Epira Paper (AGHAM - Advocates of Science and Technology for the People)

7/30/2019 Epira Paper (AGHAM - Advocates of Science and Technology for the People)

1/12

Samahan ng Nagtataguyod ng Agham at Teknolohiya para sa Sambayanan132B Matahimik St., Teachers Village, QC [email protected] Telefax: 9263139 www.agham.org

Ever increasing rates from the EPIRAA closer look at the electric power industry in the Philippines

Electric power is a basic service that is needed by households in everyday activities and is equally importantfor industries to operate. The failure of the government to provide electric power was evident when thecountry faced massive blackouts in the late 1980s and early 1990s due to a shortage of power supply.

The response of the government to this power crisis was not to build the necessary infrastructure to meet thedemand but to contract out power generation to independent power producers or IPPs. Furthermore, it hasmade steps to privatize the whole power industry effectively abandoning its role in providing electric powerservices and opening up the power industry to private companies.

The EPIRA and the privatization of power

Historical background

During the late 18th century, the hacienda system had expanded the control of land by Spain and thisspurred massive plantations of export crops like tobacco, sugarcane, abaca, etc.raw materials for theSpain to compete with other countries. In order to hasten the exchange of goods and extraction of rawmaterials, transportation and communication facilities were developed. They constructed steamships, roads,more efficient seaports, railroads, and so on.

During the later part of 19th century, due to the urgent need of Spain, the first power corporation was born inthe Philippines, the La Electricista that had 10 60-KW AC steam generators.

When the United States (US) replaced Spain in colonizing the Philippines in 1998 through the Treaty ofParis, it did not change our economic orientation but increase the amount of commercial crops and raw

materials for export. Manufacturing and processing industries like sugar centrals, coconut oil refineries, ropefactories, and other industries necessary for extracting and exporting raw materials from the Philippines weremaintained.

In 1903, the Manila Electric Railroad and Light Company (MERALCO) was established to provide railtransportation and electric services in Manila. In 1905, after being awarded a 50-year franchise, MERALCOtook over La Electricistas business and its first 2,250-KW power plant was commissioned.

A year after the establishment of Philippine Commonwealth Government in 1935, the Commonwealth ActNo. 120 creating the National Power Corporation or NPC as a non-stock, government-owned corporationwas passed. After two decades, NPC became a stock corporation through RA 2641.

In 1972, two months after Martial Law is declared, PD 40 was enacted. This mandated NPC to construct

generation and transmission facilities in Luzon, Visayas, and Mindanao. Moreover, NPC was tasked to ownand operate a single integrated network for all power-generating facilities nationwide.

When NPC bought MERALCOs thermal power plants in 1979 and this plant was integrated in the Luzonpower grid, the total generation capacity of NPC increased by 90% and this made NPC the countrysdominant producer and supplier of electricity.

In 1987, EO 215 signed by President Cory Aquino in 1987 effectively deregulated the power generationsector. This was to fulfill the governments commitment to prepare the groundwork for the eventualprivatization of the NPC as pushed by the International Monetary Fund (IMF). The first build-operate-transfer(BOT) contract allowed by the EO was signed in 1988 with Hopewell, a Hong Kong-based firm, to constructand operate a 210-MW power plant (Navotas I).

The issues surrounding the privatization of NPC are mostly related to the power crisis and due to thegovernments efforts to address this critical shortfall in power supply. By 1991, the 6- to 10-hour dailyblackouts were costing the Philippine economy an estimated $1 billion in lost output annually. To stave offthe crisis, RA 7638 or the Department of Energy Act of 1992 was enacted to create the Department of


2/12

Energy (DOE). DOE was tasked to develop and update the existing Philippine Energy Program (PEP) whichshall provide for an integrated and comprehensive exploration, development, utilization, distribution andconservation of energy resources. As its policy response to the power crisis, RA 7648 or the Electric PowerCrisis Act was enacted in the same year that the DOE was created. This further opened the door to entry ofprivate power corporations. DOE was tasked to boost the entry of these private firms in construction andoperation of power plants.

The Electric Power Industry Reform Act or the EPIRADue to the pressure by creditors to the Philippine government to fast track the approval of the Power Actbefore they release the power reform program loans to finance the countrys power development program,the Electric Power Industry Reform Act, or the EPIRA, railroaded and signed into law by President GloriaMacapagal Arroyo in 2001 despite intense disapproval from of the people. Major creditors include the JapanExport-Import Bank, Asian Development Bank (ADB), and World Bank (WB). These power sector reformsand the sale of NPC to private business were long standing recommendations of the IMF. Theserecommendations were part of the structural reform program the country has to implement as a pre-conditionfor more loans.

The EPIRA seeks to restructure the electricity industry and privatize the National Power Company or theNAPOCOR. The governments objective in privatizing NAPOCOR is to cut losses from loans and pass onthe burden of power infrastructure investment to the private sector, while earning revenues from the sale.

Contrary to what has been promised during the passage of the law, the EPIRA has not caused any realdecrease in power rates. Aside from the initial, and fleeting, 30 centavo Power Act reduction, there has beenno decrease in power rates due to the EPIRA. Instead, it has legitimized the PPA through the contractsentered into by the NAPOCOR and have hidden it through the unbundling of rates. Even with theestablishment of the wholesale electricity spot market (WESM) which would purportedly be the mechanismto identify and set the prices between sellers and buyers of electricity, the bilateral contracts betweendistribution utilities would still be honored.

Cross subsidy removal would translate to an increase in power rates to residential consumers which bynumbers would dominate the end-users of electricity. Even with discount schemes within customer classes,the removal of subsidies would at the least translate to a 71 centavo increase within 3 years. Note that thisincrease would already render useless the 30 centavo rate reduction.

The law was designed to reform the power industry not for the benefit of end users and development but itonly seeks to privatize NAPOCOR and deregulate the power industry for the entry of foreign companiesregardless of the costs to the general public. The various highlights of the EPIRA ranging from the creationof the National Transmission Company (TRANSCO), the Power Sector Asset and Liabilities Managementcorporation (PSALM), the Energy Regulatory Commission (ERC), the wholesale electricity spot market(WESM), the unbundling of power rates and the various codes and rules implemented under the EPIRA aredesigned to segregate each saleable part of NAPOCOR, make it attractive to investors and create structuresand offices to facilitate these transactions.

Furthermore, the EPIRA makes the national government assume P 200 B worth of NAPOCOR loans tomake it viable for sale. This P200 B however would be recovered as stranded debts in future bills to endusers.

The law integrates the independent power producers (IPP) and their onerous contracts into the whole powerindustry. These IPPs and the contracts entered into by the government and distribution utilities are thesource of the PPA or the purchased power adjustment. The PPA remains to be a large part of electric powerrates of end-users albeit under different names. With the unbundling scheme ordered by the ERC, the PPAwas hidden and distributed in the various line items in the new electric bill such as the generation charge, thetransmission charge, system loss charges, subsidies and franchise taxes.

These IPPs are mostly owned by foreign transnational corporations in partnership with big local powertycoons. At least twenty two out of the 41 IPPs are largely foreign owned. Five are partly or wholly owned byMeralco and some others by regional distribution utilities. Furthermore, in the findings of an inter-agencycommittee tasked to review IPP contracts, only six out of 35 contracts were found to be without any legal orfinancial issues. The rest was supposed to be renegotiated by the government. Privatization actuallyfacilitates the entry and control of national economies by foreign TNCs who, at present, are the dominantplayers among the IPPs. Only these foreign TNCs alongside a number of local power tycoons (Lopez,Aboitiz, Alcantara, etc) have the financial capacity to operate and maintain power generation, transmissionand distribution, and even buy out the Napocor.


3/12

If we exclude the US, the IPP capacity in the Philippines exceeds that put up over the rest of the worldcombined in terms of installed capacity. This would continue to increase with the full implementation of theEPIRA and the privatization of power generation.

The EPIRA brings about the exploitation and plunder of our natural resources to the benefit of these foreigncompanies. Far from improving our electric power independence by promoting indigenous energy sources, ithas reduced taxes and royalties from those exploiting our resources. This would make our resources free for

plunder and profit to all takers which are mostly foreign owned transnational companies.

The EPIRA provides for the equalization of taxes and royalties on the exploitation of natural energy sourceswhich just means the removal of these taxes or the exemption from such taxes of the IPPs. Under the bill toincrease VAT rates to 12% being discussed in Congress, IPPs are already being exempted despite the factthat these companies are paying only 3% of their revenues as taxes.

In addition, the power of eminent domain, as provided for in the act (Sections 6 and 12), granted totransmission and distribution companies gives them prior rights over the countrys land resources and thusmay evict the occupants or owners of the land in question. The dislocation of the indigenous peoples (IPs)from their ancestral domain and of other peasant settlers with the construction of power plants and otherdevelopment projects over their claimed territories has been well documented

The EPIRA favors power industry players over consumer interests. It legitimizes the passing on of costs ofpower generation to end users. The passing on of power generation costs to consumers is legitimized by theEPIRA such as the passing on of system loss charges transfer the inefficiency losses of distribution utilitiesto end users. Other line items in the unbundled bill such as the missionary electrification charge andenvironmental charges passes on the responsibility of rolling our new electric power lines and theenvironmental maintenance of power utilities to the general public. Stranded costs and debts by both theNAPOCOR and utilities are also to be recovered from the general public in the Universal Charge.

The EPIRA has put as policy the full recovery of prudent and reasonable economic costs of a distributionutility. As a result, distribution utilities now recover and pass on currency fluctuations, fuel cost fluctuationsas well as contract obligations (PPA) to the end-users. The mechanisms approved by the ERC such as theGeneration Rate Adjustment Mechanism (GRAM) and the Incremental Currency Exchange Rate Adjustment(ICERA) are concrete examples of these pass on costs to consumers.

The unbundled rates, even with the discounts, hit the smallest end users hardest. Small end users, evenwith the 50% discounted rates, still pay 159% more than their real electricity costs. Higher users of electricitywould pay from 120% (100 kwh) to double (more than 500 kwh) their real electric costs.

The EPIRA has not brought about and will not bring about a stable electricity supply to the whole country. In2003, the total installed capacity in the country is 13,380 megawatts, of which 11,191 megawatts is theactual dependable capacity. Current peak demand is 67% of dependable capacity or 7,497 megawatts. ThePhilippines has an excess capacity of around 11% factoring buffer requirements. This has changed in 2004,where the country's total installed generation capacity stood at 15,763 MW and its dependable capacity at14,008 MW. Our peak demand is 9,069 MW and thus overall, we have the capacity to provide for ourelectricity needs. However, interconnections of major islands are needed to distribute this power capacityover the country.

It is indeed true that the construction of power plants will still have to continue but the government and theEPIRA makes sure that the IPPs will play a key role in providing electricity. However, this does not meanthat the IPPs would find it viable to build and maintain in the long run a power plant. As soon as the locationbecomes a liability to the private companys profit margins, they can and will shut down operations. This canbe seen in the threats some years of the Cebu based Cebu Private Power Corp (CPPC) that it will shut downoperations of its 65 MW plant due to financial constraints further aggravating the projected shortage in theVisayas. Such moves makes the development and industrialization of our country hostage to the whims andprofit margins of the private industry players.

Why are power rates so high?

Energy is a necessary factor for industrialization and the Philippines is rich in a variety of fossil andrenewable energy sources. Despite this no significant industrialization activity has taken place in the country.

If we look at the distribution of energy sales (1999), 90.8% of the total energy sales go to households andsmall businesses (residential and commercial) while only 8.2% is coming from sales to industries.

This implies two things: that the country lacks industries to utilize the production of energy and it is the


4/12

consumer of electric power (mostly households and commercial buildings) that are most affected by rateincreases. The privatization of Napocor through the Electric Power Industry Reform Act of 2001 or the PowerAct therefore has direct implications on the people's daily routine (since electricity is a basic utility) and haslong term strategic implications on our national development.

In December 2004, it will cost you at least 28% more in electricity bills this compared to the same time theprevious year. A household consuming 150 kWh per month will effectively be paying P7.20 per kilowatt hour

in year end 2004 compared to P5.61 for each kWh December last year. The 28% increase is mainly due tothe provisional authority granted by the Energy Regulatory Commission to the National Power Corporation(NAPOCOR), increases in transmission rates, previous adjustments in generation rates due to theGeneration Rate Adjustment Mechanism or GRAM as well as adjustments in the currency exchange rates.Those with 70 and 100 kWh monthly usage are going to pay 23 % and 22% more, respectively.

Comparative Rates for December 2003 and 2004

These increases in electric rates is a direct result of the Electric Power Industry Reform Act, or the EPIRA,and the rabid implementation of the government of Gloria Macapagal Arroyo of her privatization policies. Norhad the so-called discounts for users with monthly consumption less than 100 kWh, those using 50 kWh willbe paying 36% more this year. These discounts are in reality paid for by other consumers and not thegovernment nor Meralco.

These high power rates have made the Philippines fourth in Asia after Japan, Hongkong and Cambodia interms of residential power rates. Industrial rates are also seventh in Asia according to the DOE as of June2004 after Cambodia, Japan, India, Hongkong, Indonesia and China.

Source: 5th status report on EPIRA Implementation, May 2004-October 2004, Department of Energy

Since 1990, where one kWh costs P1.83, the price of electricity has increased to 300% resulting to at leastP5.58 on the average for the country.

Unbundling of rates

With the unbundling of power rates, it is instructive to study the costs of each item in the approved rate

Electricity rates (usage in kWh/month)

MERALCO FRANCHISE AREAS Amount Effective amount per kWh

Dec 2003 Dec 2004 Increase % increase Dec 2003 Dec 2004 Increase % increase50 125.76 170.70 44.94 36% 2.52 3.41 0.9 36%

70 241.53 296.36 54.83 23% 3.45 4.23 0.78 23%

100 438.36 534.34 95.98 22% 4.38 5.34 0.96 22%

202 1207.12 1506.38 299.26 25% 5.98 7.46 1.48 25%


5/12

schedule. Although, it is a vital part of the EPIRA and energy privatization, it is worthwhile to note that theCourt of Appeals (CA) annulled the Energy Regulatory Commissions decision to unbundle electric powerrates for Meralco. Recently, the CA have denied the motion of reconsideration of Meralco and the ERC onthis decision. This means that the unbundling should again be heard and rates reverted back to its previouslevels. Furthermore, consumers should also be refunded from rates stemming from the unbundling decision.We estimate the refund to total at least P 6.4 billion pesos. For a family using 200 kWh per month this wouldbe around P680 pesos for the 20-month duration since the unbundling up to January 2005.

Other unbundling cases previously approved by the ERC should be reviewed. There are several electriccooperatives and distribution utilities whose unbundling should be looked into in the light of the CA decision.

With the unbundling of power rates, several recovery mechanism has been prescribed by the ERC,effectively hiding the PPA, and passing on all risks and price fluctuations to the consumers.

The Purchased Power Adjustment (PPA) and IPPs

The junking of the 650-megawatt US$2.2-billion Bataan Nuclear Power Plant in the mid-1980s, no buffer forincreased power demand by industries and households was constructed nor planned. By the early 1990s,this resulted in daily 8 to 12-hour blackouts. Citing lack of sufficient funding to construct power generationfacilities to adequately meet present and future demand, the Ramos administration enticed foreign andprivate-sector investors into the countrys electric power industry using such measures as the Build-Operate-

Transfer (BOT) program resulting into the entry of Independent Power Producers (IPPs).

An estimated US$6 billion to construct and operate power generation facilities with a total capacity of 4,800MW were built by IPPs around 1998. A year after, half of total energy sales in the country were alreadysourced from IPPs. As of December 2001, Napocors IPPs accounted for 31%, or 3,667 MW, of the totalgenerating capacity and non-Napocor IPPs (such as those owned by the Lopezes, First Gas and Quezonpower) provide the remaining 1,168MW or 10% of the total generation capacity.

This generation capacity was not obtained cheaply. With the onerous take-or-pay provisions, where off-takerequirements of 70%-85% of contracted capacity, Napocor has to pay the IPPs whether power generatedwas actually consumed or not. Higher tarrifs result from the recovery of these losses through thecontroversial Purchased Power Adjustment (PPA). As of June 2002, the PPA was already more than half ofthe electricity bills of consumers.

Added costs from these contracts are features such that Napocor has to deliver fuel on-site to provide tax-exemptions for the IPPs. Furthermore, these contracts are dollar-denominated, making these Napocorobligations vulnerable to dollar-peso foreign exchange fluctuations.

Only six out of 35 IPP contracts were found to be without any legal or financial issues after a review of thesecontracts by the Department of Finance. Yet no serious renegotiation to remove the take-or-pay provisionwas done.

Due to massive protests and outrage, President Arroyo personally mandated in May 2002 for the NAPOCORto limit its PPA to only 40 cents/kwh when its actual PPA was then P1.25/kwh. The NAPOCOR itself saidthat this order directly contributed to losing 85 cents/kwh, or P29B per year since 2002. In a hearing in theERC, the Napocor has admitted under cross examination during that part of their losses stem from fullpayment of contracted power to IPPs despite electricity being not being delivered in full to consumers in theform of the Purchased Power Cost Adjustment.

President Arroyo's gambit of reducing the PPCA as her response to protests against the PPA has now fallenflat and her financial engineering because this has resulted to the ballooning of Napocor's debts. TheseIPP owned by firms such as KEPCO, Edison Global, Mirant and others billed us for 27.27 billion kwh whileonly delivering 19.15 Billion kWh in 2002. Thats around 30% of what we paid never getting to our homes orindustries. This is one of the biggest contributors to the losses NAPOCOR wants to recover from the rateincrease.

The Generation Rate Adjustment Mechanism (GRAM)

The GRAM was designed essentially as a replacement for the recovery of the PPA. Like the PPA, it is alsoan automatic cost recovery mechanism but this time without yet the notoriety that the PPA has earnedamong the millions of consumers of NPC, Meralco and the various distribution utilities.

On top of the generation charge, pegged at P 3.4029 during unbundling and consequently increased through


6/12

the provisional authority last year from the ERC to 3.4236. Factored into the formula for generation rateadjustments is the purchased power cost as approved by the ERC. In the PPA formula there is the cost ofelectricity during a supply month. Both do not make a distinction whether the electricity was actuallydelivered or not as a result of the onerous take or pay provisions of many IPPs. Both do not also filter outelectricity purchased at excessive rates. Certainly neither the GRAM nor the PPA formulas strip thoseamounts of cost expenses that should not be there at all but which accountans can easily sneak in.

Thus, through the GRAM, as with the PPA, the consumers, among other things, will continue to pay forelectricity that they do not actually use; shoulder the cost of excessive rates of power contracted by NPC andMeralco; and pay for the inefficient operations of IPPs.

The ERC in its its approval of the unbundling of Meralco rates has acknowledged that

The current PPA is allocated between the generation andtransmission rates. The generation component shall beperiodically updated through the Generation Rate AdjustmentMechanism (GRAM).

-ERC Order dated 30 May 2003, page 9

Thus with the unbundling of rates, the PPA is now being paid for under five new line items in the electricitybill as diagrammed below:

Recovery of foreign currency exchange losses throuigh the ICERA

Automatic recovery of losses, designed and approved by the Energy Regulatory Commission, such as theICERA or the incremental currency exchange rate adjustment, spell no relief for the people. The owners ofutilities, transmission and generation companies pass on their bloated operational and maintenance costs tothe people and thus our electric bills keep on increasing. Dollar rates have historically risen on the averageand thus an automatic recovery of forex fluctuations also automaticcally increase power rates.

Far from improving our electric power independence by promoting indigenous energy sources, the EPIRAhas reduced taxes and royalties from those exploiting our resources and set these resources for sale andplunder to all takers which are mostly foreign owned transnational companies.

Reduction of cross-subsidies

A 28.52 centavos/kwh increase in the electric bill of the residential consumers starting October 2004 was theresult of the reduction by 40% of the interclass cross subsidy. The EPIRA mandates that all subsidies willhave to be removed within 3 to 10 years, with the lifeline rate subsidy to the consumers using less than 100kwh the last to go. Thus, residential consumers will have to pay an additional 42.78 centavos by October2005 and lifeline consumers will lose their discounts around 2010. Even the 30 centavos Power Act Discountthat the government used to sugarcoat the passage of the EPIRA bill is now just 16.52 centavos, effectively

increasing our rates by 13.48 centavos.

The total removal of inter-class subsidies will result in an increase of 71.30 centavos. In fact this subsidyscheme becomes a milking cow for distributors such Meralco because the amount that they collect is more


7/12

than the discounts they give.

The mathematics of power rate discounts: Sweetening power rate increases

Malacanang's attempt to sweeten the blow of the hefty power rate increases on the poor is through the so-called 50-percent lifeline rate discounton their rates. This subsidy is taken from 65% of the customer baseand is not due to any concern or interest of our government to alleviate the burden of these power increases.It is more a case of the poor subsidizing the poorer. Commercial and industrial electric users pass on thecosts of these subsidies as price increases to consumers.

Computing the costs of these discounts for a month in 2003, the revenue lost to Meralco is P134,923,561.But to recover these losses, Meralco collects 7.61 centavos/kWh from the residential consumers using 101kWh and above, from the commercial and industrial consumers. Given the total kWh consumption of theseconsumers in one month so we simply multiply by 7.61 cents/kwh and we get P152,474,582. This isP17,551,021 (or P210,612,252 per year) more than they lost from the subsidy.Presently, consumers using 100 kwh and below get the following discounts:

Monthlyconsumption

(kWh)

No. ofCustomers

(2002) Discount

collectionfrom lifeline

rates

0-50 661,716 50 % -

51-70 299,737 35 % -

71-100 465,236 20 % -

101-200 1,257,820 - 0.0761

201-300 564,417 - 0.0761

301-400 258,133 - 0.0761

over 400 415,648 - 0.0761

These discounts apply to the generation, system loss, distribution, metering and supply charges. The aboveis called by its technical term, lifeline rate subsidy. Those using above 100 kwh presently pay an additional

7.61 centavos per kwh that is used to subsidize the lifeline consumers above who are using less than 100KWh (which is really a case of one section of consumers subsidizing another section of the consumers).

In addition, all residential consumers get a discount of 71.30 centavos per kwh subsidy paid for by collectingfrom the commercial and industrial consumers. This will be removed within 3 years under the Electric PowerIndustry Reform Act or EPIRA. This means an increase of 71.30 centavos on top of all the recent rateincreases.

In this discount scheme, Meralco, NPC and President Arroyo are happy since they earn brownie points whilehiding the reality that none of them gave any centavo to alleviate the burden of high electric rates. WhatMalacanang should do, instead of this obfuscation, is to reduce electric power rates and grant wage hikes totruly address the concerns of the people

Other recovery mechanismsIn summary, the PPA has not been removed. It has been hidden within the generation charge, thetransmission charge, the system loss charge, franchise tax and other charges. If the PPA were truly gone,we would have enjoyed a reduction by almost half in our electric bills. Instead most households havereceived higher bills due to the unbundled power rates.

Now that they have hidden the PPA, any further increase in purchased power cost will be hidden under theGeneration Rate Adjustment Mechanism (GRAM) charge. This is the new PPA.

Power consumers would have to prepare for the eventual imposition of the Transmission Rate AdjustmentMechanism (TRAM) which would pass off the costs of transmission companies to the people, similar to thefunction of GRAM. Any changes in the cost of the transmission of electricity through the transmission towerswill be shouldered by the people.

The other "pass-through" charges are also really pass-on costs to consumers. Generation charges arecomputed with a 60-40 mix of National Power Corp. (Napocor) and Meralco power plants. About 53 percent


8/12

of this cost is remitted to Meralco's independent power producers (IPPs), most of which charge nearly twiceas much per kilowatt-hour as Napocor plants. The Lopezes earns also from the generation charge.

The systems loss, including pilfered power and the electricity used by Meralco offices and facilities, ispassed on to us at a rate of 69.65 centavos per kWh. This is despite the fact that for the past years,Meralco's technical system loss (i.e. excluding pilferage) has not changed from 8%. That means Meralcohas not seriously tried to become more efficient. It goes after pilferage since they can recover twice of theirlosses, once from the pass-on cost as part of the systems loss charge, another courtesy of the Anti-Pilferage

act which allows them to charge the households the estimated cost of their pilferage.

The systems loss has several components. One is the electricity lost through pilferage. Another is electricitylost as they pass through distribution equipment and wires. A third component bundled with the systemsloss charge is electricity consumed by Meralco offices and facilities, technically called company use. TheMeralco consumers pay for all this, and it is all legal because the government allows it.

Republic Act 7832 or the Anti-Pilferage of Electricity and Theft of Electric Transmission Lines/Materials Actof 1994 supposedly provides for the rationalization of system losses by setting caps on recoverable systemloss allowed to private electric utilities and electric cooperatives. This cap shall be no lower than ninepercent.

Essentially this passes on to consumers any inefficiency of a distribution utility like Meralco. Technical losses

are losses inherent in the electrical equipment, devices and conductors used in the physical delivery ofelectricity. These are losses in sub-transmission lines, substation power transformers, primary andsecondary distribution lines, distribution transformers, service drops, voltage regulators, capacitors, reactorsand all other equipments used in the operation of the distribution of electricity.

On top of these technical losses, load loss due to electric energy pilferage is also considered as part of whatis termed as non-technical loss. System loss charges also includes administrative losses (company use)which are the electric consumption of distribution substations, the offices, warehouses and workshops of thedistribution utility. Meralcos system losses currently amount to 13.38 %.

Our main criticism with regard to system losses is the fact that Meralco and other distribution utilities pass onthese system losses to the public. This pass on charge was part of the PPA previously and the public isunduly burdened in paying for the inefficiencies of the distribution utility. This part of our electric bill is due to

energy that never gets used in our homes and is mainly due to any technical inefficiency in the part of thedistributor, their in-house use of electricity and pilferages. Although pilferage is being pointed to at byMeralco as a big part of these losses, any violator that will be caught is required to pay consequent feesdespite these losses being already collected and paid for by the item for system loss in our bills. If so, whydo we still have to be charged for system losses?

More pass-on charges are the metering charge and franchise and local taxes. Universal charges, whichinclude many other components such as the missionary and environmental charge, will also include in thefuture stranded cost and debt recoveries that amounts to around 200 billion pesos to be collected in 15 to 25years. The missionary charge is a compulsory contribution to a fund to be used for electrifying remotebarangays because no businessmen would like to invest in those areas where there are only a fewcustomers but requires big capital outlay for the long wires and many posts. But why are we charged for ajob the government should be doing?

This is also true of environmental charges. Why are we charged for the havoc that the generation plants ofNapocor or these IPPs do to the environment? Consumers seem to be the perpetual milking cow of Meralco,Napocor and the IPPs.

Unbundling has increased power rates and it will continue to increase because of the new charges, thepassing on of the 200-billion-peso stranded cost and debt recoveries and the eventual reduction ofsubsidies. All these mean higher electric rates for all.

Electric cooperatives

An electric coop (or REC, or rural electric cooperative, the legal nomenclature used) is owned andmanaged by the consumers who are also its members who elect the members of the board and appoint a

GM to manage its day-to-day operation.

An REC can be either a non-profit non-stock or a stock coop. If a stock coop the member/consumers ownstocks and can be paid out dividends when a profit is made. SORECO II is an example of a stock coop


9/12

where the member consumers buy stocks on monthly installments, many at P5.00 per month up to a certainmaximum.

A coop can either be registered or not with the Cooperative Development Authority (CDA). If registered it isexempted from income and other taxes, which is an incentive for coops to be registered. Both aresupervised by the CDA as far as their coop legal responsibilities are concerned, like calling for a regularassembly and the like.

A coop belongs to that group called Distribution Utility (DU). Since distribution is still regulated under theEPIRA a coop must file for its power rate with the ERC (Energy Regulatory Commission) before it can bill itscustomers.

In its application for power rate (or tariff) the coop factors in its O&M (operation and maintenance)expenses, a reinvestment fund (for upgrades and expansion), other expenses that may be allowed by theERC, and the desired RORB (Return on Rate Base) which is the provision for profit so that members canhave dividends. If non-profit, non-stock there is no such provision so that the power rate would be lower.Normally though member/consumers of stock coops would not mind a higher electricity rate because theywould share in the profit.

The big difference then between an REC and a DU that is privately-owned like Meralco (Lopezes) or DavaoLight (Aboitiz) is the nature of ownership and control of the utility. If the DU is a coop the consumers

themselves own and control and manage the utility firm and any profit made (if stock coop) are sharedamong the consumers who are of course the people in the community. The coop is responsible to themembers who are also its consumers who are also its owners. Conflict of interest is very minimal becausethe owners and the consumers are the same people.

If the DU is a private company a few wealthy individuals own, control and manage the utility firm. Any profitmade is shared only among them. Since the objective of businessmen is to maximize their profit you willeasily understand why such racket as the overcharging case of Meralco happened, where it had to pay usback P29B in overcharges illegally collected in ten years.

In reality, many coops in the 70s, when Marcos issued his PD ordering the setting up of coops, startedcorrectly and with very good intentions. Of the 119 coops today, only about 1/3 are classified as Class A,many in Class D and E and mired in debt and operational losses due to inefficiencies and overpricing of

materials, etc.

With many coops in sorry state and in debt the government, instead of setting things aright through ways ofstrengthening the coops wants to have thse coops sold to private companies through what is called anInvstment Management Contract (IMC) or outright buy. The IMC is the more clever way because a privatecompany, after 5 years of managing and controlling a coop operations can buy the coop for a song. TheseIMCs are going to be part of the strategic plan to privatize wholly the power sector.

The role of foreign interests in the privatization of the power industry

It was not a secret that President Arroyo railroaded the signing of the EPIRA due to the pressure by creditorson the Philippine government before they release the power reform program loans to finance the countrys

power development program. Major creditors include the Japan Export-Import Bank, Asian DevelopmentBank (ADB), and World Bank (WB). These power sector reforms and the sale of NPC to private businesswere long standing recommendations of the IMF. These recommendations were part of the structural reformprogram the country has to implement as a pre-condition for more loans.

The recent joint application of rate increases was also clearly due to a pressure from the creditors of theNapocor on its USD 10 billion loans. The training of staff, and even the website, of the ERC, as well as itsgamut of consultants, are courtesy of the AGILE, a USAID program that seeks to facilitate liberalization ofour economy.

According to US Department of Energy, the Philippines is important to world energy markets because it is agrowing consumer of energy, particularly electric power, and a major potential market for foreign energyfirms. Aside from importing from these foreign energy firms, the Philippines also buys from these foreign

TNCs who own most of the private local energy supply. The passage of the Power Act, which will fullyprivatize the Napocor, further increases the dependence of the country from these profit-thirsty TNCs. Hereis a country that is a market of foreign firms who sell goods that are extracted from the country itself. If thesetrend will not be reversed, the Philippines would likely end up being a private property of foreign TNCs.


10/12

Energy sources of the Philippines

The Energy Information Administration of the Department of Energy of the US has enumerated the followingmain sources of energy in the Philippines: geothermal, hydropower, coal, oil, and natural gas. All of thesecontribute to the countrys energy production, which is concentrated in the electricity sector.

Oil production in the country remains flat and far below oil consumption. Oil consumption on the other handhas been increasing since 1986 up to the present. Despite small proven oil reserves, companies, likeAustralia-based Nido Petroleum (formerly Sydney Oil Company Drilling and Exploration), that are into oilexplorations in the northwest and southwest Palawan Basin, the Cagayan Basin, and other smallconcessions elsewhere in the country believes that significant quantities of oil may be recoverable.

The Philippines has 2.8 trillion cubic feet of proven natural gas reserves. In the largest natural gasdevelopment project in the country and one of the largest-ever foreign investments in the country, ShellPhilippines Exploration (operator, with a 45% stake), Texaco (45%), and the Philippine National OilCompany (PNOC, 10%) has tapped the Malampaya natural gas fields estimated 2.5 trillion-cubic-feetreserves. Gas from Malampaya will fire three power plants with a combined 2,700-MW capacity for the nexttwenty years, and could replace as much as 50% of the oil that the Philippines currently imports for powergeneration.

Coal is the Philippines largest source of fossil energy production but 82% (1998) of total coal consumption isimported.

Geothermal power accounts for the countrys largest share of indigenous energy production, followed byhydropower, coal, and oil and gas. The Philippines is the worlds second largest producer of geothermalpower, after the United States. The country is located in the volcanically active Ring of Fire. As of April2000, Geothermal power makes up around 17% of the Philippines installed generation capacity, most ofwhich has been developed by the Philippine National Oil Company-Energy Development Corporation(PNOC-EDC).

The Philippines does have significant amounts of hydroelectric potential. The most notable development, theAgus units, has been built at the Maria Cristina Falls on northern Mindanao, which makes for 32% of thecountrys total hydroelectric power as of December 1999. Hydroelectric power on Luzon accounts for the

largest share to the total hydroelectric power generation (1,280 MW, 56%).

According to EIA, electricity demand is expected to grow almost 9% per year until 2009, necessitating almost10,000 MW of new installed electric capacity. As of 1999, the total electric power generation is 12,050 MW.The National Power Corporation (Napocor) provides a total of 5,400 MW (45%) of electricity while variousindependent power producers (IPPs) provide the remaining 6,650 MW.

Southern Energy, a wholly owned subsidiary of Consolidated Electric Power Asia Ltd. (CEPA) of GreatBritain, is the Philippines largest IPP and operates five power plants in the country. Southerns new coal-fired Sual plant began commercial operation in late 1999. The 1,218-MW plant is about 130 miles north ofManila and reportedly is the nations largest electricity producer. Napocor is the sole purchaser of Sualelectricity.

Texas-based El Paso Energy International and Hawaiian Electric Industries in February 2000 formed a 50-50 joint venture to own and operate five power plants now owned by East Asia Power ResourcesCorporation, a public Philippine company. The total generation capacity of the ventures holdings will be 390MW. The plants are located in Manila and Cebu.

Actually, there is an oversupply of power generated by the Napocor power plants and those of the IPPscombined. Honoring its Power Purchase Agreements (PPAs) with the IPPs, the NPC had to retire theoperations of its power generating plants to accommodate the higher priced power generated by the IPPs.The current demand for power is only around 7,000 MW while the total supply is 11,000 MW.

Indeed, the Philippines is rich in energy sources and it seems that explorations for such resources isendless. In late 1999, the Philippine and Spanish governments agreed to a plan whereby Spain would assistin bringing solar power to some of the Philippines rural areas. Finland plans to help fund a project to electrify10,000 homes in the rural Antipolo area with methane generated by the San Mateo landfill, following the

landfills December 2000 closure. In cooperation with the Netherlands, the Philippine government is planningto expand its wind energy capacity. DOST estimates that wind resources could generate 70,000 MW ofpower.


11/12

Power to the people

The Philippines rich energy sources did not result to economic prosperity of the Filipino people. The EPIRAhas only resulted into ever increasing power rates, the plunder of our natural resources, the intensifyingcontrol of foreign TNCs over our power industry and our economic development as a whole. Furthermore, ithas shown the vulnerability of the government to pressure and dictates of huge foreign banks and financialinstitutions. It is indeed an ironic situation that the Philippines rich energy sources did not result to economicprosperity of the Filipino people, power consumers and power sector workers alike.

Public utilities are services that are used by the people in their daily activities and economic production.These are power, water, fuel, transportation and telecommunications services. Limited access to theseservices would introduce additional difficulties that can be eased or facilitated by the use of the servicesprovided by said utilities.

In the case of power, water and fuel, the role of a public utility is to generate or procure these resources,deliver and distribute it to the public. In the case of transportation and telecommunications services, thepublic utility provides the infrastructure and means that enable people to take advantage of the goods andservices inherent to the utility. Power, water and fuel utilities provide access to electricity, water and fuel tohouseholds and industry. These utilities should be accessible and affordable to the people. Limiting accessby increasing the costs of these services would make, in general, daily activities more difficult for the people.

Nationalization of public utilities is important since it these public utilities are strategic in nature to thedevelopment of the country. It provides the necessary infrastructure and support to the peoples dailyactivities and industrial growth. If these industries are left to foreign monopoly capital, whose interest is torecoup their investment and rake in profits--- we would lose quality of service, an unending increase in utilitycosts and our national interest will not be addressed.

In particular, electric power is a basic service that should be provided to the people and is an indispensablefactor required in genuine industrialization. The governments excuse of having no funds to build therequirements of the power industry is a false claim because it can shell out hundreds of billions of pesos todebt servicing and military deployments. Furthermore, it gives numerous incentives and sweetheart deals toforeign investors.

The privatization and deregulation of electric power by the EPIRA runs counter to the interests of the Filipino

people. It has only resulted in non-stop increases of rates. The long term solution to the excessive electricitycharges entails the nationalization of the entire power sector. We must work to call for a stop to this policy ofprivatization and deregulation by calling for the scrapping of the EPIRA and to have the government takeover NAPOCOR, the IPPs, transmission lines and the distribution utilities such as MERALCO. Furthermore,alternative sources of power that are low-cost and environment friendly should be promoted and developed.

The government should pursue genuine nationalization of the power industry instead of neoliberal powerreform if it is truly serious about bringing down the electric power rates.###

The paper is written by Dr. Giovanni Tapang, Engr. Ramon Ramirez and Mr. Kim Gargar

References:

1. Energy Information Administration, US Department of Energy, http://www.eia.doe.gov2. PNOC-Energy Development Corporation, http://www.energy.com.ph3. Comptons Encyclopedia Online 19984. FAQ Sheet on House Bill No. 8457, Committee on Energy, House of Representatives5. Complete privatization of Napocor: private power, IBON Special Release 38, October 19986. Power reform or privatization, IBON Special Release 52, April 20007. Ang Panganib ng Pribatisasyon, prepared by ACT, AHW, COURAGE, CONTEND, and HEAD for the

Peoples Summit, July 19, 20018. Meralco Employees and Workers Association Press Release, May 26, 20019. Power play causes delay, article by Marcelo E. de la Cruz and Pablo C. Villasenor10.5th status report on EPIRA Implementation, May 2004-October 2004, Department of Energy11.AGHAM files and press releases


12/12

Akoni Elektrokyut ng Anakpawis(with apologies to the kid in the TV ad)

Gastos sa:

Generation charge...akoTransmission charge...akoSystems loss charge...akoNinakaw na kuryente...ako

Kuryenteng di naman nila nilikha...akoKuryenteng di ko naman ginamit...akoKuryenteng di nasukat dahil sira pala ang metro...akoKuryenteng ginamit ng Meralco sa nga opisinanito...ako

Gastos sa:

Distribution charge...akoSupply charge...akoRetail customer charge...akoMetering charge...akoDiscount para sa mga da poor lifeliners...akoDiscount ko, binawasan na akoOvercharging ng Meralco...ako

Gastos sa:

CERA dahil sa pagtaas-pagbaba ng dolyar...akoLocal franchise tax...akoNational franchise tax...akoNoon nga pati income tax...akoButi na lang nagreklamo at nanalo akoGRAM sa pabago-bagong gastos sa paglikha ngkuryente...akoPakuryente sa mga liblib na pook, alyas missionarycharge...akoPara sa pag-alaga sa kalikasan, alyas Environmentalcharge...ako

Gastos sa:

12% Return on Rate Base o Kita ng Meralco....ako

8% Return on Rate Base o Kita ng NPC...akoP24 Bilyon kita ng Mirant noong 2002...akoP4.6 Bilyon kita ng Lopez' First Gas Power noong2002...akoBilyon-bilyong kita ng iba pang IPPs at powerutilities...akoMilyon-milyong suweldo ng mga executives ng mgaito...ako

May mga darating pang gastos sa:

TRAM na pabago-bagong gastos sa pagdeliver ngkuryente...ako pa rinkahit na alam kong tinaTRAMtado na nila akoBilyon-bilyong stranded debts ng NPC...ako pa rinBilyon-bilyong stranded contract costs ng NPC...ako parinEqualization taxes and royalties...ako pa rin

Lagi na lang ako.Lahat din lang naman ang gumagastos akoI-takeover ko na lang kaya ang NPC, Mirant, mga IPPsat Meralco.Pagkatapos ako ang magiging may-ari....si Juan de laCruz, ako!

Documents

Epira Paper (AGHAM - Advocates of Science and Technology for the People)