PRIVATIZATION OF POWER SECTOR THE ROOT OF HIGH POWER RATES

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

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

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

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

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

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

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

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

Open Access

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

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

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

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

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

Reversing Privatization

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

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

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

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STUDY OTHER REVENUE MEASURES OUTSIDE VAT, GOV’T URGED

Malacanang consistently refuses to repeal the reformed value-added tax (RVAT) on oil and power saying that it will harm the country’s revenues. But according to independent think-tank IBON Foundation, there are measures that government can implement which are less burdensome and can generate more revenues than the RVAT.

These measures include improving revenue performance, which according to the National Tax Research Center, could earn the government an average of P57 billion annually in uncollected VAT on items other than petroleum products and P82 billion in uncollected corporate taxes as of 2006.

If government increases its tax collection efforts from 14% of the gross domestic product to 16%, this can produce at least P94 billion in a year. These revenues are more than enough to cover the revenue losses from the removal of VAT on oil and power.

Removing the RVAT on oil and power will also help mitigate the significant supply-side pressure on inflation due to high global oil prices and may decrease the inflation rate by 0.5-0.8 percentage points, especially since global oil prices are expected to continue increasing at least through 2008, with improvement only in 2009.

Raising revenues through a regressive VAT is convenient only for the government, which amid the spiraling cost of basic goods and services, should implement revenue-generation measures that do not unduly burden the poor Filipino majority– which is unfortunately what the regressive VAT does

Bishop urges new kind of people power

Lagdameo: It’s for truth and to end corruption By Beverly T. Natividad
Philippine Daily Inquirer

MANILA, Philippines — The head of an influential group of Roman Catholic bishops Tuesday raised the possibility of a new brand of “people power” that would spur people to bring out the truth and end corruption that had kept the country hostage to the “greed of power-holders.”

Archbishop Angel Lagdameo, president of the Catholic Bishops’ Conference of the Philippines, said that a “convergence of bearers of truths” could save the country.

Backed by the Church hierarchy, Jaime Cardinal Sin called on people power and hundreds of thousands of Filipinos responded and toppled strongman Ferdinand Marcos in 1986.

Lagdameo told reporters after meeting with about 50 civic, student and business groups that the massive anticorruption movement that ousted President Joseph Estrada in 2001 was a disappointment because it “installed a President who later on was judged by surveys as the most corrupt president.”

Lagdameo was apparently referring to Gloria Macapagal-Arroyo, who became President after Estrada was ousted.

“We went from one frying pan to a worse frying pan,” he said.

Referring to the recent CBCP call for “communal action,” Lagdameo said that if, by consensus, “the communal action is people power, it will have to be a different ‘brand.’ It will not be simply a repeat of the past … The movements of some groups for a national campaign against corruption may be a sign.”

At the meeting, civil society groups asked the Church leadership to guide and spearhead “communal actions.”

“They want clearer guidance and leadership. They want to see us with them,” said Lingayen-Dagupan Archbishop Oscar V. Cruz after he, Lagdameo and Caloocan Bishop Deogracias Iñiguez held a dialogue with various sectoral groups.

Cruz said the bishops listened in order to know the “what, how and when” of the planned communal actions.

Lagdameo made the comments amid mounting calls for Ms Arroyo to resign as a Senate inquiry looks into alleged bribery in the scrapped $329-million broadband deal with China’s ZTE Corp.

Priests and nuns have offered refuge to a key witness in the Senate investigation — a former consultant for the project, Rodolfo Lozada Jr. — amid threats to his life. They have also organized prayer protests and joined street rallies calling for Ms Arroyo’s resignation and a clean government.

Who’s who

Lagdameo called for a “brand new people power” and said a campaign against corruption in government may be a start.

Among those who attended the dialogue were representatives of the Black and White Movement, Bagong Alyansang Makabayan (Bayan), Makati Business Club, Integrated Bar of the Philippines, Kubol Pag-Asa, Gabriela, Muslim Legal Assistance Foundation, Bangon Pilipinas, National Council of Churches of the Philippines, United Church of Christ in the Philippines, Association of Major Religious Superiors of the Philippines, Solidarity Philippines and the La Salle Brothers.

But even Lagdameo’s presence at the meeting does not signify that the CBCP has already joined the movement against the Arroyo administration.

Lagdameo said he attended the meeting only as the archbishop of Jaro.

“That’s why I attended this meeting, because I will bring this message to my brother bishops,” he said.

On Monday, Lagdameo lauded the successful holding of “communal action” undertaken by civil society in response to the bishops’ call.

Apparently referring to Lozada, Lagdameo said in a statement: “Imagine, with just one courageous person willing to witness to the Truth, some good things are already starting to happen, like the exposition of other scams, lies, deceits, ‘moderate and immoderate greed’.

“We hope and encourage that other courageous and inspired persons will emerge to tell or expose or humbly face the truth, whose concealment had made our country captive to corruption and greed of power-holders.”

Lagdameo told reporters the challenge to Filipinos today was to find “how to express its new brand of people power.”

He said he was optimistic that the civil society groups he met may have already found some of the answers to this challenge.

Not just talking

Cruz said that no clear action had yet resulted from the meeting.

Both sides, he said, only committed themselves to a continuing dialogue but would come out with a more concrete agenda soon.

“This is not the end of this. Our agreement does not stop here. And this will not be just talking but definitely there will be doing and acting,” said Cruz.

He said the dialogue with civil society was gaining ground because more people were joining it. With a report from Associated Press

SUPPLY CONTRACTS IN MASINLOC SALE MAY HIKE ELECTRICITY BILLS FURTHER

The Arroyo government’s recent low-profile sale of the National Power Corporation’s (Napocor) 600-megawatt Masinloc coal-fired plant may result in higher electricity bills, according to independent think-tank IBON Foundation.

The plant was sold to AES Transpower Ltd of Singapore, a unit of US-based global power corporation AES with a bid price of US$930.83 billion.

The plant was able to fetch such a rich price because the Power Sector Assets and Liabilities Management (PSALM) Corporation, in conjunction with Napocor, packaged the plant with an aggregate 264.514 MW of power supply contracts, which will be the required volume of power to be supplied. Such contracts may result in higher rates through cost recovery mechanisms such as the controversial Purchased Power Adjustment (PPA).

This is particularly since the bid price is especially high, given that the winning bid in the last failed auction of Masinloc was US$561 million, reportedly enough to buy a brand-new 600MW power plant.

In the earlier sale, it was estimated that for the winning bidder, YNN Corp., to recover its bid, Masinloc’s production cost at the time of the bidding would have to increase by some 144 to 154 percent.

As shown by the country’s past experience with deregulation of the oil industry and privatization of water services in Metro Manila, private corporations would use all means available to them to jack up profits given that they have a captive market.

MORE FILIPINOS HAVE TROUBLE PAYING FOR MEDS, WATER, POWER BILLS

Filipinos are increasingly having trouble paying for their basic expenses, especially for medicines and medical treatment, and for their water and power bills, according to the results of the latest IBON survey.

Respondents of the IBON July 2007 Survey said that, during the past three months, they had difficulty meeting the following expenses: electricity and/or water (72.45%); medicines and/or medical treatment (71.24%); children’s schooling (67.74%); food (67%); and transportation (65.32%).

These responses were substantially higher than those gathered in the same period last year, when 64% of respondents said they had trouble paying for their water and/or electricity; 62.47% said they had trouble meeting medicines and/or medical treatment; 66.7% said they did not have enough to buy food; 63.69% had trouble paying for their children’s schooling and 59.65% had trouble meeting transportation costs.

IBON’s July 2007 survey was conducted nationwide from July 2 to 13 with 1,488 respondents to find out the people’s perception of the economy, their income and livelihood, government performance, and other pressing issues. The latest survey has a margin of error of plus or minus three percent. (end)

Below is the tabulation of the results of the respondents’ perception on meeting their basic expenses.

In the past three months, has your family had difficulty meeting the following expenses?

July 2006 July 2007

Frequency Percentage Frequency Percentage

Food 992 66.71 997 67.00

Children’s Schooling 947 63.69 1,008 67.74

Transportation 887 59.65 972 65.32

Water and/or Electricity 952 64.02 1,078 72.45

Medicines/Medical Treatment 929 62.47 1,060 71.24

For the full results of the IBON July 2007 Survey, please e-mail us at media@ibon.org or contact us at tel. 927-6986. The results will also be available online at www.ibon.org starting July 28.