GO, Robert Bartholomew O.
2014-55412/ BS BAA
Eng 10 - WFU 3
Prof. Sandra Nicole Roldan
Position Paper
12 December 2014
Word Count: 2,261
From Gas to Governance: The Case of Philippine Natural Gas
Before I began work on this paper, the only things I knew about natural
gas were that it powered three power plants, and that the country got it from the
Malampaya gas field. As I learned more, however, I realized that the natural gas
industry was an industry riddled with problems that affected not only it, but the
whole electricity sector at large. As such, this paper attempts to trace the causes
of the stagnation of the natural gas sector to their roots, in order to prevent other
industries from meeting a similar fate.
The natural gas industry began when the Malampaya natural gas field
began production in 2001, giving us a local source of natural gas (Steingiga et al
1-2). According to the Department of Energy’s (DOE) list of existing Luzon
power plants of 2013, our three active natural gas-fired power plants were all
commissioned from 2001-2002, or right after Malampaya began operations (1).
According to a USAID study on our electricity prices, said plants supply 25% of
Luzon’s energy needs (7). Despite the power crisis, which was projected as far
back as 2009 (“PDP” 4) , development has only recently restarted, with the Avion
and San Gabriel plants being built by local company First Gen (First Gen) and the
Pagbilao Liquefied Natural Gas (LNG) Terminal and 600 MW power plant being
constructed by Energy World Corp. (EWC) (Gonzales). It is this stagnation in the
face of a power crisis that we study, starting by looking at the direct obstacles to
development.
The Problems Today: Local Opinions and Foreign Consultations.
The most recent data available on the Philippines’ natural gas industry
would be the Lantau Group’s Natural Gas Master Plan, which is a feasibility
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study that serves as a framework for the future importation and transport of
natural gas, considering the uncertainty of Malampaya supplies starting 2024
(“Final Report” 2-2).
One problem they enumerate is the lack of highly-important
infrastructure required to expand the amount of power that can be delivered.
Projects such as the Batangas-Manila natural gas pipeline (BatMan 1) and the
Bataan LNG terminal to accept imported natural gas are behind schedule.
According to the list of Public-Private Partnership (PPP) projects dated
September 24, 2014, BatMan 1 is still in feasibility studies (1), despite both
projects being scheduled to be finished by 2015 according to the DOE’s 2012
study (2-2).
The Lantau Group’s next complaint was regarding the Electricity
Regulatory Commission (ERC). They found that the ERC is using outdated
Power Supply Agreements (PSAs) that encourage running the plants constantly
in order to provide a base of power. This is because these contracts are for the
plant’s entire capacity, which is just like renting the power plant for the duration.
This precludes the existence of a competitive free market, which in theory would
create the lowest possible prices. This runs counter to RA 9136 the Electric Power
Industry Reform Act (EPIRA) of 2001, which states that free and fair competition,
as in a free market, is national policy.
These two problems suggest a lack of government ability to properly
regulate and manage the industry. To help us understand this, we need to
examine the electricity industry, starting from the market itself.
EPIRA mandated a free market in the form of the Wholesale Electricity
Spot Market (WESM). The system is described by Dr. Ma. Joy V. Abrenica, one of
the Philippines’ leading energy economists, in her September 5, 2014
presentation. All electricity is bought and sold within the WESM, with bilateral
contracts such as PSAs as a financial hedge against risk. The WESM is a reverse
auction, with the suppliers or power generators bidding price-quantity blocks (in
an auction, lots), at nondecreasing prices (no succeeding lots should be cheaper
than the first price-quantity block). The final price paid is determined by the
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market-clearing price, which is the price of the last block of power purchased.
(Abrenica) The WESM is governed by the Philippine Electricity Market
Corporation (PEMC) and regulated by the ERC, which are discussed below.
Pursuant to Section 38 of EPIRA, the ERC is made up of a chairman and
four members of the Commission, appointed by the President of the Philippines.
They form a regulatory body that performs judicial functions in order to enforce
the rules of EPIRA (17-18) and govern the Philippine Electricity Market (PEM)
Board, which administers the WESM. According to the DOE’s 2006 WESM rules,
the PEM Board is composed of representatives of the different sectors of the
electricity industry. (5-10) This division of responsibilities mirrors the judicial
system, with the ERC as the courts and the PEM Board as the citizens.
The actual performance of this system has been less than stellar, as seen in
Dr. Abrenica’s 2009 paper on the presence of market power in the first three
months of WESM. ERC regulation was proved to be deficient when the PEMC
acted on a complaint by the Manila Electric Corporation (MERALCO) about
possible abuse of market power in the WESM. The ERC then took seven months
to investigate the complaint that took the PEMC 45 days, and ending with an
final report similar to the PEMC’s original statement, as well as finding no
evidence of collusion. (17-21)
This calls into question the ERC’s ability to regulate effectively. This is
significant, as a USAID report on power pricing in the Philippines has
established a negative correlation between supply and prices in the WESM. Less
risky PSAs, which have historically taken up 80 percent or more of total supply,
take supply out of the market, thus raising prices. (37-44) The lack of regulation
also makes foreign firms hesitant to enter and raise supply. KPMG, a leading
American consultancy firm, released an Energy Report for 2013-2014, where they
cited strong, pro-free market regulation as important in future development (9).
With a large body of literature citing the weakness of the ERC and its
consequences, it is interesting to note that the PEM Board is made up of private
individuals while the ERC is a government office. This suggests that the
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bureaucratic nature of the ERC may play a role in its inefficiency, which we now
examine.
The Brain-Drained Philippine Bureaucracy
Toby C. Monsod, a professor of developmental economics at UP Diliman,
names two trends that explain why the Philippine bureaucracy has failed to
become a “repository of expertise and an efficient implementer of
policy” (Constantino-David, qtd. in Monsod 2). The first is RA 6758, or the Salary
Standardization Law of 1987. This fixes pay for government employees at noncompetitive rates, causing the famous “brain drain” (7), or the exodus of
qualified government employees for better-paying jobs.
Epictetus E. Patalinghung, a UP professor, and Gilberto M. Llanto, a
researcher for the Philippine Institute for Development Studies (PIDS), note in
their 2005 paper that the ERC itself is troubled. They describe an organization
that is understaffed, underfunded, and lacking in institutions to retain expertise
(13-14). This was partly caused by the ERC’s re-hiring from its predecessor, the
Energy Regulatory Board (ERB), which had lower qualifications and therefore
compensation (14), implying the existence of brain drain in the ERC.
The second cause is political patronage, and a use of bureaucratic posts as
political rewards. Fewer and fewer government employees have taken the civil
service examination, which could mean two things things. First, that qualified
employees are leaving, and second, that unqualified employees are being
appointed, possibly as political rewards. (Monsod 18, 21)
These papers establish the existence and propose causes for bureaucratic
inefficiency, one of which is political patronage. This suggests that the problems
run deeper than the bureaucracy, moving the study in the direction of Philippine
governance and its history.
The Philippine Democracy: Power, Personalities, and Families
One of the Philippines’ eminent political scientists is Dante C. Simbulan,
and his seminal 1960s work on what he calls the “modern principalia”, or the
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Philippines’ ruling political and business elite. He studied the Philippines’
richest and most powerful families, both in politics and industry, and found a
very homogenous group.
He found that most of these elites are descended from Spanish or Chinese
mestizos (half-bloods) who ran the country during the Spanish occupation. By
cooperating with foreign powers and holding on to their wealth, they remained
in power despite chaos in the country. (17-45)
Continuing his analysis, Simbulan also found that their power is either
derived from money or vice-versa. In the transactional politics of the Philippines,
money and political appointments are given out as rewards to faithful
supporters, similar to the situation Monsod notes in her report. (Ch. 5 and 6) This
paints a picture of a political scene based on power, wealthy families, and
personalities, where people and reputations, matter more than issues.
This train of thought has been noted by multiple other authors. David
Kang Chon-oong’s book on crony capitalism in the Philippines and South Korea
notes that both nations possess political scenes based on power, wealthy families,
personalities, and weak bureaucracies.
In the Philippine case, the bureaucracy was vehicle for political patronage
before Marcos. It was then turned into a showcase for highly-qualified
technocrats to attract foreign investment, squandering their talent with political
meddling. (77-84) This pattern has unfortunately continued into the present, as
shown in a paper co-written by Dr. Majah-Leah Ravago, a professor of resource
economics at UP Diliman, where she cites a laundry list of examples showing the
extent of the weaknesses in Philippine governance (18-24).
It is a common thread in all of these works that in the Philippines, power,
money, and name make right. This is exemplified by Laura Lee Junker’s research
into the precolonial Philippines, which notes the highly-personalized structures
of power and use of foreign influence of the local tribal chiefs or “datus” (61).
Social classes were based on riches (121), and conspicuous consumption through
feasting was normal for the powerful to boost their reputation (313-333).
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The sheer endurance and prevalence of the power-based, personalistic
Philippine political scene suggests an even more primal cause for this system.
Due to the highly social nature of governing, I propose that culture, the study of
behavior of groups of people, may hold the answer.
Hofstede’s Dimensions: What Drives Your Culture?
Geert Hofstede, a renowned cross-cultural psychologist, first conducted
his study in the 1980s, using a naturally gathered sample of IBM employees from
over forty countries. By asking this relatively homogenous group the same
questions across cultures, he was able to isolate a number of values common to
all the cultures surveyed, which became Hofstede’s Dimensions. This was then
published as Cultures and Organizations: Software of the Mind, now in its 3rd
edition.
Hofstede’s Dimensions are a set of six dimensions that quantify the
desires of a culture. In effect, they form a sort of landscape of cultural values
upon which all other things are built or derived from, influencing all of a
culture’s habits.
To very briefly summarize Hofstede’s work on the Philippines, the results
characterize us as a country that idealizes leaders who are “different” from the
rest of us (high Power Distance) by being rich and powerful (high Masculinity),
value groups and think in terms of “we” rather than “I” (low Individualism), and
focus on the short-term, thinking of what should be rather than how to achieve
goals (low Long-Term Orientation).
These values do not match those he finds are held by the Americans, after
whose institutions ours are modeled. The American systems are designed for
Americans, who possess a much smaller Power Distance Index and much higher
Individualism, where the assumption is that people in power are merely there
for convenience and are not so different from us, and therefore, that people have
the right and the ability to criticize the government. The disappearance of this
ability causes imbalance in the system. Instead of being corrected by public
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criticism, government gains free rein to use (or abuse) its power, something we
see in the Philippine situation.
We should, however, be cautious of using Hofstede’s Dimensions outside
organizations and businesses, for which it was designed. They were originally
meant to compare organizations rather than individuals, making application at
the individual level counterproductive. (Fons Ch. 4) This is supported by
personal consultation with Dr. Nestor Castro, one of UP Diliman’s leading
anthropologists, notes that this psychological model does not take into
consideration ethnicity, religion, and other important determinants of cultural
ideas and personal values. This is important to take note of, as the subjective
appeal of Hofstede’s Dimensions may cause us to ignore situations that may
make them irrelevant.
Conclusions and Solutions: What does it all mean?
The direct causes of problems in the natural gas industry are simple; lack
of infrastructure and weak regulation of the electricity market. However, these
causes in turn have their own causes, which must be addressed to create real,
lasting solutions. My personal stance on this issue is that the root cause is the
interaction between culture and bureaucracy causing inefficiency, which presents
problems to all industries.
An example of a country that has merged modern challenges and cultural
traditions is China. Though sharing many of our cultural values, their
preferences differing only on one dimension (The Hofstede Centre), they are
among the world’s greatest economies, in part due to their unity and respect for
their traditions (Kuhn). Rather than copying the methods of others, they have
found their own way and prospered. We deserve no less.
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