh). More nationwide increases in the privatized and deregulated power industry, based on petitions pending before the Energy Regulatory Commission (ERC), should be expected by hapless households.

In the context of its fiscal woes, the Aquino administration welcomes these increases despite their harsh effect on consumers as they mean more VAT collections for the government. In fact, oil and electricity are the two largest sources of VAT revenues, increasing in direct proportion with rising pump prices and monthly electricity bills. From November 2005 (when RA 9337 was implemented) to December 2009, the VAT burden from oil and power has reached P239.94 billion, or more than 65.3 percent of the total revenues (P367.28 billion) generated by RA 9337.

Similarly, higher toll means higher VAT collection for the government. Under the old SLEx fees, for example, government’s VAT revenues will only range from P2.64 to P7.80 per vehicle per trip. But under the new rates approved by the TRB, the VAT burden of SLEx users will quadruple to P10.2 to P30.6. Overall, taxpayers will shoulder a tax burden of more than P12 billion annually from the VAT on toll.

No new taxes? It does not make a difference amid rising rates and prices due to deregulation and privatization, and continued imposition and expanded coverage of the 12 percent VAT. And lest we forget, Aquino’s promise of no new taxes is highly conditional on the results of its anti-smuggling and tax evasion drive which means the worst is yet to come.

More power rate hikes coming soon

Meralco has raised its generation charge for the fourth straight month and the seventh time since the start of the year (Photo from Reuters/www.daylife.com)

Sorry folks. Meralco (Manila Electric Co) “miscalculated” and had to increase our monthly bills again by 44 centavos per kilowatt-hour (kWh). (Read here) This is the fourth straight month that the giant utility has raised its generation charge and the seventh time since January. This also means that we will be paying Meralco P2.18 per kWh more this month than what we used to pay at the start of the year. If you are consuming 200 kWh a month, it means you will be paying about P236 more in your August billing than what you paid Meralco last January. The bad news is the power profiteers are just getting started.

Good news?

The good news is, according to Malacañang spokesperson Edwin Lacierda, high electricity rates are just temporary and may go down next month. No, the Aquino administration will not compel the Energy Regulatory Commission (ERC) to scrap the Automatic Adjustment of Generation Rates (AGRA) that has legitimized the monthly increases in Meralco’s generation charge. Lacierda, quoting Energy Secretary Jose Rene Almendras, said that they just expect the San Jose power plant to be completely rehabilitated by September. “Hopefully next month we will have lower prices of electricity,” Lacierda said. (Read here)

I do not know which “San Jose power plant” Lacierda is referring to. But I suppose it is the San Jose substation in Bulacan, which is not a power generation plant but a 2,400 Megavolt-Ampere (MVA) transmission facility. In May, the ERC approved the rehabilitation of the San Jose substation, which serves 40 percent of Metro Manila’s power needs, and ordered the replacement of its transformers. The ERC assured then that the rehabilitation “will have no immediate impact on the price of electricity charged to consumers”. (Read here)

Anyway, Lacierda and Almendras are blatantly misleading the people. Electricity rates will remain unreasonably high and will continue to increase in the coming months and years unless Congress will repeal Republic Act (RA) 9136 or the Electric Power Industry Reform Act (Epira) of 2001. (Read here) No less than President Noynoy Aquino has assured the people of high power rates in his State of the Nation Address (Sona), in which he lambasted the Arroyo administration for allowing the National Power Corp. (Napocor) to sell electricity at a loss. But Aquino’s argument on why the state-owned power firm went broke ignored the role of privatization as I’ve pointed out in a previous post. (Read here)

Nationwide increases

The problem of exorbitant and unabated power rate hikes is not confined to Metro Manila or Meralco’s franchise area. Using the Performance Based Regulation (PBR) scheme, a rate-setting methodology for distribution utilities that was made possible under Epira (Read here), the Visayan Electric Co (Veco), for example, has recently raised its distribution charge for residential customers by 3.41 percent. (Read here) Meralco, using the PBR methodology, has also increased its distribution charge by a total of 35 percent last year, on top of its increases in generation charge. (Read here)

But the rate increases of Meralco, Veco and other distribution utilities are just a portion of the bigger increases that households nationwide will have to face soon. The Power Sector Assets and Liabilities Management (Psalm) Corp., which Epira created to undertake the privatization of Napocor’s generation assets, has asked the ERC for rate increases (all in all, about P1.86 per kWh) to recoup supposed losses arising from stranded costs (read: guaranteed profits of independent power producers) as well as fat bonuses of Psalm officials. (Read here) The Philippine Electricity Market Corp. (PEMC), which is the governance arm of the Wholesale Electricity Spot Market (WESM), another Epira creation, has filed a petition for a 74-centavo per kWh hike in the spot market’s transaction fees. (Read here) The National Grid Corp. of the Philippines (NGCP), which took over the privatized transmission facilities, again as mandated by Epira, is seeking its own rate increase of 5 centavos per kWh in Mindanao. (Read here) Finally, Napocor has pending applications for rate increases of P3.38 per kWh in Luzon and P4.71 in the Visayas to recover adjustments in generation costs and currency fluctuations. (Read here)

Imagine how much our monthly electricity bill will cost if all these applications – on top of the automatic monthly increases such as Meralco’s generation charge – were approved by the ERC.

MRT fare hike: subsidies for transnational banks and big comprador profits

MRT fare hike, privatization - ito ba ang daang matuwid ni Noynoy? (Photo from pictures.wayn.com)

In his first SONA, Aquino identified the case of the metro rail transit (MRT) as among the questionable and disadvantageous projects of the Arroyo administration:

“The government tried again to buy the people’s love. The operator was forced to keep the rates low. In effect, the guarantee given to the operator that he will still be able to recoup his investment was not fulfilled. Because of this, Land Bank and the Development Bank of the Philippines were ordered to purchase the MRT. The money of the people was used in exchange for an operation that was losing money”. (Read full SONA text here)

As if on cue, the Department of Transportation and Communication (DOTC) consequently announced that MRT commuters must brace for a fare hike due to rising operation and maintenance cost as well as government subsidies. (Read here)

(A very similar case is the National Power Corp. [Napocor]. The Department of Energy [DOE] disclosed after the SONA that power rates will increase to recover so-called stranded debts of the state power firm. Read salient points and issues here)

Aquino’s transportation officials justified the planned fare hike by pointing out that all Filipino taxpayers are unfairly subsidizing Metro Manila residents who are the regular commuters of the MRT. They claimed that the real cost of transporting a passenger from North Avenue to Taft Avenue can reach as much as P60. But actual maximum fare, in the last seven years, has remained at only P15. (Read here)

But the truth is taxpayers subsidize not the actual transportation cost of the ordinary worker, office employee or student who regularly uses the MRT. Profits are being squeezed from taxpayers and commuters for guaranteed debt payments and profits of the transnational banks and big comprador firms that undertook the MRT project through Public-Private Partnership (PPP) – yes, the same type of development initiative that Aquino said his administration will pursue.

Taxpayers are subsidizing the debts incurred by the private consortium that built the MRT – the Metro Rail Transit Corp. (MRTC).  Aside from guaranteeing debt payments, the national government also guaranteed a 15 percent return on investment per annum for MRTC under their 25-year build-lease-transfer (BLT) agreement in 1997 with the DOTC.

Thus the so-called “subsidies” go the Export-Import Bank of Japan, Sumitomo Bank, and other Japanese and Czech banks, as well as some local banks like the Bank of Philippine Islands (BPI). What made the deal more financially onerous was that the banks that provided the loan of US$462.5 million in 1998 and the private firms that constructed the MRT have the same owners.

MRTC included the Ayala Land Inc., owned by the Ayala family which also controls the BPI. MRTC also entered into an Engineering, Construction, and Procurement (EPC) Contract with the Sumitomo Corporation, owned by the same Japanese investors that control Sumitomo Bank.

Foreign lenders (Japan provided US$278.5 million while the Czech Republic, $88.4 million) also apparently “tied” their loans for the MRT, thus further maximizing profits for their exported capital (i.e. we pay for the principal plus interest for services and goods that come from the same country). Japanese Sumitomo Corporation used, as principal subcontractors, Japanese TNC Mitsubishi Heavy Industries for the civil works, track works, and electro-mechanical work, and Czech Republic-based CKD Dopravini for the manufacturing, testing, and commissioning of the rail vehicles.

In fact, the BLT was so financially burdensome that government started missing paying debts on time. Consequently, the government through the Land Bank of the Philippines (LBP) and the Development Bank of the Philippines (DBP) initiated an $800-million buyout of the MRTC to acquire 76-percent equity last year. The move was meant to terminate the guaranteed 15 percent return, that was supposed to last until 2025 (end of the BLT deal), by providing a lump-sum payment.

But in the end, Filipinos through our taxes will still shoulder this lump-sum payment. If the MRT fares will be increased, taxpayers will be paying for this exorbitantly priced PPP project twice over.

Meanwhile, aside from cashing in on the guaranteed profits and the lump-sum payment, MRTC firms have been raking additional profits from other investments made more lucrative by the MRT. The Ayalas, for instance, have built the TriNoma Mall in 2007, which is directly linked to MRT’s North Avenue station. The MRT also made the Ayala Center commercial complex in Makati City more accessible and thus more profitable.

Fil-Estate, which is also part of the MRTC consortium, on the other hand, had as early 2000 secured a P1.4-billion investment from the Bank of America to develop high-rise real estate projects along the MRT system.

Worse, the MRT fare hike is apparently just a prelude to its privatization (as usual to make it attractive to investors). Aquino’s officials said they are already talking to prospective buyers. And they plan to privatize not only the MRT along Edsa but the entire railway system in the country. (Read here)

And consider how a privatized and deregulated power industry has resulted in skyrocketing electricity costs – a major input in MRT/railway operation. If you want to just take the bus or jeepney because you can no longer afford a train ride, you will still have to contend with increasing fares because the oil industry is deregulated.

Hindi naman tumataas ang sahod mo. O swerte ka nga kung may trabaho. Ito na ba ang matuwid na daan ni Noynoy?

SONA 2010: Water, power crises

Aquino just inherited from previous administrations the country’s water and power insecurity but the challenge is will he overhaul the existing policy framework that has allowed the privatization and deregulation of the country’s utility sectors and created the mess we are in right now? (Photo from Reuters/Cheryl Ravelo)

First published by the Philippine Online Chronicles

Part 1

President Benigno Aquino III will hold his first State of the Nation Address (SONA) on Monday, July 26 amid a water shortage engulfing a substantial portion of Metro Manila, with long queues for rationed water becoming a common sight.

Meanwhile, about two weeks ago, around the same time when the Manila Electric Co. (Meralco) announced another rate hike, a brownout hit the President’s residence at Times Street in Quezon City which he blamed for arriving late for an appointment. Rotating brownouts have been just as frequent as power rate hikes in the past couple of months.

“Wala nang kuryente, wala pang tubig, ang taas pa ng singil” is the common man’s complaint.

The double whammy of water and power crises, of supply disruptions and skyrocketing rates is being felt not only in the metropolis but nationwide. Government officials and private utilities have pinned the blame squarely on force ma jeure like the prolonged dry spell and slow dam replenishment due to lack of enough rains.

However, there are obvious policy issues that the latest episodes in water and power supply insecurity have brought to the fore. Considering their immediate and long-term effects on the people’s welfare and overall economic development, Aquino is expected by the public and policy makers to outline in his SONA how the administration plans to address these recurring problems.

Magnitude of the water shortage

According to the latest update from the Department of Public Works and Highways (DPWH), 344 barangays (villages) with close to 3 million people in the service area of Maynilad Water Services Inc. are already affected by the water shortage. The number is almost half (49 percent) of the entire West Zone concession area of Maynilad, which together with its East Zone counterpart Manila Water Co. Inc., took over the water distribution function of the privatized Metropolitan Waterworks and Sewerage System (MWSS) in 1997.

Maynilad chief operating officer Herbert Consunji disclosed that as of July 20, at least 18 percent (equivalent to some 450,000 people) of those affected by the water shortage in the West Zone can be considered as “severely affected”. This means that these areas have available water supply for only up to six hours at most or none at all.

In an earlier advisory posted on its website, Maynilad said that among those severely affected are 22 barangays in Quezon City, 13 barangays in Caloocan City, 4 barangays in Malabon, 4 barangays in Valenzuela City, 2 barangays in Las Pinas City, and 1 barangay in Navotas. The Pangilinan-Consunji-controlled water utility has already deployed 28 tankers to ration water in these areas. Reports say that residents are forced to line up as early as 5 AM and wait for Maynilad’s tankers.

In the service area of Manila Water, a smaller 21 percent is being affected by the water shortage, according to DPWH Secretary Rogelio Singson as quoted in a news report. The Ayala-led water firm in a separate report admitted that there is already a gradual reduction in water pressure in elevated within its concession area such as in parts of Pasig, Marikina, Cainta, Rodriguez, Taguig, and San Mateo in Rizal province. Manila Water may also have to resort to water rationing if the water level in Angat Dam – where they and Maynilad get 97 percent of their water supply for the domestic needs of Metro Manila and parts of Cavite and Rizal – will not improve in the coming months.

Blame it on the (lack of) rain

Due to a depleted water level because of the El Niño phenomenon, the private water concessionaires said that their water allocation from Angat Dam has substantially declined. DPWH reported that at present, Maynilad is actually receiving 1,800 million liters per day from Angat Dam, down from its normal level of 2,400 million liters per day (a 33.3 percent reduction). Manila Water, on the other hand, has seen its allocation dwindle to 1,245 million liters per day from 1,600 million liters per day, or a 28.5 percent reduction.

Latest update from the MWSS on the water level in Angat Dam pegged it at

Among the many promises of water privatization was 24/7 access to water for all (Photo from Raffy Lerma)

158.2 meters above sea level (masl) as of July 21. A day before that, it dropped to 157.56 masl, lower than its historic low of 158.15 masl in September 1998 which was also an El Niño year. Authorities said that recent typhoons “Basyang” and “Caloy” did not substantially replenish Angat Dam, adding up a combined 27 centimeters only. The critical level of Angat Dam is pegged at 180 masl, which was breached in April during the height of the latest El Niño. Without heavy rains, the dam’s water is expected to further recede to 147 masl by September. At 120 masl, the dam could no longer provide water for Metro Manila’s domestic consumption.

Rotating brownouts, power rate hikes

The lack of rains and depleting water level in the country’s major dams because of the El Niño have also been blamed for the power crisis – characterized by rotating brownouts and spikes in electricity rates – that has hit the country this year. In March, the power supply deficits reached record highs with Luzon experiencing a shortfall of 641 megawatts (MW) and Mindanao, 700 MW, according to the National Grid Corporation of the Philippines (NGCP).

Meralco had to implement a 90-minute power supply disruption throughout the day because of the supposed deficiency in available electricity. In Mindanao, blackouts have lasted by up to 12 hours a day, a situation that began as early as February. The southern island heavily depends on hydro power for its electricity needs, with hydropower plants accounting for 53.1 percent of Mindanao’s generating capacity, according to data from the Mindanao Economic Development Council (MEDCO).

But low water levels derailed the operation of these power plants. The 727-MW Agus and 255-MW Pulangi hydroelectric power plants, for instance, experienced an 80 and 90 percent reduction in capacity, respectively because of the prolonged drought. The water level in Lake Lanao, source for most of the hydropower plants in Mindanao, has breached its critical level of 699.15 meters in early March and dropped to 699.08 meters.

In addition, reduced power supply due to depleted dams amid high electricity consumption because of the hot temperature brought about by El Niño has also pushed up power rates throughout the country. Meralco, for example, has increased its rates several times in the past six months, with the latest rate hike of 5.8 centavos per kilowatt-hour (kWh) announced in the first week of July, supposedly because of high generation charges at the Wholesale Electricity Spot Market (WESM). Overall, Meralco’s generation charge has already jumped by P1.84 per kWh between January and July.

Part 2

The double whammy of water and power crises – major issues that require urgent response and actions from President Benigno Aquino III

Policy issues

While the private companies and government agencies concerned have conveniently blamed natural phenomenon for the water and power crises, a deeper look will show that the conditions for the crises have been laid out and at the same time aggravated by wrong policies.

Both the water and power sectors have been deeply privatized, a process that was set off by Aquino’s mother, the late President Corazon Aquino in the late 1980s, accelerated by the Ramos and Estrada administrations in the 1990s, then continued and intensified by former President and now Pampanga Representative Gloria Macapagal-Arroyo.

Among the many promises made by the private water concessionaires and hyped by the then Ramos administration to justify the privatization of the MWSS was upgrading the decrepit water system infrastructure. Such upgrade intends to substantially reduce non-revenue water (NRW, or water lost due to leaks and pilferage) and help achieve universal and 24/7 water supply for an increasing number of households. In their original concession agreement with MWSS, the private water firms promised to provide universal access by 2001.

But until today, less than 60 percent of 790,000 households in Maynilad’s service area have 24-hour water service while only 74 percent receive water at 7-pound per square inch (PSI) or stronger pressure. More than half (53 percent) of water allocated to Maynilad continues to get wasted because of leaks and pilferage. Meanwhile, Manila Water, claims 99 percent water supply coverage in its service area but will not say how big the portion is with individual and direct household connection and those serviced by private water suppliers or “middlemen”. These areas served by a third party private contractor are often poor communities and most vulnerable to water supply disruption.

Amid water supply problems, Maynilad and Manila Water jacked up their rates tremendously, taking advantage of full-cost recovery mechanisms offered by privatization. Since MWSS was privatized, Maynilad’s basic charge has already soared by 449 percent and Manila Water, by 845 percent.

Private monopolies and manipulation

The power crisis that the country has been facing is also more man-made than natural. Plant shutdowns and supposed fuel constraints have combined with the impact of depleted dams on hydropower generation to substantially constrict available capacity throughout the islands. The implementation of Republic Act (RA) 9136 or the Electric Power Industry Reform Act (Epira) of 2001, which facilitated the privatization of power generation and transmission as well as deregulated the setting of power rates, has not addressed the country’s energy security issues.

Under Epira, hydro and other power plants have been privatized and sold to foreign and local firms (Photo from napocor.gov.ph)

Epira merely transferred the state monopoly on power to private companies, which has set the stage for various forms of possible abuses and manipulation. Cross-ownership, for instance, between distributors like Meralco and power producers made electricity rates more blurred than transparent.

Take the case of the WESM, which Epira created to supposedly allow freer competition among industry players but in fact has become a venue for speculation and rigging of prices. Among the so-called independent power producers (IPPs) trading in the WESM is First Gen Power Corp. that runs two natural gas-fired power plants (1,000-MW Sta. Rita and 500-MW San Lorenzo) and two hydropower plants (100-MW Pantabangan and 12-MW Masiway). The Lopez family, which controls 13.4 percent of Meralco, owns First Gen which aside from the WESM transactions also supplies 35.7 percent of Meralco’s power requirements.

Plant shutdowns

Furthermore, another Meralco owner, San Miguel Energy Corp. (SMEC) which has a 34-percent stake in the utility giant, also operates the biggest power plants in the country like the 620-MW Limay Combined Cycle Power Plant, the 1,000-MW Sual Coal-Fired Power Plant, and the 1,200-MW Ilijan Combined Cycle Power Plant. During the height of the El Niño, SMEC shut down, along with other privately operated plants, one unit of its Sual plant (with a capacity of 540 MW) due to “coal supply problems”. Its Limay plant also went offline for about three weeks early this year for “inspection purposes”.

The unscheduled outages in its power plants fueled talks that SMEC may have intentionally decommissioned the Sual and Limay to constrict power supply and jack up rates. After the SMEC plant shutdowns, First Gen followed suit with its own maintenance shutdown of its natural gas-fired Sta. Rita and San Lorenzo power plants in mid-February to early March.

The cost of generation has gone sky-high because of these plant shutdowns that artificially reduced available capacity. Meanwhile, power retailers like Meralco have been able to easily pass on the charges to unfortunate end-consumers. Under Epira, they are allowed to automatically adjust generation charges on a monthly basis through a cost recovery mechanism called Automatic Adjustment of Generation Rates (AGRA).

Is Noynoy up to the challenge?

Despite the recurring problems caused by its flawed policies on water and power, the previous Arroyo administration has continued the relentless march towards the neoliberal restructuring of these sectors. In fact, among what can be considered a midnight deal, is the April 28 bidding of the Angat Dam which was won by a South Korean power company. If this deal will be completed, consumers fear of more water supply woes even as the country’s energy needs are not necessarily guaranteed.

To be sure, President Aquino just inherited from previous administrations these problems besetting the country’s water and power security. The challenge, however, is will he overhaul the existing policy framework that has allowed the privatization and deregulation of the country’s utility sectors and created the mess we are in right now?

He will have the chance to do this in his first SONA on Monday when he outlines his vision for the country in the next six years. People who have been abused long enough by private water and power utilities, who suffered endless brownouts and lack of water amid skyrocketing monthly bills, will certainly be interested to listen.

Water shortage in Metro is beyond El Niño

A depleted Angat Dam (photo by Raffy Lerma)

The water shortage in Metro Manila has been conveniently blamed by the private water concessionaires and authorities on everything else but themselves. They blamed it on El Niño for drying up the Angat Dam. They blamed it on “Basyang” for not pouring enough rains on Norzagaray, Bulacan to replenish the dam’s water (read news report here).

But how much of the current shortage can be blamed on natural phenomenon and how much should be attributed to policy errors like water privatization? True, the prolonged dry spell depleted water to precarious levels not only in Angat but in several major dams around the country. The impact on domestic water supply in Metro Manila, however, could have been tolerable or at least not as bad as it is now if not for structural issues related to the privatization of the Metropolitan Waterworks and Sewerage System (MWSS) almost 13 years ago.

All-time low

According to the latest report, Angat Dam’s water, which supplies 97 percent of the domestic water needs of some 14 million people in Metro Manila and parts of Cavite and Rizal, has already dropped to an alarming 157.59 meters as of Sunday (July 18). This is an all-time low, with the previous record pegged at 158.15 meters recorded during the 1998 El Niño episode. The critical level of Angat Dam is 180 meters.

One of the private companies that took over the water distribution function of MWSS, Maynilad Water Services Inc., has already resorted to rationing water to some areas in its concession area. (Maynilad serves the West Zone of the old MWSS service area, while Manila Water Co. Inc. serves the East Zone)  Maynilad said that its water allocation has declined by 30 percent, causing supply disruptions since last week.

But many of these areas in Maynilad’s west zone have long been experiencing water supply problems even before the current El Niño. “Unfortunately, the reduction in our water allocation has forced us to ration water in elevated areas, in areas with a lot of water loss usually due to illegal connections, and in areas that need further service upgrade,” a Maynilad official said, describing the areas currently experiencing water supply disruption.

A failed policy

Among the many promises made by the private water concessionaires and hyped by the then Ramos administration was upgrading the decrepit water system infrastructure. Such upgrade intends to substantially reduce non-revenue water (NRW, or water lost due to leaks and pilferage) and help achieve universal and 24/7 water supply for an increasing number of households. In their original concession agreement with MWSS, the private water firms promised to provide universal access by 2001.

But until today, less than 60 percent of 790,000 households in Maynilad’s service area have 24-hour water service while only 74 percent receive water at 7-pound per square inch (PSI) or stronger pressure (read here). More than half (53 percent) of water allocated to Maynilad continues to get wasted because of leaks and pilferage (read here). Meanwhile, Manila Water, claims 99 percent water supply coverage in its service area but will not say how big the portion is with individual and direct household connection and those serviced by private water suppliers or “middlemen”. These areas served by a third party private contractor are often poor communities and most vulnerable to water supply disruption.

There is no available data that break down NRW into leaks and pilferage. But the continued pervasiveness of illegal connections may be explained by skyrocketing water bills due to full-cost recovery under water privatization. Since MWSS was privatized, Maynilad’s basic charge has already soared by 449 percent and Manila Water, by 845 percent. Put that in a situation of worsening job scarcity, stagnant wages and income, and rapid increases in the overall cost of living and you will get the picture. (See Chart)

 

Reverse privatization

Maynilad and Manila Water must be held accountable for failing to provide, after more than a decade of privatization, reliable and universal access to water for the people – a situation that has just been aggravated today by the El Niño.

Certainly, there is a need to reverse water privatization, a neoliberal policy that has already been discredited worldwide. Public control must be asserted especially over water which is not a simple commodity or service that we can afford to leave in the hands of profit-seeking companies.

The Aquino administration can start this by suspending the sale of the Angat Dam itself, which has been auctioned to a Korean power company last April. The further privatization of water through the sale of Angat Dam will mean worse water shortages in the coming months and years, with or without an El Niño.

These issues must be included in the medium-term policy agenda of the new administration.

Stopgap measures

But in the meantime, as a stopgap measure, Malacañang, the private concessionaires, MWSS, National Water Resources Board (NWRB) and other concerned government agencies must come out with a detailed plan on how they will ensure that water for domestic use will be available. Due focus must be given to vulnerable communities as they tend to be displaced under a privatized water system by well-off customers and commercial establishments even during times of abundant water supply.

Authorities must also strictly monitor and regulate the wasteful use of water by golf courses, malls, hotels, private parks, car wash shops, and other commercial establishments. An 18-hole golf course, for instance, consumes an average of 2.3 million liters of water per day, according to the United Nations (UN), causing an enormous impact on water withdrawals, and competing with the basic water needs of as much as 115,000 people.

Meralco’s rate hikes and neoliberal power reform (2)

Continued from Part 1

The series of increases in generation charge that Meralco has implemented this year is made possible by deregulation under Epira. Meralco explains in its website that “the level of Generation Charge is adjusted on a monthly basis as prescribed by the ERC in its Order dated October 13, 2004 under ERC Case No. 2004-322 approving the ‘Guidelines for the Automatic Adjustment of Generation Rates  and System Loss Rates by Distribution Utilities or the AGRA’”.

Increasing rates

Section 43 (f) of Epira authorizes the ERC to “adopt alternative forms of internationally-accepted rate setting methodology that will ensure reasonable price of electricity and non-discriminatory rates”. Since power rates have been unbundled under Epira, the ERC have set different rate setting methodologies for generation, transmission, and distribution as well as system loss.

Distribution utilities (DUs) like Meralco use the Performance-Based Regulation (PBR) methodology for their distribution rates and the AGRA to reflect adjustments in generation costs charged by their suppliers. AGRA allows DUs to calculate new generation rates on the tenth day of each calendar month. In the last 12 months, generation rates “passed on” by Meralco have been on an upward trend jacking up the electricity bill of end-users. (See Chart)

According to the ERC, the AGRA was devised to ensure, among others, “transparent and reasonable prices of electric power service in a regime of free and fair competition and to achieve greater operational and economic efficiency”.

From PPA to AGRA

But is it fair and reasonable for end-consumers to shoulder the adjustments under the AGRA? The AGRA actually is the latest incarnation of the notorious, pre-Epira Purchased Power Adjustment (PPA). The PPA was an automatic cost recovery mechanism designed to attract private IPPs in power generation. Through the PPA, IPPs are assured that they will be paid for contracted capacity (even if they did not actually produce it) and they will be protected from the fluctuating costs of fuel and foreign exchange rate – all of which are shouldered by the consumers in the form of PPA.

When Epira’s unbundling of rates was implemented in May 2003, the PPA was incorporated in the generation rates charged by IPPs and passed on to end-consumers by Meralco and other DUs in the form of the Generation Rate Adjustment Mechanism (GRAM). The GRAM was a deferred recovery mechanism using a three-month test period. Napocor and DUs had to apply their quarterly GRAM before the ERC, which will review and approve it. Meralco and other DUs criticized the GRAM because it “does not represent the true cost of power for the period that it is being recovered” and that “it resulted to cash flow problems on the part of the DUs”.

Automatic adjustments

Thus, the ERC replaced the GRAM used by the DUs with the AGRA (Napocor, on the other hand, continues to use the GRAM). The main difference is the manner of recovery – the AGRA like the PPA is automatically calculated and collected by Meralco and other DUs every month (i.e. without public hearings conducted by the ERC like in the case of GRAM).

The only sort of “oversight” on AGRA that the ERC exercises is that “at least every six months, the ERC shall verify the recovery of Generation Costs by comparing the actual allowable costs incurred for the period with actual revenues for the same period generated by the generation rates and the portion of the Systems Loss Rates attributable to Generation Costs”.  But if the ERC fails to verify the generation rate within six months from the submission of calculation by a DU, “the rates shall be deemed final and confirmed”. This set up not only gives Meralco more opportunities to exploit consumers but even legitimizes such abuse.

Automatic cost recovery schemes such as AGRA are indispensable in a deregulated and privatized energy sector. They are the concrete operationalization of the neoliberal principle of making so-called market forces in a regime of presumed free and fair competition determine the cost of a commodity or service. But the problem is there is neither free nor fair competition in the power sector as giant private monopolies like Meralco have been further strengthened by Epira. Worse, a related sector that significantly affects the cost of power, the oil industry, is also deregulated and dominated by private monopolies thus doubling up the burden of consumers.

Market-based, pro-investment rates 

Aside from the AGRA, Meralco is also allowed to increase its distribution rates using another market-based mechanism – the PBR. Based on Epira’s Section 43 (f) provision, the ERC is using the PBR to determine the rates that Meralco and others can charge. The PBR, which hiked Meralco’s distribution charge by a total of 41 centavos per kWh in separate increases in April and December last year, was chosen by design.

Consistent with the neoliberal agenda of Epira, PBR makes rates setting more market-based and reduces regulatory oversight, abolishing the 8-12 percent return on rate base (RORB) that DUs were allowed to use in the past. Under an RORB formula, rates are pegged on “reasonable” return on the assets actually used in distributing electricity. The PBR, on the other hand, adheres to the principle that “good utility performance should lead to higher profits” and thus allows DUs to charge rates based on projected investments and operating expenses related to electricity distribution. Like the AGRA in the case of power generation, the PBR ensures the commercial viability of DUs by making the end-consumers shoulder the risks of future investments and operating costs of running the utility.

Revenue-neutral?

The generation charge is just one of the 20 unbundled items that can be found in a Meralco monthly bill. But it comprises 50-60 percent of what Meralco customers pay. (The distribution charge, on the other hand, accounts for 20-25 percent of the monthly bill, Meralco claims.) The utility giant repeatedly claims that as a pass through charge, generation rate is revenue-neutral or it does not add anything to Meralco’s income. This may be true, but it does not mean that certain owners of Meralco do not benefit from increased generation rates.

The Lopez family, which currently controls 13.4 percent of Meralco, for instance, also owns the IPP First Gen that in turn owns First Gas Power Corp., operator of the 1,000 megawatt (MW) Sta. Rita Power Plant, and the FGP Corp. which operates the 500-MW Sta. Lorenzo Power Plant. In May 2010, the two power plants accounted for a combined 35.7 percent of power supplied to Meralco.

Other power sources of Meralco include the Napocor, which accounted for 24.3 percent and the wholesale electricity spot market (WESM), 17.2 percent. WESM was created under Epira as a spot market for trading electricity in the Philippines. Among the power generators involved in the WESM are the Lopez-owned First Gen power plants and the First Gen Hydro Corp., which runs the 100-MW Pantabangan Hydroelectric Plant and the 12-MW Masiway hydro plant. In addition, the Lopez family also established the First Gen Energy Solutions to “sell, market, or aggregate electricity to end-users” in the WESM.

Private monopoly

Aside from not prohibiting owners of DUs to also operate generation plants, Epira also allowed the DUs themselves to own power generation plants. Meralco, for instance, is planning to get into power generation to remain “competitive” when open access is implemented next year. Open access, another restructuring under Epira that is expected to be operational as early as next year, allows customers using not less than 1 MW to choose their own suppliers.

Epira’s objective was to dismantle the monopoly of Napocor over the power industry. But by allowing cross-ownership in distribution and generation, it has simply transferred such monopoly control to a few private companies such as Meralco. Transmission is also now a private monopoly by a consortium that includes Enrique Razon’s Monte Oro.

A year after open access, Meralco’s supply contract with Napocor shall automatically lapse. Under Epira, DUs are allowed to source not more than 50 percent of its power needs from its bilateral contracts with affiliated IPPs but the cap does not cover contracts forged before Epira was passed (such as Meralco’s supply contracts with First Gen). Meanwhile, DUs are also mandated by Epira to purchase at least 10 percent of their power requirements from the WESM for the first five years of the spot market’s operation. Epira is not clear what will happen after this period. In other words, Meralco can purchase as much as 90-100 percent of its power needs from affiliated IPPs, making cost manipulation easier.

Spot market manipulation

But even if Meralco is required to buy more from the WESM, it still does not guarantee cheaper and more reasonable power rates. This is because even the spot market which is supposed to facilitate free competition among suppliers to bring down electricity costs has been used to manipulate and jack up electricity rates. In fact, the largest monthly increase in generation charge implemented by Meralco so far this year was by 93 centavos per kWh in April, which the utility giant blamed on the increase in the price of WESM.

The WESM has become a venue for speculation in the price of electricity to the detriment of consumers. At one point in February, when talks about limited power supply due to El Niño started to surface, the price of electricity in the spot market jumped to an unbelievably high P68 per kWh.

It was also observed that half the time in the first two months of the year, the maximum offered capacity in Luzon was lower than peak demand although reported dependable capacity was even higher than peak demand. During this period, some big plants like San Miguel Energy Corp.’s (SMEC) 540-MW Sual Unit 1 power plant stopped operation for one month due to “coal supply problems”. Another SMEC-owned power plant, the 620-MW Limay power plant, also went offline for about three weeks during the same period for “inspection purposes”. San Miguel also has a 34 percent stake in Meralco. The unscheduled outages in its power plants fueled talks that SMEC may have intentionally shut down the Sual and Limay plants to constrict power supply and jack up rates.  

At the mercy of “market forces”

Epira did not make power rates charged by Meralco and other DUs in the country cheaper, reasonable, or even transparent. By further strengthening the monopoly control of private utility giants like Meralco through privatization and deregulation of power rates, Epira made consumers even more vulnerable to abuse and exploitation.

The series of increases in the generation charge this year amid allegations of supply manipulation and speculation in the WESM and unresolved and fresh cases of Meralco’s overcharging has made the long-time practice by power companies of passing all the business risks associated with generation, transmission, and distribution to hapless consumers even more deplorable. For consumers, there is no other way out of this quagmire but to repeal Epira and reverse the privatization and deregulation of the power industry.

Meralco’s rate hikes and neoliberal power reform (1)

Photo from flickr.com/Maan Bernales

Consumers are again up in arms with the latest increase in electricity rates imposed by the Manila Electric Co. (Meralco). The utility giant called the rate hike “slight”. At 5.8 centavos per kilowatt-hour (kWh), maybe it will be hardly felt by Meralco’s 4.7 million customers in their August billing.

But the recent power rate increase is neither small nor negligible when viewed in the context of successive rate hikes in the previous months (amid rotating brownouts, no less). The past increases were also huge that some consumers complained of having to pay Meralco twice as much for the same consumption.

Long-held perception

The unabated rise in monthly power bills reinforced the long-held public perception that Meralco is greedy and abusive and government regulators are inutile. It also revived calls to immediately bring down power rates by scrapping the 12 percent value added tax (VAT) on electricity. Indeed, Meralco and the Energy Regulatory Commission (ERC) must be held to account and the VAT on power must be scrapped.

But these proposals are not enough. Power rates will remain exorbitant and power utilities like Meralco will continue to abuse consumers without reversing one of Gloria Arroyo’s most anti-people, anti-development, corruption-ridden legacies – the neoliberal privatization and deregulation of the energy sector through the Electric Power Industry Reform Act (Epira).

Soaring profits

Doubtless, Meralco is a bad company (for consumers, that is, but surely not for its stockholders). Its long list of illegal and over collection cases is a testament to its unscrupulous reputation. To be sure, the Energy Regulatory Commission (ERC) is an even worse regulator. Its habitual failure to check Meralco’s abusive practices, and in many cases even legitimizing them, demonstrates its bias for industry players.

Last year, Meralco’s net profits increased by a whopping 114 percent (from P2.8 billion in 2008 to P6 billion) mainly due to an ERC-approved 13.9-centavo per kilowatt-hour (kWh) hike in the distribution charge of the utility giant in April 2009. Then in December, the ERC approved another increase in Meralco’s distribution charge, this time by 26.9 centavos. The distribution charge of Meralco thus increased from P1.0831 per kWh at the start of 2009 to P1.2227 in April and then to P1.4917 in December.

Imagine how much profits Meralco will rake in this year once the December increase in distribution charge makes its presence felt in the company’s end-2010 balance sheet. But to give you an idea, Meralco disclosed to the Philippine Stock Exchange (PSE) that its first quarter 2010 profits grew by 135 percent compared to the same period in 2009 (from P0.8 billion to P2 billion).

Overcharging

One week approving after Meralco’s distribution rate hike in December, the regulatory body received the report of the Commission on Audit (COA) saying that Meralco illegally collected as much as P6.64 billion from its customers in 2004 (P4.7 billion) and 2007 (P1.93 billion). But instead of reconsidering its earlier decision allowing the utility to hike its distribution charge, the ERC sat on the COA report. It was only after more than one and a half months since receiving the audit body’s findings that the ERC started to hear the case.

Amid this fresh allegation of overcharging, the ERC still allowed Meralco to continuously jack up its rates to recover the supposed increases in the cost of power generation like the 5.8-centavo/kWh increase this month. Prior to this increase in generation charge, Meralco also raised it by 44 centavos in February, P1.83 in March and P1.20 in April. It eased by P1.26 in May that the utility attributed to lower price of power it buys from its suppliers. But it again jumped by 18 centavos in June.

Remember also that until today, Meralco has yet to fully implement the billions of pesos in refunds that it owes to consumers worth more than P34.12 billion, including the P30.2 billion in income taxes that Meralco illegally collected from 1994 to 2002.    

VAT on power

Meanwhile, the 12 percent value added tax (VAT) imposed on electricity continues to be an onerous burden for consumers. In the case of the power industry’s system loss, VAT is doubly onerous since it is a consumption tax charged on electricity that is not even consumed.

In 2009, the Bureau of Internal Revenue (BIR) collected P10.6 billion (preliminary data) in VAT from the power industry and electric cooperatives. Since electricity was included among VAT-able goods and services in November 2005, no thanks to Republic Act (RA) 9337, the government has already collected a total of more than P47.41 billion in VAT on power.

Latest national data on electricity sales is 2008, pegged at 49,206 gigawatt-hours (GWh). Meanwhile, VAT collection from the power sector during the same year was P16.05 billion. This means that on the average, VAT collection from the power sector in 2008 was about 32.6 centavos per kWh.

System loss in 2008 for the entire power industry was about 12.63 percent of total electricity sales. This means that on the average, hapless consumers shelled out more than P2 billion to pay for the VAT on electricity they never used.

(To be concluded)

Meralco’s insulting attempt at pa-pogi

Meralco bill (Image from ofwnow.com)

On Tuesday (March 9), the Manila Electric Co. (Meralco) asked the Energy Regulatory Commission (ERC) to allow it to “reduce” and spread over several months the whopping P1.83 per kilowatt-hour (kWh) hike in this month’s generation charge.

This is clearly a case of an insulting attempt at pa-pogi. Meralco wants to make it appear that consumers should have utang na loob for the firm’s voluntary offer to mitigate the impact of a drastic rate hike when in reality, the rate increase is unreasonable and Meralco has billions of unpaid debts to its close to 5 million customers.

Lower rate hike

In its petition, Meralco said that instead of a one-time hike of P1.8298 per kWh in generation charge for March, the ERC approve a rate hike of just P1.3852. The remaining balance of 44.46 centavos shall be collected from April to September to ease the impact of the increase on its customers.

Under the Electric Power Industry Reform Act (Epira) of 2001, distribution utilities like Meralco can implement automatic generation rate adjustment. This means that they can automatically pass on to consumers increases in the cost of power generation.

Overcharging probe

Meralco’s move comes amid an ongoing probe on fresh allegations that the power firm overcharged its customers. In a December 2009 report, but released to the public only last month by the ERC, the Commission on Audit (COA) accused Meralco of overcharging its customers by as much as P7.29 billion.

According to the COA report, Meralco illegally passed on to consumers operating expenses such as P2.36 billion worth of employees’ pensions and benefits. Consumers were also made to shoulder the costs of property and equipment that COA said are questionable including the construction of a P526.2-million creek and a P156-million parking lot.

The ERC is expected to conduct public hearings this month to determine if the power firm needs to refund or implement a rate reduction to offset its over collections. Or it can also uphold Meralco’s claim of innocence.

Propensity for abuse

But this is not the first time that Meralco has been accused of overcharging. In 2003,  the Supreme Court (SC) affirmed COA’s findings that Meralco illegally collected P30.2 billion from its customers from 1994 to 2002. COA discovered that Meralco included income taxes in its RORB (return on rate base) calculations resulting in bloated electricity bills for consumers. Until today, the power distributor has yet to fully comply with the refund order of the SC.

Far from the image of a considerate and responsible company it desperately hopes to portray, Meralco has shown its unmistakable propensity for abuse. Its pattern of overcollections in the past couple of years clearly attests to this. Aside from the P30.2 billion, Meralco was also ordered by the ERC to return P2.88 billion in meter deposits as well as P3.92 billion in over-recovery of currency adjustments.

Upholding public interest

The power distributor could not claim that its generation charge is simply a pass on cost. Remember that Meralco sources its electricity from its own independent power producers (IPPs) and sister firms. Even in the Wholesale Electricity Spot Market (WESM), which Meralco is citing for the sudden and drastic hike in this month’s generation charges, Meralco’s sister companies and IPPs allow Meralco to account for as much as 40 percent of generated capacity.

Thus, consumers have nothing to thank Meralco for. We do not owe Meralco a single centavo, and it is Meralco that still has to return billions of pesos it illegally collected from us.

In light of the latest COA report accusing Meralco of again overcharging the consumers, the ERC should disallow any petition for a rate hike by the power distributor. Allowing it to jack up its rates would mean continuing injustice to consumers.

An immediate rate reduction is also justifiable considering that the latest COA report questioned the cost assumptions that the ERC used in approving Meralco’s huge 41-centavo hike in its distribution rates last year, which  allowed Meralco to post a 114 percent increase in its 2009 profits.