Electricity rates unbundled (2):  How we can reduce electricity rates 

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The Philippines has among the highest residential and industrial rates of electricity in the world today.  It is a social and financial burden felt across the income class and a handicap weighing down on the ability of our industries and goods to compete here and abroad.

I have previously discussed specific charges and factors that contribute to high cost of electricity in my earlier article on the subject <https://youronevoicecanmakeadifference.wordpress.com/affordable-electricity-for-all/>.  Most of these charges can be reasonably reduced (or even removed) and cost factors mitigated through a combination of executive and legislative measures.  And the political will to cause it to happen is quite badly needed today.

The following measures may only require executive (or regulatory) intervention, hence immediately realizable:

1.  Increase the “lifeline rate subsidy” from 100 to 150 kWh.  Lifeline rate subsidy refers to special rate given to captive marginalized/low-income consumers who cannot afford to pay full cost.

At present, customers of the Manila Electric Company (Meralco) with an average monthly consumption of 50 kWh or less are getting 50% discount on payment of their electric bills, those with 51-70 kWh average monthly consumption are getting 35% discount, and those who consume 71 to not more than 100 kWh per month are getting 20% discount. 

2.  Remove the Expanded Value Added Tax (E-VAT) from residential electric bills not exceeding PhP5,000.  Electricity is not a highly taxable luxury item or vice but a “basic commodity” among most Filipinos.  Household consumers badly need cost relief, and the concern cuts across the income class.

3.  Review and re-negotiate all power contracts of the National Power Corporation (Napocor) with its Independent Power Producers (IPPs).  The desired output of the exercise is the removal of the “take-or-pay” provisions from the power contracts.  The outcome of the exercise should be made to apply as well to all the power contracts between the Distribution Utilities (DUs) and their respective IPPs.

Most of these IPPs have been operating for more than 15 years now and have already made their money.  A reasonable rate of return on their investment should be determined and regulated by the Energy Regulatory Commission (ERC) in an atmosphere of public scrutiny and fair play.

The bottom line is that consumers should not pay for the staggering cost of “ghost deliveries” of electricity, as a consequence of the “take-or-pay” provisions in the power contracts.  

4.  Effect the downward adjustment of Napocor’s basic average generation charge.  Generation charges account for around 58% of electricity rates.  The basic average generation charge of Napocor was set by the ERC in 2004 based on, among other things, payments made by Napocor, its existing generation assets and payroll,  and the average foreign exchange rate at that time.

Since then, many generation assets of Napocor have already been privatized (38% according to the Department of Energy) and the peso has appreciated against the US dollar.  Yet the consumers continue to pay Napocor its 8% return (the ERC-approved return on capital for Napocor) on OPEX, payroll, fuel, depreciations and other expenses of these privatized assets even though Napocor is no longer operating and supplying electricity from these plants. 

The ERC should direct Napocor to reduce its generation charges and refund the consumers.  

masinloc-power-plant5.  Facilitate privatization of the remaining generation assets of Napocor The withdrawal of Napocor from generation will pave the way for the emergence of a generation market and competition among the IPPs.

At the same time, the government should reconsider its privatization policy that favors short term gains over long term benefits.

Section 47.a. of the Electric Power Industry Reform Act of 2001 (EPIRA) stipulates:  “The  privatization value to the National Government of the NPC generation assets, real estate, other disposable assets as well as IPP contracts shall be optimized (highlighting mine).  The Power Sector Assets and Liabilities Management Corporation (PSALM) interprets it as a directive to “put high price tags” on Napocor’s assets and sell them to the highest bidders, completely ignoring the law’s primordial purpose of lowering electricity rates.

As a result, the new owners of these privatized assets are now recovering their huge investments in these overvalued second hand power plants through high generation charges.

By choosing to ignore the strategic benefits of reasonable prices of electricity NOW — more industries, more jobs, more revenues in the future — in favor of  its short sighted policy of more revenues now, the government contributes to high cost of electricity, which is contrary to its declared policy intent of lowering electricity rates.

electric-transmission-lines16.  Remove the corporate income tax from the ERC-approved Average Revenue Requirement (ARR) of the National Transmission Corporation (TransCo) and effect downward adjustment of transmission chargesTransmission charges account for around 12% of electricity rates.

The inclusion of TransCo’s income tax in its ARR is inconsistent with the Supreme Court ruling in Republic of the Philippines versus Meralco (G.R. No. 141314) that the income tax burden should not be shifted to the consumers. 

At the same time, the government should consider reviewing its contract with TransCo’s concessionaire with the view to reducing transmission charges.

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 charges, the government went for the highest concession fee.

As a result, the winning concessionaire, the National Power Grid Corporation of the Philippines, is recovering its huge concession fee commitment to the government through higher transmission charges to the consumers.

7.  Implement segregation and recovery of system lossesSystem loss charges account for around 8% of electricity rates.  System losses are recoverable if segregated into its components (technical, non-technical and administrative), with each component assigned an individual cap.  Segregation of system losses and assignment of individual caps makes it possible to reduce and monitor individual losses with a degree of transparency, instead of the current lump cap. 

Optimizing transmission and distribution networks can reduce technical loss.  Non-technical loss can be reduced with the strict implementation of R.A. 7832 (The Anti Electricity Pilferage Act)  and improved system of detection, apprehension and prosecution of electricity pilferage and theft.

Capping administrative loss will require prior determination of historic levels of efficient use of electricity by the utilities, or it may just be included in the operating expenses of the utilities.

In 2004 the ERC issued the Guidelines for the Application and Approval of Caps on the Recoverable Rate of Distribution System Losses but its implementation was postponed for a later period.  In 2007 the ERC, for reasons not publicly explained, postponed anew the implementation of the setting of segregated system loss caps to 2010, thus pushing back the adoption of measures to reduce system losses.

System losses cannot be avoided but can be minimized.  And it will require genuine effort on the part of the ERC and the DUs themselves to minimize the cost of system losses to the consumers.

8.  Stop collecting E-VAT on franchise tax, system loss and deferred accounting adjustment (DAA)Collecting tax on franchise tax is a case of double taxation, a tax on a tax.

Colllecting E-VAT on system loss penalizes the consumers twice:  first, consumers are made to pay for electricity that is not delivered to them; second, they are made to pay a tax on electricity that is not delivered to them.

DAA refers to charge for the recovery of foreign exchange losses by the utilities.  This pass on cost is unfair as it shifts foreign currency risks from the utilities to the consumers.  Utilities need not hedge their foreign currency exposure since they can always rely on DAA to recover their losses.  Fluctuation in currency rates is also not a taxable production input. 

9.  Remove charge for the benefits of communities hosting power plantsIt is right to compensate host communities with beneficial projects.  What is not right is to require consumers to finance the obligation of generators and energy developers to their host communities.

10.  Stimulate increasing development and utilization of indigenous renewable energy resources.  R.A. 9513 (The Renewable Energy Act of 2008) took effect on January 30, 2009.  It provided the DOE with the legal and institutional framework for harmonizing the regulation and administration of the development and utilization of renewable energy resources.  Let us hope that this law will help stimulate increasing utilization of indigenouse renewable energy that can gradually replace an increasing percentage of our imported fuel requirement for power generation; not just hydro-power but more particularly coco bio-diesel (coco methyl ester, or CME), biomass, solar and wind.

11.  Launch and maintain a nationwide information campaign on energy use and conservationHow we use electricity impacts on our overall supply and rates of electricity.  Electricity is such a vital energy resource that the government cannot leave to the private stakeholders, alone, the task of orienting consumers on the prudent and efficient use of electricity.  After all, the government spends millions on lesser things like political ads that are thinly disguised as public information.

The following strategic measures may require legislation:

12.  Reduce or remove certain energy taxes as well as royalties on indigenous fuels.  The government should reduce, if not remove, royalties and taxes levied on indigenous natural gas, for both the share of the local government and the unencumbered share of the national government.

First of all, high royalty fee is a disincentive to the development and commercial exploitation of indigenous fuels; secondly, it adds more costs to power generation. 

The government should also consider reducing all forms of taxes levied  on imported energy and petroleum products.  According to the Department of Energy (DOE), about 17% of the pump price of petroleum products is government tax, but some independent tax experts say that the effective rate of tax is anywhere from 25-30% depending on the type of product.

It does not take an Albert Einstein to figure out that lower taxes on imported energy and petroleum products will result in lower cost of transportation and electricity.

Lower cost of transportation reduces cost of food and basic commodities.  Lower cost of electricity enhances productivity and investment, in addition to providing residential consumers with badly needed cost relief.

Increased productivity and investment growth logically translate to more industries, more jobs, and more revenues for government, which should more than make up for the “lost” revenues from reduced energy taxes. 

13.  Revisit the EPIRA and R.A. 7822 and introduce timely amendmentsThe EPIRA  primarily aims to:  a) restructure the power industry into 4 component sectors, namely: generation, transmission, distribution and supply, and b) privatize the assets of the state-owned Napocor.

The EPIRA’s primary objectives are:  a) stimulate competition in the power industry and the development of renewable indigenous sources of energy, b) produce cheaper electricity, and c) put an end to the financial hemorrhaging of Napocor.

Let us make a quick review of the EPIRA’s aims and objectives 10 years after it took effect.  Aim:  a) the restructuring of the power industry into 4 component sectors was accomplished; and b) according to the DOE, about 38% of Napocor’s generation assets were privatized to date

Objectives:  a) a generation market does not exist, transmission and distribution are still monopolistic, the market for supply is virtually non-existent, and we still rely heavily on imported energy for power generation; b) electricity rates have doubled since the EPIRA took effect in 2001; and c) the financial bleeding of Napocor continuous unabated.

In our haste to stimulate competition in generation, we induced private investors with lucrative and risk-free guaranteed power contracts with Napocor.  These power contracts are grossly disadvantageous to the government (and the consumers) and contribute more costs to power generation.

The privatization of the remaining bulk of Napocor’s assets is also taking too long (10 years now and counting).  The current public stewards of Napocor and PSALM should take the higher and nobler cause of facilitating the early disposal of Napocor’s assets, instead of dragging their feet and hanging on to their jobs and perks. 

The EPIRA is also not clear about “cross ownership” between generation and distribution.  At the rate the Lopez family-controlled Meralco/ FirstGeneration Holdings Corporation and the Aboitiz family-owned Aboitiz Power Corporation are buying Napocor’s generation assets, we might be headed for a greater concentration of generation and distribution in the hands of a few families.

Due caution and prudence should also be exercised in handling the sale and award of Napocor’s hydroelectric assets as these facilities do not only produce electricity but also supply household and irrigation water.

R.A. 7821, on the other hand, is an act penalizing the pilferage and theft of transmission lines/materials and rationalizing (read: guess estimating) system loss and phasing out pilferage losses as a component of electricity rates.

Pilferage of electricity and theft of transmission lines and materials are, no doubt, criminal offenses that must not go unchecked and unpunished. 

What is objectionable about this law is the fact that it legalized the “unfair business practice” of charging consumers with “excessive fee” for electricity that is not delivered to them. 

14.  Remove cross-subsidy charges.  The government is duty-bound to provide for and deliver electricity service to the unserved and underserved areas of the country.  Consumers from Luzon, particularly the customers of Meralco, should not be required to pay for that duty.

15.  Remove universal charges The cost of missionary electrication should be absorbed by the government.  The Department of Transportation and Communications rolled out telephone lines in “missionary areas” in the 1990s at no added monthly cost to the customers of both private telcos and state-owned facilities.

The cost of watershed rehabilitation and management, as a component of universal charges, is also unfair to the consumers because, first, not all consumers source their electricity from hydroelectric plants or in the same degree of sourcing; and second, these plants are the ones polluting and degrading the watersheds.  Following the rule that “polluters pay”, the cost of watershed rehabilitation should be charged directly to the hydroelectric plants.

16.  Periodic audit of the IPPs, DUs and ECs by a panel of government auditors from the Commission on Audit, Bureau of Internal Revenue and Bureau of Customs.  Utility companies in the regulated industry of electricity enjoy certain business incentives and  guarantees from the government.  Inherent with the government’s right to grant is its right to verify and enforce compliance with the terms of such grant. 

Consumers need to be protected too from illegal charges and overpriced electricity. 

meralco-building117.  Open up the franchise areas of Meralco and the other DUs to interested industry players.  Distribution charges account for around 12% of electricity rates.  Meralco and the other DUs in the country are natural monopolies in their respective captive area of operation. 

In a natural monopoly, there is no competition that can stimulate lower rates, better service and improved operating efficiency because the market does not exist.

The passage of R.A. 7925 (The Public Telecommunications Policy Act of the Philippines) in 1995 opened up the telecommunications industry and broke the “growth-restricting” monopoly of  the Philippine Long Distance Telephone Company, which resulted in the emergence of a vibrant and competitive telecommunications market it is today.

We can also open up the distribution areas of Meralco and the other DUs to interested industry players.  After all, Section 2.d. of the EPIRA declared it to be the policy of the State to enhance the inflow of private capital and broaden the ownership base of power generation, transmission and distribution sectors (highlighting mine).” 

Consider these data:  The franchise area of Meralco covers the entire National Capital Region and the provinces of Bulacan, Rizal, Cavite, Laguna, Batangas and Quezon.  The franchise area accounts for around 50% of the Gross Domestic Product (GDP), 50% of the total energy consumption, 56% of the total energy demand and 25% of the total population of the Philippines.  Leaving this very strategic area a captive market of a monopoly is not only risky but also contrary to free and fair market competition fostered by the EPIRA and the State.

Author:  Rene “RC” Catacutan
Published 12 November 2009


Public officials and private individuals who can help lower electricity rates to more affordable levels:

President Benigno Aquino III

Senate President Juan Ponce Enrile

House Speaker Feliciano Belmonte

Senator Sergio Osmeña III, Chairman, Senate Energy Committee

Congresswoman 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 Electrifiction 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