Sunday, July 5, 2009

Reaction to the Electric Power Industry Reform Act (EPIRA)

After 7 years of congressional debate and court cases, the Electric Power Industry Reform
Act (EPIRA) was passed into law on June 26, 2001. EPIRA has three main objectives: 1) to
develop indigenous resources; 2) to cut the high cost of power in the Philippines; and 3) to
encourage foreign investment. Passage of the Act sets into motion the deregulation of the
power industry and eventual privatization of state-owned enterprises. Actual sale of state
assets and implementation of the program was targeted to take place between late 2002 or
2003. 

The legislation requires the state-owned utility National Power Corporation (Napocor) to
break-up its vertically integrated assets into smaller sub-sectors such as generation,
transmission, distribution and supply for its privatization. The result will be a system in
which privatized generators would sell directly to private distribution companies. Napocor
has designated two new subsidiary companies designed solely for privatization. These two
firms, Transco and Psalmcorp, will entail the state's high voltage transmission lines and
infrastructure, and power plants, respectively. The government also will sell off its share of
Meralco, a smaller company that serves Manila and the immediate surrounding area by
buying power from various Independent Power Producers (IPPs). 

Napocor will need to transfer its existing power purchase obligations to private distributors,
and also to renegotiate high-priced contracts. The cost savings lie in the fact that private
distributors will likely be unwilling to enter into agreements that are above market rates.
There are other financial incentives for the government as well. Napocor's huge debt and $9
billion in power purchase agreements are unsustainable, and the government must already
contribute $300 million per year to keep Napocor afloat. Finally, the government needs
more foreign investment in the sector as demand is projected to outpace supply by around
2005 at current rates of investment. 

In order to make the sale of Napocor more attractive to investors, the government has
absorbed a significant amount of Napocor's $6.7 billion debt. In addition, the $9 billion in
power purchase agreements with IPPs also will be sold off. The transmission system will be
transferred to an independent company, Transco, which is set by law to be privatized 6
months after the passage of RA 9136. Privatization of Transco, however, is contingent upon
congressional approval for the rules governing a new wholesale spot market as well as a
reduced transmission tariff, or "wheeling charge". According to deregulation laws, no one
potential buyer will be allowed to own more than 30% of the Philippines' generating assets. 

HIGHLIGHTS OF 
EPIRA LAW’S OBJECTIONABLE PROVISIONS 

ISSUE ON CROSS-OWNERSHIP (RA 9136, Sec. 45)

The Epira should disallow cross-ownership. Those who own electricity generation companies
should not be allowed to own electricity distribution companies because it results in higher
electricity rates.

Cross ownership among corporations in generation, transmission and distribution was

banned in California from which the EPIRA was modeled. However, under the law,
distributors (such as Meralco) were allowed to also own power plants (such as Quezon
Power, Duracom, and First Gas as sister companies of Meralco), which is a clear indication
of a conflict of interest. 

This is one reason why the Lopez-managed Meralco continues to buy expensive electricity
from its own IPPs and passing on the extra cost to its customers. 

As a result of the sweetheart provisions of these IPP contracts, Meralco is charging

consumers much higher rates than if it was buying from Napocor with whom it has an
existing supply contract.

From a data gathered in December 2002, Meralco paid 6.54 pesos per kilowatt hour from
Quezon Power, 5.41 pesos from First Gas-Sta. Rita, and 4.89 pesos from First Gas-San
Lorenzo, These higher costs cannot compare with Napocor's average price of only 3.62
pesos per kWh during the time.

ISSUE ON THE REMOVAL OF IPP ROI CAP 

Epira's provisions pertaining to the contracts with independent power producers (IPP) of the
state-owned National Power Corp. and the Manila Electric Company distribution utility
should likewise be reviewed. [RA 9136 SEC.33.(B)(4)]

We should eliminate the provision that allows IPPs to charge to end-users the cost of
electricity not consumed, adding that this provision was causing suffering to the consuming
public. (RA 9136, SEC. 32) 

Epira, which removed the cap on the return on investment that IPPs are allowed to get,
should be restored. 

Meralco which owns IPPs, can easily bloat income and still make it appear as if Meralco was
just breaking even because the IPPs are now exempt from having a cap on their return on
investment. Meralco then can still pass on the cost to the end-user.

ISSUE ON UNIVERSAL CHARGE (RA 9136, SEC. 34)

The provision which allows the Energy Regulatory Commission (ERC) to determine the
universal charge one year after the law took effect gave Distribution Utilities like Meralco
and Napocor the right to pass on the burden of paying for the stranded costs under the IPP
contracts to consumers. 

The imposition of the universal charge like the passing on to consumers charges for the
stranded recovery costs of Napocor and Meralco, missionary electrification, watershed
rehabilitation, as well as cost of royalty on energy from indigenous or renewable sources
etc. shall likewise increase power rates. It is unjust for costs not directly related to the
service of providing electricity, to be collected from consumers who are already reeling
under heavy power prices.

The charge was only meant to be the payment for the stranded debts in excess of the
amount assumed by the national government, as well as the stranded contract costs of
utility distribution resulting from the energy industry’s restructuring. 

ISSUE ON UNBUNDLING OF RATES

Unbundling of rates as mandated in Sec. 36 of RA 9136 is only intended to have
transparency on the various charges inputted by MERALCO in its monthly billing. However,
with its implementation the cost of electricity even escalated further. This is withstanding
the fact that the controversial Power Purchase Adjustment (PPA) has already been scrapped
from the electricity bill. However, this does not necessarily mean that PPA has been
removed from their charges. PPA could just probably been embedded in the different parts
of the unbundled rates of MERALCO, where rates increase could easily been made
discreetly.

From among the numerous breakdowns of MERALCO charges through the unbundling of
rates, where has it been inputted and how much is its rate at present from the time it was
last seen in the MERALCO bill? 

HIGHLIGHTS OF THE SOLUTIONS INTRODUCED BY

SENATE PRESIDENT ENRILE IN SB 2121 (EPIRA AMENDMENTS) TO AVERT THE
CONTINUOUS HIKE IN THE PRICE OF ELECTRICITY

Deleted the imposition of stranded debts and contract costs of NPC and stranded costs of
distribution utilities through the universal charge. By providing for the non-recovery of
stranded debts and contract costs of industry players it will be reflective of the true cost of
power. Any charges that will raise the prices of electricity that have no direct relation to the
cost of electricity are anti-consumer and will not make the prices of electricity in our country
competitive with other countries. 

The bill also provides that the cost of royalty on energy from indigenous or renewable
sources will not be charged on to the consumers through the universal charge to ensure
lower rates for electric power consumers.

The bill provides that franchise taxes imposed by local government units shall be limited
only to the distribution and wheeling charges earned by the distribution utilities and not on
its gross receipts. With this kind of tax imposition, prices of electricity will further push down
prices of electricity.

On the issue of cross-ownership, 50% limit on bilateral power supply contracts between
commonly owned distribution and generation entities while adding a secondary restriction
that bilateral contracts between affiliates must not exceed 20% of the grid for one
distribution utility.

The bill likewise disallows the grant of provisional authority for increases relating to basic
rate components such as the transmission wheeling charges for TRANSCO and distribution
related charges for distribution utilities. The ERC may grant provisional authority for
operational applications or pass-through charges, provided that the Commission shall
immediately conduct public hearings and render a final determination and decision not later
than 120 days from the issuance of the provisional authority. 

To ensure transparency, the bill provides that public hearings shall be conducted on
matters relating to rate adjustments or any issue that will affect private rights or impose
obligations on electricity end-users. This provision is designed to prevent the ERC from
conducting mere “public consultations” wherein resource persons and witnesses are not
bound by oath, thereby limiting accountability.

The bill strengthens and UPHOLDS THE BASIC RIGHTS of consumers as follows:

To have quality, reliable, affordable, safe, and regular supply of electric power
To be accorded courteous, prompt, and non-discriminatory service by the electric service
and reasonable price of electricity.

To be an informed electric consumer given adequate access to information on matters

affecting the electric service of the consumer;

To be accorded prompt and speedy resolution of complaints by both the distribution utility
and/or the commission;

To know and choose the electric service retailer upon the implementation of retail
competition; and

To organize themselves as a consumer organization in the franchise area where they belong
and where they are served by the distribution utility