Tuesday, January 11, 2011

Does road to power-industry reform lead anywhere?

TUESDAY, 11 JANUARY 2011 20:36 ALBERTO C. AGRA AND MARI JENNIFER M. BRUCE / FORENSIC SOLUTIONS

(Part 1)
The last three decades have seen profound transformations in the Philippine electric power industry (EPI).
The end of the Marcos regime in 1986 saw two major developments in the EPI: the shift of the government-owned National Power Corp. (Napocor) from being the sole power generator in the country, and the return of the Manila Electric Co. (Meralco), a private company that was nationalized during martial law, to its previous owners.
Before the creation of Napocor in 1936, the EPI was completely private, with Meralco (then called the Manila Electric Rail and Light Company) holding a franchise to service Manila. Meralco was nationalized during martial law, and Napocor was given the monopoly of generation and transmission. It was only in 1987 that private entities were again allowed to participate in power generation, but this did not have much impact since there was practically no uptake of private investment. It was not until the power crisis in the early 1990s that the country saw the entry of the private sector into the EPI through the independent-power-producers (IPPs) scheme—a scheme made necessary by the need to augment the power being generated by Napocor. While Napocor still has monopoly over transmission, it was now allowed to purchase power from the IPPs.
In 2001, with the enactment of the Electric Power Industry Reform Act (Epira), Napocor was stripped of its transmission functions, and was required to sell all of its generation assets. Epira also requires distributors to source their electricity from the spot market. Subject to the occurrence of certain conditions, the law was designed to usher in a future of retail competition in energy purchase and supply, and open access on distribution wires.
The EPI’s development over the last decades practically follows the four models of regulation and reform, each in increasing level of competition: (1) monopoly, (2) single buyer, (3) wholesale competition, and (4) retail competition. The EPI has unsuccessfully gone through the first two models, resulting in the passage of Epira, which mandates the fourth model with the third as a transition. Each model has its pros and cons, but it seems that the Philippines has racked up the cons of the first three models. With our history, it seems unlikely that the country will ever achieve genuine EPI reform.
Monopoly. In a monopoly, generation is not subject to competition and no one has a choice of supplier.
Napocor as a monopoly was highly politicized and inefficient. There were excess expenditures for plant construction and for fuel purchases. By the early 1980s, compared to other countries in Asean, the average production of electricity per consumer was low despite high demands, and the number of newly electrified households significantly fell despite the increase in population. There was no budget for maintenance and the country resorted to financing borrowed from foreigners. By the next decade, blackouts were prevalent and the average tariff was one of the highest in the region, save for Japan.
Napocor, as a self-regulating entity, did not achieve the efficiencies that competition brings to the generation market. Napocor’s pricing structure was increasingly politicized, and the cost of inefficiency was passed on to the government through subsidies.
Single buyer. In a single-buyer model, one entity buys electricity from a number of generators. The buyer has access to the transmission network and delivers to distribution utilities. The generators do not have access to the transmission network.
The inefficiencies of Napocor’s monopoly took its toll in the 1990s with prevalent blackouts and high cost of electricity. As electricity generation is capital-intensive, and there was no clear source of financing for plant construction and/or maintenance of Napocor’s generation assets, the government opened the market to IPPs.
The primary significance of the single-buyer model is that the generation market will be open to competition. Studies show that, as long as anticompetitive conduct is avoided, the increased competition is likely to result in improved power-plant capacity, customer savings, diversity of power supply and improvements in generating technology. These expected improvements were, however, not achieved. The power purchase agreements (PPAs) with the IPPs gave generous incentives to investors and transferred practically all risks to Napocor—market demand, exchange rate, fuel cost, retail tariff and sovereign risks. The PPAs also contained take-or-pay provisions where Napocor was required to pay for energy generated by the IPPs, regardless of actual dispatch. While take-or-pay provisions are not unfamiliar in the PPAs, the take-or-pay provisions in the Napocor’s PPAs took a backlash because Napocor contracted for power that was significantly more than market demand. Napocor was losing billions of pesos every year on the PPAs alone. This was aggravated by high transmission losses (Napocor remained as operator of the transmission system), political pressure to keep tariffs low, and pilferage.
Wholesale competition. In the wholesale-competition model, distribution utilities buy electricity directly from generators. The generators have access to the transmission network, but the distribution utilities have monopoly over retail in their respective franchise areas.
With the passage of Epira, the restructuring of the Philippine EPI adopted the wholesale-competition model to ensure the total electrification of the country, provide reliable and affordable electricity, and enhance private capital and encourage competition. For these purposes,  Epira requires the sale of Napocor’s generation assets, renegotiation of the PPAs, creation of an electricity spot market from which distributors are required to source their power requirements, and the abolition of cross-subsidies.
(To be continued)
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This is the position of Forensic Solutions.
Forensic Law and Policy Strategies, Inc. or Forensic Solutions is a think tank offering services in the fields of policy, law reform, advocacy and governance. The group provides forensic study and viable policy options, giving our clients a crucial advantage in navigating executive, administrative, legislative and judicial inquiries.
Alberto C. Agra was the immediate past Secretary of Justice, Solicitor General and Government Corporate Counsel. As counsel of government institutions, he represented administrative agencies and government corporations on water, as well as water districts. He was a former Trustee of the Metropolitan Waterworks and Sewerage System and OIC Chief Regulator of its Regulatory Office. He teaches Law on Local Governments and Public Corporations.
Mari Jennifer M. Bruce is a consultant of the Asian Development Bank, former Associate of Puyat Jacinto and Santos Law Office, and former Director at the Office of the Chief Presidential Legal Counsel, and former Court Attorney in the Supreme Court. Her areas of expertise are water, energy and infrastructure.

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