Tuesday, May 13, 2008

10 Reasons Why Electricity Bills Are High


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By the Freedom from Debt Coalition
Sunday, 11 May 2008 12:05

A position paper submitted to the:
Joint Congressional Power Committee (JCPC)



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May 12, 2008

After MERALCO, the country’s largest electricity distributor and supplier, announced last April an increase in its generation charges by 51.88 centavos per kilowatt hour (kWh), rumors of a brewing government takeover began spreading like wildfire. Signals are there, experts say, as shares of both the government and the Lopezes each jumped to more than 30%, with the Lopezes having a slight fractional advantage.



The recent government actions to pin down MERALCO and target the Lopezes, however, only serve to narrow the discourse to a simplistic formula: Electricity rates are high; for which MERALCO and the Lopezes are to blame. Meralco is no doubt an easy and guilty target. But there are more reasons for electricity rates in the Philippines being among the highest in Asia. And the Arroyo government is equally to blame, if not more.




The Freedom from Debt Coalition (FDC) believes that the issue of high electricity prices is a result of a confluence of factors, from bad governance to corruption to mismanagement to rent-seeking to framework concerns. It is also more complex than what media portrays or what some politicians would want us to believe. We attempt to identify these factors as our contribution to gaining a fuller understanding of the problem of unabated expensive electricity.

FDC argues that the skyrocketing price of electricity emanates from structural, management, policy, governance and paradigmatic causes. FDC believes that these problems cannot be resolved fully without transforming the electricity industry into one that is more responsive and accountable to the people, and more environmentally sustainable. Meanwhile, it would greatly help the consumer for the government to target specific rate-hiking factors and introduce immediate reforms, with the end-in-view of course, of more comprehensive changes sooner rather than later.

We believe electricity is expensive because of the following:

1. The Energy Regulatory Commission (ERC) allows MERALCO, other distribution utilities (DUs) and the National Transmission Commission (Transco) to earn over and above what used to be the statutory return on rate base of 8-12%. The Electric Power Industry Reform Act (EPIRA) allowed ERC to change the system of tariff setting, and it did. But the systems it now follows allows both transmission and distribution companies to earn far more than what they were allowed to earn in the past. And as far as generation and supply companies are concerned, the ERC has little if any say in the prices they charge because generation and supply are deregulated under EPIRA.

2. The Arroyo government wants to attract private investors to purchase NPC’s assets, and for the assets to become attractive, electricity rates have to be high. The higher the winning bidder bids, the higher the electricity price we have to pay in the future so the winning bidder can recover its investment.

This can be observed with the nature of recent electricity rate hikes. Following the suggestion of the Asian Development Bank (ADB), the National Power Corporation (NPC) petitioned rate hikes in order to attract investors since no investor would invest without proof of financial viability. Out of the PhP1.98/kWh NPC petitioned in 2004, PhP1.03/kWh was approved by ERC in 2005 – the highest rate hike in the history of the ERC. Transmission charges also increased from PhP0.7716/kWh in May 2006 to PhP0.9163/kWh in July 2006 (which is contrasted with almost flat prices from November 2005 up to May 2006) as the privatization and the bidding process is about to start.

3. The Arroyo government did not renegotiate the contracts with NPC’s independent power producers or IPPs. These contracts require NPC to purchase electricity whether or not these are actually generated or dispatched, and to supply fuel to IPPs that are in operation. The price NPC agreed to pay for this electricity was overstated to begin with, and many of these contracts have clauses that allow the IPP to raise rates over time. NPC also bears the risk of peso devaluation and the risk of the cost of fuel, such as oil and coal, going up.

We have been paying for these contracts in our electric bills for over a decade, and we continue to pay for these today, although this is less transparent, thanks to unbundling. With world oil and coal prices hitting all time highs, with the peso now at PhP40 to the dollar compared with PhP26:$1 when these contracts were signed, the cost of these contracts are an excessive burden on ordinary Filipino electricity consumers. Even consumers that do not have electricity at home are also made to pay for these contracts because the government guarantees all of NPC’s obligations to the IPPs.

4. EPIRA allows MERALCO to purchase at most half of its electricity requirements from its sister companies or IPPs. Besides the problem of NPC with the IPPs, we have the problem of MERALCO’s contracts directly with its own IPPs. EPIRA also allows cross ownership between generation and distribution. A closer look at the ownership of most of MERALCO’s IPPs will show that they are owned by the Lopezes. Examples include the Santa Rita, the San Lorenzo Natural Gas, and the Quezon Coal-fired Power Plants. Whatever guarantees the government gives to its IPPs, MERALCO also gives to its IPPs. MERALCO has always claimed that it doesn’t earn from the high generation charges of its IPPs, and that it is merely passing on to its IPPs whatever it charges its customers for generation. MERALCO is telling the truth. But that is not the entire picture. For while MERALCO doesn’t itself earn from the high generation charges of its IPPs, the Lopezes do. A simple review of the financial statements of the Lopez holding company and its generation companies will show this.

This results to a clear case of double-whammy for the consumers. At one end, NPC must still pay for the unsold electricity it gets from IPPs because of the take-or-pay provision – an undue costs which will later be part of NPC’s stranded cost to be passed on later to the consumers.

At the other end, MERALCO pays its IPPs more than what it would have paid NPC, if it bought the electricity from NPC during the same hours that MERALCO was buying from its IPPs. As NPC rates vary from hour to hour, becoming more expensive when demand for electricity peaks, we must compare on an hourly basis what MERALCO pays its IPPs with what it would have paid NPC if it bought electricity from NPC instead of its IPPs.

Fortunately during the May 6, 2008 dialogue at the ERC, members of FDC and EmPower Consumers were able to obtain a copy of Meralco’s electricity suppliers and their respective cost and share for the months of March and April. Data shows that the cost of power from Meralco’s IPPs is higher than that of NPC’s.

Supplier
March 2008
April 2008
Increase / Decrease
Feb ’08 cost
Mar ’08 cost
Cost
NPC and WESM
4.8673
5.3692
0.5020
NPC
4.5231
4.0173
(0.5058)
WESM
5.9356
10.6822
4.7466
Major IPPs
4.0588
4.5496
0.4908
QPPL
3.7253
6.4340
2.7088
Sta. Rita
4.1659
4.2749
0.1090
San Lorenzo
4.1165
4.2888
0.1723
Philpodeco
5.7245
3.9352
(1.7893)
Total
4.3998
4.9192
0.5194


(Source: Meralco)

NPC generated electricity is cheaper, also because there is a PhP0.30/kWh mandated reduction required by EPIRA for electricity generated by NPC or its IPPs. The electricity MERALCO buys from its IPPs are not subjected to this 30 centavo mandated reduction.

5. High electricity prices breed inefficiencies, which further raise the cost of electricity. The power sector is inherently inefficient. Average capacity utilization of Transco’s transmission lines, according to an ADB report, is only at 12%. We are paying for the investment and loans incurred to set up a transmission grid and on the average, only 12% of the capacity is being utilized. With regard to generation, dependable capacity in the Philippines amounted to 13,639MW at the end of 2006, but that same year, peak demand for electricity was only 8,760MW. We pay for capacity we don’t use, and this is such a heavy burden on consumers that we economize on our use of electricity even further. However, the less we consume of electricity, the more we have to pay of unused capacity. This is a vicious cycle similar to a debt trap. Industries cannot survive such a set-up. Poor consumers, even less so.

This is manifested in electricity consumption data obtained from the Department of Energy: Electricity consumption grew by 10.6% in 2003, then by a lower 3.2% in 2004, then by an even lower 2.5% in 2005. In 2006 electricity consumption grew by only 1.1%. Today it is residential and commercial users who hold a bigger share of total consumption. The thing is, residential and commercial consumers have peak hours when their demand for electricity is strong. Beyond that, demand is very low. This leaves the power sector with a huge inefficient setup: Base load demand is weak but you have to have extra capacity for use during the peak hours. This also means that you have to spend on additional capacity that will most likely get used only during peak hours. This is clearly wasteful and inefficient.

6. Other ERC decisions have rendered the cost of electricity high. One such decision is the ERC's dismissal of the Power Sector Assets and Liabilities Management Corporation (PSALM) market abuse case alleged by the Philippine Electricity Market Corporation (PEMC), the operator of the Wholesale Electricity Spot Market (WESM). The ERC dismissed this for lack of sufficient evidence, despite the detailed market data submitted by PEMC clearly showing that PSALM exercised its market power to raise the WESM spot price. The dismissal by ERC will cost consumers an additional PhP14B.

7. EPIRA-mandated removal of subsidies. Following the logic of privatization and market-reforms, EPIRA states that instruments such as cross-subsidies which distort the “real” price of electricity should be removed. This is in keeping with the transformation of electricity industry from a public service industry to a commodity market. The prices should be subjected to market rules alone – and considerations such as equity and justice in the provision of electricity should be abolished. Households no longer enjoy subsidies from the industrial and commercial sectors, and households in Mindanao and Visayas are no longer being subsidized by households in Luzon. These households that no longer enjoy the subsidies of the pre-EPIRA days have experienced a hike in rates as a result of the removal of these subsidies.

Even the lifeline rate today is not what it used to be. In the logic of subsidy, better off consumers subsidize the more disadvantaged ones. This may work in cities like Manila but in areas that are by and large poor, the lifeline rate is symbolic more than real and it is actually the less poor who are subsidizing the poorer.

8. Unfair and unjust practices of industry players that the ERC is ineffectual to regulate, or may even condone. ERC is known to have been powerless in providing more substantial solutions to recurrent abuse (overcharging and corporate malpractice) of DUs such as MERALCO. There had already been a number of times when MERALCO was proven to have engaged in such unscrupulous practice, yet MERALCO can and will probably engage in such practice because of the lack of fundamental action on the part of the ERC. For example:

• In 2002, ERC discovered PhP0.50/kWh unjustified over-recoveries of MERALCO from the PPA. It reached PhP12.3 billion as based in December 2001 computations. MERALCO was asked to refund it to the consumers.

  • In 2003, the Commission on Audit discovered that MERALCO overcharged its customers by PhP0.017/kWh through inclusion of income tax as operation expense which it passed on to consumers from 1994 to 2002. The Supreme Court subsequently ordered MERALCO to stop this practice and to refund the consumers by as much as PhP30 billion.
  • Also in 2003, FDC questioned ERC’s giving of provisional authority to MERALCO to raise their rates by as much as PhP0.12/kWh. Fortunately for the consumers, the Supreme Court junked the ERC decision in January 2004 because it violated certain rules during its own hearings.
  • In June 2004, MERALCO again applied for PhP0.1327/kWh increase through Generation Rate Adjustment Mechanism (GRAM). The Supreme Court again junked the petition in February 2006 as MERALCO did not follow the prescribed process (lack of hearing and publication).

But MERALCO is not the only one engaged in abusing and deceiving the consumers. The Panay Electric Company (PECO), also known to be owned by the Lopez family, had also been asked by the ERC to refund the consumers PhP2/kWh it earned due to overcharging.

9. Value Added Tax (VAT). Because of the ballooning fiscal deficit of the government, which is in part caused by guaranteed obligations of Government-Owned and -Controlled Corporations (GOCCs) like NPC, the 12% VAT now includes oil and electricity which was exempted before (zero-rated) in the previous consumption tax regime because it was categorized as “socially-sensitive” – raising its prices will translate to rising prices of other commodities. According to some studies, VAT raises electricity prices by PhP0.60/kWh to PhP0.90/kWh. It is estimated that the government earned at least PhP7.668 billion from VAT in the electricity industry in 2005.

One of the more controversial applications of VAT in electricity is the imposition of VAT to system loss, electricity which had been generated but not used. It is unjust to impose consumption tax on goods and services not actually consumed.

10. Corruption and Mismanagement


  • In NPC. Corruption in National Power Corporation (NPC) artificially inflates generation charges. This includes allegations of “overpricing” in the process of buying coal and oil supply for NPC-owned power plants and NPC-IPP’s.
  • In PSALM. The privatization of NPC plants is anomaly-ridden, the most outstanding proof of which is the halted sale of the Masinloc Power Plant to the winning bidder – the YNN. Aside from the fact that YNN capacity is questionable (it failed to pay down payment despite three extensions), sale of Masinloc to YNN will only raise electricity prices form PhP2.80 to PhP4.80/kWh. What is more revolting is this case is that, according to a COA report, PSALM officials gave themselves PhP10-million bonus because of the “successful” closing of the failed transaction with YNN.

3 comments:

kris said...

So, what now? Will there be a position paper outlining 10 actions to counter high electricity cost?

James said...

A Dozen Ways to Reduce Electricity Rates: Towards Sustainable and Pro-Consumer Electric Power Industry

By the Freedom from Debt Coalition
Tuesday, 17 June 2008

On May 12 this year, the Freedom from Debt Coalition (FDC) submitted to and presented before the Joint Congressional Power Commission (JCPC) its position paper titled “10 Reasons Why Electricity Bills Are High.” In the said paper, the Coalition explained the confluence of factors causing high electricity rates—from bad governance to corruption to mismanagement to rent-seeking to framework concerns. Recognizing the complexity of the issue, FDC attempted to identify these factors as the Coalition’s contribution to gaining a fuller understanding of the problem of unabated expensive electricity.

Recently, Finance Secretary Margarito Teves, together with the newly-formed Economic Team Study Group created by the Arroyo administration, boasted of six government measures that would bring down rates by as much as 64 centavos per kilowatt hour (kWh). From asking the Distribution Utilities (DUs) to absorb the Value Added Tax (VAT) on systems loss starting July, to mandating Local Government Units (LGUs) to utilize 30 percent of their share of the National Wealth Tax to reduce electricity rates, these measures only serve to highlight the government’s strategy of resolving the staggering hike of consumer electricity prices in the country by passing the buck to the next guy without sacrificing anything.

The Coalition believes that while these proposals may soften the blow of electricity rate hikes, the fundamental cause of the whole price surge is the underlying government paradigm of private sector control of supply and deregulation of a highly concentrated market. Thus, the administration’s palliatives which pander to such a paradigm will not keep electricity rates down. FDC consequently rejects the Arroyo administration’s unsustainable, and at times unfounded, populist rhetoric, serving only to raise false hopes of future security for ever-struggling and increasingly insecure consumers.

Strategically, we are calling for a complete and substantial overhaul of the Electric Power Industry Reform Act (EPIRA) which is one of the major reasons why electricity rates remain high. After seven years of implementation, EPIRA has brought about a transition from government monopoly to an enhanced private monopoly—worse, a hundred percent increase in power rates. The promised competition embodied in Wholesale Electricity Spot Market (WESM) is one of form with little substance. Hence, instead of rate reduction, we now have one of the highest rates today.

What we are actually witnessing appears to be a new kind of competition among leading and dominant players in the power sector with Malacañang seemingly in the leading role supported by Ricky Razon in TRANSCO, the Aboitizes in the generation sector and Winston Garcia's presence in MERALCO.

In this paper, FDC aims to offer, vis-à-vis the plethora of proposals by Secretary Teves and other interest groups, what it believes to be more sustainable, democratic, and pro-consumer solutions to the Philippine electric power quagmire.

The following measures are proposed:

1. Remove oil and power from VAT coverage. This will effectively reduce electricity rates by at least P0.80/kWh. In addition, a reduction of at least P4/liter of VAT on oil will cut down the generation cost of oil-based power plants. In 2007, oil-based power plants contributed 18 percent to total generation. When the capacity of natural gas plants, hydropower plants and coal-fired plants is not available for whatever reason, the oil-based power plants are put into operation to provide the electricity the other plants cannot supply.

2. Refund to consumers the overcharging by DUs and NPC. In the April billing of Meralco, the biggest distribution utility charged its customers P0.89/kWh more than it should have, if the ‘least cost’ provision of section 23 of EPIRA were to be followed. Meralco billed its customers P4.90/kWh in generation charge in April when the ‘least cost’ power during that time was National Power Corporation’s P4.01/kWh. Meralco and other DUs still have to fully comply in the decision made by ERC to refund around P13 billion for meter and bill deposits provided under the Magna Carta for Residential Consumers.

Aside from Meralco, another Lopez-owned DU, the Panay Electric Company (PECO), still owes the Ilonggos a P2.89-billion refund from the amount it illegally collected from its customers.

3. Stop the operation of WESM. Contrary to its mission of providing good choice and cheap supply of electricity, the Wholesale Electricity Spot Market has become a trading center of the most expensive electricity in the country. In March, its peak trading was P10.68/kWh. In April, it reached almost P12/kWh. WESM in the Philippines is running a small market whose supply is controlled by a few—the government through PSALM and NPC, and whose demand is largely that of only one utility—Meralco, which has sister independent power producers whom it favors in its purchase of electricity. According to WESM’s own data, the Philippine electricity market is highly concentrated. Furthermore, studies of electricity restructuring have shown that even in less concentrated markets, a deregulated market can be effective only when it is heavily administered. This is costly, something that adds to the already high cost of electricity we are paying. The same studies also conclude that the functions of an independent market operator can be undertaken by an independent and competent regulator.

4. Remove royalty taxes on the use of renewable energy. Royalty taxes on natural gas from Malampaya in the last quarter of 2007, according to Meralco, amounted to P1.61/kWh. The policy change will not only bring down generation cost but also encourage investments in REs, which should be the way of the future, starting today.

5. Amend RA 7832 or the “Anti-electricity and Electric Transmission Lines/Materials Pilferage Act of 1994” by rationalizing further the allowable limits provided to PDUs, electric cooperatives and Transco to recover their systems losses from the consumers. Pass-on charges, particularly those from administrative and other non-technical losses should not be allowed.

6. Review tariff rates of NPC given its decreasing liabilities, i.e. from P900 billion to P300 billion, with National Government writing-off P200-billion NPC debts. This is on top of fifteen (15) rate adjustments for cost-recovery since the unbundling of rates (Generation Rate Adjustment Mechanism and the Incremental Currency Exchange Rate Adjustment).

7. Adjust tariff rates of electric cooperatives. Some P18-billion debts of electric cooperatives were passed on to and absorbed by Power Sector Assets and Liabilities Management Corporation (PSALM) after the passage of EPIRA. But up to now, tariff rates of electric cooperatives are not yet fully adjusted to reflect the consequence of this debt condonation.

8. Reform the Energy Regulatory Commission. In the past six years, the Commission has been remiss in its duty of protecting the interest of consumers. Worse, ERC’s presence only serves as false semblance of consumer protection, preventing more adequate, substantial, and effective measures to be taken. Thus, reforms must be undertaken to improve ERC:

a. Depoliticize the ERC. Competence and integrity must be the main criteria for the selection of ERC commissioners, most especially its Chairperson.

b. Democratize the ERC. ERC as an institution, while retaining its quasi-judicial nature, should proactively re-focus itself from merely answering legal questions of rate increases towards meeting more substantive public concerns, such as the question of consumers’ capacity-to-pay. Moreover, ERC must accord full representation for consumers by giving them at least one seat.

c. Prohibit the ERC in granting a provisional authority for all kinds of cost recovery application. ERC should be empowered to decide directly on electricity price adjustments.

d. Stop the implementation of ERCs new rate methodology. The use of performance based rate methodology allowed DUs and Transco to enjoy returns that are higher than the previously mandated return on rate base (RORB) of 8 to 12 percent.

9. Renegotiate IPP contracts. Consumers should not be made to pay for electricity they did not consume. Onerous provisions such as the ‘take-or-pay’ guarantees provided by the government to both the NPC and Meralco IPPs must be removed. These guarantees assured the IPPs that they were to be paid fully for their generation capacities regardless of whether these contracted capacities are actually delivered or consumed. In preparation for the renegotiation, a performance and technical audit must be conducted among the IPPs to ensure if contracted capacities are optimized and actually delivered.

10. Public investment for potential RE sources. If the government is concerned about the country’s sustainable energy future, it must invest in renewable energy now rather than wait for the private sector to come in later. Strategically, REs would provide not only the cleanest but also the most cost-effective energy in the country, particularly in the context of current skyrocketing prices of oil and coal. The Philippines is the second largest producer of geothermal power in the world, next to the United States, with installed capacity of more than 1,900 MW. Production in this area can be further optimized. Also, initial production of natural gas showed promising prospects of increased production. These vast resources, including those from other renewable energy sources such as hydro, wind and solar, must be made top priority in future energy plans.

Aside from these, a new study revealed that the country has a vast potential in renewable energy—some 204,000 MW of capacities from geothermal, hydro, ocean, wind, natural gas and solar sources.

11. Promote community-based power systems. The country’s archipelagic set up is a disincentive to a centralized power system. Our national grid made the cost of transmission excessively high because of its low utilization, a mere 22 percent according to the Asian Development Bank. Advance technologies in power generation, decentralization of power and democratization of ownership of the industry, and adequate government support can make this framework extremely possible.

12. Eliminate corruption and mismanagement in NPC, National Transmission Corporation (Transco) and DUs which tend to artificially inflate prices. Open the books of these utilities for comprehensive audit, and set the policy of procurement in a long-term contract manner in order to avoid or minimize the effect in the fluctuation of prices in the international market. -30-
Last Updated ( Saturday, 21 June 2008 16:48 )

Anonymous said...

I'm not questioning the effectivity of your proposals the y seem to be well researched and thought off solutions.

But couldn't you lobby that they open another franchise slot for power resellers for each region. As it will not only help alleviate the prices as with any market of free trade. It will helps to alleviate the constitutional oversight that there is a monopoly in the power sector which definitely against our laws.