TRAIN cost increases: Energy consumers’ curse?

Published January 1, 2018, 10:00 PM By Myrna M. Velasco

https://business.mb.com.ph/2018/01/01/train-cost-increases-energy-consumers-curse/

Santa’s ‘gifts’ to consumers came a week late – on New Year’s Day to be exact, and these are not something that will drive Filipino consumers into a glee of celebrations, but one that will rip their pockets of perilous cost hikes.

Sure, the Tax Reform for Acceleration and Inclusion (TRAIN) Act that was signed by President Rodrigo Duterte last December promised ‘higher package of exemption’ for individual wage earners, but any ‘cost offsetting’ calculation to be done could prove that the policy would be badly suited to consumers’ already high energy bills.

For fuel excise taxes alone, prices at the pumps had risen by P2.50 per liter for diesel, P2.65 per liter for gasoline, P3.00 per liter for kerosene, effective January 1; and then there’s that impending P1.00 per kilogram hike for liquefied petroleum gas (LPG) – all these with added 12-percent value added tax (VAT) charges.

Under the whole TRAIN package, diesel excise taxes will rise further by additional P4.50 per liter by next year and P6.00 per liter to year 2020; gasoline will go up to P9.00 per liter or an increase of P4.65 in 2019 and will further climb to P10 per liter in 2020. LPG’s additional tax hike cost impacts will be P2.00 and P3.00 per kg in years 2019 and 2020, respectively.

The Department of Finance (DOF) as well as the lawmakers who deliberated on the measure justified that fuel excise taxes had to be increased because “these have not been adjusted since 1997,” and such supposedly eroded State revenue collections by P140 billion per year (as referenced on 2016 pump prices).

What government policymakers failed to recognize, however, had been the fact that energy taxes were also raised via the Expanded Value Added Tax (E-VAT) law in 2006 so revenues could help plug the gaping deficit in the national budget at that time. That was also the reason why excise taxes in fuel had not been adjusted previously, to provide room then for higher adjustments in VAT charges.

Beyond tax hikes on petroleum products, higher coal excise taxes will also be levied at additional P50 per metric ton this 2018; P100/mt in 2019; and P150/mt in 2020. For this tax imposition, it is worth noting that coal remains the ‘dominant fuel’ (accounting for an average of 50-percent) in the country’s technology-agnostic energy mix, as prescribed by the Department of Energy.

Other countries have been heavily subsidizing their energy sector – despite budgetary pressures experienced by some. Yet that is a strategy they reckon as one that could help foreign direct investments (FDIs) size up in their countries, and in turn, for them to attain inclusive economic growths.

The story of the Philippine energy sector is an exact reverse to that of its neighbors in Southeast Asia – that aside from fully reflecting true costs of its energy services and commodities, these are also heavily taxed – and the consumers are at the poor end shouldering all of these costs. Singapore’s energy sector, a more progressive economy than us, is similarly anchored on a “true cost recovery” mechanism, but their consumers are just paying 9.0-percent goods and services tax (GST) (going up this year from 7.0-percent in 2017) on their respective energy usage.

Conversely, Filipino consumers even with their crumbling purchasing power shall paradoxically endure higher tax charges and subsidies in their energy bills. According to industry players, tax components in fuel products could now sum up to 25-percent overall. Beyond that, they further noted that “fuel price hikes will also have spiraling effect on transport fares as well as on the cost of basic commodities.”

In the electric bills, the total equivalent government charges being shouldered by consumers, for those catered to by biggest power utility Manila Electric Company (Meralco), already hover at R1.35 per kilowatt hour (minus yet the higher coal excise taxes).

Yet sadly, the DOE that could have taken up the cudgels for energy consumers had not lent even a sober voice in the TRAIN measure’s deliberations – so far, none that was expressed publicly.

Inflationary impact

Lest government policymakers and lawmakers forget, the energy sector is a backbone of every country’s economy. For many countries that had really advanced and succeeded in their economic agendas, the basic logic and policy design they had embraced had been to keep their energy prices as low as possible.

How many times have we heard that foreign investors, especially those intending to put up manufacturing facilities in the country, were complaining of high electricity rates – that’s why they preferred to relocate to other Asian countries? We’ve already lost some opportunities and we may drive away more with unmanaged expectations on policy enforcements.

The basic question is: can the Philippine government not have any more viable sources of funding for its infrastructure development plan?  Without doubt, the government’s goal is noble, but it must also realize that extremely punishing one core of your economic backbone – that is the energy sector, could disintegrate the country’s industrialization goals before it could even take off.

In DOF’s calculation, inflationary pressures would remain tractable, although it is seen highest for the transport sector at 2.8-percent; electricity at 0.7-percent and food prices at 0.73-percent.

Primarily for the hiked excise tax for diesel, it will have a three-tiered effect on consumers: one, will be direct with motorists filling up at gas pumps; two, will be the diesel-fired peaking facilities used on-grid in the country’s power system; and three, on the universal charge for missionary electricity (UCME) that all Filipino power consumers have been paying for as subsidy to the Small Power Utilities Group (SPUG) that are generally leaning on diesel-fired electricity generating facilities. Diesel is also the replacement fuel for the 1,200-megawatt Ilijan plant every time the Malampaya gas production facility goes on maintenance shutdown.

As noted by Energy Secretary Alfonso G. Cusi, “this will definitely increase the subsidy charges for the SPUG areas,” hence, he promised “we will have to study that.” Currently, the National Power Corporation (NPC), which is in charge of extending power services to the SPUG areas, has pending application with the Energy Regulatory Commission (ERC) for P10 billion worth of UCME recoveries that will have an ‘overall hike effect’ in the charges. So with the swell in diesel’s excise taxes, subsidy cost recoveries will also escalate.

On top of that, higher coal excise taxes are also up for enforcements. Senate Committee on Energy Chairman Sherwin T. Gatchalian estimated that overall cost impact would be worth P13.2 billion – all ‘pass on’ charges on the consumers’ electric bills. When it reaches the level of P100/mt, the cost impact to consumers will be at P0.0478 per kWh.

The lawmaker, who appeared to be the lone voice in opposing that particular TRAIN provision, qualified that for energy-intensive industries and even for smaller commercial and other business establishments, the brunt of higher coal taxes will still end up financially harrowing to them. And in areas where many marginalized consumers are served by electric cooperatives (ECs), 27 of these power utilities have been sourcing 100-percent of their power supply from coal-fired generating facilities, thus, they will definitely endure the ‘cost sting’ of higher coal taxes.

Mr. Gatchalian emphasized that the 27 ECs account for one-fourth of the total electric cooperatives in the country, thus stressing that “if you look at the number of household they serve, they serve around 2.7 million households…that is 10-percent of the total households in the entire country.”

On other fuel products, it is also worth noting that kerosene and LPG are basic household commodities. Kerosene, in fact, has various uses – that aside from meeting the basic lighting needs of rural communities, it is commonly used by fisher folks; and also a base fuel for industries, such as in aviation/airline industry.

With a heavy dose of ‘realpolitik’, the DOF still surmised that the implementation of higher fuel excise taxes “is wrongly perceived to be anti-poor.” At this juncture though, it is now up to the affected public to decide.

 ‘Smorgasbord’ of policies

In 2017, the DOE had authored and issued multiplicity of policies, which in the department’s assessments could draw much-needed investments for the sector – among these have been the Renewable Portfolio Standards (RPS) for the renewable energy sector following Mr. Cusi’s final declaration on the end of the fit-in-tariff (FIT) regime for the sector; the modified contracting round of upstream petroleum ventures via the Philippine Conventional Energy Contracting Program (PCECP); the Philippine Natural Gas Industry Framework; the proposed ‘rectification measures’ to the Retail Competition and Open Access (RCOA) policy; and most notably Executive Order No. 30 (EO 30) which targets to streamline permitting and approval processes for “energy projects of national significance’. Another one that is a “work in progress’ is the transformational shift of the Wholesale Electricity Spot Market (WESM) into having an independent market operator (IMO), a long delayed reform process set out in the Electric Power Industry Reform Act (EPIRA) and its implementing rules and regulations.

For all the efforts that had been put into crafting these policies, Mr. Cusi’s team could score a “high rating’ if writing the rules were the only basis. Nevertheless, the unpleasant truth had been that many of these policies are actually lacking of the incentive schemes or viable regulatory frameworks that investors have been looking for so they can genuinely be enticed to pump in fresh capital in the country’s energy sector.

Primarily in the petroleum contracting round, despite what was designed as flexible submission of ‘unsolicited proposals’ year round, the more basic policy issues that investors really want resolved are those on the “tax regime’ concerns precipitated by the Commission on Audit  (CoA) case against the contractors of the Malampaya project; as well as the lifting of the ‘seismic activity and drilling moratorium’ in what were deemed as ‘conflict areas’ in the West Philippine Sea, areas that are also known to several investors as ‘highly viable prospects’. Even additional gas extraction from Malampaya – for its anticipated life cycle extension of 10 years — is hurdled by the COA case, with Shell Philippines President Cesar G. Romero sounding off that “it will be difficult to plan ahead with all these unresolved issues.”

On gas investment frameworks, prospective developers of the planned LNG terminal as well as off-taker power projects have been noting the ‘lack of market for capacity’ that will confront them in the coal-dominated energy mix. Additionally, they have concerns over vague policy prescriptions on fiscal incentives that LNG projects can avail of, such as those with the Board of Investment (BOI) as well as the set of duties on importation of equipment, to name a few.

As far as the advancement of retail competition in the power industry is concerned, the basic hurdle that both the DOE and ERC must first cast aside is the legal gridlock on the policy – the temporary restraining order (TRO) that the Supreme Court had ruled upon when it stopped the policy’s mandatory implementation in February last year.

On RE investments, the signed version of the RPS is being counted upon by Mr. Cusi as a measure “that could deliver the green’ in the fossil fuel-dominated power mix – done by enforcing 35-percent RE share in the supply portfolio of mandated distribution utilities (DUs) onward to year 2030, with incremental sourcing kicking off in year 2020.

The energy chief laid down the ‘safety nets’ that will protect consumers from RE-induced price hikes: one, is for RE procurement to comply with the competitive selection process (CSP) or auction to ensure least cost; and another is the provision on “no higher rates” dictum.

Nonetheless, several questions still ‘perturb’ that policy imposition: the first is premised on assumptions that some DUs may have fully contracted for their requirements (because of a previously implemented policy also of the DOE), so if that is the case, will they be forced to contract still for additional RE capacity; second is on the “no higher rates’ provision – what is the real cost reference to it and will it yield viable returns to RE investors eventually, primarily if they will have to compete with cheaper rates of other technologies (i.e. coal) or if they will match plummeting prices in the WESM now ranging at P2.10 to less than P3.00 per kWh on average; third is: if the procured RE is of intermittent nature (i.e. solar and wind), what technologies or supply source can DUs resort to and how the cost of that technology back-up be factored in into the consumers’ electric bills; and fourth, on questions of some stakeholders on the lack of technical and economic studies to support the RPS prescriptions, what will hurt the DOE or the National Renewable Energy Board (NREB) on coming up with one since the policy will have two-year transition phase anyway (2018 and 2019) and the RPS Circular also sets review provision – couldn’t it be a better strategy to prevent palpable blunders  rather than just attempt to sort out investment mess later on?

Isn’t it enough that the country already had painful and expensive lessons learned in the FIT era of RE as well as the solar ‘over-development’ in Negros? Bluntly then, despite the precipitous slide in technology costs of RE in recent years, lacking studies could still not be afforded as DOE’s or NREB’s  “cheat sheet” in this rule-making exercise – since for sure, even deep-pocketed investors will not just easily risk money in a market with many undefined investment terrains.

For now though, Mr. Cusi can just promise that “the RPS for on-grid rules outlined various safety nets to protect the electricity end-users and to ensure that this new venture will not result in higher electricity rates.” The question still is: will it work well enough?

 ‘EO 30’ and ERC in doldrums

 Malacañang’s issuance of Executive Order No. 30 (in June 2017) was immensely applauded by investors in the sector because it heralds a policy regime of drastically cutting red tape on energy project approvals – it sets off covenant with project developers that they can secure approvals of their proposed facilities or ventures in the span of 30 days.

 The EO envisioned that approvals can be facilitated by the creation of the multi-agency Energy Investment Coordinating Council (EICC) led by the DOE. That was institutionalized August 4 last year, but the very basic dilemma of EO 30 is the failure on crafting of its implementing rules and regulations (IRR), that lingers until now.

Perceptibly, not everything is hunky dory on this domain – it is even ironic that while the policy promises ‘drastically streamlined project approval processes’, it now transcended that “ano ang hinihintay mo Pasko” witticism thrown against it when it comes to the lengthy timeframe of its IRR crafting. Six months after, the investors’ rib-tickler to it is that it may have already started gathering dusts in DOE’s policy writing nooks.

In several forums, Mr. Cusi gave word that EO 30 will help facilitate processes for energy investors. That as a given, it is time for him then to take that policy off the ground, not in the near future but now!

 Beyond that, the mayhem that afflicted the ERC just before the Christmas holidays added up to the industry’s troubles. While already reeling from backlogs of cases that could compromise P1.588 trillion worth of power investments, an order of the Office of the Ombudsman suspending four of its sitting Commissioners for one year without pay came as another crushing round for the sector’s regulating agency.

Despairingly, ERC Chairperson Agnes T. Devanadera warned that “the debilitating impact of the Ombudsman decision to suspend the four incumbent ERC Commissioners will render the operations of the agency in severe paralysis,” adding that “as a collegial body, the presence of at least three (3) members of the Commission is needed to constitute a quorum to enable the ERC to adopt any ruling, order, resolution, decision or other acts of the Commission.”

The New Year ushers in renewed hope, and in an industry still blighted by multiple sets of messy events and policy deficiencies, the recycled ‘wish list’ of players in the industry could still be “stronger, clearer, predictable and viable policies or set of business rules.”