Special Report: Who holds the key to power sector restructuring?

A week from now, the highly controversial Republic Act 9136 otherwise known as the Electric Power Industry Reform Act (EPIRA) of 2001 will mark its first year. But labor pains still persist.

Signed in June 26 last year, the EPIRA was envisioned and should have paved the way for the smooth restructuring of the power industry and the privatization of the state-owned and debt-ridden National Power Corp. (Napocor) to free the government of subsidizing the huge losses of the power firm.

Since other countries in the region such as Korea and Thailand are conducting their own power restructuring activities, industry stakeholders believe that important reforms should be carried out to bring efficiency and reliability to the country’s deteriorating power industry. The electricity retail price in the Philippines is among the highest in Asia and long-term electricity requirements need massive financial support. Estimates show that more than $1 billion a year will have to be raised over the next 10 years to build the infrastructure for the growing electricity requirements.

Based on the 10-year Power Development Plan of the Department of Energy (DOE), the country will need an additional 5,000 megawatts (MW) for the period 2000-2010 on top of the new generation projects that Napocor and the Manila Electric Co. (Meralco) have committed to undertake. It is feared that without this new capacity, the country will have a supply shortfall in the next two to four years. Specifically, the power shortage is expected in Luzon by the year 2007 and in the Visayas and Mindanao as early as 2004 and 2006, respectively.

Aside from the lack of electricity supply if the power reform bill was not passed, the selling point of the proponents of the EPIRA is that the National Government will continue to borrow on behalf of Napocor or at least provide the guarantee to finance the power generation firm’s operations which would result to total borrowing of P160 billion over the next five years.

Napocor does not have the funds to finance the construction of power plants and transmission lines to meet the increasing demand for power. Todate, the debts of the formerly high revenue earning firm account for approximately 25 percent of the country’s total foreign debts.

The Arroyo administration made the EPIRA one of its priority reforms, claiming that the New Power Bill will be responsive to the clamor of many sectors by pushing for more improvements in the pro-consumers provisions.

It was the time of former Energy Secretary Jose Isidro Camacho that the power bill was passed. Camacho delegated the implementation of the law to then BOI Executive Director Vincent S. Perez (now the Energy Secretary) when the former was transferred to the finance department.

Perez, a former investment banker like Camacho, believes that the EPIRA is a landmark legislation.

But months after the power law was enacted in June 2001, there were indications that several hurdles have yet to be fleshed out. These unresolved issues came after the law’s more than six years in the making and after it went through countless revisions under three administration.

Lawmakers who authored the power bill admitted they need to carry out some revisions because they have missed out a number of important provisions that should be either clarified, spelled out or totally scrapped.

These changes are embodied in different House bills filed by the same authors of the EPIRA. For one reason or another, they have claimed that there is a need to increase the lifeline rate from 50 kilowatthour (kWh) to 75 kWh; to create a separate franchise from the newly-created National Transmission Co. (Transco) which they forgot to include in the first version of the law; to exempt from the payment of universal charge for at least three years companies with self-generation capabilities like shopping malls and other vital facilities like hospitals; to allow the Power Sector Assets and Liabilities Management Corp. (PSALM), the government-owned and controlled corporation to assume all the liabilities of Napocor and to borrow money to refinance the stranded contract costs incurred by the state-run power firm; and to peg at a constant 40-centavo per kWh the universal levy that would be imposed to electricity end-users for the period of 25 years.

Restructuring and privatization timetable

Under the timeline of the restructuring and privatization process, within the next six months after the signing of the power law, the PSALM will submit a privatization plan to be endorsed by the Joint Congressional Power Commission and approved by the President of the Philippines.

Based on the plan, at least 70 percent of the total capacity of the generation assets of Napocor will be privatized within three years and all outstanding debt obligations of Napocor will be transferred to and assumed by PSALM.

Within this six-month timeframe, the transmissioin and subtransmission facilities of Napocor and all other assets related to transmission operations will be transferred to Transco.

In consultation with relevant government agencies, the electric power industry participants, non-government organization and end-users, the DOE will promulgate the implementing rules and regulations of the Power Bill.

Simultaneously within that six-month prescribed period under the law, the Napocor and other distribution utilities (DUs) should file its revised rates with the Energy Regulatory Commission (ERC), an independent quasi-judicial/regulatory body that is free from political influence.

Section 36 of the EPIRA provides that the tariff rates will be unbundled so that cost components can be determined, and electricity prices can be determined, and electricity prices can be rationalized and made transparent. With the unbundling of tariff rates, consumers will know how much each component of the electricity service cost. The resulting cost efficiencies will be passed on to consumers. As of this date, there are 138 utilities that have submitted their applications.

It was the controversial filing of the unbundling rate petitions of the Napocor and the DUs that the controversy of PPA started to brew again. The last time consumers heard from PPA was when it was used by Sen. Juan Ponce Enrile as his campaign propaganda during the last national elections.

In their unbundled rate petitions, the DUs will have no reflect the itemized distribution and supply costs of each service while Napocor’s revised rate will have to show the transmissions and generation costs.

While the Napocor and the DUs did comply with the Dec. 26 filing deadline for unbundled rate applications with the ERC, they did not see the end of it.

The implementation of the rest of the items in the timetable, on the other hand, such as: the establishment of the wholesale electricity spot market wherein a market operator will be chosen (June 26,2001 to June 25, 2002); the transfer of Transco’s subtransmission assets, functions and associated liabilities to qualified DUs (June 26, 2001 to June 24, 2003); the retail competition, and open and non-discriminatory access to distribution wires (June 26, 2001 to June 25, 2004); the National Electrification Administration (NEA) to prepare electric cooperatives for operating and competing in the deregulated market (june 26,2001 to June 25, 2006); and retail competition and open access may be implemented for electric cooperatives (June 2006), has yet to be established.

Brohaha over purchased power agreement

The mandated power rate reduction of 30 centavo per kWh, implemented immediately after the signing of the Power Bill, did not pacify and stop the consumers from demanding a clear explanation on what will happen to the PPA which oftentimes carry a higher cost than the basic rate as reflected in their electric bills.

PPA is an automatic cost recovery mechanism set up by Napocor and distribution utilities, like Meralco, to cover fluctuations in fuel prices, power costs, and foreign exchange rate.

Based on records, the charging of the PPA started when a power crisis hit the country in the early 90’s. During this time, the Napocor signed contracts with IPPs with a "take-or-pay provision", which means that the state-owned firm is forced to pay a certain amount to the IPPs even though this power was used or not.

Official figures show that since 1997, when most of the IPP project started, the state agency had incurred losses on the contracts. In 1997, it incurred a P3.2 billion loss, in 1998 a loss of P8.09 billion and in 1999, a loss of P8.7 billion.

The government, through PSALM, also expects to lose some $500 million (roughly P25 billion) if the Meralco pushed its pre-termination of its 10-years power supply agreement. The contract, which will be due in year 2004, pre-terminated by Meralco after Napocor started imposing a fine of around P2.1 billion for not buying the agreed minumum capacity of 3,600 MW in January. The fine has ballooned to P5.7 billion as of end-May.

Meralco argued that the 10-year supply contract with Napocor was already overtaken by events with the passage of the EPIRA.

The Lopez-managed utility firm has, in fact, urged the Department of Energy (DOE) to step into its ongoing negotiations with Napocor on settlement of the penalty. "They (DOE) should intervene. We urged them to (intervene) in order to finally put an end to this," Meralco’s treasurer Rafael Andrada says.

This request came after Meralco president Jesus Francisco announced during the power firm’s annual stockholders’ meeting recently that they will not pay the said penalty. "We resisted recognizing that. We will not pay that. Compromise settlement is possible but not that same thing as penalty," Francisco said.

Francisco said they refuse to pay such penalty now amounting to P5. 7 billion to prevent its customers from paying higher PPA or an additional P2.50 per kilowatthour (kWh) PPA.

"There is no basis for such imposition. So, why do we have to pay that? Granting we had paid that, we will have to pass on the burden to our customers by raising electricity bills by as much as P2.50 per kWh," Andrada stressed.

But Perez believes that as a matter of principle, Meralco just could not terminate a contract. "If Meralco wished to renegotiate they could have merely invited Napocor to sit down and discuss the possible renegotiation of the power sale contract. Of course, the government respects the sanctity of the independent power producer (IPP) contracts given the hope that Filipino company, which is Meralco, will also value the power sale contract," Perez pointed out.

Andrada, however, is optimistic that the DOE chief will remain objective in threshing out this dispute. "I believe that the DOE will come to a conclusion that will not only benefit both parties but the consumer as well. For the benefit of the mindset of the public, I think they should keep an open mind on this," the Meralco official added.

Andrada said Meralco has a legal basis to terminate the contract, which took effect early March of this year. A termination letter was sent to Napocor in January.

"In June last year the EIRA of 2001 was passed. Based on the provisions, we believe that Napocor is required, under the law, to enter into a TSC. So, we sent them a letter early September last year saying that we’re ready.

As of now, Meralco is sourcing 67 percent of its supply from Napocor which was supposed to be 90 percent under the 10-year supply agreement. The remaining 33 percent is sourced from its independent power producers (IPPs).

PSALM, however, noted that even if the existing supply agreement would be converted into a transition supply contract (TSC), the fact remains that Meralco’s offtake (volume of supply bought) from the Napocor would still be reduced.

According to a Napocor official, who requested anonymity, the state-owned power firm’s fault at that time, was its inability to look for an alternative source of power when the controversial Bataan Nuclear Power Plant (BNPP) was not allowed to operate. The Aquino administration had decided then, not to run the BNPP due to the environmental reasons.

To recall, Napocor, in adesperate move to resolve the crisis, contracted a number of independent power producers (IPPs) to augment system capacities, and utilize these capacities to meet the increasing demand at that time. The decision to enter into onerous IPP contracts was backed on hoeps that the economy would bounce back but this optimism did not materialize when a financial crisis hit the region in 1997.

But, it seemed that everything has its price and the supposed help from IPPs had a "very high price".

Believing that the contracted price between them and the Napocor is not enough to cover the costs of generation and purchased power, these power producers applied for an adjustment in their respective basic rates from the then Energy Regulatory Board (ERB). However, this was not granted.

Since Napocor’s automatic cost adjustment charges are still pegged at 1993 level, while Meralco’s at 1994, this means that the basic rates being charged by the two utility firms to their respective customers do not reflect the true costs of electricity, and is not marked-based. To correct this discrepancy, and allow the utilities to recover their costs of generation and purchased power, the ERB approves the adjustments through PPA for Meralco and FPCA (fuel cost adjustment) for Napocor.

Under the New Power Bill, thouh, the Napocor and all Dus should file for new, cost-based rates within six months from the effectivity of the Act. There are 19 private distribution utilities and 120 electric coooperatives in the country.

The rate filings required by law differ from previous rate cases in two very distinct areas. Firstly, the utilities are required in these rate filings to establish separate retail rates for each category of service as defined by the Act. This requires the unbundling or separation of all ements of the revenue requirement calculation, including operating expenses and rate base so that the required transparent retail rates can be determined for each category of service and each customer class.

Secondly, the rates determined are to be free of all inter-grid and intra-grid subsidies in the case of Napocor, and all inter-class subsidies in the case of the Dus. In other words, the rate structure shall reflect the true cost (free of cross-subsidies) of serving each customer class.

ERC chairperson Fe Barin says the unbundling of the rates of the Dus will not necessarily result in an increase in their rates. In the case of Meralco, it has a pending petition since April 2000 for a basic rate hike of 30 centavos per kWh until the unbundling rate petition overtook such application.

Meralco’s Andrada, however, stressed that the P1.12 per kWh resultant figure under its unbundling petition will just be used by ERC in its data gathering for future formulation of rate increase applications. "All we are asking for is 30 centavos," the power utility firm’s finance chief opines.

Barin also elaborates that the rates which are reflected in the unbundled rate petitions of Napocor and Dus will naturally be higher because of the test year that was used.

The rate filings are based on a test year ending Dec. 31, 2000. The base year, being used by Dus before the unbundling of rates, is 1994.

In an ERC primer, its explains that in a rate filing, the test year selected establishes the base perid to be used to develop the historical financial cost information for the element of revenue requirement. Those elements include: the amount of operating expenses as well as the level of investment in rate base for private utilities and the level of debt service for the electric cooperatives.

More so, the test year information may have to be adjusted for known and measurable changes that have occurred since the end of the test year up until the time the ERC issues an order. These adjustments, ERC says, may be required in order to help assured that the level of costs and investments during the test year are a reasonable representation of what the level of costs and investment will be during the period when the new rates are effective.

The ERC points out that given the use of a recent test year, the applications propose new rates may differ from existing overall rate levels. This means that the filings are not revenue neutral. Instead, the revenue requirements in many instances may be different than existing revenue stream.

It was, however, during the public hearings on the Meralco’s unbundled rate petition in the ERC court that various militant and consumer groups started raising questions on PPA.

Not to mention the ERC’s recent cease and desist order (CDO) on Meralco’s collection of its deferred PPA amounting toa bout P10.9 billion as of March 2001. This CDO actually suspended to collection of some 38 to 40 centavos additional PPA being charged by Meralco to its customers which started September 2001. Meralco claims that this deferred PPA was actually a relief for consumers since it had decided to implement the collection in a stagged basis to cushion the imapct the ease the burden of its customers from a very high PPA at that time. (To be continued)