WHY ELECTRICITY IS SO
EXPENSIVE IN THE
PHILIPPINES?
CAUSES AND PROPOSED
SOLUTIONS
LUIS CORRAL
Co-Convenor, Alliance for Consumer
Empowerment (ACE)
Co-Convenor, NAGKAISA!
1
EPIRA HAS AFTER 10 YEARS
ILLUSORY GAINS
• Privatization of 90% of NPC assets to
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promote competition to lower rates
“Corrupt/Inefficient” government out of
power sector
Entry of competent and efficient and
private players
Private players with deep financial
capacity and international experience
Decentralized independent planning
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EPIRA AFTER 10 YEARS
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REAL LOSSES
Vertical integration of privatized IPPs
with DUs
No competition within franchise area
Sweetheart Deals between generation
and distribution sectors
Increasing power rates and yet
continuing brownouts
Energy security at the mercy of private
sector
No investment in renewables
3
PHILIPPINE POWER RATES: ASIA’S
HIGHEST
 PHILIPPINES -------US$0.2460/kWh
 Japan---------------US$0.243/kWh
 Singapore---------US$0.22/kWh
 Indonesia----------US$.092/kWh
 Thailand------------US$.086/kWh
(source : 2010 IEC study)
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WORLD’SInternational
HIGHEST
POWER
RATES
Energy Agency (Q1 2011)
RESIDENTIAL (/kWh)
 Denmark ---US$0.3563
 Germany --- US$0.3248
 Italy --- US$0.2632
 Austria --- US$0.2576
 PHILIPPINES- US$0.2460
 Ireland --- US$0.2326
 Japan --- US$0.2322
 Belgium --- US$0.2317
 Netherlands --- US$0.2212
 Sweden --- US$0.2180
(Source : 2010 IEC study)
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WORLD’S International
HIGHEST
POWER
RATES
Energy Agency (Q1 2011)
INDUSTRIAL POWER RATES (/kWh)
 Italy --- US$0.2581
 Slovak Republic – US$0.1691
 Japan --- US$0.1544
 Turkey --- US$0.1509
 Czech Republic – US$0.1439
 Ireland --- US$0.1372
 PHILIPPINES ---US$0.1320
 Belgium --- US$0.1245
 Netherlands --- US$0.1230
 Luxembourg --- US$0.1219
(Source : 2010 IEC study)
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EPIRA: REAL LOSSES FOR FILIPINOS
Undercapacity in power
Threats of brownouts
No energy road map
Power sector left to the vagaries of the
market
Gencos and distribution firms can rig the
market: Create artificial shortages to drive
up rates or to justify bringing in dirty coal or
expensive diesel
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IMPLICATIONS OF HIGH POWER
RATES:
 Philippines becomes uncompetitive regionally
 Private Public Partnership viability suspect
 Current business locators might transfer to Indonesia,
Thailand, Vietnam, Cambodia or even Burma
 Investors moving to Asia Pacific, we might miss out on
the boat
 Surrender of power industry to socially and politically
unaccountable private sector
 Consumers left with a take it or leave it choice:
expensive power or no power at all
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WHY AND HOW DID THIS
HAPPEN?
 EPIRA unbundled the natural horizontal monopoly
of the industry: generation, transmission,
distribution, supply unbundled.
 Theory that the generation firms would compete with
one another, thereby lowering rates in generation
sector.
 Gencos divided country among themselves: no
competition in areas where they put up generation
plants.
 Gencos and DUs vertically re-integrated whereby
Genco A sells power to DU A through a “sweetheart
contract” where both parties are cross owned.
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WHY AND HOW DID THIS
HAPPEN?
• In Generation Sector
• Lobby of Gencos in the drafting of EPIRA
 The Generation sector under EPIRA defined as not
being a “utility”. Only utilities are subject to the 12%
RORB ceiling of the Public Utilities Law.
 The Return on Rate Base of Gencos ranges from 29% to
40% because there is really no competition and there
is no limit to the profit that they make.
 Cross-ownership was allowed under the EPIRA
 Regulatory capture of ERC
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WHY AND HOW DID THIS
HAPPEN?
 Unbundling created four (4) middlemen structures
to jack up the rates at each stage: (i) generation; (ii)
transmission; (iii) distribution; and (iv) aggregation
 Each unbundled component in effect allows an
additional rate because of the legal fiction that there
are four industries in what is really a natural monopoly
 The PSALM holds NPC hostage through an
Operations and Management Agreement (OMA)
whereby all the gross receipts from the operations of
the NPC must be turned over to the PSALM.
RESULT: Additional “Stranded Costs”.
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WHY AND HOW DID THIS HAPPEN?
 Polticized and captured ERC. ERC: Performance-Based
Rate-making Formula (PBR).
 PBR allows distribution utilities to collect additional rate
increases if it meets certain benchmarks. (eg, new
connections, restoration of downed lines, increased
efficiencies in operations, response time to complaints)
 PBR performance hurdle was drawn up by utility itself not
by independent regulator, therefore it is self-serving and
easily met.
IN OBTAINING ITS FRANCHISE DUs PROMISED
CONGRESS THAT THEY WOULD RESTORE DOWNED
LINES AND PUT UP NEW CONNECTIONS BECAUSE
THEY ARE COMPETENT AND CAPABLE. WHY SHOULD
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WE PAY EXTRA FOR WHAT THEY PROMISED?
WHY AND HOW DID THIS HAPPEN?
In Distribution Sector
 PBR allowed distribution utility to charge extra for:
(i) Connection of new applicants;
(ii) Putting back lines brought down by typhoons;
(iii) Increased street-lighting and lighting for public
areas such as parks; and
(iv)Better efficiency in operations.
BUT THESE ACTIVITIES WERE PROMISED BY THE
DU AS BASIS FOR AWARD OF FRANCHISE.
TO ADD INSULT TO INJURY PBR IS EXPRESSED IN
A COMPLEX, INCOMPREHENSIBLE ALGORITHMIC
FORMULA. HOW CAN WE INTERVENE?
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POLITICAL ANTECEDENTS
•Non-existent/immature consumer movement in the Philippine
•Very small middle class
I
•Immature
capital markets
•Lack of understanding of power industry in the mass media
•Lack of genuine consumer representation in the ERC
•USAID funded lobby to privatize NAPOCOR, used NGOs that w
in cahoots with high government officials pushing privatization
•Pressure from the ADB, the IMF, and the World Bank
“IMF Letter to Speaker Noli Fuentabella”
•Portrayal of oppositors as ideological “crazies”
“FDC Manlilinlang!”
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•Congressional PAYOLA: PHP 500,000 each!
WHY AND HOW DID THIS
HAPPEN?
•FAKE” CONSUMER GROUPS RECEIVING GRANTS
FROM THE USAID, AUSAID, AND IFIS TO DEODORIZE
EPIRA. THEIR PROPAGANDA:
“FIGHT FOR CONSUMER CHOICE BY SUPPORTING
EPIRA”
“END THE MERALCO MONOPOLY AND CREATE THE
POWER OF CHOICE.”
“END THE CORRUPTION AND THE HIGH POWER
RATES OF NAPOCOR
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HISTORICAL OVERVIEW OF THE POLITICAL DYNAMICS
THAT CONTRIBUTED TO THE HIGH TARIFFS
 FVR Administration. The 35 IPP Take-or-Pay
Contracts left for consumers or taxpayers to assume as
stranded costs.
 Government sold NPC assets debt-free. As a result we
were saddled with US$ 11 billion in stranded liabilities.
 These liabilities were take or pay contracts with IPPs to
purchase power whereby GOP takes the promised
capacity from the IPP, AND EVEN IF GOP DOES NOT
TAKE IT MUST PAY. “NAGBABAYAD SA
KURYENTENG HINDI GINEGENERATE AT HINDI
GINAGAMIT.
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HISTORICAL OVERVIEW OF THE POLITICAL DYNAMICS
THAT CONTRIBUTED TO THE HIGH TARIFFS
 Estrada Administration. Allowed the private sector to
take over the industry whole hog.
 A financially rapacious and socially unaccountable
private sector cartelized the electricity industry.
 Electric industry was worried that ERAP would dip his
fingers into the pie so they maneuvered to cut up
generation areas : Aboitiz power generation in
Northern Luzon, Cebu, and Davao City. San Miguel
generation to take over Central Luzon. Lopez
Generation continues in NCR and in Southern
Tagalog, as well as Visayas and Southern Mindanao 18
HISTORICAL OVERVIEW OF THE POLITICAL DYNAMICS
THAT CONTRIBUTED TO THE HIGH TARIFFS
 Arroyo Administration. The Arroyo government sold
the remaining assets low (by overvaluation of
liabilities and undervaluation of assets).
 The TRANSCO concession was sold to Monte Oro grid
and national grid of China. (Unholy alliance between
Ricky Razon and Chinese government: payment issues
because of unusually low down payment and national
security issues because of Chinese government
operation and ownership of the national “toll roads” of
transmission lines through which all power passes.
 RESULT: the high stranded costs of NPC remained
unaddressed. Henry Sy Jr. would later acquire
theTRANCO concession.
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THE COMING STORM:
ADDITIONAL POWER RATE INCREASES
 PSALM’s P1 Trillion stranded costs is to be charged as part
of the “Universal Charge”. Estimated to cost an additional
P0.39/kWh.
 SPUG-NPC budget shortfall of P7 Billion just for 2011.
This will cost additional P0.07/kWh included in the
“Universal Charge.”
 Additional SPUG-NPC P3.1 Billion budget shortfall for
ICERA and GRAM. This will increase power rates for offgrid areas.
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THE COMING STORM:
ADDITIONAL POWER RATE INCREASES
• NPC-Meralco CA settlement: Php 14 Billion,
Meralco may pass-thru amount of penalty
imposed upon it to consumers.
• Pending ERC petitions of Meralco, Davao Light and
Power, Visayas Electric Company, and other
Distribution Utilities (including 119 electric
cooperatives).
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THE COMING STORM:
ADDITIONAL POWER RATE INCREASES
 Transition Supply Contracts between distribution
corporations/or NPC and the privatized Generating
firms end in 2011, and are up for renewal. These Gencos
are defined under the EPIRA as not being utilities and
therefore not subject to a 12% ceiling on RORB or ROI.
The end result is that these Genco Generation Charges
will zoom up with their new contracts.
 The Transition Supply Contracts of the Independent
Power Producers/Gencos who are selling through an
IPPA Administrator (salesman or middleman) will end
in 2011. Therefore new IPPA contracts will bring up
Genco Generation Charges.
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THE COMING STORM:
ADDITIONAL POWER RATE INCREASES
 The proposed Renewable Energy program with its
Feed-In Tariff would tie the country up to immature,
unreliable and expensive power that would entail an
additional P0.1256/kWh.
 SC Case on illegal dismissal of NPC workers:
Backwages of P48 Billion.
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 EVERY ONE (1) CENTAVO PER kWh INCREASE
REPRESENTS P657,000,000.00 PER ANNUM (BASED
ON CURRENT DEMAND OF 7,300 MW)
 One centavo (1)/kWh of power increase means 40% or
P263,000,000.00 is taken away which should be food
for the poor (based on lifeline rates); 10% or
P118,000.00 represents educational costs, medicine,
transportation or house rentals
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OTHER SCENARIOS
• Variations on take-or-pay/power demand
lower than contracted capacity: Feed-In-Tariff
• Increased tariffs, less energy security
• Sell off 119 electric cooperatives to generation
cartel at a discount: “Sell corrupt/incompetent
electric coops to Aboitiz, Pangilinan, Ang,
Lopez, Sy
> Corporatization: Ownership by the few
of power
> Vertical integration of all DUs with
dominant IPP group
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OTHER SCENARIOS
> Division of de facto franchises into a
spoils system
> Sweetheart deals everywhere: rigged
tariffs. Mini Meralcos everywhere.
• Open Access: The power of choice (for the
few)
> Lower rates for 1 MW commercial and
industrial load. Higher rates for captive
residential customer, viability of ECs losing
large industrial load/vulnerable to corporate
takeover.
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OTHER SCENARIOS
> Higher tariffs for captive residential
market
> Poor subsidizing the rich
> Tariff volatility
• WESM: Spot market limited impact with only
five players
• Energy planning surrendered to private
players: power supply planning takes is a
function of stage managed artificial shortages
• Renewables made expensive through F-I-T to
make coal acceptable
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OPEN ACCESS SCENARIOS : PANGILINAN
LAUGHING ALL THE WAY TO THE BANK
1. CHERRY-PICK 1 MW LARGE LOADS (LOWER RATES)
2.CAPTIVE RESIDENTIAL RATES INCREASE
3. MERALCO SUBSIDIARY AGGREGATES RESIDENTIAL
TO MEET 1 MW
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OTHER SCENARIOS
>Massive contractualizations in privatized
firms and Ecs subjected to hostile takeovers
> No investment in additional capacity
until “energy shortage” kicks in
> Occupational safety and health of power
industry employees sacrificed
> No investment in staff training
> Unlimited salaries or bonuses for top
management and board/stockholders
> Capital flight to dividends or foreign
expansion
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THE POWER INDUSTRY PLAYERS:
THE CARTEL
 POWER GENERATION is now in the hands of four (4)
sisters: Pangilinan, SMC, Aboitiz, and Lopez/EDC .
 DISTRIBUTION is dominated by MERALCO (71% in
Luzon), Aboitiz (700 MW Visayas; 300 MW Davao) and
CEPALCO (100 MW Cagayan de Oro).
 80% of the land area are serviced by electric cooperatives
with a total of eight (8) million households.
 ECs continue to be the milking cow of the corrupt
National Electrification Administration even as they
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THE POWER INDUSTRY PLAYERS:
THE CARTEL
 TRANSMISSION is the concessionaire National Grid
Corporation of the Philippines held by the SM Group,
One Taipan Holdings of Henry Sy, Jr.
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SOME CRITICAL QUESTIONS
Is energy shortage “artificial”?
 Is threat of brownouts scaremongering to
get consumers to accept expensive quick
fixes?
 Is energy shortage propaganda device for
acceptance of FIT?
 Are the projections of energy demand too
high and based on unrealistic growth
predictions?

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RECOMMENDATIONS
(NATIONAL)
 Define generation sector legislatively as a public utility
and therefore subject to 12% RORB ceiling under
Public Utilities Law: 12% RORB only.
 Halt additional programs that would only bring up
electricity rates: (a) open access; (b) aggregation; (c)
PEMC-WESM expansion; (d) RE FIT program.
 Do away with PBR Formula: Return to RORB ceilings
for Distribution Utilities.
 Stop Open Access until full multi-stakeholder national
consultations are held with realistic tariffs simulations
showing no resultant tariff increase in the captive
residential rates.
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RECOMMENDATIONS
(NATIONAL)
 Register all electric cooperatives with CDA to ensure
genuine consumer ownership and lower rates through
tax exemptions including all national taxes, local
taxes, and VAT. This will ensure greater management
accountability and transparency of operations to the
true owners: the General Assembly
 Compel all generation corporations through
legislation to have at least 50% of their shares to be
publicly held.
 Undertake public bidding of the purchase by all
distribution firms of their power requirements within
the next six (6) to eight (8) months.
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RECOMMENDATIONS
(NATIONAL)
 Require all power firms to invest a set percentage of
their annual earnings to the development of the
baseload of the country with priority to Mindanao.
 Establish a National Distribution Corporation for the
purpose of doing away with all sweetheart deals
between related companies in the generation and
distribution sectors.
 Amend the EPIRA to prohibit cross ownership in the
power sector.
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RECOMMENDATIONS
(MINDANAO)
 Accelerate transfer of three (3) power barges from
Visayas to Mindanao to provide additional 200 MW
capacity in less than a year.
 Rehabilitate Operation and Maintenance Contract for
Agus Pulangui Hydroelectric plants through
international bidding. No need to privatize since a
reasonable rate increase can be built in through the
ROM contract.
 Operate existing Iligan powerplant.
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RECOMMENDATIONS
(MINDANAO)
 Stop the interconnection of grids between Visayas and
Mindanao. This will only jack up the rates. WESM will
only bring up rates through additional costs. Currently
cheap Visayas power used entirely by Luzon.
 Maramag transmission line to connect power
produced in Northern Mindanao to power needed in
Southern Mindanao.
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RECOMMENDATIONS
(MINDANAO)
 Rescind OMA of PSALM, remit all gross receipts of
Agus-Pulangui for its rehabilitation and maintenance.
 Create a GOCC, the Mindanao Power Corporation to
operate Agus-Pulangui. Keep the Agus-Pulangui
hydroelectric complex in government hands.
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Thank You.
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