Electricity rates unbundled:  Why do we have prohibitive rates of electricity?


Bolt of Lightning

Electricity is the universal source of energy among Filipinos.  According to a survey conducted by the National Statistics Office, 14.6 million households (or about 87.6% of 16.6 million households) use electricity.  Among the various types of fuel, electricity has the greatest proportions of household users, ranging from 90-98% across the income class; except in the lowest range of less than PhP5,000 monthly family incomes where roughly 80% of households use kerosene and/or fuel wood.  In short, electricity is a basic need to most Filipino households. 

Residential rates of electricity today are double what they were in 2001 (the year the Electric Power Industry Reform Act, or EPIRA, took effect), while our industrial rates are among the highest in the world.  Ironically, we seek and “induce” foreign investors with expensive electricity. 

Why do we have prohibitive rates of electricity in the Philippines?  First, a brief review of the structure of the electric power industry in the Philippines.  

The electric power industry was reestructured into 4 component sectors by the EPIRA in 2001, namely:  generation, transmission, distribution and supply.

The Generation Sector (meaning the producers or generators of electricity) consists of the National Power Corporation (Napocor) and some 50 private Independent Power Producers (IPPs).

The electricity produced by Napocor and the IPPs is sold to and distributed to the consumers by the Distribution Utilities (DUs) — e.g.: the Manila Electric Company (Meralco), Visayan Electric Company, Davao Light and Power Company, 119 Electric Cooperatives (ECs) all over the country, etc. — constituting the Distribution Sector.

The power generators transmit their electricity to DUs and ECs through the power grid operated by the National Transmission Corporation (Transco), which was created by the EPIRA from Napocor’s substation and transmission assets to constitute the Transmission Sector.

The Supply Sector, as provided for by the EPIRA, refers to the “… supply of electricity to the contestable market …” and will not be discussed here.             

The following charges and factors contribute to high cost of electricity in the country:

1.  High cost of power generation (for the customers of Meralco, the generation charge is reflected as the 1st item in the Billing Summary of your monthly electric bills).  Generation charges account for around 58% of electricity rates. The major reasons why we can’t generate cheaper electricity are:

a)  High depedence on imported energy (oil and coal) for power generation.  The price we pay for imported energy and the supply we get for the price we pay are both dictated by external market forces beyond our control. 

b)  Fluctuation in currency rates.  When the peso is weak, importers of oil and coal need more of it and the added cost is passed on to power producers.  In the case of direct importation by the IPPs, their foreign exchange and fuel cost risks are guaranteed by the government and routinely passed on by Napocor, DUs and ECs to the consumers.

c)  High government taxes and royalty fees.  High government taxes levied on production inputs and royalty fees on indigenous natural gas from the Camago-Malampaya field off Palawan contribute to higher cost of power generation.  Local government units also extract their share of the “booty” in the form of franchise and business taxes, adding more costs to electricity rates.

Meralco’s IPP and sister company, the First Gas Power Corporation (FGPC), claims that consumers are paying more than PhP2 per kWh in government royalties and E-VAT on electricity produced by its Sta. Rita and San Lorenzo power plants that are both using natural gas from the Camago-Malampaya field.

High royalty fee is also a disincentive to the development and commercial exploitation of our indigenous sources of energy.

Masinloc power plantd)  High cost of purchased power contracts.  This refers to the cost of electricity Napocor is obliged by its contractual obligations to purchase from its 40 IPPs, whether or not the supply is needed by Napocor.  This is because of the “take-or-pay” provisions in their power contracts that require Napocor to pay for a fixed volume of electricity at fixed rates, whether or not Napocor actually uses the entire volume and whether or not the IPPs actually produce and deliver the entire volume.

In most cases contracted volumes of electricity are never delivered by the IPPs and Napocor simply pass on the cost of undelivered electricity to the consumers.  If these power contracts are not “sweetheart deals” I don’t know what is.

Not to be left out, private DUs have their own sweetheart (sometimes “incestuous”) deals with their IPPs too.  A good case in point is the power contract between sister companies Meralco and FGPC.  The industry practice of charging the cost of undelivered electricity to the consumers makes it possible for FGPC to rake in enormous profits with less volume delivery, less generating capacity and less operating cost.

True enough, Meralco officials admitted before the energy committee of the House of Representatives that Meralco made its customers pay for “ghost deliveries” of electricity.  For the 3-year period from 2000-2002, alone, Meralco paid FGPC around PhP18.3 Billion when the latter delivered only PhP5.3 Billion worth of electricity, which is not even 30% of the total amount collected by Meralco from its customers.   

In 2002 the IPPs of Napocor and Meralco delivered only 70% and 50% respectively of the total energy billed to consumers for the same year.  And we are only talking here of a single year! 

The staggering amount of money consumers paid for “ghost deliveries” of electricity, to date, is mind boggling.

 e)  Absence of a “self-triggering” system of review and downward adjustment of Napocor’s basic generation charge to reflect decline in cost factors.  Napocor’s basic generation charge per kWh was set by the Energy Regulatory Commission (ERC) in 2004 at PhP3.8966 for Luzon, PhP2.8879 for the Visayas and PhP2.1030 for Mindanao.  Since then the cost effect of the following items on the basic generation charge of Napocor has steadily declined: 

•  Rate base.  Rate base (the total value of the capital assets of Napocor net of depreciation) determines the return on capital that Napocor (or a utility company) can earn from its investment, which is 8% in the case of Napocor. 

Napocor’s rate base still includes assets that were already sold by the Power Sector Assets and Liabilities Management Corporation (PSALM).  It means that the consumers continue to pay Napocor the 8% return on payroll, OPEX, fuel, depreciations and other expenses of these plants even though Napocor is no longer operating and supplying electricity from these plants.

•  Purchased power cost and BOT capacity fees.  The amounts of these items that are embedded in Napocor’s basic average generation charge were based on actual payments of PhP25.9 Billion for capacity fees and PhP30 Billion for purchased power made by Napocor in 2002 when the average Peso-to-US$ exchange rate was PhP52.70 to $1.  The subsequent appreciation of the peso should have triggered the downward adjustments of these embedded amounts. 

•  Deferred Accounting Adjustment (DAA).  DAA refers to the recovery of foreign exchange losses by utility companies through pass on cost to consumers.  The last approved DAA of Napocor was for the period March-June 2006; amounting to PhP0.5996 for Luzon,  PhP0.0300 for the Visayas and PhP0.0188 for Mindanao.  It has not applied for a DAA since then but continued to collect these last approved adjustments despite the subsequent appreciation of the peso against the US dollar. 

 f)  Charge for  benefits to host communities.  Under Energy Regulation 1-94 of the Department of Energy, generators and energy developers are required to set aside PhP0.01 per kWh of their total electricity sales to fund projects in their host communities.  This cost is passed on to the consumers through the generation charge.  Consumers, in effect, are financing the legal and social obligation of generators and energy developers to their host communities.          

 g)  Napocor’s financial shortfall.  Saddled with enormous debts, contractual obligations, inefficient power plants and a huge bureaucracy, Napocor is recovering the bulk of its financial shortfall from consumers in order to reduce its subsidy from the national government.

At the end of 2001 Napocor’s debts and obligations stood at PhP851 Billion, in 2007 it was around PhP1.2 Trillion, and that was minus the PhP200 Billion  already absorbed by the national government in 2004 as mandated by the EPIRA.

The bottom line is that the current structure, business practice and regulations in the electric power industry needlessly drive up the cost of power generation. 

2.  Universal charge (for the customers of Meralco, universal charge is reflected as the 7th item in the Billing Summary of your monthly electric bills).  This is an imposed charge for the recovery of stranded debt and contract costs of Napocor.  It is a non-bypassable charge, which is collected from all customers on a monthly basis by DUs and ECs.

In the form of Missionary Electrification Charge and Watershed Rehabilitation and Management, this cost is borne by Luzon customers, particularly the customers of Meralco, in order to subsidize the provision of electric service in less viable areas and the rehabilitation of watersheds.

3.  Cross-subsidy charges (for the customers of Meralco, cross-subsidy charge is reflected as the 5th item in the Billing Summary of your monthly electric bills).  Cross-subsidy charges consist of:

a)  Inter-regional grid cross-subsidy.  This refers to an amount embedded in the electricity rates of Napocor and charged to its customers that are located in a viable regional grid in order to reduce electricity rates in less viable regional grids.

b)  Intra-regional grid cross-subsidy.  This refers to an amount embedded in the electricity rates of Napocor and charged to DUs and non-utilities with higher load factor and/or delivery voltage in order to reduce the electricity rates charged to DUs with lower load factor and/or delivery voltage located in the same regional grid.

c)  Inter-class cross-subsidy.  This refers to an amount charged by DUs to commercial users as well as other subsidizing customer sectors such as residential  end-users, hospitals and streetlights.

In short, cross-subsidy charges, like universal charges, add more costs to Luzon consumers, particularly Meralco’s customers, in order to subsidize consumers and DUs in less viable areas.

4.  System loss charges (for the customers of Meralco, system loss charge is reflected as the 3rd item in the Billing Summary of your monthly electric bills).  System loss charges account for around 8% of electricity rates.  The charges represent recovery of power lost due to technical, non-technical and administrative losses, currently pegged at 9.5% for private DUs and 14% for ECs.

Technical loss refers to losses incurred by the passage of electricity through the transmission and distribution networks.  Non-technical loss refers to pilferage of electricity (e.g.: meter tampering or erroneous meter reading) and theft of transmission/distribution lines and materials.  Administrative loss refers to electricity used in the operations of DUs and ECs (e.g.: electricity used to power substations and office equipment).

What system loss charges amount to is that ordinary and honest consumers are made to pay for electricity that is not delivered to them.   

During a hearing of the energy committe of the House of Representatives, Meralco officials admitted that Meralco is billing its customers around PhP1.3 Billion a month or around PhP15.6 Billion a year in system losses.

It is estimated by some industry analysts that less than 20% of system losses can be attributed to non-technical losses (meaning pilferage/theft of electricity), while more than 80% is due to poor operating systems.

5.  Expanded Value-Added Tax (E-VAT) on electricity and on costs that have no value to the consumers  (for the customers of Meralco, the government tax on your electric bill is reflected as the 6th item in the Billing Summary of your monthly electric bills).  The government collects a 12% E-VAT on our consumption of electricity. It also collects E-VAT on items that have no intrinsic value to the consumers:  franchise tax, system loss and DAA.

Electric transmission lines6.  High transmission charges (for the customers of Meralco, transmission charge is reflected as the 2nd item in the Billing Summary of your monthly electric bills).   Transmission charges account for around 12% of electricity rates.

TransCo was privatized through a competitive bidding for the concession contract which was awarded to the highest bidder.  Instead of opting for a concessionaire who could offer to operate the facility at the least cost to reduce transmission charge, the government went  for the highest concession fee.

The end result of this rather short-sighted privatization policy of  the government is that the winning concessionaire, the National Grid Corporation of the Philippines, is recovering its huge concession fee commitment to the government through higher transmission charges to the consumers.

The inclusion of TransCo’s corporate income tax in its ERC-approved Average Revenue Requirement (ARR) also contributes to high transmission charge.  It is also inconsistent with the the Supreme Court ruling in Republic of the Philippines vs. Meralco (G.R. No. 141314) that the income tax burden should not be passed on to the consumers.

Meralco building7.  Distribution monopolies (for the customers of Meralco, the distribution charge is reflected as the 4th item in the Billing Summary of your monthly electric bills).  Distribution charges account for around 12% of electricity rates. Private distribution utilities and electric cooperatives throughout the country monopolize the distribution business in their respective captive area of operation.

A natural monopoly is characterized by the absence of a market.  Where there is no market, there is no competition that can stimulate lower rates, better service and improved operating efficiency.

8 Ineffective government regulators.  The principal government regulators of the electric power industry are the Energy Regulatory Commission, Department of Energy, and National Electrification Administration.

Suffice is to say that if these government regulators are doing their jobs and effectively regulating greedin the power industry, we would have affordable rates of electricity in the country today.

The question is:  can we reduce our rates of electricity to more affordable levels?  Absolutely, and the subject is discussed in my related article @ https://youronevoicecanmakeadifference.wordpress.com/kuryente-2-how-we-can-reduce-electricity-rates/ . 

Author:  Rene “RC” Catacutan
Published 11 July 2009

Public officials and private individuals who can help lower the highest electricity rates in ALL of Asia to affordable levels:

President Benigno Aquino III

Senate President Juan Ponce Enrile

House Speaker Feliciano Belmonte

Senator Sergio Osmeña III, Chairman, Senate Energy Committee

Cong. Henedina Abad, Chairperson, House Energy Committee

Secretary Rene Almendras, Department of Energy

Secretary Cesar Purisima, Department of Finance, and ex-officio Chairman of Psalm, Napocor and Transco

Zenaida Cruz-Ducut, Chairperson, Energy Regulatory Commission

Froilan Tampinco, President, National Power Corporation

Rolando Bacani, President, National Transmission Corporation

Edita Bueno, Administrator, National Electrification Administration

Manuel Lopez, President & CEO, Manila Electric Company

Enrique Aboitiz, Chairman, Aboitiz Power Corporation

Antonio Cailao, President & CEO, Philippine National Oil Company

Ramon Ang, Chairman & CEO, Petron Corporation