Consolidate

The massive power outage that hit Panay island last week was an economic calamity. The event underscores the vulnerability of our power infrastructure.

Delivering reliable power is a complex business – not the least because it produces and distributes a commodity with no shelf life at all. There needs to be constant orchestration among the many parts of the power industry: the generating plants, the grid system and distribution utilities. Any lapse or any flaw in any of the many parts brings down the whole system.

The Department of Energy (DOE) is holding the National Grid Corporation of the Philippines (NGCP) responsible for last week’s outage. The national grid is entirely private owned and is said to be extremely profitable for its stakeholders, the largest being the China State Power Grid.

The NGCP has been under close scrutiny for many months now. It has been faulted for delays in interconnecting our islands and providing for sufficient ancillary power supply. All those issues will be the subject of high profile public hearings to be conducted over the next few days.

It has been suggested that the state acquire a stake in the NGCP if only to have an inside look into how it discharges its responsibilities. The DOE proposed that the newly organized Maharlika Investment Fund (MIF) buy into the NGCP. This proposal was echoed by House Speaker Martin Romualdez and apparently agreed to by the MIF management.

This seems a sound proposal, given the many issues hounding the NGCP. Nevertheless, buying into the grid requires thorough study by both the energy and financial experts.

We did not go through all the trouble and controversy of setting up the MIF simply to buy into an already existing company. The buy-in should ensure not just better performance by the grid but also more affordable power for the domestic economy.

The grid is one layer of costs the consumer pays for. We need to know if there is a way to lower grid charges. By necessity, the grid is a monopoly and as such is not subject to market challenge.

In fact, while we are at it, the entire energy infrastructure must be thoroughly studied for efficiency and economy. We cannot aspire to get into the race to reach higher income country status if our energy infrastructure is inefficient, costly and unreliable. We cannot build a strong industrial base with expensive and unreliable power.

In need of comprehensive scrutiny, as much as the grid, is the way we have organized power distribution in our archipelago. Just like the grid, many of our electric cooperatives deliver costly power and spotty service that hinder the development and investment attractiveness of localities.

Our system of electric cooperatives evolved on the basis of both the specific requirements to supplying energy to an archipelagic economy and the political facts on the ground. Like the grid, our electric cooperatives (ECs) are natural monopolies. Franchises for these local monopolies are precious grants often awarded as part of the political spoils instead of on the basis of economic efficiency.

According to a study using data development analysis of our 120 ECs, the current set-up is uneconomical. The study finds that most ECs can reduce their inputs by up to 18 percent and still produce the same level of output. This implies that electricity charges in most localities may be reduced by a fifth if the system was reconfigured.

Furthermore, the study demonstrates that productivity in this sector has not improved significantly despite reforms instituted in 2001. The study shows that the efficiency of ECs rises with size.

The implication here is clear. We need to reconfigure the way energy is distributed locally to allow for better technical management and enhanced investment in new technologies. The ECs will have to be consolidated to achieve economies of scale. New investments in power distribution will have to be made.

The achievement of economies of scale will likely be resisted by current franchise holders. The existing cooperatives are cash cows for their owners, who are frequently also the local powerbrokers. These powerbrokers are over-represented at the House of Representatives which has the exclusive power to renew or revoke franchises.

The National Electrification Administration (NEA), which oversees the ECs, was established in 1973 by Presidential Decree No. 269 to ensure all our communities are energized. The agency was initially funded from revenues from Japanese war reparations.

The decree, issued under conditions of martial law, was forward looking. It effectively advanced electrification nationwide and opened enough leeway for ECs to be merged if it was more economical to do so. The NEA was given the power to review existing franchises for the quality of service they delivered. It tasked the agency to constantly review the country’s energy situation and ensure a comprehensive strategy for efficient electrification.

Somehow, over the decades, the NEA contented itself with a minimalist role in our energy planning. It lacked militance in ensuring the cooperatives provided the most economical service possible.

As a result, many cooperatives underinvested and delivered poor services. They were content reaping profit from hapless consumers who had no other choice but to bear with inferior power distribution.

It is time to review the development role of cooperatives and the NEA given all the inefficiencies and vulnerabilities of our energy situation. As much as Congress must look into the possible failure of the grid as it is presently constituted, we must also look at the fragmented and inefficient way energy is distributed.