WHY ELECTRICITY BILLS ARE HIGH
Deconstructing the Cost of Electricity
By the Freedom from Debt Coalition
A position paper submitted to the:
Joint Congressional Power Committee (JCPC)
The Freedom from Debt Coalition (FDC) believes that the issue of high electricity prices is a result of a confluence of factors, from possible corruption to mismanagement to rent-seeking to framework concerns, and is more complex than what is being portrayed in the media or what some politicians would want it to be pursuant to their political interests. These factors, nevertheless, can be enumerated and organized so as to give us a clearer picture of what is going on, and to help us in targeting the multiple sources of problems that cause our electricity price quagmire.
FDC argues that the skyrocketing price of electricity emanates from structural, management-related, policy-related, and paradigmatic causes. FDC believes that these problems cannot be resolved fully without fundamental transformation in the way the electricity industry is set up and run in the Philippines. Meanwhile, it would greatly help the consumer for the government to target specific rate-hiking factors and introduce immediate reforms, with the end-view of course, of more comprehensive changes later on.
The reasons are as follows:
1. The ERC allows MERALCO, other distribution utilities and Transco to earn over and above what used to be the statutory return on rate base of 8-12%. 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), NPC petitioned rate hikes in order to attract investors since no investor will invest without proof of financial viability. Out of the PhP1.98/kwh NPC petitioned in 2004, PhP 1.03/kwh was approved by the Energy Regulatory Commission (ERC) in 2005 – the highest rate hike in the history of ERC. Transmission charges also increased from PhP 0.7716/kwh in May 2006 to PhP 0.9163/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 a 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, although today what we pay for 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 of 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 as have the problem of MERALCOs contract directly with the IPPs. We must remember that not all of MERALCO’s supplied electricity was brought from NPC, some it buys directly from IPPs. What is surprising is that some of these IPPs are also owned by the same family, 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 their IPPs. Since MERALCO has a separate contract with its sister IPPs and EPIRA allows form cross-ownership, NPC can’t compel MERALCO, its largest customer, to buy up its generated electricity.
This is 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. 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 now stands at __MW, but on a daily basis, only an average __MW gets used. 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. The less we consume, the more we have to pay of unused capacity. Industries cannot survive such a set-up.
This is manifested in electricity consumption data: Consumption is growing by only % a year, and 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 plan only for the peak.
6. Other ERC decisions have rendered the cost of electricity high. Such as the decision to dismiss the PSALM market abuse case alleged by PEMC. 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 distorts the “real” price of electricity should be removed. This is acquiescent to 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.
On lifeline rates, lifeline rate today is not what it used to be. In the logic of subsidy, better off consumers subsidies the more disadvantaged ones. This may work in cities like Manila but in areas that are by and large poor, lifeline rate is a joke and it is the less poor that 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 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, CoA discovered that MERALCO overcharges 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 PhP 30 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 GRAM. The Supreme Court again junked the petition in February of 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 Owened 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 PhP 0.60/kwh to PhP 0.90/kwh. It is estimated that the government earned at least PhP 7.668 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 PhP 2.80 to PhP 4.80/kwh. What is more revolting is this case is that, according to a report by the Commission on Audit (CoA), PSALM officials gave themselves PhP 10 million bonus because of the “successful” closing of the failed transaction with YNN
