Wrong policies that keep oil prices and power rates rising

By Cecilio Arillo - June 25, 2018

https://businessmirror.com.ph/wrong-policies-that-keep-oil-prices-and-power-rates-rising-7/

Transco and gencos

RESTRUCTURING and privatization of the power industry under the Electric Power Industry Reform Act (Epira) had three objectives: (1) rationalizing the roles of the Department of Energy (DOE), the National Electric Authority, National Power Corp. and the Energy Regulatory Commission (ERC); (2) restructuring and privatizing the NPC; and (3) cross subsidy removal and introduction of so-called competition in the power sector.

The idea of restructuring and privatizing the NPC involved the dismantling of the state agency and separating its functions in pursuing missionary electrification (NPC-Small Power Utilities Group) and setting up a National Transmission Corp. (Transco). Immediate casualties of this dismantling were 6,000 NPC employees retrenched in November 2002.

NPC plants and NPC–contracted independent power producer (IPPs) were geographically grouped together to form generation companies, according to the Epira. The gencos included other assets and liabilities that were transferred to Power Sector Assets and Liabilities Management Corp. (PSALM), which, on June 30, 2003, assumed NPC’s
assets and liabilities.

Former Energy Secretary Vincent S. Perez, citing the government’s inability to operate and maintain the country’s transmission project, had stressed the importance of privatizing Transco. The government projected some P105 billion in revenues upon completion of the sale.

A Transco privatization committee was formed to oversee the competitive bidding and final awarding of contracts. The members of the committee on privatization represented officials from Transco, the DOE and PSALM. The committee scheduled the first bidding in August 2003. However, the committee had to announce another bidding failure because no investors showed interest in the deal. The government had been considering a negotiated bid with Singapore Power, the lone bidder.

The projected revenue accruing from Transco’s privatization became a long-term consideration of the government. In the short-term, however, the government needed to privatize Transco to be able to borrow again by issuing bonds. Perez deliberately failed to mention that Transco privatization was also an Asian Development Bank conditionality for issuing a partial guarantee to the NPC through bond flotation, which was needed for its 2004 operating expenses.

The government continued to implement its finalization of privatization plan for the gencos. PSALM proposed that the gencos be privatized simultaneously with the Transco. So far, PSALM was able to bid out and award some of the NPC-owned generating facilities.

Impacts of power privatization

The main impact of power privatization in the Philippines, particularly during President Ramos’s regime, was the continuing increase in the cost of electricity. There were two reasons for the increase in electricity rates: (1) the purchased power adjustment, or PPA, and (2) the application for rate hikes by local distribution utilities.

The PPA combined the purchased power-cost adjustment, fuel-cost adjustment and foreign currency-exchange adjustment. These adjustments in costs represented privileges extended to IPPs, when the government contracted them to generate and supply power under PPA.

Distribution utility Meralco, known as a Lopez family-owned company, also charged consumers the contractual costs of electricity bought from the NPC and other distribution utilities. These contractual costs were onerous because of the so-called take-or-pay provisions in the supply contracts. This meant that all contracted power was considered sold and to be paid for by consumers, whether the electricity supply was used or generated. Included also in the take-or-pay contract were the fuel costs, which were bought in foreign currency—US dollars—therefore, subject to fluctuation in exchange rate.

Consumers have been paying for fuel-cost adjustment and foreign-currency adjustment since 1994.

Electricity charges have been unbundled as mandated under Epira. Conveniently, with rates now unbundled into major services, the PPA was no longer identified in monthly electric bills, but continued to be subsidized by consumers as part of the generation charge.

Aside from the PPA, rising electricity costs resulted from rate increases filed by local distribution utilities (DUs) or rural electric cooperatives (RECs). The ERC conducts the review and approval of new rates.

Through Manila Electric Co. (Meralco), the same Lopez clan that controlled the larger water-concession area monopolized the electricity distribution in the National Capital Region. Even under the Epira, all other DUs and RECs continued to individually secure franchise to ensure that the monopoly of power utility in their respective area would be maintained.

For one, Meralco, the biggest DU, had succeeded in clinching successive rate increases using the Epira to legitimize collection and recovery of costs for its expensive power contracts. In addition to rate increases filed to collect costs incurred in the process of distributing electricity, DUs also managed to include the recovery of their income taxes in filing for rate hikes.

When Mrs. Aquino’s administration unquestionably returned Meralco, ABS-CBN and other corporations shortly after the Edsa uprising, the Lopezes claimed they were victims of the Marcos regime.

But documents gathered by this writer belied their claim, showing that they sought President Marcos’s help for financial assistance for Meralco and offering the sale of their shares in three letters signed by Eugenio Lopez on February 19, 1973, March 20, 1973, and September 17, 1973.

The sale was finally consummated on December 16, 1974, to Meralco Foundation Inc., which assumed the indebtedness of Benpres holdings in Meralco Securities Corp. to foreign and local banks amounting to P101.1 million.

The deed of sale was, in fact, guaranteed by the Philippine National Bank through a letter of credit it issued to the foundation for the purchase of the Benpres shares of stocks.

The foundation also assumed Benpres’s P9.5-million debt on stock subscription and an obligation to pay Benpres P48.6 million on its equity, payable by installment over a 10-year period at a 10-percent interest on the unpaid balance.

In other words, what this particular set of documents showed was that the Lopezes were not victims of martial law, but were, in fact, the beneficiaries, when Marcos helped them out of their financial mess.

Strangely, the takeover by the Lopez family of the Meralco after the Edsa mutiny was shrouded in mystery despite President Aquino’s avowed policy of full disclosure and transparency.