The government’s out to take over Meralco in its bid to lower electricity prices. It’s working for the mean time. Everywhere, I hear people taking the blame on the company like its a loan shark hungry for all your money. Not for me. Unlike most of you who try to get on the government’s malicious bandwagon, I am not stupid. I understand what’s going on. I do not voice out my opinion on nuclear fusion as if I’m all too knowledgeable just to win the votes of the populace if I didn’t even finish high school. For the sake of humanity itself, don’t be ridiculously stupid. Educate yourself. I’m posting a snip of an interview with former UP Diliman dean Dr. Viray regarding the issues. For those still adamant on their bent beliefs, you will the ultimate reason why eugenics is a failure from the start.
This was posted on abscbn-news.com but I can’t find it anymore there.
When the international and business community want an expert opinion on the problems of the power sector in the Philippines, they seek the advice of Dr. Francisco Viray. The country’s energy technocrat has served in the academe, electric cooperatives, and the National Power Corp.. Former President Fidel Ramos, in recognition of his skills in power system engineering, tapped him as Secretary of the Department of Energy from 1994 to 1998. He was former dean of the UP College of Engineering. He is currently president of the Energy Council of the Philippines and president/CEO of The PHINMA Group’s energy-related firms. abs-cbnNEWS.com/Newsbreak talked with Dr. Viray, May 16 where he shared his views on high power rates, Meralco, power sector reforms, and the need for well-targeted subsidies. Excerpts:
Q. Why are our power rates still the second highest in the region?
A. We’ve been the second highest since time immemorial, including during Marcos time.We’re still the second highest in Asia. It has always been a problem. And more often than not, issues on energy rates surface in the headlines when prices of crude oil go up. When prices are high, people complain. When prices stabilize, the issue dies down and people get used to the price levels. The issue of power rates has always been there, especially now, because of the clamor of the industry to be competitive.
Q. Are our high power rates due to taxes and inefficiencies?
A. It’s because of the nature of our being an archipelago.
Q. Why are power rates still high despite the passage of Electric Power Industry Reform Act (EPIRA) and implementation of power sector reforms?
A. First of all, EPIRA’s implementation has been delayed. With respect to the privatization, it’s because of the delay in issuances of some of the rules and regulations of the Energy Regulatory Commission (ERC), and even with respect to the setting up of the Wholesale Electricity Spot Market (WESM). EPIRA’s effect has not yet been fully realized because of these delays. There’s still no open access, so full competition has not yet really been realized. The competition that is supposed to bring down power rates is not yet really in place.
The problem is, we have already been overtaken by events. In 2001, price of crude was about $20, the price of coal was about $30 per metric ton. Today, it is $125. So even if competition will set it, the high prices of the input will erode the supposedly price reduction that competition is supposed to bring in. And the people will not feel it. That’s what I’m afraid of: that even with full competition, people won’t see a reduction in price relative to the 2001 levels.
And the worst thing that can happen, and which is now the problem in the Visayas, is that even if you have full competition, there will be shortages of supply. And therefore, you won’t be able to fully realize the effect of competition. Competition will only be successful if there is ample supply. Naturally, if there is a shortage of supply, there will be artificial price increases.
So all of these things might overtake the intentions of the EPIRA. That is probably the worst thing that can happen. People will say EPIRA is a failure, and we cannot do anything about it. No amount of explanation will convince the public that EPIRA works, even if they try to make some amendments today. If they want to say that this amended EPIRA will lower power rates, they should have a reference. From what level will you lower it?
Q. When you say this issue is being overtaken by events, and people will think EPIRA is a failure, do you think there will be a clamor to go back to the old system where government should play a dominant role and subsidize power rates?
A. Well, they will probably clamor for subsidy, but subsidies are short-term solutions. That’s been done before. During Cory Aquino’s time, she subsidized the rates in island grids like Masbate, Mindoro, and fixed it at P2.50 with NPC subsidizing it. But it was never sustained, and NPC incurred a lot of losses. So to me, if subsidies are not well-planned, it’s not sustainable.
Q. Will subsidies ever work?
A. Subsidies will just help the rich. They’re the ones consuming more. If I consume 1,000 kilowatts as against one who is consuming 50, my subsidy is 50 centavos per kilowatt-hour. How much subsidy do I get? P500 as against P25. It’s just like subsidies in petroleum products, it’s the rich who benefit. If it’s targeted subsidies, maybe, yes. As long as there is a source, a well-defined source. If it’s a well thought-out subsidy, it will work. I think the so-called lifeline rate, that’s a form of subsidy. That’s a cross-consumer subsidy, with the rich subsidizing those consuming less.
Q. But that’s only in Metro Manila. Does that also happen in Visayas and Mindanao?
A. It’s national. The problem in the provinces is that the threshold level qualifies a big portion of consumers because they consume less in the rural areas. So the subsidizing class is small. Unlike in Metro Manila where many industries are able to subsidize. The subsidy given to jeepney drivers, that’s a good subsidy program. And it is a cross-product subsidy. But when you subsidize across the board, you benefit the rich and deprive the poor of the budget for social services, education, health.
Q. Why are power rates lower in the Visayas?
A. They have lower rates in the Visayas because the generation rate of NPC there is lower. It’s below 3 pesos. They don’t have new capacity. And that’s the reason why there is a shortage. Because new entrants will mean higher electricity cost. They’re incurring shortages. Negros is complaining. They’re asking NPC to put up a power barge. A power barge is diesel-fired. If you have a diesel engine, bunker-fired when the price of crude is more than $100, I don’t know how NPC can sell that below P3. They will end up subsidizing.
Q. Is the shortage only in the Visayas.?
A. Yes.
Q. And in parts of Mindanao?
A. Mindanao, they need an annual requirement of 50 to 100 megawatt addition. And the reason why power rates in Mindanao are low is because it’s still predominantly hydro[electric], with the Agus [power plant]. More than 50% is still hydro. And another reason why they have lower rates is because these are old power plants that have already been cost-out. Even in the Visayas, the reason why the power rates are low is because these plants have been cost-out already. But the privatization in Visayas will act as if you will have a new power plant. Because the private investors will buy the old plant at the price of a new plant. It’s just like making a new investment on an existing capacity, that will bring up the price.
So EPIRA has been overtaken by events. And that’s the fear now, that even if they amend it, and if they just really look at the objective of lowering power rates, then it [amendments] will not accomplish it [lower rates].
Q. What about efficiency of power plants?
A. The process of government, especially on procurement, is not really designed to support the operations of utilities. The government is always lowest bid. Three bidders, lowest bid. A bidder will then find it very hard to buy from an original equipment manufacturer. And then the lowest bid is just on the basis of price. Sometimes, you have to pay for quality. It might be the lowest bid, but what if it breaks down easily? Many will suffer.
And that’s with the reason why, if you have been attentive, the power plants they privatized, which is Masinloc and Calaca, they were not operating at full capacity. I believe that if government were the ones who built all the power plants, and if it had not done it through BOT [Build-Operate-Transfer], what they call the IPPs like Sual, Pagbilao, perhaps, only half of the plant’s capacity can be tapped. We will have shortages, massive shortages in Luzon. If you recall, one unit of Sual suffered a major failure, complete replacement. If that was put up government, maybe that unit will still be down now.
Q. So EPIRA is no longer the answer?
A. To me, it’s still the answer. Except that the expected lowering of rates may not happen. Because people are using as reference the lower of rates, based on the 2001 level, when EPIRA was passed. But as I’ve said, in 2001, the price of crude was only about $24 to a barrel. Coal was about $30. Today, it is $100 plus. So even if there competition, maybe the high cost of your input will not allow you to lower your price below the 2001 levels. So people will say power rates are still high, and they will ask: Why is it that even with EPIRA and with full competition, prices are still high?
But if government will explain it that way, people will understand. It will work because EPIRA is the long-term solution. For me, it’s competition that is the long-term solution. Without a long-term solution, it will just be a palliative. The problems will recur every two years.
Q. You don’t think government is explaining it well?
A. I think there’s no…communication is lacking to the public.
Q. It seems like a blame game?
A. Blame game, and the public is confused. They just use a particular portion that is advantageous to one party, the rest is forgotten.
Q. What does this conflict over Meralco tell us, this intra-corporate conflict, which has become a national issue?
A. It will be up to the shareholders to decide. Because at the end of the day, whoever wins will still take care of the interest of their shareholders. If you just lower the rates for the sake of lowering, and not give the desired return to the shareholders, you’re also reneging on your duty as a director. It’s a Catch-22 situation.
Q. Do you agree there are inefficiencies within Meralco?
A. I cannot say for sure. You really need to take a look at their books, records and so on to be able to make that assumption. Right now, it’s just speculation. They say power rates of Meralco are higher if you compare with the Visayas and Mindanao. But the reason is because the generation rates are much higher in Luzon.
Q. So the call for transparency in Meralco is good.
A. In any company, you should call for transparency if you are a director. If you’re an owner, even if you don’t lower rates, if you reduce inefficiencies, you will get higher returns, right?
Q. This practice of passing on costs like income tax to consumers…
A. The Supreme Court has already ruled against that. That was allowed before. It’s just a change in jurisprudence.
Q. But if you compare utilities with other industries, where it’s the company which absorbs some of the business costs, in the utilities, it’s more obvious.
A. Usually, on the return on rate base, you’re allowed a certain return on rate base. It’s just a question of what costs are allowed. I don’t think the Philippines is the only country doing this. I don’t think we are allowing costs that are not being allowed by other countries. Usually, we just base our rulings on the rulings of other countries. On that basis, Philippines does not really have a unique jurisprudence of its own. I think that’s also allowed in other countries. Losses are allowed, but there’s a cap, which is much lower than the one that they were doing before when there was no cap.
And again, they’re trying to attack the anti-pilferage law from a different angle. They said the anti-pilferage law has allowed these utilities to pass on losses. In fact, what that did was to cap the loss that was not being capped before. The law is supposed to give teeth to the utilities to file a case against those who steal electricity. Because before, unless you can prove theft, you cannot cut off their electricity. Now, if you catch them, you can cut off power. It’s up to the court to determine if he stole electricity. But despite this, utility firms are still having a hard time. Sometimes, especially in the provinces, the local officials are the ones involved. There are syndicates. So even if you cut off power, after a while, it’s back. But there have been some improvements. So the solution is not to repeal that.
There’s a component in the systems loss that is due to heat. That is part of business. You cannot just say, don’t charge that. Because when you transmit from one point to another, there will always be a loss there. If you don’t allow that to happen, he will just increase his price anyway, if you allow him a certain return. At least, this is transparent.
Q. This is happening also in other businesses, but in the utilities, it’s more transparent.
A. Yes, it’s more transparent. Actually, I’m surprised why they don’t want unbundling of rates. When it was unbundled, people learned about their bill. That was the clamor before, transparency. It’s as transparent as you can see. And now, they can question everything, which is good, like where are you passing on losses. That’s good. To me, it’s working because it’s really transparent. They know how to attack the problem. What ERC wants to do is to segregate the loss into three, what they call technical; non-technical, which is pilferage, and then administrative. This is where they’re questioning the 70 million kilowatt hours of Meralco.
Q. But is that true, that they pass it on?
A. That’s true, because it’s allowed. It’s part of the systems loss. ERC wants to segregate it into three such that for each of this grouping, in each sub-group, there’s a cap. But I think that’s still pending. That was part of the plan, but I don’t know the status of that. That will be good because the administrative losses of Meralco will have a cap. So even if they are able to lower in one sub-group, it still cannot pass on the losses to the other sub-group.
Q. There should be no value-added tax (VAT) on Meralco’s losses, right?
A. That should not be covered by VAT. But if you look at it now, that’s 70 million kilowatts, divided by the total sales. That’s even less than one centavo per kilowatt hour. So they’re also barking at the wrong tree. Even if you remove that, people will not feel the reduction. Even if you remove all the salaries of Meralco executives, nobody will feel it because it’s less than one centavo per kilowatt hour. Of course, if you look at the absolute amount, it’s big. But on a per kilowatt hour, it’s only a small percentage of total cost. If you attack that, remove all of it, then lo and behold, what?
Q. During your time as energy secretary of President Ramos, did you encounter this same problem?
A. It was a time of crisis. At that time, they were telling us, ‘Give us electricity at whatever price.’ That’s what they’re saying now in the Visayas.
Q. How should the problems in the power sector be addressed?
A. I think government should look at sustainable measures. One is really to implement the competition feature of the EPIRA. It’s slow because of the 70% rules and so on. So they have to complete that. And Mr. [Juan] Ibazeta [of Power Sector Assets and Liabilities Management Corp.] said he can complete that by end of the year. So maybe 2009, 2010 will probably be the era of competition. But government should not let the people expect that it will lower rates from where it is now, or more so, from where it was in 2001, by explaining that the cost of inputs before was this and this. What it will do is really to temper any further increases in rates in the future.
Q. So power rates won’t go down.
A. It might go down. but not from the 2001 level. Maybe from where it is right now, at the current prices, it might go down. But suppose it might be implemented at $150 dollars per barrel? If it is implemented for a year and then it stays at $150 per barrel, maybe it will go down. But once it is implemented at $150 per barrel, and after three months, it becomes $200 per barrel, you’ll probably expect it to rise. But maybe, not at a level where there is no competition. So the increases will be tempered, and it is sustainable. What’s good with competition is that it is the investors who will take the heat, not government. And it has to be done in a period when there is excess capacity. And then what’s good in that situation is that that competition will encourage investments in new plants that will address requirements for supply in 2012, 2013, 2014. And there is still enough time. Otherwise, we will start only when there is a shortage, which means implementation of EPIRA will again be overtaken by these events. They they’ll suspend it and people will say EPIRA is a failure.
Q. Do you have other proposals?
A. They can review the systems loss cap. That anti-pilferage is the other one. The ERC should put a cap on the three. And then implement it in all utilities and rural electric cooperatives, especially for rural electric cooperatives serving major urban centers. You can also go into selective subsidies, transparent ones like lifeline rates. They can increase the amount of subsidy, but not necessarily the coverage. They might want also to subsidize export-leading industries so that they can be competitive.
Q. Isn’t that being done already?
A. In some countries, residential consumers subsidize industries. Here it’s the other way around. In some countries, especially the dollar earners in industrial sector, they are subsidized by residential consumers.
Q. That’s a hard sell here.
A. But what is one or two centavos per kilowatt hour if it will create additional revenues for the country, higher tax, more employment? So it should be targeted. There should be direct benefit. You don’t just throw money around. If you adopt subsidies across-the-board, you’re throwing your money to waste. You just help those who consume more, those who don’t contribute to production, a consumer who uses his aircon 24 hours because he has a subsidy but does not contribute to employment.
They can even subsidize hospitals or educational institutions. So, targeted subsidies. And there are, today, available sources of subsidy. One is the lifeline rate, the cross-subsidy we are doing. The other one is the royalty they want removed. You know, a portion of that royalty, a percentage share of that is used to reduce electricity rates to host communities, geothermal and so on. You need an amendment of the law to be able to expand that coverage outside of the host communities. Maybe, they can expand it to cover industries.
Q. So it should be well-targeted.
A. Yes. Rather than removing the royalty, why not divide it and give it to sectors that need it? If you remember that pronouncement of President Arroyo that she would like to locate eco-zones in geothermal sources, which is, to me, correct. You can start locating eco-zones now in host communities of power plants. You don’t even have to amend the law. They are part of the host communities, and you can give them that reduction. And it will improve the economy of the local community.
Like in Sual, there are large areas there. That was the project of FVR [President Ramos] before. He wanted industries to locate in Sual, Pangasinan, and in that western part, in Alaminos. In fact, they had a plan to put up an airport there. Proton actually established a factory there because of that Sual project. It was tied down to this.
And the other measure is Department of Energy Order 1-1994. In this executive order, every power plant will contribute one centavo per kilowatt hour, and 50 percent of that is for electrification of the host community. Again, it will reach a point in time wherein the amount collected will increase because you’ve already covered all communities. Well, you can amend that executive order again and use that for targeted subsidy.
And then the other source is the universal charge. You can impose anything on the universal charge. So again, you can levy most probably against high residential consumers in order to encourage conservation. Let’s say, if you consume beyond 1,000 kilowatt hours, for every additional kilowatt hour, you have to pay a universal charge. If they don’t want to pay tax, they can conserve. So there’s an incentive, it’s not regressive taxation.
This no longer being done.
Q. Why?
A. They reversed it. Now, it’s a flat rate.
Q. Any other proposal to bring down rates?
A. They can also review the E-VAT. I agree, systems loss is not a service, so why charge E-VAT. I checked my bill, there’s E-VAT on systems loss.
Q. What about splitting the franchise of Meralco?
A. You know, the World Bank, even ADB have a theory. The direction is to amalgamate electric cooperatives, put them together under one franchise. Because fragmentation is inefficient.
Water utilities is a different case because water can be independent. But with respect to power lines, it’s a grid, you can interconnect. And if you have a densely-populated area, it’s better to have that under one franchise because you can interconnect the line. It’s more reliable. If you have a line that’s down, you can pass it to others.
Q. In electric utilities, we don’t share “pipes”.
A. We don’t share pipes. There’s no interconnection. They’re not able to cross when a line is broken. Because seldom do pipes get broken. The only way to stop it is you repair the leakage. In electricity, when a line is cut, there’s really no power. There’s no partial leakage. In a densely-populated area, it’s hard to segregate streets. To provide better reliability, it’s better to interconnect, so that if one line is down, you can tap another line. The operation of water utilities is different in electricity, even in terms of facilities.
Q. How do you consolidate electric cooperatives if we have so many islands?
A. Amalgamation of cooperatives is easier said than done. It’s like a political kingdom. If you have more congressional districts, you’ll have more congressmen. With more cooperatives, you’ll have more directors.
Q. So Congress should not reverse the reforms EPIRA.
A. They should not. They should improve on what is in the EPIRA. Many provisions have not been implemented. For instance, TransCo is not yet in the hands of the private sector. We don’t know yet what will be the result of that. And then there’s still no full competition in Luzon. It hasn’t also started in the Visayas. We don’t know yet if it will encourage new capacities.
Q. So the reforms should first be completed.
A. Yes, complete first the tasks, and then see to it that they’re properly implemented, come up with competition rules of the ERC, then work on targeted subsidies. What’s happening now is, NPC is being asked to bring down rates even at a loss.
Q. Your proposals don’t need legislation?
A. Yes, except for my proposal on expanding the use of royalty collections outside of the host communities. DOE 1-94, we’ve already done that. That’s a department order passed by [former DOE Secretary] Delfin Lazaro. That was his idea.
Q. What’s your take on EPIRA being imperfect?
A. A law is always imperfect.
Q. It allows cross ownership between power generators and distributors.
A. Well, that’s probably one they will take a look later on, whether cross-ownership is bad or not.
Q. Should it be case-to-case?
A. Well, it’s not really case-to-case. Because what’s been happening is that people were already both in generation and distribution. To immediately say, you prevent cross ownership, what will happen is that no Filipino can invest in the power sector. Because there are very few families with investments in power: Aboitiz, Abaya, and Lopez. There are only two major ones—Aboitiz and Lopez. If you exclude them, then you will just expect the foreigners to make investments in one sector.
The idea here is to allow cross-ownership first and then try to encourage new Filipino investors like Ramon Ang [of San Miguel], Gokongwei, Ayalas, and so on. Once they see it’s working, they might make investments. So you have more investors. If cross-ownership is not allowed, then only foreigners will invest. It’s not good to have 100 percent of your supply handled by foreigners. Filipinos should have some control.
Q. In the case of Aboitiz, they have generation assets.
A. But not in their franchise area. But they’re building power plants in Davao. I’m sure that in their Subic plant, they’re managing the Subic distribution.
Q. Which may not be under the purview of ERC?
A. Yes, but there’s a limit. You cannot contract out more than 50% of your requirement with your subsidiary.
Q. That’s also in EPIRA.
A. Yes. Our version of cross-ownership during Ramos time was not on the contract. It’s on the holdings.
Q. How does that work?
A. If you are in generation, you are limited to 10 percent equity holdings in a distribution company.
Q. On reports that government may take over Meralco.
A. Investors have not seen a stable business environment in the power sector. If this will be the case, who will invest? Who knows, if government really takes over Meralco, after that, other utilities will be next.
They should follow the policy they adopted in the case of Petron, where they did not push through with the buy back of Saudi Aramco’s 40 percent stake. They should not intervene in Meralco. If government takes over Meralco, it will be subject to government rules on procurement, etc..
You need stability in these government corporations. You can’t keep changing directors. Just like any corporation, you need stability. [The late Energy Minister Geronimo] Velasco was successful partly because of his long reign at the energy ministry and offices. He was able to really put in place reforms. In energy, you can’t plan for just six years.
